PROFILE

Cyanotech Corporation produces high-value natural products from microalgae,  and
is  the  world's  largest  commercial   producer  of  natural  astaxanthin  from
microalgae.  Products include BioAstinTM,  a natural astaxanthin product for use
as human nutritional supplement;  NatuRose(R) natural astaxanthin used worldwide
in the aquaculture and animal feed industry; Spirulina Pacifica(R),  a nutrient-
rich dietary supplement;  and phycobiliproteins,  which are fluorescent pigments
used in the immunological diagnositics market. Corporate and product information
is available at http://www.cyanotech.com
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA

                                                                     Years ended March 31,

($ in thousands, except per share data)        2000          1999            1998            1997            1996
                                          -----------------------------------------------------------------------
RESULTS OF OPERATIONS
<S>                                       <C>           <C>             <C>             <C>             <C>
Net sales                                 $   7,398     $   6,738       $   7,627       $  11,399       $   8,081
Gross profit                                  1,503           973           3,137           6,809           4,563
Impairment of long-lived assets               2,796            --              --              --              --
Income (loss) from operations (a)            (4,312)       (2,642)           (300)          3,751           2,571
Net income (loss) (a)                        (4,485)       (2,557)           (300)          4,159           2,509
Net income (loss) per common share
          Basic (a)                       $   (0.34)    $   (0.21)      $   (0.05)      $    0.31       $    0.22
          Diluted (a)                     $   (0.34)    $   (0.21)      $   (0.05)      $    0.25       $    0.17
Average Shares Outstanding
          Basic                              13,775        13,602          12,909          12,583           9,583
          Diluted                            13,775        13,602          12,909          16,598          14,502

SELECTED BALANCE SHEET DATA
Cash and investment securities            $     405     $     323       $   1,397       $   6,729       $   9,409
Working capital                               2,094           917           2,596           9,065           9,749
Total assets                                 19,689        23,621          25,667          26,015          19,716
Long-term debt and capital lease
         obligations, excluding current
         maturities                           1,307            13             129             559             838
Stockholders' equity                         16,645        20,707          23,174          23,335          17,316
</TABLE>

       (a) Loss from operations, net loss and net loss per common share for  the
year ended  March 31, 2000  reflect the effect of an asset impairment  charge of
$2,796.  For further detail,  see  the sections  "Operating  Expenses-Impairment
of Long-Lived Assets"  and  "Liquidity  and Capital  Resources" in  Management's
Discussion and Analysis of Financial Condition  and  Results of  Operations from
the Company's fiscal 2000 Annual Report.

<PAGE>
CHART

TO OUR STOCKHOLDERS

Fiscal 2000 was a turnaround period for Cyanotech.   The  actions we took during
the year,  and  previously,  to  cut  costs and  increase revenues have begun to
result in steady improvements in performance.

Cyanotech enters the new millenium  well positioned  to capitalize on what could
become sustained growth in demand for our innovative microalgae products.

WHY THIS OPTIMISM?

*  Cyanotech  is clearly  a  leader in  microalgae production and the only large
commercial producer  of  natural  astaxanthin from microalgae.  We have operated
our production facility on a consistent  basis since  1985 and have the capacity
to  deliver a large  volume of high-margin products.  We also control additional
acreage to quickly increase our production capacity.

*  We have a broader product base than ever  before with our  Spirulina Pacifica
nutritional supplement and our two natural  astaxanthin products -- NatuRose for
animal pigmentation and BioAstin for human nutritional needs.

*  We are  developing a broader  customer base  worldwide  with  sales  reaching
throughout  North  and  South America, Europe, Asia and the Indian subcontinent.
International business represents about 50% of net sales.

Our program  to commercialize  microalgae production and to  emerge as a company
with multiple market-leading products has been successful.  We believe Cyanotech
is leveraged  to  increase  sales  and  production  quickly,  substantially  and
profitably.

SPIRULINA DEMAND GROWING AGAIN

Cyanotech's  Spirulina  product  is the leader  in quality.  Because of this, we
experienced an increase in demand  from existing as well as new customers during
fiscal 2000.  Recently, we completed a preliminary agreement to supply a company
marketing Spirulina in India,  a country with an  estimated  200 million  middle
and upper income consumers.

NATUROSE ACCEPTANCE INCREASING

With  numerous  feeding  trials  successfully  completed,  NatuRose  is becoming
generally  accepted  in the  aquaculture industry as a "natural" pigment source.
Prices  of synthetic  astaxanthin are  lower than NatuRose prices,  but we  have
decided  to maintain  a price level  consistent  with our product's  quality for
aqualculture producers seeking a natural pigment.

Although we had planned for NatuRose to become a key driver of our business, the
development of our higher-margin  human  astaxanthin  product  has  caused us to
place NatuRose in the perspective of an active part of a broader product mix.

<PAGE>

BIOASTIN: EXTRAORDINARY PROMISE

We launched  BioAstin in August 1999 after  receipt of clearance by the Food and
Drug  Administration  (FDA)  to  market  it for  human nutritional use and began
marketing  directly  in  January  2000.  The  response  to  the product has been
enthusiastic and is growing.

While not a panacea,  BioAstin  appears to have  several  beneficial  effects on
human health.  We are in the process of securing  patent  protection for four of
these  health  benefits,  including  amelioration  of  carpal  tunnel  syndrome,
protection from sunburn by ultraviolet  rays,  treatment of fever blisters (cold
sores)  and  canker  sores,  and  reduction  of  muscle soreness after strenuous
exercise.

In June 2000,  we initiated our first  clinical  trial for BioAstin to establish
the beneficial effect for carpal tunnel syndrome. A successful completion of the
trial will allow us to petition the FDA to make a label claim for that benefit.

As the world's largest producer of natural astaxanthin,  our intent is to secure
a  proprietary  position  for major  health  claims and develop a unique line of
products that address specific health  concerns.  Validation of BioAstin's value
for human  nutrition  should allow us to finalize  distribution  alliances  with
major end-product manufacturers and place BioAstin fully in the marketplace.

GROWTH GOING FORWARD

Cyanotech  has  achieved  a sounder  financial  condition  to pursue  its growth
objectives.  In April 2000, we refinanced a $1.6-million  credit facility with a
$3.5-million,  10-year  term loan  at market rate.  In May 2000,  we completed a
private placement of convertible  subordinated debentures providing $1.1 million
in net proceeds.

We are operating 67 culture ponds on 90 acres with all systems working well, and
are continuing to increase  efficiency and productivity.  We are also seeking to
balance sales among our products and by product type to achieve  higher  margins
overall.  Depending  upon this mix, our 90 acres could generate from $12 million
to $35 million or more in annual revenue.

We control an adjacent 93 acres that have been partially  graded for new culture
ponds.  These  ponds and added  infrastructure  would cost about $18  million to
fully complete. If the current sales trend continues, we hope to begin expanding
onto a portion of this acreage in fiscal 2001 using internally  generated funds,
if  available.  Depending  on the product mix,  this  additional  acreage  could
potentially  generate  in  excess  of $35 million  in annual  revenue when fully
developed.

We look forward to reporting positive results as the year progresses.


Gerald R. Cysewski, Ph.D.
Chairman, President and CEO

June 27, 2000


<PAGE>

MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS

                             RESULTS OF OPERATIONS

The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
<S>                                     <C>                     <C>                   <C>
YEARS ENDED MARCH 31,                               2000                  1999                   1998
                                        -------------------     -----------------     ------------------
Net sales                                          100.0 %               100.0 %                100.0 %
Cost of sales                                       79.7                  85.6                   58.9
                                        -------------------     -----------------     ------------------
Gross Profit                                        20.3                  14.4                   41.1
                                        -------------------     -----------------     ------------------

OPERATING EXPENSES:
     Research and development                        7.0                  13.3                    8.8
     General and administrative                     21.3                  26.5                   17.3
     Sales and marketing                            12.5                  13.8                   18.9
     Impairment of long-lived assets                37.8                   --                     --
                                        -------------------     -----------------     ------------------
       Total operating expenses                     78.6                  53.6                   45.0
                                        -------------------     -----------------     ------------------
        Loss from operations                       (58.3)                (39.2)                  (3.9)
                                        -------------------     -----------------     ------------------

OTHER INCOME (EXPENSE):
     Interest income                                 0.1                   0.2                    2.6
     Interest expense                               (3.8)                 (2.6)                  (0.4)
     Other income (expense), net                     1.1                  (0.6)                   0.1
                                        -------------------     -----------------     ------------------
       Total other income (expense)                 (2.6)                 (3.0)                   2.3
                                        -------------------     -----------------     ------------------

Loss before income taxes                           (60.9)                (42.2)                  (1.6)
Income taxes                                         0.3                   4.3                   (2.3)
                                        -------------------     -----------------     ------------------
       Net loss                                    (60.6)%               (37.9)%                 (3.9)%
                                        ===================     =================     ==================
</TABLE>


FISCAL 2000 COMPARED TO FISCAL 1999

Net Sales

Net sales for the year ended March 31, 2000 were $7,398,000,  a increase of 9.8%
from net sales of $6,738,000  for the year ended March 31, 1999. The increase in
net sales  during the year ended March 31, 2000 is  primarily  due to  increased
sales  of  bulk  Spirulina  tablets  and  natural  astaxanthin   products  (both
NatuRose and BioAstin,  offset in part  by lower sales of bulk  Spirulina powder
and packaged consumer products.

        International sales represented 46% and 40% of total  net  sales for the
year  ended  March 31, 2000 and 1999, respectively.  This increase was primarily
due to higher sales of bulk Spirulina products to Spirulina International, BV, a
Spirulina marketing and distribution company based in the Netherlands.  Sales to
this customer  accounted for 23% of net sales for the year ended March 31, 2000,
compared  to 11% for the year ended  March 31,  1999,  and less than 10% for the
year ended March 31, 1998.

Gross Profit

Gross profit  represents  net sales less the cost of goods sold,  which includes
the cost of materials,  manufacturing  overhead costs, direct labor expenses and
depreciation and amortization.  Gross profit increased to 20.3% of net sales for
the year ended March 31, 2000,  from 14.4% of net sales for the year ended March
31,  1999.  This  improvement  in gross  profit from the prior year is primarily
attributable  to increased  sales of higher  margin bulk  tablets and  decreased
natural  astaxanthin  production  costs,  offset in part by increased  Spirulina
production  costs related to operating at limited  production  levels which were
below  optimal  manufacturing  efficiency  during the first six months of fiscal
2000.
                                       4

<PAGE>

Operating Expenses

Operating expenses for the year ended March 31, 2000 increased to $5,815,000, an
increase of 60.9% from the  $3,615,000  of operating  expenses  reported for the
year  ended  March  31,  1999,  primarily  due to the  recognition  of an  asset
impairment charge of $2,796,000,  related to the Company's strategic decision to
discontinue joint venture  negotiations with Norsk Hydro ASA (Norsk  Hydro).  In
accordance with the provisions of Financial  Accounting  Standards  Board (FASB)
Statement of  Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and  Long-Lived  Assets to be Disposed  Of," the
Company was obligated to record the asset impairment charge on the construction-
in-progress balance related to the 93-acre astaxanthin expansion project. If the
effect of  this  impairment  charge is omitted for the  purposes of  comparison,
operating  expenses during the year ended March 31, 2000 amounted to $3,019,000,
a decrease of 16.5% from $3,615,000 recorded for the year ended March 31, 1999.

        Research and Development    Expenditures  for  research and  development
decreased  42.6 % to $514,000 for the year ended March 31, 2000,  from  $895,000
for the year ended March 31,  1999.  The decrease  from the prior year  resulted
primarily from reduced personnel expenditures and lower outside service expenses
due to completion  of  development  work to improve  production  technology  for
natural  astaxanthin  during the prior fiscal year,  and  suspension of research
work on the  mosquitocide  project  and the  Aldolase  Catalytic  Antibody  38C2
project.

        General and Administrative    General    and   administrative   expenses
decreased  11.7%  to  $1,578,000  for  the  year  ended  March 31, 2000,    from
$1,788,000 for the year ended March 31, 1999.   The decrease from the prior year
is primarily due to  lower legal costs  related to the ongoing patent litigation
with   Aquasearch,  Inc.  (Aquasearch),   (see   Note   13,   "Commitments   and
Contingencies"  in  Notes  to Consolidated Financial Statements).

        Sales and Marketing   Sales and marketing expenses decreased slightly to
$927,000  for the year ended March 31,  2000,  from  $932,000 for the year ended
March 31, 1999.

        Impairment of Long-Lived Assets   In June 1999, we reached a preliminary
agreement with Norsk Hydro to  produce  and market NatuRose  natural astaxanthin
product in a joint venture  that would  be  owned  51% by Norsk Hydro and 49% by
Cyanotech.  The intention  of  the  joint venture  was to  build  and  operate a
NatuRose production facility in Kailua-Kona, Hawaii.  While this arrangement was
being  finalized,  the  Company  continued to independently develop  its natural
astaxanthin    production   technology   and   subsequently   made   significant
improvements.   The  Company   decided  not  to  finalize   the  joint   venture
relationship.

        As  a  result of the  Company's  decision to end the  negotiations,  the
projected  future cash  flows that  were  expected  from  the  Norsk Hydro joint
venture  were  reduced  to  zero.  In  accordance  with the  provisions  of SFAS
No. 121, an impairment loss is to be recognized  whenever the  projected  future
cash flows from an asset are less than the  carrying  value of that  asset.  The
Company recorded a non-cash asset impairment   charge  of   $2,796,000   on  the
construction-in-progress  balance  related to this project.  The impaired  asset
consisted  primarily  of the  accumulated  cost of the grading  work done on the
93-acre facility and construction contract termination costs incurred.

Other Expense

Other expense for the year ended March 31, 2000, did not change  materially from
fiscal year 1999.

Income Taxes

The income tax benefit of $20,000  for the year ended March 31, 2000  represents
an  adjustment to increase the estimated tax refund of Hawaii State income taxes
resulting  from the carryback of net operating  losses  generated in fiscal 1999
and compares with  $289,000 of income tax benefit  recorded for the prior fiscal
year.

Net Loss

The Company recorded a net loss of $4,485,000 for the year ended March 31, 2000,
of which $2,796,000 represents the effect of the aforementioned asset impairment
charge.  If the effect of this asset impairment charge is omitted for comparison
purposes, the Company recorded a loss of $1,689,000 for the year ended March 31,
2000, an  improvement  in results of 34% over the net loss of $2,557,000 for the
year ended March 31, 1999. This improvement in results is primarily attributable
to increased sales of bulk Spirulina  products,  decreased cost of product sales
and lower operating expenses.

                                       5


<PAGE>

FISCAL 1999 COMPARED TO FISCAL 1998

Net Sales

Net sales for the year ended March 31, 1999 were $6,738,000, a decrease of 11.7%
from net sales of $7,627,000  for the year ended March 31, 1998. The decrease in
net sales  during the year ended  March 31,  1999 was  primarily  due to reduced
shipment  volume of bulk Spirulina  products,  lower average  selling prices for
bulk Spirulina products, and decreased sales of packaged consumer products.

Gross Profit

Gross profit  decreased to 14.4% of net sales for the year ended March 31, 1999,
from 41.1% of net sales for the year ended  March 31,  1998.  This  decrease  in
gross profit from the prior year was  primarily  attributable  to an increase in
depreciation  expense of $391,000,  costs associated with producing  NatuRose at
limited  production  levels which were below optimal  manufacturing  efficiency,
lower per unit  selling  prices of bulk  Spirulina,  estimated  product  potency
losses in NatuRose finished goods inventory and increased  Spirulina  production
costs incurred in restarting previously idled Spirulina culture ponds.

Operating Expenses

Operating expenses for the year ended March 31, 1999 increased to $3,615,000, an
increase of 5.2% from the $3,437,000 of operating expenses reported for the year
ended March 31, 1998,  primarily due to increased general and administrative and
research and development expenses, offset in part by reduced sales and marketing
expenses.

         Research and  Development  Expenditures  for  research and  development
increased  32.2 % to $895,000 for the year ended March 31, 1999,  from  $677,000
for the year  ended  March  31,  1998.  The  increase  from the  prior  year was
primarily  the result of research  work done on the  mosquitocide  project,  the
Aldolase  Catalytic  Antibody  38C2  project,  additional  costs  related to new
product  development  and higher costs related to  developing  our PhytoDome CCS
closed culture technology.

         General  and  Administrative   General  and   administrative   expenses
increased 35.7% to $1,788,000 for the year ended March 31, 1999, from $1,318,000
for the year  ended  March  31,  1998.  The increase  from  the  prior  year was
primarily due to increased legal fees related to the  ongoing  patent litigation
with  Aquasearch  (see  Note 13,  "Commitments  and  Contingencies"  in Notes to
Consolidated Financial Statements), and increased depreciation expense.

         Sales and Marketing   Sales and marketing expenses  decreased  35.4% to
$932,000 for the year ended March 31, 1999,  from  $1,442,000 for the year ended
March 31, 1998.  The decrease  from the prior year was  primarily due to reduced
personnel,  advertising and consulting  service  expenditures  dictated by lower
sales.

Other Income (Expense)

Other expense was $204,000 for the year ended March 31, 1999,  compared to other
income of $175,000 for the year ended March 31, 1998, a difference  of $379,000.
This resulted from a decrease in interest income due to a decrease in investment
securities  and  an  increase  in  interest   expense  due  to  an  increase  in
outstanding, interest-bearing debt.

Income Taxes

The income tax benefit of $289,000 for the year ended March 31, 1999  represents
the  estimated  tax  refund of Hawaii  State  income  taxes  resulting  from the
carryback of net operating losses generated in fiscal 1999.

Net Loss

The Company recorded a net loss of $2,557,000 for the year ended March 31, 1999,
compared  to a net loss of  $300,000  for the year ended  March 31,  1998.  This
increase  in net  loss  was  primarily  attributable  to  reduced  sales of bulk
Spirulina  powder and  tablets,  costs  associated  with  producing  NatuRose at
limited  production  levels which were below optimal  manufacturing  efficiency,
higher operating  expenses,  increased  interest expense due to higher debt, and
decreased interest income.

                                       6


<PAGE>

        In February 1998, the Company reduced its workforce by approximately 25%
in order to better  align resources with sales levels.  The workforce  reduction
was part of the Company's plans to  enhance  its  competitive  position  through
improvements of operational  productivity and cost reduction - specifically more
efficient utilization of assets and employees. Production operations, sales, and
administrative functions were restructured and downsized by this action.

                             VARIABILITY OF RESULTS

Cyanotech  Corporation  was formed in 1983 and did not become  profitable  on an
annual  basis until  fiscal 1992 (the twelve  month  period  ended  December 31,
1992).  From fiscal 1992 through fiscal 1997, the Company had total net sales of
$29,401,000  and total net income of $7,931,000.  In fiscal 1998, 1999 and 2000,
the  Company  had  net  sales  of  $7,627,000, $6,738,000 and $7,398,000 and net
losses of $300,000,  $2,557,000  and  $4,485,000, respectively.  As of March 31,
2000, our accumulated deficit was $7,803,000.  There can be no assurance that we
will return to generating  profits on either a quarterly or an annual basis.  We
have experienced   significant  quarterly   fluctuations  in  operating  results
and anticipate that these fluctuations may continue  in future  periods.  Future
operating  results may  fluctuate  as a result of changes in sales levels to our
largest customers, new product introductions,  production difficulties,  weather
patterns, the mix between sales of bulk products and packaged consumer products,
start-up costs associated with new facilities, expansion into new markets, sales
promotions,   competition,   increased   energy  costs,   the   announcement  or
introduction  of new products by our  competitors,  changes in our customer mix,
overall trends in the market for our products,  government regulations and other
factors  beyond our control.  While a significant  portion of our expense levels
are relatively  fixed, and the timing of increases in expense levels is based in
large part on our 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.

                         NEW ACCOUNTING PRONOUNCEMENTS

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities," which establishes  accounting and reporting
standards for derivative  instruments and for hedging  activities.  SFAS No. 133
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning  after June 15,  1999.  In July 1999,  the FASB  issued  SFAS No. 137,
"Accounting for Derivative  Instruments and Hedging Activities - Deferral of the
Effective  Date of FASB  Statement  No. 133, an Amendment of FASB  Statement No.
133," which defers the  effective  date of SFAS No. 133 to be effective  for all
fiscal  quarters of fiscal  years  beginning  after June 15,  2000.  The Company
currently holds no derivative instruments,  nor is it currently participating in
hedging  activities.  Management  does not expect  adoption of SFAS No. 133 will
have a  material  effect  on  the  Company's  financial  condition,  results  of
operations or liquidity.

                        LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Our working  capital at March 31, 2000  amounted to  $2,094,000,  an increase of
$1,177,000 from working capital of $917,000 at March 31, 1999. Our cash and cash
equivalents increased by $82,000 to $405,000, primarily from cash flows provided
by  operations  of  $343,000,  offset  in  part by cash  used in  investing  and
financing activities of $179,000 and $82,000, respectively.

        Cash flows provided by operating activities for the year ended March 31,
2000 amounted to $343,000 compared to cash flows used in operating activities of
$874,000 for the year ended March 31, 1999. The improvement in cash flows is due
primarily to an increase in net sales of $660,000  and decreases in research and
development  expenses and  general and  administrative expenses  of $381,000 and
$210,000,  respectively,  for the year ended March 31, 2000 compared to the year
ended  March  31,  1999,  offset  in  part  by  changes  in  current  assets and
liabilities.

                                       7
<PAGE>

        Cash  flows  used  in investing  activities for the year ended March 31,
2000, which is net of $218,000  received  from the sale of an  office  building,
decreased significantly to $179,000, down 69.6% from $588,000 for the year ended
March 31, 1999.

        Cash flows used in financing activities amounted to $82,000  compared to
cash flows  provided by  financing  activities of  $388,000  for  the year ended
March 31, 1999.  The primary uses of cash flows in financing  activities for the
year ended March 31, 2000 were principal payments on long-term debt of  $213,000
and  satisfaction  of  capital  lease  obligations of $67,000, offset in part by
proceeds of $237,000 from issuance of common stock and exercise of stock options
and warrants, net of issuance costs.

Line of Credit

In July 1998, the Company entered into a Loan and Security Agreement (Agreement)
with a lender which provided for up to $3 million in credit facilities,  secured
by all the assets of the Company. The Agreement contained restrictive covenants,
which included among others, the maintenance of minimum  consolidated net worth,
as defined,  and an  acceleration  clause  contingent  upon the occurrence of an
event with a material  adverse  effect on the Company,  as defined.  On July 13,
1999,  the lender gave notice to the  Company of a default  under the  Agreement
because of the  uncertainty  of the  Company's  ability to  continue  as a going
concern.  In view of this  default,  the lender  exercised  its right  under the
Agreement  effective  July  13,  1999,  to  increase  the  interest  rate on all
borrowings  from prime plus 2.5% to prime plus 5.5%.  Consequently,  the Company
classified  the aggregate  outstanding  balance on this Agreement of $1,644,000,
representing outstanding working capital loans on a revolving basis of $994,000,
and  an  equipment  term  loan  of  $650,000,  as a  current  liability  in  the
consolidated balance sheet at March 31, 1999.

        On  October 8, 1999,  the  lender  informed the Company of its intent to
terminate  this  Agreement,  effective  December 31, 1999,  and  accelerate  the
repayment of all  outstanding  borrowings due to the Company being in default on
certain financial covenants.  In January 2000, the lender  amended the letter of
October 1999 and extended the termination date to March 31, 2000. In March 2000,
the  lender  provided  an  additional  amendment  in  the  form of a forbearance
agreement, which further extended the termination date of the Agreement to April
28, 2000. At March 31, 2000, the aggregate outstanding balance on this Agreement
amounted  to  $1,493,000,  representing  outstanding  working capital loans on a
revolving basis of $993,000 and an equipment term loan of $500,000.

Term Loan Agreement - Subsequent Event

On April 21, 2000, the Company executed a Term Loan Agreement (Term Loan) with a
new lender  which  provided for $3.5  million in  aggregate  credit  facilities,
secured  by  substantially  all the assets of the  Company.  The Term Loan has a
maturity date of May 1, 2010 and is payable in 120 equal  monthly  principal and
interest  payments  of  approximately  $48,000,  commencing  June 1,  2000.  The
interest  rate  under this  agreement,  in the  absence  of a default  under the
Agreement,  is the prime rate, as defined, in effect as of the close of business
on the first day of each calendar quarter, plus 1% (at April 21, 2000, the prime
rate was 9.5%).  Interest is calculated on the unpaid balance of principal based
on a normal amortization  schedule commencing May 1, 2000.

        A  warrant to purchase  20,000 shares of the Company's  common stock was
issued  in  conjunction with  this Term Loan agreement.  The  warrant expires in
April 2011 and has an exercise price of $2.55 per share.  The  warrant  may only
be  exercised after the Company has repaid the Term Loan in full.

        On April 26, 2000, approximately $1,593,000 of the $3.5 million proceeds
from  this  Term  Loan,  was  used to repay the balance  outstanding,  including
interest and related fees, under the Loan and Security Agreement of  July  1998.
The Company has classified $186,000  of the outstanding  balance of the previous
Agreement  of  $1,493,000  at  March 31, 2000,  as a  current  liability  in the
consolidated balance sheet at March 31, 2000. This amount represents the current
portion of the Term Loan agreement due by March 31, 2001.

Convertible Debentures - Subsequent Event

On May 2,  2000,  the  Company  completed  a  private  placement  of  $1,250,000
principal amount 6% convertible subordinated debentures due April 30, 2002. This
transaction  provided net proceeds to the Company of approximately $1.1 million.
Interest on these debentures is payable quarterly,  in arrears, on April 1, July
1, October 1,

                                       8
<PAGE>
and  January  2 in each year  commencing  on  July 1, 2000,  at a rate of 6% per
annum. The debentures are convertible into shares of common stock of the Company
at  a  conversion  price  equal  to  $1.50  per  share,  the market price of the
Company's  common  stock at the  date of issuance.  A warrant to purchase 83,334
shares of the Company's  common  stock was issued to the placement  agent of the
debentures, exercisable for five years from the issue date, at $1.80 per share.

Norsk Hydro Joint Venture

        In June 1999,  we reached a  preliminary agreement with Norsk Hydro,  to
produce  and  market  NatuRose  natural  astaxanthin product in a joint venture.
During the third quarter of fiscal 2000, the Company decided not to finalize the
joint venture relationship.  As a result of this strategic decision, the Company
recorded a non-cash  asset impairment  charge of $2,796,000 on the construction-
in-progress balance related to this project in accordance with the provisions of
SFAS No. 121.  The impaired asset consisted primarily of the accumulated cost of
the  grading  work  done  on  the  93-acre  facility  and  construction contract
termination  costs  incurred.  For  further  detail,  see  the  section entitled
"Impairment of Long-Lived Assets," located on page 5 in Management's  Discussion
and Analysis of Financial Condition and Results of Operation.

Construction Commitment

The Company has a commitment with a contractor for the 93-acre expansion project
which was  suspended  in February  1998.  In June 1999,  the Company  reached an
agreement  with the  contractor  to resume  work on the  suspended  construction
project  on or before  June 1,  2000.  In  consideration  for the  extension  of
contract, the Company agreed to pay an additional $20,000 at the startup of work
and a  surcharge  of 1.5% on work not  completed  by  September  30,  1999 and a
surcharge of 4% on work not completed by September 30, 2000.

        In September 1999,  we reached a further  agreement with this contractor
on  terms  for  indefinite  suspension  or  termination  of our  contract.  This
agreement  becomes effective  only if the  suspension  agreement  dated June 15,
1999,  expires  without  a  further  agreement to continue the  suspension.  The
contractor has calculated the remaining balance due for work completed under the
contract to be $338,000.  If the contract expires without a further agreement to
continue  the suspension,  we reached a settlement  with  the  contractor to pay
$170,000 for such completed work.  The $170,000 is  included in accrued expenses
in the  consolidated  balance sheet at March 31, 2000. In the event we choose to
proceed with the project at a future date, the contractor  reserves the right to
negotiate for escalation and remobilization  cost  increases.  If we cannot come
to  an agreement with the  contractor  for  completion  of  the project,  we may
proceed  with  an  alternate contractor after paying the remaining $168,000 plus
interest.

        On April 28, 2000, we reached an agreement with  the  contractor  for  a
modification of the terms of the suspension  agreement dated September 1999. The
contractor  has agreed to extend the date of  resumption  of work to December 1,
2000. In consideration for this modification,  on May 2, 2000 we paid $85,000 of
the $170,000  remaining on the contract,  with the balance of $85,000 to be paid
on or before December 1, 2000.  Presently,  the 93-acre expansion is dormant and
the  ultimate  decision to proceed with this  expansion  project is uncertain at
this time.

        We  believe  working  capital  provided  by  our  Term  Loan  agreement,
convertible  debentures  and  estimated  cash  flows  from  operations  will  be
sufficient to sustain operations for fiscal 2001.

                                       9
<PAGE>


Quantitative and Qualitative Disclosures About Market Risk

We have not entered 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.


                                    OUTLOOK

The Company  continues to experience  efficiencies from the downsizing and asset
management program  initiated  during the fourth quarter of fiscal 1999.  In the
last six months of fiscal  2000,  our gross  profit  margin on sales of NatuRose
improved  due  primarily  to   production   efficiencies   resulting   from  the
optimization  program begun in April 1999.  We expect these benefits to continue
into future  periods.  We have also  experienced  improved  sales during quarter
three and quarter four of fiscal 2000 due, in large part,  to  increased  demand
for our Spirulina products.

        During the last six months of fiscal 2000, the Company  initiated  sales
of its natural astaxanthin product into Chile, the world's second largest salmon
producing  country, and continued its NatuRose sales in Japan.  We  believe that
our  continued  sales efforts in Japan, combined with sales into Chile, may lead
to increased sales of NatuRose.

        The  introduction  of  BioAstin in January 2000 improved results for the
fourth quarter of fiscal 2000.  The  market for  human  astaxanthin  products is
estimated  to  exceed  $1.5 billion  annually.  The  Company  has  filed  patent
applications  for  BioAstin  on  this  product's  use  in the treatment of fever
blisters (cold  sores)  and canker sores,  carpal tunnel  syndrome,  ultraviolet
(UV)  radiation  (sunburn)  sensitivity  and relief of muscle soreness.   Patent
filings contribute to our business goal of developing proprietary positions  for
our present and future products and  support our strategic plan.  By identifying
specific health benefits of our products,  we can select applications  that have
profit  potential  and  support our  proprietary position.  Our  strategy  is to
combine  the  results  of clinical  trials with patent protection and to develop
strategic  alliances  with  companies  that target the specific areas of product
application.  In March 2000,  we initiated  a  clinical  trial  for  the effects
of BioAstin on carpal tunnel syndrome and have  plans for other clinical  trials
on  UV radiation  protection and  muscle soreness.  We will  be  monitoring  the
results  of  these studies closely to  uncover  potential uses of  BioAstin  for
other applications.

        The  Company's  future  results  of  operations and the  other  forward-
looking  statements  contained  in  the Outlook,  in particular  the  statements
regarding revenues,  gross margin,  research and development,  capital spending,
and clinical trials, involve a number of risks  and  uncertainties.  In addition
to the factors discussed above,  among the other factors that could cause actual
results to differ materially are the following:  business  conditions and growth
in the natural products industry and in the general economy; changes in customer
order patterns, and changes in demand for natural products in general;   changes
in  weather  conditions;   competitive  factors,  such  as  competing  Spirulina
producers  increasing their production capacity and their impact on world market
prices for Spirulina;  government actions;  shortage of manufacturing  capacity;
and other factors beyond our control.

        Cyanotech  believes  that  it  has  the  product  offerings, facilities,
personnel,  and  competitive  and  financial  resources  for  continued business
success, but future revenues, costs, margins and profits are all influenced by a
number of factors,  as discussed above, all of which are inherently difficult to
forecast.
                                       10

<PAGE>
<TABLE>
<CAPTION>
                          CONSOLIDATED BALANCE SHEETS

                                                                                                  March 31,
                                                                                        --------------------------
(in thousands, except share data)                                                             2000            1999
                                                                                        ----------      ----------
ASSETS
Current Assets:
<S>                                                                                     <C>             <C>
        Cash and cash equivalents                                                       $      405      $      323
        Accounts receivable, net of allowance for doubtful
                receivables of $10 in 2000 and $12 in 1999                                   1,613           1,012
        Refundable income taxes                                                                154             273
        Inventories                                                                          1,609           2,105
        Prepaid expenses                                                                        50             105
                                                                                        ----------      ----------
              Total current assets                                                           3,831           3,818
         Equipment and leasehold improvements, net                                          15,746          19,623
         Other assets                                                                          112             180
                                                                                        ----------      ----------
              Total assets                                                              $   19,689      $   23,621
                                                                                        ==========      ==========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
         Current maturities of long-term debt                                           $      186      $      700
         Short-term revolving line of credit                                                    --             994
         Current maturities of capital lease obligations                                        --              67
         Accounts payable                                                                    1,130             746
         Accrued expenses                                                                      421             394
                                                                                        ----------      ----------
              Total current liabilities                                                      1,737           2,901
         Long-term debt, excluding current maturities                                        1,307              13
                                                                                        ----------      ----------
              Total liabilities                                                              3,044           2,914
                                                                                        ----------      ----------

Stockholders' equity:
         Cumulative  preferred  stock,  Series C,  of $.001 par value
                (aggregate involuntary  liquidation preference $2,355
                ($5 per share),  plus  unpaid cumulative  dividends).
                Authorized  5,000,000  shares; issued and outstanding
                471,031 in 2000 and 595,031 in 1999                                              1               1

         Common  stock  of  $.005  par  value,  authorized 25,000,000
                shares  at  March  31,  2000  and  1999;  issued  and
                outstanding   14,582,297   at   March  31,  2000  and
                13,603,572 shares at March 31, 1999                                             73              68

         Additional paid-in capital                                                         24,374          23,956
         Accumulated deficit                                                                (7,803)         (3,318)
                                                                                        ----------      ----------
              Total stockholders' equity                                                    16,645          20,707
                                                                                        ----------      ----------
              Total liabilities and stockholders' equity                                $   19,689      $   23,621
                                                                                        ==========      ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       11

<PAGE>
<TABLE>
<CAPTION>
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                                       Years ended March 31,
                                                                ------------------------------------------------------------
(in thousands, except for per-share data)                                 2000                   1999                   1998
                                                                ==============          =============           ============
<S>                                                             <C>                     <C>                     <C>
Net sales                                                       $        7,398          $       6,738           $      7,627
Cost of sales                                                            5,895                  5,765                  4,490
                                                                --------------          -------------           ------------
     Gross profit                                                        1,503                    973                  3,137
                                                                --------------          -------------           ------------

OPERATING EXPENSES:
Research and development                                                   514                    895                    677
General and administrative                                               1,578                  1,788                  1,318
Sales and marketing                                                        927                    932                  1,442
Impairment of long-lived assets                                          2,796                     --                     --
                                                                --------------          -------------           ------------
     Total operating expenses                                            5,815                  3,615                  3,437
                                                                --------------          -------------           ------------
     Loss from operations                                               (4,312)                (2,642)                  (300)
                                                                --------------          -------------           ------------

OTHER INCOME (EXPENSE):
Interest income                                                             10                     13                    202
Interest expense, net of interest costs capitalized of nil in
        2000 and 1999 and $114 in 1998                                    (282)                  (174)                   (35)
Other income (expense), net                                                 79                    (43)                     8
                                                                --------------          -------------           ------------
     Total other income (expense)                                         (193)                  (204)                   175
                                                                --------------          -------------           ------------
 Loss before income taxes                                               (4,505)                (2,846)                  (125)
     Income taxes                                                           20                    289                   (175)
                                                                --------------          -------------           ------------
     Net loss                                                           (4,485)                (2,557)                  (300)
Undeclared Preferred Stock dividends                                      (237)                  (238)                  (289)
                                                                --------------          -------------           ------------
Net loss available to Common stockholders                       $       (4,722)         $      (2,795)          $       (589)
                                                                ==============          =============           ============

Net loss per Common share
     Basic                                                      $        (0.34)         $       (0.21)          $      (0.05)
                                                                ==============          =============           ============
     Diluted                                                    $        (0.34)         $       (0.21)          $      (0.05)
                                                                ==============          =============           ============
Weighted average number of common shares outstanding
     Basic                                                              13,775                 13,602                 12,909
                                                                ==============          =============           ============
     Diluted                                                            13,775                 13,602                 12,909
                                                                ==============          =============           ============
</TABLE>
See accompanying notes to consolidated financial statements.

                                       12
<PAGE>
<TABLE>
<CAPTION>
                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                    Years ended March 31, 2000, 1999 and 1998

                                        Preferred Stock          Common Stock
                                        ---------------          ------------
                                                                                   Additional                              Total
                                         Number      Par        Number      Par       paid-in      Accumulated     Stockholders'
(in thousands, except share data)     of shares    value     of shares    value       capital          deficit            equity
--------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>     <C>         <C>        <C>         <C>             <C>                 <C>
Balances at March 31, 1997              734,977 $      1    12,712,682 $     63    $   23,732      $     (461)    $       23,335
Exercise of common stock warrants for
        cash                                 --       --       107,880        1            43              --                 44
Exercise of stock options for cash           --       --        84,750        1           102              --                103
Common stock purchased and
        cancelled                            --       --       (13,470)      --           (55)             --                (55)
Issuance of common stock to
        nonemployee directors for
        services, at fair value              --       --         8,000       --            47              --                 47
Exchange of Series C preferred stock
        for common stock               (139,946)      --       699,730        3            (3)             --                 --
Net loss                                     --       --            --       --            --            (300)              (300)
--------------------------------------------------------------------------------------------------------------------------------

Balances at March 31, 1998              595,031        1    13,599,572       68        23,866            (761)           23,174
Issuance  of  stock  options  to
        consultant for services,
        at fair value                        --       --            --       --            84              --                84
Issuance  of  common  stock  to
        nonemployee directors for
        services, at fair value              --       --         4,000       --             6              --                 6
Net loss                                     --       --            --       --            --          (2,557)           (2,557)
--------------------------------------------------------------------------------------------------------------------------------

Balances at March 31, 1999              595,031        1    13,603,572       68        23,956          (3,318)           20,707
Exercise of stock options for cash           --       --        21,650       --            20              --                20
Common stock purchased and
        cancelled                            --       --        (2,603)      --            (3)             --                (3)
Issuance of common stock warrants
        for services, at fair value          --       --            --       --            19              --                19
Issuance  of  common  stock  to
        nonemployee directors for
        services, at fair value              --       --        32,756       --            35              --                35
Issuance of common stock for services
        and rent, at fair value              --       --       130,922        1           131              --               131
Common stock issued for cash, net of
        costs of $2                          --       --       203,000        1           219              --               220
Exchange of Series C preferred stock
        for common stock               (124,000)      --       620,000        3            (3)             --                --
Net loss                                     --       --            --       --            --          (4,485)           (4,485)
--------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2000              471,031        1    14,582,297       73        24,374          (7,803)           16,645
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                       13
<PAGE>
<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                                                                                            Years ended March 31,
                                                                                        -----------------------------------------
(In thousands)                                                                               2000            1999            1998
                                                                                        =========       =========       =========
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                     <C>             <C>             <C>
Net loss                                                                                $  (4,485)      $  (2,557)      $    (300)
Adjustments to reconcile net loss to net cash provided by (used in)
        operating activities:
                Deferred income taxes                                                          --              --             373
                Depreciation and amortization                                               1,310           1,405             978
                Impairment of long-lived assets                                             2,796              --              --
                Loss (gain) on disposal of assets                                             (50)            104              --
                Amortization of debt issue costs                                               93              19              --
                Issuance of common stock, warrants and options
                        in exchange for services                                              186              90              47
                Net (increase) decrease in assets:
                        Accounts receivable                                                  (601)            115           1,664
                        Refundable income taxes                                               119            (154)           (119)
                        Inventories                                                           496             124          (1,091)
                        Prepaid expenses and other assets                                      68               4              67
                Net increase (decrease) in liabilities:
                        Accounts payable                                                      384            (192)           (570)
                        Other accrued liabilities                                              27             122             (61)
                Other                                                                          --              46              --
                                                                                        ---------       ---------       ---------
                        Net cash provided by (used in) operating activities                   343            (874)            988
                                                                                        ---------       ---------       ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements                                           (397)           (588)         (5,881)
Proceeds from sale of capital assets                                                          218              --              --
Proceeds from sales and maturities of investment securities                                    --              --           3,954
                                                                                        ---------       ---------       ---------
        Net cash used in investing activities                                                (179)           (588)         (1,927)
                                                                                        ---------       ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of stock options
        and warrants, net of issuance costs                                                   237              --              92
Proceeds from issuance of long-term debt                                                       --             750              --
Principal payments on long-term debt                                                         (213)           (149)           (401)
Debt issue costs                                                                              (38)           (103)             --
Borrowings (repayment) on short term revolving line of credit, net                             (1)            994              --
Principal payments on note payable                                                             --            (975)             --
Principal payments on capital lease obligations                                               (67)           (129)           (130)
                                                                                        ---------       ---------       ---------
                Net cash provided by (used in) financing activities                           (82)            388            (439)
                                                                                        ---------       ---------       ---------
Net increase (decrease) in cash and cash equivalents                                           82          (1,074)         (1,378)
Cash and cash equivalents at beginning of year                                                323           1,397           2,775
                                                                                        ---------       ---------       ---------
Cash and cash equivalents at end of year                                                $     405       $     323       $   1,397
                                                                                        =========       =========       =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest, net of amounts capitalized                      $     190       $    160        $      35
                                                                                        =========       ========        =========
Cash paid during the year for income taxes                                              $      --       $     --        $      56
                                                                                        =========       ========        =========
Non-cash investing and financing activity:
     Issuance of note payable for construction in progress                              $      --       $     --        $     975
                                                                                        =========       ========        =========
</TABLE>
See accompanying notes to consolidated financial statements.

                                       14


<PAGE>



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(all amounts in thousands, except share data)

Note 1  DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

        (a)     Description of Business

Cyanotech  Corporation  (Company) develops and  commercializes  natural products
from microalgae.  The Company is currently producing microalgae products for the
nutritional supplement,  aquaculture feed/pigments and immunological diagnostics
markets.

        (b)     Principles of Consolidation

The Company  consolidates  enterprises  in which it has a controlling  financial
interest.  The  accompanying   consolidated  financial  statements  include  the
accounts of Cyanotech  Corporation  and its wholly owned  subsidiaries,  Nutrex,
Inc. and Cyanotech International FSC, Inc. All significant intercompany balances
and transactions have been eliminated in consolidation.

        (c)     Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers
all  highly  liquid  debt  securities   purchased  with  original  or  remaining
maturities of three months or less to be cash equivalents.

        (d)     Inventories

Inventories  are  stated  at the  lower of cost  (which  approximates  first-in,
first-out) or market. Market is determined by net realizable value.

        (e)     Equipment and Leasehold Improvements

Owned equipment and leasehold  improvements are stated at cost.  Equipment under
capital  lease is stated  at the lower of the  present  value of  minimum  lease
payments  or  fair  value  of the  equipment  at  the  inception  of the  lease.
Depreciation and amortization are provided using the  straight-line  method over
the estimated useful lives for equipment and furniture and fixtures, the shorter
of the lease terms or estimated useful lives for leasehold  improvements and the
lease terms or  estimated  useful lives for  equipment  under  capital  lease as
follows:


<TABLE>
<CAPTION>
<S>                                                               <C>
Equipment                                                          3 to 10 years
Leasehold improvements                                            10 to 26 years
Furniture and fixtures                                                   7 years
Equipment under capital lease                                           10 years
</TABLE>

Amortization of equipment  under capital lease is included in  depreciation  and
amortization expense in the accompanying consolidated financial statements.



                                       15

<PAGE>
        (f)     Earnings Per Share

Following is a  reconciliation  of the numerators and  denominators of the Basic
and Diluted net loss per Common Share computations for the periods presented (in
thousands except share data):
<TABLE>
<CAPTION>
Years ended March 31,                                                     2000                    1999                    1998
------------------------------------------------------------------------------------------------------------------------------
BASIC LOSS PER SHARE
<S>                                                             <C>                     <C>                     <C>
Net loss                                                        $       (4,485)         $       (2,557)         $         (300)
Requirement for Preferred Stock dividends                                 (237)                   (238)                   (289)
                                                                --------------          --------------          --------------
Net loss available to Common stockholders                       $       (4,722)         $       (2,795)         $         (589)
                                                                ==============          ==============          ==============
Weighted average Common Shares outstanding                          13,775,000              13,602,000              12,909,000
                                                                ==============          ==============          ==============
Net loss per Common Share                                       $        (0.34)         $        (0.21)         $        (0.05)
                                                                ==============          ==============          ==============


DILUTED LOSS PER SHARE

Net loss available to Common stockholders                       $       (4,722)         $       (2,795)         $         (589)
                                                                ==============          ==============          ==============
Weighted average Common Shares outstanding                          13,775,000              13,602,000              12,909,000
Effect of dilutive securities
     Stock options and warrants                                             --                      --                      --
     Convertible preferred stock                                            --                      --                      --
                                                                --------------          --------------          --------------
Weighted average Common Shares outstanding, as adjusted             13,775,000              13,602,000              12,909,000
                                                                ==============          ==============          ==============
Net loss per Common share                                       $        (0.34)         $        (0.21)         $        (0.05)
                                                                ==============          ==============          ==============
</TABLE>

For the years  ended  March 31,  2000,  1999 and 1998,  warrants  and options to
purchase Common Stock shares of the Company and convertible preferred stock were
outstanding,  but were not  included in the 2000,  1999 or 1998  computation  of
Diluted net loss per common  share  because the  inclusion  of these  securities
would have had an  antidilutive  effect on the net loss per common share.  As of
March 31, 2000,  warrants and options to acquire 842,796 shares of the Company's
common  stock and  preferred  stock  convertible  into  2,355,155  shares of the
Company's  common stock were  outstanding.  As of March 31,  1999,  warrants and
options to acquire  600,375  shares of the Company's  common stock and preferred
stock  convertible  into  2,975,155  shares of the  Company's  common stock were
outstanding.  As of March 31,  1998,  warrants  and  options to acquire  431,725
shares of the  Company's  common  stock and  preferred  stock  convertible  into
2,975,155 shares of the Company's common stock were outstanding.

        (g)     Research and Development

Research  and  development   costs  are  expensed  as  incurred.   Research  and
development  costs  amounted  to $514,  $895,  and  $677 in 2000,  1999 and 1998
respectively.

        (h)     Income Taxes

Income taxes are accounted for under the asset and  liability  method.  Deferred
tax assets  and  liabilities  are  recognized  for the  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  carryforwards.  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 effect on
deferred tax assets and  liabilities  of a change in tax rates is  recognized in
income in the period that includes the enactment date.

        (i)     Stock Option Plan

The Company applies the intrinsic value-based method of accounting prescribed by
Accounting  Principles Board  (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related  interpretations,  in  accounting  for its fixed plan
stock  options  issued  to  employees  and  nonemployee   directors.   As  such,
compensation  expense would be recorded on the date of grant only if the current
market price of the underlying  stock exceeded the exercise  price.  The Company
applies the fair  value-based  method of  accounting  prescribed by Statement of
Financial  Accounting  Standards  (SFAS) No. 123,  "Accounting  for  Stock-Based
Compensation," in accounting  for its fixed plan stock options issued to outside
third parties other than nonemployee  directors.  As such, expenses representing
the fair value of stock-based  awards on the date of grant are  recognized  over
the vesting period.

                                       16


<PAGE>

        (j)     Impairment of Long-Lived Assets  and  Long-Lived  Assets  to  Be
                Disposed Of

The Company accounts for long-lived  assets in accordance with the provisions of
SFAS No.  121,  "Accounting  for the  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets to Be Disposed  Of." SFAS No. 121  requires  that  long-lived
assets and certain identifiable  intangibles be 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 future  net cash flows
expected  to be  generated  by the asset.  If such assets are  considered  to be
impaired, the impairment to be recognized is measured as the amount the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying  amount or fair value less costs to
sell.

        (k)     Segment Information

As the Company's  operations  are solely related to  microalgae-based  products,
management considers its operations to be one industry segment.

        (l)     Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principals requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent assets and liabilities at the date of the financial  statements,  and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ significantly from those estimates.

        (m)     New Accounting Pronouncements

In June 1998, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
133,  "Accounting  for Derivative  Instruments  and Hedging  Activities,"  which
establishes  accounting and reporting  standards for derivative  instruments and
for hedging  activities.  SFAS No. 133  requires  that an entity  recognize  all
derivatives  as either  assets or  liabilities  in the  statement  of  financial
position and measure those  instruments at fair value. SFAS No. 133 is effective
for all fiscal  quarters of fiscal years  beginning after June 15, 1999. In July
1999, the FASB issued SFAS No. 137,  "Accounting for Derivative  Instruments and
Hedging  Activities - Deferral of the Effective  Date of FASB Statement No. 133,
an Amendment of FASB Statement No. 133," which defers the effective date of SFAS
No. 133 to be effective for all fiscal  quarters of fiscal years beginning after
June 15, 2000. The Company currently holds no derivative instruments,  nor is it
currently  participating  in  hedging  activities.  Management  does not  expect
adoption of SFAS No. 133 will have a material effect on the Company's  financial
condition, results of operations or liquidity.

        In March 1998,  the  American  Institute of Certified Public Accountants
(AICPA) Accounting Standards Executive  Committee issued Statement of Position
(SOP)  98-1,  "Accounting  for  the Costs  of Computer  Software  Developed or
Obtained  for  Internal  Use,"  which  requires  that  certain costs,  including
certain payroll and payroll-related  costs,  be capitalized  and  amortized over
the  estimated  useful  life  of  the  software.  The provisions of SOP 98-1 are
effective  for  fiscal years  beginning  after  December 15, 1998.  The  Company
adopted the provisions of SOP 98-1 effective  April 1, 1999. The adoption of SOP
98-1  did  not  have  a  material  effect  on the Company's financial condition,
results of operations or liquidity.

        In  April  1998,  the AICPA  Accounting  Standards  Executive  Committee
issued  SOP 98-5,  "Reporting  on the Costs  of Start-up  Activities."  SOP 98-5
requires that costs of start-up  activities, including  organization  costs,  be
expensed as incurred.  The provisions of SOP 98-5 are effective for fiscal years
beginning after December  15, 1998 and earlier application  is  encouraged.  The
Company adopted the provisions of SOP 98-5 effective April 1, 1999. The adoption
of SOP 98-5 did not have a material effect on the Company's financial condition,
results of operations or liquidity.

        (n)     Reclassifications

Certain  reclassifications  have  been  made to the  March  31,  1999  and  1998
consolidated  financial statements to conform to the classifications used in the
March 31, 2000 consolidated financial statements.  Such reclassifications had no
effect on previously reported results of operations.



                                       17
<PAGE>
NOTE 2  INVENTORIES

Inventories consists of the following as of March 31, 2000 and 1999
<TABLE>
<CAPTION>
                                                                      2000                 1999
                                                           ---------------      ---------------
<S>                                                        <C>                  <C>
Raw materials                                              $            72      $            63
Work in process                                                        278                  287
Finished goods                                                       1,060                1,555
Supplies                                                               199                  200
                                                           ---------------      ---------------
                                                           $         1,609      $         2,105
                                                           ===============      ===============
</TABLE>

NOTE 3  EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

Equipment and leasehold  improvements  consists of the following as of March 31,
2000 and 1999:


<TABLE>
<CAPTION>
                                                                      2000                 1999
                                                           ---------------    -----------------
<S>                                                        <C>                  <C>
Equipment                                                  $         8,961      $         8,421
Leasehold improvements                                              13,642               13,779
Furniture and fixtures                                                  83                   83
Equipment under capital lease                                           --                  388
                                                           ---------------      ---------------
                                                                    22,686               22,671
Less accumulated depreciation and amortization                      (7,383)              (6,107)
Construction in-progress                                               443                3,059
                                                           ---------------      ---------------
     Equipment and leasehold improvements, net             $        15,746      $        19,623
                                                           ===============      ===============
</TABLE>


At March 31, 1999, construction-in-progress included $2,643 of costs incurred on
a construction project on a 93-acre parcel.  The Company has a commitment with a
contractor  for this 93-acre  expansion  project which was suspended in February
1998.  In June 1999,  the Company  reached an agreement  with the  contractor to
resume work on the suspended  construction project on or before June 1, 2000. In
consideration  for the  extension  of  contract,  the  Company  agreed to pay an
additional  $20 at the  startup  of work  and a  surcharge  of 1.5% on work  not
completed by September  30, 1999 and a surcharge of 4% on work not  completed by
September 30, 2000.

        In  September  1999,  the Company reached a further  agreement with this
contractor on terms for indefinite suspension or  termination  of our  contract.
This agreement becomes effective only if the suspension agreement dated June 15,
1999,  expires  without a further  agreement  to continue  the  suspension.  The
contractor has calculated the remaining balance due for work completed under the
contract to be $338.  If the  contract  expires  without a further  agreement to
continue the suspension, the Company reached a settlement with the contractor to
pay $170 for such completed  work.  The $170 is included in accrued  expenses in
the  consolidated  balance  sheet at March 31,  2000.  In the event the  Company
chooses to proceed with the project at a future date,  the  contractor  reserves
the right to negotiate for escalation and remobilization cost increases.  If the
Company  cannot come to an agreement  with the  contractor for completion of the
project, it may proceed with an alternate  contractor after paying the remaining
$168 plus interest.

        On April 28, 2000,  the Company reached an agreement with the contractor
for   a   modification   of   the   terms  of  the  suspension  agreement  dated
September 1999.  The contractor has agreed to extend the date of  resumption  of
work to December 1, 2000.  In consideration for this  modification,  the Company
paid $85 of the $170 remaining on the contract,  with the  balance  of $85 to be
paid on or before December 1, 2000.  Presently, the 93-acre expansion is dormant
and the ultimate decision to proceed with this expansion project is uncertain at
this time.

        In June 1999,  the  Company  reached a preliminary  agreement with Norsk
Hydro to produce and market NatuRose natural  astaxanthin  product  in  a  joint
venture  that  would  be  owned  51%  by  Norsk Hydro and 49% by Cyanotech.  The
intention  of  the  joint venture was to build and operate a NatuRose production
facility  on  the  aforementioned  93-acre parcel.   Under  the  terms  of  this
agreement,  Norsk  Hydro was  to fund the optimization of Cyanotech's production
technology for natural  astaxanthin  and  in  return,  was  to  receive  certain
worldwide market rights for the NatuRose  product.   While  this arrangement was
being finalized,  the Company  continued to independently  develop  its  natural
astaxanthin   production   technology,   and   subsequently   made   significant
improvements.  The   Company   decided   not  to  finalize  the   joint  venture
relationship.

                                       18

<PAGE>

        As  a  result of the  Company's  decision to end the  negotiations,  the
projected  future  cash  flows that  were expected  from the Norsk  Hydro  joint
venture were reduced to zero.  In accordance  with the  provisions  of SFAS  No.
121, an impairment loss is to be recognized whenever the  projected  future cash
flows from an asset are less than the carrying value of that asset.  The Company
recorded a non-cash asset  impairment  charge of $2,796 on the  construction-in-
progress balance related to this project. The impaired asset consisted primarily
of the  accumulated  cost of  grading  work  done on the  93-acre  facility  and
construction contract termination costs incurred.

Note 4  ACCRUED EXPENSES

Components of accrued expenses as of March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
                                                       2000         1999
                                                   --------     --------
<S>                                                <C>          <C>
Accrued wages, commissions and royalties           $    155     $    223
Contractor settlement                                   170           --
Legal fees                                                2          111
Other accrued expenses                                   94           60
                                                   --------     --------
                                                   $    421     $    394
                                                   ========     ========
</TABLE>


NOTE 5  LINE OF CREDIT AND LONG-TERM DEBT

Line of Credit

In July 1998, the Company entered into a Loan and Security Agreement (Agreement)
with  a  lender  which  provided  for  up  to $3  million  in  aggregate  credit
facilities,  secured by all the assets of the Company.  The major  components of
the Agreement  included working capital loans on a revolving  basis,  subject to
the availability of eligible accounts  receivable and inventory (as defined),  a
sub-limit  term loan of up to $750  (amortized  in equal  payments of $12.5 over
sixty months), secured by eligible machinery and equipment, and a sub-limit term
loan of up to $2 million (amortized over sixty months and subject to the Company
achieving and  maintaining  specific  levels of financial  performance)  for the
acquisition of new machinery and equipment. The Agreement had a maturity date of
July 31, 2001 with an optional  provision for automatic and  continuous  renewal
for  successive,  additional  terms of one year each.  The interest  rate on the
credit facility,  in the absence of a default under the agreement was prime plus
2.5% (at  March 31,  2000,  the prime  rate was 9%) until the  Company  achieved
certain  financial  performance  levels,  at which time the interest rate was to
decrease to prime plus 1.25%.  Interest  was  calculated  on a base amount of $1
million or the outstanding loan balance, whichever was greater.

        The Agreement contained restrictive  covenants,  which  included,  among
other things, the maintenance of minimum consolidated net worth, as defined, and
an  acceleration  clause  contingent  upon  the  occurrence of  an event  with a
material adverse effect on the Company, as defined. On July 13, 1999, the lender
gave notice to the Company of a default  under  the  Agreement  because  of  the
uncertainty of the Company's ability to continue as a going concern.  In view of
this default,  the lender exercised its right under the Agreement effective July
13, 1999, to increase the interest rate on all  borrowings  from prime plus 2.5%
to  prime  plus  5.5%.  Consequently,   the  Company  classified  the  aggregate
outstanding  balance  on this  Agreement  of  $1,644,  representing  outstanding
working capital loans on a revolving basis of $994 and an equipment term loan of
$650,   as   a   current   liability   in  the  consolidated  balance  sheet  at
March 31, 1999.

        On  October 8, 1999,  the  lender  informed the Company of its intent to
terminate  the  Agreement  with  Cyanotech  effective  December  31,  1999,  and
accelerate the repayment of all outstanding  borrowings due to the Company being
in default on certain financial  covenants.  This default was  attributed to the
inclusion  of  "going  concern"  language  in  the  audit  report  issued by the
Company's independent  auditors for the 1999  fiscal  year and the fact that the
Company's consolidated net worth had dropped below the minimum  specified level.
In anticipation of the  December 31, 1999 exit date,  all remaining  capitalized
loan  costs  (totaling  $61)  were  fully  amortized  during  the  quarter ended
December 31, 1999.  These costs were previously being amortized over the term of
the Agreement.

        In  January  2000,  the  lender  amended its letter of October  1999 and
agreed to  continue to advance funds per the original  Agreement at a decreasing
rate until the revised  termination date of March 31,  2000.  Effective  January
24, 2000,  advances  were  made  on  eligible  collateral at  a  rate of 75% for
receivables,  a  decrease of 5% from the original  Agreement  made in July 1998.
The receivable advance rate was reduced on the 24th day of each subsequent

                                       19
<PAGE>
month  by  5%  until  the  exit  date  of March 31, 2000.  Advances  on eligible
inventories  followed the schedule set in the letter dated October 8, 1999,  and
was decreased 1% each subsequent month until the exit  date of March  31,  2000.
Repayment of the equipment term loan was to increase to $20 per month from $12.5
per month as originally set forth in the Agreement dated July 28, 1998.

        In March 2000, the Company finalized a forebearance  agreement with this
lender which modified the exit date of March 31, 2000  to  April  28,  2000.  In
consideration for this extension of the exit date, the Company paid a fee of $25
to the lender.


Term Loan Agreement

On April 21, 2000, the Company executed a Term Loan Agreement (Term Loan) with a
new lender  which  provided for $3.5  million in  aggregate  credit  facilities,
secured  by  substantially  all the assets of the  Company.  The Term Loan has a
maturity date of May 1, 2010 and is payable in 120 equal  monthly  principal and
interest  payments of approximately  $48, commencing June 1, 2000.  The interest
rate under this agreement,  in the absence of a default under the Agreement,  is
the prime rate,  as defined,  in effect as of the close of business on the first
day of each  calendar  quarter,  plus 1% (at April 21, 2000,  the prime rate was
9.5%).  Interest is  calculated  on the unpaid  balance of principal  based on a
normal  amortization  schedule  commencing  May 1, 2000.

        A  warrant  to  purchase 20,000 shares of the Company's common stock was
issued  in  conjunction with  this  Term  Loan agreement. The warrant expires in
April 2011 and has an exercise  price of $2.55 per share.  The warrant  may only
be  exercised after the Company has repaid the Term Loan in full.

        On  April 26, 2000,  approximately  $1,593 of  the $3.5 million proceeds
from  this  Term  Loan,  was  used to repay  the balance outstanding,  including
interest  and  related  fees,  under the Agreement.  The Company  has classified
$186  of  the  outstanding  balance  on  the  previous  Agreement  of  $1,493 at
March 31, 2000,  as  a  current  liability  in the consolidated balance sheet at
March 31, 2000.  This  amount  represents  the current portion  of the Term Loan
Agreement due by March 31, 2001.

Long-Term Debt

Long-term debt consists of the following as of March 31, 2000 and 1999
<TABLE>
<CAPTION>
                                                                                              2000            1999
                                                                                        ----------      ----------
<S>                                                                                     <C>             <C>
Note  payable at  the London  Interbank Offered Rate (LIBOR)  plus 2%,  adjusted
        quarterly; principal payments  of  $12.5,  due quarterly, plus interest,
        through April 1, 2000, repaid in full in March 2000.                            $       --      $       63
Note payable at the prime rate plus 5.5% per  annum, adjusted monthly; principal
        payments of $20, due monthly, plus interest; balance due April 28, 2000,
        repaid with proceeds  from  long-term  borrowings  from a  new lender in
        April 2000 as described above.                                                         500             650
Revolving  line  of  credit  at  the  prime  rate  plus 5.5% per annum, adjusted
        monthly; balance due April 28, 2000, repaid with proceeds from long-term
        borrowings from a new lender in April 2000 as described above.                         993              --
                                                                                        ----------      ----------
Total long-term debt                                                                         1,493             713
Less current maturities of long-term debt                                                      186            (700)
                                                                                        ----------      ----------
Long-term debt, excluding current maturities                                            $    1,307      $       13
                                                                                        ==========      ==========
</TABLE>

Convertible Debentures - Subsequent Event

On May 2, 2000, the Company  completed a private  placement of $1,250  principal
amount  6%  convertible   subordinated  debentures  due  April  30,  2002.  This
transaction  provided net proceeds to the Company of approximately $1.1 million.
Interest  on these debentures  is  payable  quarterly,  in arrears,  on April 1,
July 1, October 1, and January 2 in each year  commencing  on July 1, 2000, at a
rate of 6% per annum. The debentures are convertible into shares of common stock
of the Company at a conversion  price equal to $1.50 per share, the market price
of  the  Company's  common stock at the date of issuance.  A warrant to purchase
83,334 shares of the Company's  common stock was issued to the  placement  agent
of the debentures,  exercisable for five years from the issue date, at $1.80 per
share.

                                       20
<PAGE>
NOTE 6  LEASES

The Company  leased  certain  equipment  under a capital  lease which expired in
2000, and leases facilities,  equipment and land under operating leases expiring
between 2003 and 2025.  The capital lease was  satisfied in its entirety  during
fiscal 2000.

        Future  minimum lease  payments under non-cancelable operating leases at
March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Year ending March 31:

<S>                                                             <C>
2001                                                            $                250
2002                                                                             250
2003                                                                             250
2004                                                                             224
2005                                                                             223
Thereafter, through 2025                                                       3,259
                                                                --------------------
Total minimum lease payments                                    $              4,456
                                                                ====================
</TABLE>

Total rent expense under operating  leases amounted to $330,  $350, and $211 for
the years ended March 31, 2000, 1999 and 1998 respectively.

        The  land  leases  provide  for  contingent rentals in excess of minimum
rental  commitments  based  on  a  percentage of the Company's sales. Contingent
rentals for the years ended March 31, 2000, 1999 and 1998 were not material.

        The  State  of  Hawaii  has  agreed  to allow  the  Company  to lease an
additional 93-acre parcel on a year to year  basis,  until  such  time  that the
Company  determines  the  need  for  a  longer  lease  term.   The current lease
agreement is effective through  December 31, 2000. In January 2000,  the Company
negotiated with the State of Hawaii, the option for payment of  one-half  of the
monthly fixed fee, or $5 per month, through June 30, 2000, in Common stock based
on the  closing  bid  price on the last trading day of each month.  This payment
option is at the sole discretion of the Company.

NOTE 7  SERIES C PREFERRED STOCK

Series C preferred  stock is  convertible  into common  stock at the rate of one
share of preferred  stock for five shares of common stock  through  February 23,
2000,  after  which  date the  conversion  feature is no longer  applicable.  In
January  2000,  the  Company's  Board of  Directors  approved  extension of this
conversion  date to  February  23,  2002.  This  modification  was  subsequently
ratified by the holders of Series C preferred  stock.  Series C preferred  stock
has voting rights equal to the number of shares of common stock into which it is
convertible  and has a  preference  in  liquidation  over all  other  series  of
preferred stock of $5 per share plus any unpaid accumulated  dividends.  Holders
of Series C preferred  stock are entitled to 8% cumulative  annual  dividends at
the rate of $.40 per share; cumulative dividends in arrears as of March 31, 2000
amount to $2,030 ($4.31 per share). Upon conversion of Series C preferred stock,
cumulative  dividends in arrears on converted shares are no longer payable.  The
amount of cumulative  dividends foregone due to conversion during the year ended
March 31, 2000 was $533 (nil in 1999 and $457 in 1998).  The consent of Series C
preferred stockholders is required to modify their present rights or sell all or
substantially all of the Company's assets.

        In April 2000, 100,000 shares of Series C preferred stock were converted
into 500,000 shares of common stock.

NOTE 8  STOCK OPTIONS AND WARRANTS

Stock Options

The  Company's  1995 Stock  Option Plan (the "1995  Plan"),  reserves a total of
800,000  shares  of  common  stock for  issuance  under the Plan.  The 1995 Plan
provides for the issuance of both  incentive and  non-qualified  stock  options.
Options are to be granted at, or above,  the fair market value of the  Company's
common  stock at the date of  grant  and  generally  become  exercisable  over a
five-year period.

        The  Company  also  has  a Non-employee  Director Stock Option and Stock
Grant Plan, which was approved by stockholders in 1994 (the "1994 Plan").  Under
the   1994   Plan,  and   upon   election   to  the  Board  of  Directors,  non-
                                       21

<PAGE>
employee directors are granted a ten-year option to purchase 3,000 shares of the
Company's common stock  at  its  fair  market  value  on the  date of grant.  In
addition, on the date of each Annual Meeting of  Stockholders  in each year that
the 1994 Plan is in effect, each non-employee director continuing in office will
be automatically  granted, without payment, 2,000 shares of common stock that is
non-transferable  for six  months following the date of grant.  Grants of 6,000,
4,000  and 8,000 shares of  common stock were made under the 1994 Plan in August
1999 and September 1998 and 1997, respectively.  Expense recognized as a  result
of  these  stock  grants  amounted  to $6 for the years ended March 31, 2000 and
1999, and $47 for the year ended March 31, 1998.

        At  March 31, 2000,  there were  138,529 additional shares available for
grant under the 1995 Plan and 47,000 additional shares  available under the 1994
Plan.  The per share weighted-average fair value of stock options granted during
2000,  1999  and  1998  was  $.78, $2.53 and $4.72, respectively, on the date of
grant using a Black Scholes option-pricing model with the  following   weighted-
average assumptions:  2000 - expected  dividend yield of 0%, risk- free interest
rate of 5.5%,  expected  volatility  of 96%, and an expected  life of 4.2 years;
1999 - expected dividend yield of 0%, risk-free interest rate of 5.6%,  expected
volatility of 98%, and an expected life of 5.7 years;  1998 - expected  dividend
yield of 0%, risk-free interest rate of 6.6%, expected volatility of 99%, and an
expected life of 4.5 years.

        The Company applies the provisions of  APB Opinion No. 25 in  accounting
for employee  stock-based  compensation and,  accordingly,  no compensation cost
has been recognized for its employee stock options in the accompanying financial
statements.  Had the Company determined compensation cost based on the estimated
fair value at the grant date for its employee  stock options under SFAS No. 123,
the Company's net loss available to Common  stockholders and net loss per common
share would have been as reflected in the pro forma amounts below:
<TABLE>
<CAPTION>
                                                              2000            1999           1998
                                                        ---------------  -------------  -------------
Net loss available to Common stockholders
<S>                                                     <C>              <C>            <C>
        As reported                                     $       (4,722)  $     (2,795)  $       (589)
        Pro forma                                       $       (5,103)  $     (3,282)  $     (1,041)

Net loss per common share
        As reported                         Basic       $        (0.34)  $      (0.21)  $      (0.05)
                                            Diluted     $        (0.34)  $      (0.21)  $      (0.05)
        Pro forma                           Basic       $        (0.37)  $      (0.24)  $      (0.08)
                                            Diluted     $        (0.37)  $      (0.24)  $      (0.08)
</TABLE>

Pro forma net loss  available  to Common  stockholders  and net loss per  common
share information reflect only options granted since 1996.  Therefore,  the full
impact of calculating  compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net loss available to Common stockholders and net
loss per common share  amounts  presented  above  because  compensation  cost is
reflected over the options' vesting period of 5 years, and compensation cost for
options granted prior to April 1, 1995 is not considered.

Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
                                                                   Weighted-
                                              Number of              average
                                                 shares       exercise price
                                        ---------------       --------------
<S>                                     <C>                   <C>
Balance at March 31, 1997                       420,388       $         4.42
     Granted                                    125,000                 6.31
     Exercised                                  (84,750)                1.21
     Forfeited                                  (53,913)                5.87
                                        ---------------       --------------
Balance at March 31, 1998                       406,725                 5.48
     Granted                                    213,600                 3.22
     Expired                                    (20,000)                6.63
     Forfeited                                  (24,950)                4.81
                                        ---------------       --------------
Balance at March 31, 1999                       575,375                 4.63
     Granted                                    301,596                 1.03
     Exercised                                  (21,650)                0.94
     Expired                                    (42,025)                0.94
     Forfeited                                  (95,500)                2.86
                                        ---------------       --------------
Balance at March 31, 2000                       717,796       $         3.68
                                        ===============       ==============
</TABLE>
                                       22
<PAGE>

The following table summarizes  information  about stock options  outstanding at
March 31, 2000:
<TABLE>
<CAPTION>
                           Options Outstanding                                Options Exercisable

                           Number        Weighted-avg                                  Number
   Range of        outstanding at           remaining         Weighted-avg     exercisable at        Weighted-avg
exercise prices          03/31/00    contractual life       exercise price           03/31/00      exercise price
----------------   --------------    ----------------       --------------     --------------   -----------------
<S>        <C>            <C>               <C>                 <C>             <C>                  <C>
   $.97 to $1.69          275,896           4.3 years           $     1.05            12,096            $    1.40
  $3.13 to $3.69          152,900           4.0 years           $     3.22            40,308            $    3.24
  $5.13 to $7.63          289,000           1.3 years           $     6.43           216,275            $    6.31
----------------   --------------    ----------------       --------------      ------------    -----------------
   $.97 to $7.63          717,796           3.0 years           $     3.68           268,679            $    5.62
================   ==============    ================       ==============      ============    =================
</TABLE>

Warrants

At March 31,  2000,  the Company has  warrants  outstanding  to acquire  125,000
shares of the  Company's  common  stock.  A warrant to acquire  75,000 shares of
common stock was granted in December 1999 in consideration for services provided
by a third party.  The warrant is exercisable at $.63 per share,  and expires in
December, 2004.  A warrant to acquire  50,000 shares of common stock was granted
on January  19,2000 in  connection  with the  purchase  of 50,000  shares of the
Company's common stock by an existing stockholder. The warrant is exercisable at
$1.00 per share, and expires in January, 2005. Warrants to acquire 25,000 shares
of common stock at $1.00 per share expired during fiscal 2000.


NOTE 9  MAJOR CUSTOMERS AND EXPORT SALES

Sales to major  customers for the years ended March 31, 2000,  1999 and 1998 are
summarized as follows (percent of product sales):
<TABLE>
<CAPTION>
                                                                 2000                1999              1998
                                                        ---------------------------------------------------
<S>                                                               <C>                 <C>               <C>
Customer A                                                         23%                 11%                *
                                                        ===================================================
* Less than 10% of product sales
</TABLE>

Net product  sales by geographic  area for the years ended March 31, 2000,  1999
and 1998 are summarized as follows:
<TABLE>
<CAPTION>
                                                           2000                    1999                    1998
                                                  ------------------------------------------------------------------
<S>                                               <C>          <C>        <C>          <C>        <C>          <C>
United States                                     $   3,992    54%        $   4,075    60%        $   4,297    56%
Canada/South America                                    371     5%              426     6%              404     5%
The Netherlands                                       1,715    23%              717    11%              496     7%
Europe, excluding the Netherlands                       613     8%              498     7%              788    10%
China                                                    73     1%               50     1%              358     5%
Asia/Pacific, excluding China                           634     9%              972    15%            1,284    17%
                                                  ------------------------------------------------------------------
                                                  $   7,398   100%        $   6,738   100%        $   7,627   100%
                                                  ==================================================================
</TABLE>

Foreign product sales transactions are consummated in U.S. dollars.

                                       23
<PAGE>

NOTE 10  INCOME TAXES

The  components  of income tax  expense  (benefit)  are as follows for the years
ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
                                                               2000           1999            1998
                                                        -----------     ----------      ----------
CURRENT
<S>                                                     <C>             <C>             <C>
     Federal                                            $        --      $      --      $      (13)
     State                                                      (20)          (289)           (185)
                                                        -----------     ----------      ----------
                                                                (20)          (289)           (198)
                                                        -----------     ----------      ----------
DEFERRED
     Federal                                                     --             --             314
     State                                                       --             --              59
                                                        -----------     ----------      ----------
                                                                 --             --             373
                                                        -----------     ----------      ----------
                                                        $       (20)    $     (289)     $      175
                                                        ===========     ==========      ==========
</TABLE>

A reconciliation of the amount of income taxes computed at the federal statutory
rate of 34% to the amount reflected in the Company's consolidated  statements of
operations for the years ended March 31, 2000, 1999 and 1998 follows:
<TABLE>
<CAPTION>
                                                                          2000                 1999                    1998
                                                                  ------------          -----------             -----------
<S>                                                               <C>                   <C>                     <C>
Amount at the federal statutory income tax rate                   $     (1,532)         $      (968)            $       (43)
State income taxes, net of federal income tax effect                       (13)                (191)                    (83)
Increase in the valuation allowance for deferred tax assets              1,855                  889                     270
Other                                                                     (330)                 (19)                     31
                                                                  ------------          -----------             -----------
                                                                  $        (20)         $      (289)            $       175
                                                                  ============          ===========             ===========
</TABLE>

The  significant  components  of deferred  income tax expense  (benefit) for the
years ended March 31, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
                                                                          2000                 1999                    1998
                                                                  ------------          -----------             -----------
<S>                                                               <C>                   <C>                     <C>
Deferred tax expense (benefit), exclusive of the change in
        beginning-of-the-year valuation allowance balance         $     (1,855)         $      (889)            $       103
Increase (decrease) in beginning-of-the-year balance of the
        valuation allowance for deferred tax assets                      1,855                  889                     270
                                                                  ------------          -----------             -----------
                                                                  $         --          $        --             $       373
                                                                  ============          ===========             ===========
</TABLE>
                                       24
<PAGE>

The tax effects of temporary differences related to various assets,  liabilities
and  carryforwards  that give rise to  deferred  tax  assets  and  deferred  tax
liabilities as of March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
                                                                                         2000                  1999
                                                                                  -----------           -----------
DEFERRED TAX ASSETS:
<S>                                                                               <C>                   <C>
     Net operating loss carryforwards                                             $     3,114           $     2,020
     Leasehold improvement, impairment loss for financial reporting purposes            1,062                    --
     Tax credit carryforwards                                                             238                   252
     Other                                                                                174                   200
                                                                                  -----------           -----------
        Gross deferred tax assets                                                       4,588                 2,472
Less valuation allowance                                                               (3,148)               (1,293)
                                                                                  -----------           -----------
        Net deferred tax assets                                                         1,440                 1,179
Deferred tax liability - equipment and leasehold improvements, principally due
        to differences in depreciation and amortization                                (1,440)               (1,179)
                                                                                  -----------           -----------
        Net deferred tax asset                                                 $           --           $        --
                                                                                  ===========           ===========
</TABLE>

The valuation  allowance  for deferred tax assets as of April 1, 1999,  1998 and
1997 was $1,293,  $404 and $134 respectively.  The valuation allowance increased
by $1,855,  $889 and $270 during the years ended March 31,  2000,  1999 and 1998
respectively.  In assessing the realizability of deferred tax assets, management
considers  whether it is more  likely  than not that some  portion or all of the
deferred tax assets will not be realized.  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.  Management
considers the scheduled  reversal of deferred tax liabilities,  projected future
taxable income, and tax planning strategies in making this assessment.

        Based upon the level of historical taxable  income and  projections  for
future taxable income over the periods in which the net deferred tax assets  are
deductible,  management  believes it is more  likely  than not the Company  will
realize  the  benefits  of these  deductible  differences,  net of the  existing
valuation  allowance  at March 31,  2000.  The amount of the deferred tax assets
considered  realizable,  however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.

        At March 31, 2000, the Company has net operating tax loss  carryforwards
and tax  credit carryforwards available to offset future federal income taxes as
follows:
<TABLE>
<CAPTION>
                                                                              Research and
                             Net operating          Investment tax         experimentation
Expires March 31,                   losses                 credits             tax credits
                        ------------------      ------------------      ------------------
<S>                             <C>                     <C>                     <C>
2001                            $       --              $      14               $       15
2002                                    --                     --                       22
2003                                    --                     --                       15
2004                                    --                     --                       52
2005                                    --                     --                        5
2006                                   400                     --                       --
2011                                    --                     --                       23
2012                                    44                     --                        9
2013                                 1,601                     --                       --
2019                                 3,632                     --                       --
2020                                 2,663                     --                       --
                        ------------------      -----------------       ------------------
                               $     8,340              $      14               $      141
                        ==================      =================       ==================
</TABLE>

In addition,  at March 31, 2000, the Company has alternative  minimum tax credit
carryforwards of approximately  $83 which are available to reduce future federal
regular income taxes over an indefinite period.

        At March 31, 2000, the Company has tax net operating loss  carryforwards
of $4,646, which expire in March 31, 2019 and 2020, available  to offset  future
Hawaii state taxable income.

        Investment tax credits will be recorded as a reduction of the  provision
for federal income taxes in the year realized.

                                       25
<PAGE>


NOTE 11  FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
defines  the fair  value of a  financial  instrument  as the amount at which the
instrument could be exchanged in a current transaction between willing parties.

        The  following  methods and  assumptions  were used to estimate the fair
value of each class of financial instruments as of March 31, 2000 and 1999.

Cash and Cash Equivalents

The carrying amounts  approximate fair value because of the short-term nature of
these instruments.

Short-Term Revolving Line of Credit

The carrying value of the short-term  revolving line of credit approximates fair
value because the instruments reprice monthly at market rates.

Long-Term Debt

The carrying  amounts  approximate  fair value because the  instruments  reprice
monthly or quarterly at market rates.

NOTE 12  PROFIT SHARING PLAN

The Company sponsors a 401(k) profit sharing plan for all associates not covered
under a separate  management  incentive  plan.  Under the 401(k) profit  sharing
plan,  5%  of  pre-tax  profits  may  be  allocated  based  on  gross  wages  to
non-management   associates  on  a  quarterly  basis.   Fifty  percent  of  each
associate's  profit sharing bonus is distributed in cash on an after-tax  basis,
with the remainder  deposited in each  associate's  401(k)  account on a pre-tax
basis  with a six year  vesting  schedule,  based on years of  service  with the
Company. All associates may make voluntary pre-tax contributions to their 401(k)
accounts.  Compensation  expense  relative  to this plan was nil for each of the
three years ended March 31, 2000, 1999 and 1998.

NOTE 13  COMMITMENTS AND CONTINGENCIES

On July 13, 1998, the Company filed a complaint (Case No.  CV98-00600) in United
States  District Court  for the District of Hawaii (Court)  against  Aquasearch,
Inc.  (Aquasearch),  seeking  declaratory  judgment  of patent  noninfringement,
patent invalidity,  and non-misappropriation of trade secrets relating to closed
culture  production  of  astaxanthin.  The  complaint  was filed in  response to
assertions by Aquasearch,  a competitor in the astaxanthin market, regarding its
alleged intellectual property rights.  Aquasearch has answered the complaint and
filed   counter   claims    alleging   patent    infringement,    trade   secret
misappropriation,  unfair  competition  and breach of contract.  The Court later
granted  Cyanotech's  motion to amend its  complaint  against  Aquasearch to add
claims of  misappropriation  of trade secrets  regarding  open pond  technology,
unfair competition and breach of contract.

        On  December 30, 1999, the Court denied  Cyanotech's  motion for summary
judgment of non-infringement and patent invalidity as to Aquasearch's U.S.Patent
No. 5,541,056 and granted  Aquasearch's  related motion that Cyanotech infringes
its patent.  The Court also granted Aquasearch's partial summary judgment motion
finding that Cyanotech misappropriated  Aquasearch trade secrets and committed a
breach of contract. In response, Cyanotech filed a motion for reconsideration on
January 14, 2000, with the Court. On March 3, 2000, United States District Court
Judge Alan C. Kay denied  Cyanotech's motion for  reconsideration.  Although the
outcome of this  litigation  cannot be assured,  management does not expect that
damages,  if any,  against  Cyanotech will have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.

        As of March 31, 2000,  the  Company  had  a  commitment  for a suspended
construction project on a 93-acre parcel (see Note 3).

                                       26
<PAGE>
INDEPENDENT AUDITORS' REPORT





The Board of Directors
Cyanotech Corporation

We have  audited  the  accompanying  consolidated  balance  sheets of  Cyanotech
Corporation  and  subsidiaries  as of March 31,  2000 and 1999,  and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
each  of the  years  in the  three-year  period  ended  March  31,  2000.  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 auditing standards generally accepted
in the  United  States of  America.  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, 2000 and 1999, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended March 31, 2000 in conformity with accounting  principles  generally
accepted in the United States of America.






/s/ KPMG LLP
Honolulu, Hawaii
May 5, 2000

<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA


                                              First           Second         Third           Fourth         Total
($ in thousands, except share data)          Quarter         Quarter        Quarter         Quarter          Year
----------------------------------------- --------------  -------------- --------------  -------------- --------------
2000
<S>                                       <C>             <C>            <C>             <C>            <C>
Net sales                                 $   1,599       $    1,496     $   2,037       $   2,266      $    7,398
Gross profit                                    267              126           512             598           1,503
Net loss (a)                                   (527)            (609)       (3,188)           (161)         (4,485)
Net loss per common share
     Basic (a)                                (0.04)           (0.05)        (0.24)          (0.02)          (0.34)
     Diluted (a)                              (0.04)           (0.05)        (0.24)          (0.02)          (0.34)

1999
Net sales                                 $   1,763       $    1,525     $   1,675       $   1,775      $    6,738
Gross profit                                    179              401           122             271             973
Net loss                                       (631)            (442)         (719)           (765)         (2,557)
Net loss per common share
     Basic                                    (0.05)           (0.04)        (0.06)          (0.06)          (0.21)
     Diluted                                  (0.05)           (0.04)        (0.06)          (0.06)          (0.21)
</TABLE>

         (a) Net loss and net loss per common  share for the third  quarter  and
for the total fiscal year 2000 reflect the effect of an asset impairment  charge
of $2,796. For further detail, see the sections  "Operating  Expenses-Impairment
of Long-Lived  Assets" and  "Liquidity  and Capital  Resources" in  Management's
Discussion  and Analysis of Financial  Condition and Results of Operations  from
the Company's fiscal 2000 Annual Report.

                                       27
<PAGE>



OFFICERS

Gerald R. Cysewski, Ph.D.
President, Chief Executive Officer
and Chairman of the Board


Glenn D. Jensen
Vice President - Operations

Kelly J. Moorhead
Vice President - Sales and Marketing

Ronald P. Scott
Executive Vice President -
        Finance and Administration
        Treasurer and Secretary



BOARD OF DIRECTORS

Gerald R. Cysewski, Ph.D.
Eric H. Reichl (1,2)
Ronald P. Scott
John T. Waldron (1,2)
Paul C. Yuen, Ph.D.  (1,2)

1 Member of the Audit Committee
2 Member of the Compensation and
  Stock Option Committee



CORPORATE INFORMATION

Corporate Headquarters
Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Keahole Point
Kailua-Kona, HI 96740
Tel (808) 326-1353
Fax (808) 329-3597



WHOLLY-OWNED SUBSIDIARIES

Nutrex, Inc.
Cyanotech International FSC, Inc.


<PAGE>

TRANSFER AGENT AND REGISTRAR

American Securities Transfer and Trust, Inc.
12039 West Alameda Parkway
Lakewood, CO 80228
(303) 986-5400


INDEPENDENT ACCOUNTANTS

KPMG LLP
P.O. Box 4150
Honolulu, HI 96812-4150



LEGAL COUNSEL

Goodsill Anderson Quinn & Stifel
P.O. Box 3196
Honolulu, HI 96801-3196



FORM 10-K

A copy of Cyanotech's annual report to the Securities and Exchange Commission on
Form 10-K is available without charge upon written request to:

         Secretary, Cyanotech Corporation
         73-4460 Queen Kaahumanu Hwy.
         Suite 102
         Kailua-Kona, HI 96740



NOTICE OF ANNUAL MEETING

The 2000 annual meeting of stockholders will be held
on Thursday, August 24, 2000, at 7:00 p.m. at
Ala Moana Hotel
410 Atkinson Dr.
Honolulu, HI 96814



ADDITIONAL INFORMATION:

As a service to our stockholders and prospective investors,  copies of Cyanotech
news  releases  and  financial  statements  issued  in the  last 12  months  are
available 24 hours a day, seven days a week on the Internet's  World Wide Web at
http://www.cyanotech.com.


MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Cyanotech's  Common  Stock is traded on the  NASDAQ  National  Market  under the
symbol "CYAN." The following table sets forth the high and low selling prices as
reported by the NASDAQ Stock Market for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended                           High                   Low

2000
<S>                                      <C>                    <C>
March 31, 2000                           $       4.88           $       1.00
December 31, 1999                        $       2.25           $       0.50
September 30, 1999                       $       1.44           $       0.72
June 30, 1999                            $       1.59           $       0.59

1999
March 31, 1999                           $       1.25           $       0.88
December 31, 1998                        $       1.75           $       0.91
$eptember 30, 1998                       $       3.69           $       1.50
June 30, 1998                            $       4.44           $       3.13
</TABLE>

         Cyanotech  has never  declared  or paid cash  dividends  on its  Common
Stock. We currently intend to retain all of our earnings for use in the business
and do not anticipate  paying any cash dividends on Series C Preferred  Stock or
Common Stock in the foreseeable future.

         The approximate number of record holders of outstanding Common Stock as
of June 26, 2000 was 1,368.


FORWARD-LOOKING INFORMATION

Certain  statements  herein  set  forth management's intentions, plans, beliefs,
expectations or predictions of the future based on current  facts and  analyses.
Actual  results  may  differ  materially  due  to a variety of factors including
reduced  product  demand,  price  competition,  government  action,  and weather
conditions.  Additional  information  on factors that may affect the Company and
cause  actual  results  to  differ  from  current  expectations  can be found in
Cyanotech's filings with the SEC.

                                       28