UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                   Quarterly Report Under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For Quarterly Period Ended December 31, 1999

                         Commission File Number 0-14602


                              CYANOTECH CORPORATION
             (Exact name of registrant as specified in its charter)


          NEVADA                                               91-1206026
 (State or other jurisdiction                                (IRS Employer
 of incorporation or organization)                        Identification Number)



            73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740
                    (Address of principal executive offices)

                                 (808) 326-1353
                         (Registrant's telephone number)


     Check whether the registrant (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes xx No


     Number of common shares outstanding as of January 31, 1999:

             Title of Class                                Shares Outstanding
             --------------                                ------------------

  Common stock - $.005 par value stock                         13,838,242

<PAGE>




                              CYANOTECH CORPORATION
                                    FORM 10-Q

                                      INDEX

PART I.   FINANCIAL INFORMATION
-----------------------------

Item 1.  Financial Statements                                               Page
                                                                            ----

         Consolidated Balance Sheets (unaudited)
                  December 31, 1999 and March 31, 1999 ....................    3

         Consolidated Statements of Operations (unaudited)
                  Three and nine month periods ended
                  December 31, 1999 and 1998  .............................    4

         Consolidated Statements of Cash Flows (unaudited)
                  Nine month periods ended
                  December 31, 1999 and 1998  .............................    5

         Notes to Consolidated Financial Statements (unaudited)  ..........    6

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations ............................   11


PART II.  OTHER INFORMATION
---------------------------

Item 1. Legal Proceedings .................................................   21

Item 3. Defaults Upon Senior Securities ...................................   21

Item 6. Exhibits and Reports on Form 8-K ..................................   22



SIGNATURES ................................................................   23




                                        2

<PAGE>




PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements

                              CYANOTECH CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                (Dollars in thousands, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                     December 31,  March 31,
Assets                                                                   1999        1999
                                                                       --------    --------
<S>                                                                    <C>         <C>
Current assets:
     Cash and cash equivalents                                         $    120    $    323
     Accounts receivable, net                                             1,343       1,012
     Refundable income taxes                                                161         273
     Inventories  (note 2)                                                1,767       2,105
     Prepaid expenses                                                        81         105
                                                                       --------    --------
              Total current assets                                        3,472       3,818

Equipment and leasehold improvements, net (note 3)                       16,170      19,623
Other assets                                                                 51         180
                                                                       --------    --------
              Total assets                                             $ 19,693    $ 23,621
                                                                       ========    ========

Liabilities and Stockholders' Equity
Current liabilities:
     Current maturities of long-term debt (note 7)                     $    563    $    700
     Short-term revolving line of credit (note 7)                         1,159         994
     Current maturities of capital lease obligations                         --          67
     Accounts payable                                                       788         746
     Other accrued liabilities                                              548         394
                                                                       --------    --------
              Total current liabilities                                   3,058       2,901

Long-term debt, excluding current maturities                                 --          13
                                                                       --------    --------

              Total liabilities                                           3,058       2,914

Stockholders' equity:
     Cumulative preferred stock, Series C, of $.001 par value
     (aggregate involuntary liquidation preference $2,975 ($5 per
     share), plus unpaid cumulative dividends). Authorized 5,000,000
     shares; issued and outstanding 595,031 shares at December 31,
     1999 and March 31, 1999 (note 4)                                         1           1
     Common Stock of $0.05 par value, authorized 25,000,000 shares;
     issued and outstanding 13,833,242 shares at December 31, 1999
     and 13,603,572 shares at  March 31, 1999                                69          68

     Additional paid-in capital                                          24,207      23,956
     Accumulated deficit                                                 (7,642)     (3,318)
                                                                       --------    --------
              Total stockholders' equity                                 16,635      20,707
                                                                       --------    --------

                    Total liabilities and stockholders' equity         $ 19,693    $ 23,621
                                                                       ========    ========
</TABLE>


See accompanying notes to consolidated financial statements.



                                        3

<PAGE>

                              CYANOTECH CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                     Three Months Ended     Nine Months Ended
                                                        December 31,           December 31,
                                                     1999        1998        1999        1998
                                                   --------    --------    --------    --------
<S>                                                <C>         <C>         <C>         <C>
NET SALES                                          $  2,037    $  1,675    $  5,132    $  4,963
COST OF PRODUCT SALES                                 1,525       1,553       4,227       4,261
                                                   --------    --------    --------    --------
        Gross Profit                                    512         122         905         702
                                                   --------    --------    --------    --------

OPERATING EXPENSES:
        Research and development                        124         185         446         652
        General and administrative                      393         397       1,117       1,086
        Sales and marketing                             274         248         659         747
        Impairment of long-lived assets (note 9)      2,796          --       2,796          --
                                                   --------    --------    --------    --------
        Total operating expenses                      3,587         830       5,018       2,485
                                                   --------    --------    --------    --------
        Loss from operations                         (3,075)       (708)     (4,113)     (1,783)
                                                   --------    --------    --------    --------

OTHER INCOME (EXPENSE):
        Interest income                                   2           4           7           7
        Interest expense                               (118)        (51)       (224)       (121)
        Other income (expense), net                      --          (4)          3          (9)
                                                   --------    --------    --------    --------

                   Total other expense                 (116)        (51)       (214)       (123)
                                                   --------    --------    --------    --------

                   Loss before income taxes          (3,191)       (759)     (4,327)     (1,906)
                   Income taxes                           3          40           3         114
                                                   --------    --------    --------    --------
NET LOSS                                           $ (3,188)   $   (719)   $ (4,324)   $ (1,792)
                                                   ========    ========    ========    ========

NET LOSS PER COMMON SHARE
     Basic                                         $  (0.24)   $  (0.06)   $  (0.33)   $  (0.14)
     Diluted                                       $  (0.24)   $  (0.06)   $  (0.33)   $  (0.14)

SHARES USED IN CALCULATION OF:
     Basic                                           13,778      13,604      13,713      13,601
     Diluted                                         13,778      13,604      13,713      13,601
</TABLE>


See accompanying notes to consolidated financial statements.


                                        4

<PAGE>


                              CYANOTECH CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                       Nine Months Ended
                                                                         December 31,
                                                                        1999       1998
                                                                      -------    -------
<S>                                                                   <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
          Net loss                                                    $(4,324)   $(1,792)
          Adjustments to reconcile net loss to net cash provided by
          (used in) operating activities:
                    Depreciation and amortization                         983      1,036
                    Impairment of capital assets                        2,796         --
                    Amortization of debt issue costs                       93         15
                    Issuance of stock in exchange for services            118         --
                    Net (increase) decrease in:
                            Accounts receivable                          (331)       338
                            Refundable income taxes                       112         --
                            Inventories                                   338       (147)
                            Prepaid expenses and other assets              60        (28)
                    Net increase (decrease) in:
                            Accounts payable                               42        (34)
                            Other accrued liabilities                     154         24
                                                                      -------    -------

Net cash provided by (used in) operating activities                        41       (588)
                                                                      -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:
          Investment in equipment and leasehold improvements             (326)      (526)
                                                                      -------    -------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Net proceeds from exercise of warrants and options               15         --
          Net proceeds from issuance of common stock                      119         --
          Debt issue costs paid                                            --       (103)
          Proceeds from issuance of long-term debt                         --        750
          Principal payments on long-term debt                           (150)       (99)
          Borrowings (repayment) on short-term revolving line of
                 credit, net                                              165        392
          Principal payments on note payable                               --       (975)
          Principal payments on capital lease obligations                 (67)      (100)
                                                                      -------    -------

Net cash provided by (used in) financing activities                        82       (135)
                                                                      -------    -------

Net decrease in cash and cash equivalents                                (203)    (1,249)
Cash and cash equivalents at beginning of period                          323      1,397
                                                                      -------    -------

Cash and cash equivalents at end of period                            $   120    $   148
                                                                      =======    =======
</TABLE>


See accompanying notes to consolidated financial statements.

                                        5

<PAGE>


                              CYANOTECH CORPORATION
                                    FORM 10-Q
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999
                                   (Unaudited)

1.   BASIS OF PRESENTATION

     The  accompanying  unaudited  consolidated  financial  statements have been
     prepared in accordance with generally  accepted  accounting  principles for
     interim  financial  information and with the  instructions to Form 10-Q and
     Regulation S-X. Accordingly, they do not include all of the information and
     footnotes required by generally accepted accounting principles for complete
     financial  statements.  These consolidated  financial  statements and notes
     should be read in  conjunction  with the Company's  consolidated  financial
     statements  contained in the Company's previously filed report on Form 10-K
     for the year ended March 31, 1999.

     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.  While the financial information furnished for the three and
     nine month periods ended December 31, 1999 is unaudited,  the statements in
     this report reflect all material items which, in the opinion of management,
     are necessary for a fair  presentation of the results of operations for the
     interim  periods  covered and of the financial  condition of the Company at
     the dates of the consolidated balance sheets. The operating results for the
     interim period presented are not necessarily indicative of the results that
     may be expected for the year ending March 31, 2000.

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  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.

2.   INVENTORIES

     Inventories are stated at the lower of cost (which  approximates  first-in,
     first-out) or market and consist of the following (dollars in thousands):


                                             December 31, 1999   March 31, 1999
                                             -----------------   --------------
     Raw materials                                  $   74           $   63
     Work in process                                   240              287
     Finished goods                                  1,247            1,555
     Supplies                                          206              200
                                                    ------           ------
                                                    $1,767           $2,105
                                                    ======           ======


                                        6

<PAGE>


3.   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 the
     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  furniture  and
     fixtures and the shorter of the lease terms or  estimated  useful lives for
     leasehold improvements and equipment under capital lease as follows:


     Equipment                                    3 to 10 years
     Leasehold improvements                      10 to 27 years
     Furniture and fixtures                             7 years
     Equipment under capital lease                    10  years


     Equipment and leasehold  improvements  consist of the following (dollars in
     thousands):

<TABLE>
<CAPTION>
                                                December 31, 1999    March 31, 1999
                                                -----------------    --------------
<S>                                                  <C>              <C>
Equipment                                            $  8,921         $  8,421
Leasehold improvements                                 13,848           13,779
Furniture and fixtures                                     83               83
Equipment under capital lease                              --              388
                                                     --------         --------
                                                       22,852           22,671

Less accumulated depreciation and amortization         (7,090)          (6,107)
Construction in-progress                                  408            3,059
                                                     --------         --------
Equipment and leasehold improvements, net            $ 16,170         $ 19,623
                                                     ========         ========
</TABLE>

4.   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.  On  December  30,  1999,  the  Company's  Board  of  Directors
     approved,  as being in the best  interests of the Company,  an extension of
     the conversion  deadline to February 23, 2002. 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 accumulated but unpaid  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 December 31, 1999 amount to $2,505 ($4.21 per share). Upon conversion of
     Series C preferred  stock,  cumulative  dividends  in arrears on  converted
     shares  are  no  longer   payable.   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.




                                        7

<PAGE>


5.   EARNINGS PER SHARE

     For the three,  and nine months ended December 31, 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 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 December  31, 1999,  warrants and options to acquire  792,800
     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
     December 31, 1998,  warrants and options to acquire  638,925  shares of the
     Company's  common stock and  preferred  stock  convertible  into  2,975,155
     shares of the Company's common stock were outstanding

     Following is a  reconciliation  of the numerators and  denominators  of the
     Basic and Diluted EPS computations for the periods  presented (in thousands
     except share data):

<TABLE>
<CAPTION>
                                                  Three Months Ended               Nine Months Ended
Basic Earnings per share                             December 31,                    December 31,
                                                 1999            1998            1999            1998
                                             ------------    ------------    ------------    ------------
<S>                                          <C>             <C>             <C>             <C>
Net loss                                     $     (3,188)   $       (719)   $     (4,324)   $     (1,792)
Less: Requirement for Preferred Stock
dividends                                             (59)            (59)           (179)           (179)
                                             ------------    ------------    ------------    ------------
Loss to Common stockholders                  $     (3,247)   $       (778)   $     (4,503)   $     (1,971)
                                             ============    ============    ============    ============

Weighted average Common Shares outstanding     13,778,374      13,603,572      13,713,121      13,601,110
                                             ============    ============    ============    ============
Net Loss per Common Share                    $      (0.24)   $      (0.06)   $      (0.33)   $      (0.14)
                                             ============    ============    ============    ============

Diluted Earnings per share
Loss to Common stockholders                  $     (3,247)   $       (778)   $     (4,503)   $     (1,971)
Plus: Requirement for Preferred Stock
dividends                                              --              --              --              --
                                             ------------    ------------    ------------    ------------
Loss to Common stockholders, as adjusted     $     (3,247)   $       (778)   $     (4,503)   $     (1,971)
                                             ============    ============    ============    ============

Weighted average Common Shares outstanding     13,778,374      13,603,572      13,713,121      13,601,110
Effect of dilutive securities:
     Stock options and warrants                        --              --              --              --
                                             ------------    ------------    ------------    ------------
     Convertible preferred stock                       --              --              --              --
                                             ------------    ------------    ------------    ------------
Weighted average Common Shares
outstanding, as adjusted                       13,778,374      13,603,572      13,713,121      13,601,110
                                             ============    ============    ============    ============
Net loss per Common Share                    $      (0.24)   $      (0.06)   $      (0.33)   $      (0.14)
                                             ============    ============    ============    ============
</TABLE>


                                        8

<PAGE>


6.   ACCOUNTING CHANGES

     Accounting for Derivative Instruments and Hedging Activities. In June 1998,
     the Financial  Accounting  Standards  Board  ("FASB")  issued  Statement of
     Financial  Accounting Standard ("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 for 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 to have a
     material effect on the Company's financial condition, results of operations
     or liquidity.

     Accounting  for the Costs of Computer  Software  Developed  or Obtained for
     Internal  Use. 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.  Adoption of SOP 98-1 did not have a material  effect on the
     Company's financial condition, results of operations or liquidity.

     Reporting  on the Costs of Start-up  Activities.  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. Adoption of SOP
     98-5 did not have a material effect on the Company's  financial  condition,
     results of operations or liquidity.

7.   LINE OF CREDIT AND LONG-TERM DEBT

     In July  1998,  the  Company  entered  into a Loan and  Security  Agreement
     (Agreement)  with a lender  which  provides  for up to $3 million in credit
     facilities,  secured by all the assets of the  Company.  This  Agreement is
     discussed  in  detail  in the  section  describing  Liquidity  and  Capital
     Resources in Item 2 of this report. On October 8, 1999, the lender informed
     the  Company of its intent to  terminate  its  lending  agreement  with the
     Company, effective December 31, 1999 due to the Company being in default on
     certain financial covenants. In January 2000, the lender amended the letter
     dated October 8, 1999 and has extended the date for termination of the loan
     to March 31, 2000. The conditions of this agreement are discussed in detail
     in the section describing Liquidity and Capital Resources in Item 2 of this
     report. In January 2000, the Company entered into a letter of intent with a
     new lender to refinance  its existing debt and provide  working  capital to
     the  Company.  Subject  to  favorable  completion  by the lender of its due
     diligence  process,  the Company  expects this new credit facility to be in
     place within 90 days of the date of application.  There can, however, be no
     assurance that the Company will be successful, or that if successful,  that
     it will be able to obtain  replacement  financing  under  favorable  terms.
     Failure to alternative  financing  would have a material  adverse effect on
     the Company's financial condition, results of operations and liquidity.

                                        9

<PAGE>


8.   GOING CONCERN STATUS

     The  consolidated  financial  statements  at  December  31,  1999 have been
     prepared on a going concern basis,  which assumes  continuity of operations
     and  realization  of assets and  liquidation of liabilities in the ordinary
     course of  business.  During the years ended  March 31, 1999 and 1998,  the
     Company incurred losses of $2,557,000 and $300,000 respectively. During the
     nine  months  ended  December  31,  1999,  the  Company  incurred a loss of
     $4,324,000 which included an asset impairment charge of $2,796,000 recorded
     in December 1999.  During these two fiscal years,  and for the first six of
     nine months of the current fiscal year, the Company  experienced  declining
     sales which management believes can be attributed to increased  competition
     for sales of  Spirulina  products  in all of its major  markets.  The major
     effect  of the  decrease  in  sales  has  been a  significant  decrease  in
     liquidity.  Due to the  significant  decrease  in sales and the  decline in
     working  capital,  the Company has taken action to reduce  expenditures and
     obtain  additional   sources  of  external   financing  while  concurrently
     continuing to diversify its product offerings and explore opportunities for
     expanding  the  markets  for its  products.  Management  believes  that the
     objective  of  this  plan  is  to  increase   revenues  and  to  return  to
     profitability.

     The Company's continuation as a going concern is dependent upon its ability
     to generate sufficient cash flow to meet its obligations on a timely basis,
     to comply with the terms of its financing  agreement,  to obtain additional
     financing or refinancing as may be required, to attain profitability,  or a
     combination  thereof.  The  Company is seeking  other  possible  sources of
     external  financing,  but unless it is  successful,  there may be liquidity
     shortfalls in future  periods.  There can be no assurance  that the Company
     will  be  successful  in  obtaining   additional  financing  or  will  have
     sufficient  cash  resources  to  support  its  continued  operations.   The
     accompanying   consolidated   financial   statements  do  not  include  any
     adjustments that might result from the outcome of this uncertainty.

9.   IMPAIRMENT OF LONG-LIVED ASSETS

     In June  1999,  we reached a  preliminary  agreement  with Norsk  Hydro ASA
     ("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.  Under the terms of
     this  Agreement,  Norsk Hydro was to fund the  optimization  of Cyanotech's
     production technology for 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
     astaxanthin  production  technology,   and  subsequently  made  significant
     improvements.  Due to the improved  production  economics,  and the initial
     interest in the human astaxanthin  product,  the Company has decided not to
     finalize  the  joint  venture  relationship.   Negotiations  are,  however,
     continuing  with  Norsk  Hydro to find a basis for some  kind of  long-term
     cooperation.

     As a result of ending the joint venture negotiations,  the projected future
     cash flows that were  expected  from the Norsk Hydro joint  venture are now
     zero.  In  accordance   with  the  provisions  of  Statement  of  Financial
     accounting  standards No. 121 - Accounting for the Impairment of Long-Lived
     Assets and for Long-Lived  Assets to Be Disposed Of, an impairment  loss is
     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    amounting    to    $2,796,000    on    the
     construction-in-progress   balance  related  to  the  93-acre   astaxanthin
     project. The impaired asset consists primarily of the cost incurred to date
     to level the 93-acre facility and construction contract termination costs.


                                       10

<PAGE>


                              CYANOTECH CORPORATION

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

     This report on Form 10-Q contains forward-looking  statements regarding the
future  performance  of  Cyanotech  and future  events  that  involve  risks and
uncertainties  that could cause  actual  results to differ  materially  from the
statements  contained  herein.  This document,  and the other documents that the
Company  files from time to time with the  Securities  and Exchange  Commission,
such as its reports on Form 10-K, Form 10-Q, Form 8-K, and its proxy  materials,
contain  additional  important factors that could cause actual results to differ
from the  Company's  current  expectations  and the  forward-looking  statements
contained herein.

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>
                                            Three Months Ended     Nine Months Ended
                                               December 31,          December 31,
                                             1999       1998       1999       1998
                                            ------     ------     ------     ------
<S>                                          <C>        <C>        <C>        <C>
Net Sales                                    100.0%     100.0%     100.0%     100.0%
Cost of product sales                         74.9       92.7       82.4       85.9
                                            ------     ------     ------     ------
Gross profit                                  25.1        7.3       17.6       14.1
                                            ------     ------     ------     ------
Operating expenses:
Research and development                       6.1       11.1        8.7       13.1
General and administrative                    19.3       23.7       21.8       21.9
             Impairment of capital assets    137.3         --       54.4         --
Sales and marketing                           13.4       14.8       12.8       15.0
                                            ------     ------     ------     ------
Total operating expenses                     176.1       49.6       97.7       50.0
                                            ------     ------     ------     ------
Loss from operations                        (151.0)     (42.3)     (80.1)     (35.9)
                                            ------     ------     ------     ------
Other income (expense):
Interest income                                0.1        0.2        0.1        0.1
Interest expense                              (5.8)      (3.0)      (4.4)      (2.4)
Other income (expense), net                     --       (0.2)       0.1       (0.2)
                                            ------     ------     ------     ------
Total other expense                           (5.7)      (3.0)      (4.2)      (2.5)
                                            ------     ------     ------     ------
Loss before income taxes                    (156.7)     (45.3)     (84.3)     (38.4)
Income taxes                                   0.2        2.4         --        2.3
                                            ------     ------     ------     ------

Net loss                                    (156.5)%    (42.9)%    (84.3)%    (36.1)%
                                            ======     ======     ======     ======
</TABLE>



                                       11

<PAGE>



Third Quarter of Fiscal 2000 Compared to Third Quarter of Fiscal 1999

Net Sales

     Net sales for the three month period ended  December 31, 1999 increased 22%
to $2,037,000,  from  $1,675,000 in the comparable  period of fiscal 1999.  This
increase  in net  sales is  primarily  due to  higher  sales  of bulk  Spirulina
products and higher sales of NatuRose(TM) natural astaxanthin.

     International  sales  represented  49% and 44% of total  net  sales for the
three  month  periods  ended  December  31,  1999 and 1998,  respectively.  This
increase was primarily due to increased  sales of bulk  Spirulina in all markets
and higher sales of bulk Spirulina tablets to our largest  customer,  a European
distributor   of   natural   products.   Sales  to  this   customer,   Spirulina
International, BV, accounted for 17% of total net sales during the quarter ended
December 31, 1999.

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 $512,000
for the three month period ended December 31, 1999, up 320% from $122,000 in the
comparable  period of fiscal 1999. Our gross profit margin also increased to 25%
for the three month  period  ended  December  31,  1999,  compared to 7% for the
comparable  period of fiscal 1999. This increase in gross profit margin from the
prior year period is primarily  attributable  to greater  sales of higher margin
bulk Spirulina  tablets and slightly higher margin on sales of packaged consumer
products  and bulk  organic  Spirulina  products,  offset  in part by  increased
Spirulina  production  costs  resulting  from  operating  at lower than  optimum
production levels during the first six months of the current fiscal year.

Operating Expenses

     Operating  expenses  were  $3,587,000  during the three month  period ended
December 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. In  compliance  with SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to be  Disposed  Of",  the  Company  was  obligated  to record  the asset
impairment  charge  on  the  construction-in-progress  balance  relating  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 three
month  period  amounted  to  $791,000,  a decrease  of 5% from  $830,000  in the
comparable period of fiscal 1999.

     Research and  Development.  Research and development  expenses  amounted to
$124,000 for the three month  period ended  December 31, 1999, a decrease of 33%
from $185,000 for the comparable  period of fiscal 1999.  This decrease from the
prior year was  primarily  due to lower  expenditures  related to  completion of
improved  production  technology  for natural  astaxanthin  at the  beginning of
fiscal 2000.

     Sales and Marketing.  Sales and marketing expenses amounted to $274,000 for
the three month period ended December 31, 1999, an increase of 10% from $248,000
for the comparable  period of fiscal 1999.  This increase from the prior year is
primarily due to higher  consulting  service costs related to bulk Spirulina and
NatuRose sales.


                                       12

<PAGE>



Other Expense

     Other  expense  for the three  month  period  ended  December  31, 1999 was
$66,000  higher than the $51,000  recorded for the  comparable  period of fiscal
1999.  The increase from the prior year is primarily  due to increased  interest
rate on borrowings under the Company's current financing agreement.

Income Taxes

     An income tax benefit of $3,000 was  recorded  for the three  month  period
ended December 31, 1999 due to an increase of the Company's  estimated state tax
refund for the fiscal year ended March 31, 1999. The  interperiod tax benefit of
$3,000  compares  to an  interperiod  tax  benefit of $40,000  recorded  for the
comparable period of fiscal 1999.

Net Loss

     The Company  recorded a net loss of  $3,188,000  for the three months ended
December  31,  1999,   $2,796,000  of  which   represents   the  effect  of  the
aforementioned  asset impairment charge. If the effect of this impairment charge
is omitted for comparison purposes,  the Company recorded a loss of $392,000 for
the three months ended  December 31, 1999,  an  improvement  of 45% over the net
loss of $719,000 for the comparable  period of fiscal 1999. This  improvement in
result is primarily attributable to increased sales of bulk Spirulina powder and
tablets,  decreased cost of product sales and decreased research and development
expenses,  offset by the higher  interest rate on borrowings and  accelerated of
amortization of acquisition fees pertaining to its present  financing  agreement
due to the  notification  received  from the  lender  of its  intent to exit the
lending agreement effective December 31, 1999.


Nine Months Ended  December 31, 1999 Compared to Nine Months Ended  December 31,
1998

Net Sales

     Net sales for the nine month period ended December 31, 1999 increased 3% to
$5,132,000  from  $4,963,000  in the  comparable  period  of fiscal  1999.  This
increase is primarily due to increased  sales of bulk Spirulina  tablets and our
natural astaxanthin product, NatuRose, offset in part by lower sales of packaged
consumer products.

     International sales represented 48% and 44% of total net sales for the nine
month periods ended December 31, 1999 and 1998, respectively.  This increase was
primarily due to higher sales of bulk Spirulina tablets to our largest customer,
a European  distributor of natural products.  Sales to this customer,  Spirulina
International,  BV,  accounted  for 19% of total net  sales  for the nine  month
period ended December 31, 1999.

Gross Profit

     Gross  profit  increased  29% to $905,000  for the nine month  period ended
December 31, 1999,  from $702,000 in the  comparable  period of fiscal 1999. Our
gross profit  margin  increased to 18% for the nine month period ended  December
31,  1999,  compared  to 14% for the  comparable  period  of fiscal  1999.  This
increase  in gross  profit  margin  from the  prior  year  period  is  primarily
attributable  to increased  sales of higher  margin bulk  tablets and  decreased
astaxanthin  production costs, offset in part by increased Spirulina  production
costs  related to operating at lower than optimum  production  levels during the
first six months of fiscal 2000.



                                       13

<PAGE>



Operating Expenses

     Operating  expenses  were  $5,018,000  during the nine month  period  ended
December 31, 1999, as compared to $2,485,000, in the comparable period of fiscal
1999. The  aforementioned  asset impairment  charge of $2,796,000 is included in
the current fiscal year's operating  expenses.  In compliance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company was obligated to record the asset impairment charge
on the  construction-in-progress  balance  relating to the  93-acre  astaxanthin
expansion  project.  If the  effect of this  impairment  charge is  omitted  for
comparison purposes, operating expenses during the nine month period amounted to
$2,222,000, a decrease of 11% from $2,485,000 in the comparable period of fiscal
1999. This decrease was primarily due to decreased  research and development and
sales and marketing expenses for the nine month period ended December 31, 1999.

     Research and  Development.  Research and development  expenses  amounted to
$446,000 for the nine month  period  ended  December 31, 1999, a decrease of 32%
from $652,000 for the comparable  period of fiscal 1999.  This decrease from the
prior year was primarily due to reduced personnel expenditures and lower outside
service  expenses  related to completing the development of improved  production
technology for natural astaxanthin during fiscal 1999.

     Sales and Marketing.  Sales and marketing expenses amounted to $659,000 for
the nine month period ended  December 31, 1999, a decrease of 12% from  $747,000
for the comparable  period of fiscal 1999.  This decrease from the prior year is
primarily  due to  reduced  personnel  and  travel  expenses  dictated  by lower
revenues, offset in part by increased advertising and consulting service costs.

Other Expense

     Other expense for the nine month period ended December 31, 1999 was $91,000
higher than the $123,000  recorded for the comparable period of fiscal 1999. The
increase from the prior year is primarily due to the increased  interest rate on
borrowings under the Company's current financing agreement.

Income Taxes

     An income  tax  benefit of $3,000 was  recorded  for the nine month  period
ended December 31, 1999 due to an increase of the Company's  estimated state tax
refund for the fiscal year ended March 31, 1999. The  interperiod tax benefit of
$3,000  compares to an  interperiod  tax benefit of  $114,000  recorded  for the
comparable period of fiscal 1999.

Net Loss

     The Company  recorded a net loss of  $4,324,000  for the nine months  ended
December  31,  1999,   $2,796,000  of  which   represents   the  effect  of  the
aforementioned asset impairment charge on the  construction-in-progress  balance
relating to the 93-acre  astaxanthin  expansion  project.  If the effect of this
asset impairment charge is omitted for comparison purposes, the Company recorded
a loss of $1,528,000 for the nine months ended December 31, 1999, an improvement
in result of 15% over the net loss of $1,792,000  for the  comparable  period of
fiscal 1999. This  improvement in result is primarily  attributable to increased
sales of bulk Spirulina powder and tablets,  slightly  decreased cost of product
sales and decreased research and development expenses, offset by higher interest
expense and accelerated  amortization  of fees related to its present  financing
agreement due to the notification received from the lender of its intent to exit
the lending agreement effective December 31, 1999.


                                       14

<PAGE>



Variability of Results

     The Company has experienced significant quarterly fluctuations in operating
results and anticipates 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  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 forecasts of future sales, if net sales are below  expectations in
any given period,  the adverse  impact on results of operations may be magnified
by our inability to adjust  spending  quickly enough to compensate for the sales
shortfall.  We may also choose to reduce prices or increase spending in response
to market  conditions,  which may have a material  adverse  effect on  financial
condition and results of operations.

     The Company's continuation as a going concern is dependent upon its ability
to generate  sufficient  cash flow to meet its obligations on a timely basis, to
comply with the terms of its financing agreement, to obtain additional financing
or refinancing  as may be required,  to attain  profitability,  or a combination
thereof. There can be no assurance that these efforts will be successful or that
the Company  will return to  generating  profit on either a quarterly  or annual
basis.

Liquidity and Capital Resources

Cash Flows

     The Company's  working capital for the nine month period ended December 31,
1999 decreased by $503,000 to $414,000 from $917,000 at March 31, 1999. Cash and
cash equivalents decreased by $202,000 to $120,000 and is primarily attributable
to cash flows of $326,000  used for  investment  in property and  equipment  and
$150,000  used for reduction of long-term  debt and capital  lease  obligations,
offset in part by net proceeds  from the  exercise of common stock  warrants and
options and issuance of stock and common stock warrants totaling $134,000 and an
increase in short-term revolving debt of $165,000.

     The primary  uses of cash flows in  operating  activities  during the first
nine months of fiscal 2000 was a net loss of $4,324,000 adjusted by depreciation
and  amortization  totaling  $983,000,  the impairment  charge of $2,796,000,  a
decrease in  inventories  of  $338,000,  an increase in accounts  receivable  of
$331,000,  and a Hawaii State income tax refund of $112,000.  These calculations
indicate  that cash flows  provided by operating  activities  for the first nine
months of fiscal  2000  amounted to $41,000  compared to cash used in  operating
activities of $588,000 in the comparable period of fiscal 1999.

     Cash used in investing activities for capital expenditures during the first
nine months of fiscal 2000  decreased  to $326,000  compared to $526,000 for the
comparable period of fiscal 1999.



                                       15

<PAGE>



     Cash  provided  by  financing  activities  during the first nine  months of
fiscal 2000 amounted to $82,000,  compared to cash used in financing  activities
of $135,000 for the  comparable  period of fiscal 1999.  The primary  sources of
cash flows from financing activities during the first nine months of fiscal 2000
were net proceeds from issuance of common stock and the exercise of common stock
warrants  and options  totaling  $134,000  and net  borrowings  on a  short-term
revolving  line of credit of $165,000  offset in part by  principal  payments on
long-term  debt of  $150,000  and  repayment  of capital  lease  obligations  of
$67,000.

Loan and Security Agreement

     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 major  components of
the credit facility include 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 $750,000  (amortized in equal payments of $12,500
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  December  31,  1999,  the prime rate was 8.5%)  until the Company
achieves certain financial  performance  levels, at which time the interest rate
will decrease to prime plus 1.25%. Interest is calculated on a base amount of $1
million or the  outstanding  loan  balance,  whichever  is greater.  The fee for
renewing the  Agreement  beyond the maturity date of July 31, 2001 was set at 5%
of the  aggregate  outstanding  balance  at the end of the  initial  term of the
agreement.

     The Agreement contains certain restrictive  covenants which include,  among
other things, the maintenance of minimum consolidated net worth, as defined, and
an acceleration  clause 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 has classified the aggregate outstanding balance
on this Agreement of $1,697,000,  representing outstanding working capital loans
on a revolving basis of $1,159,000 and an equipment term loan of $538,000,  as a
current liability in the consolidated balance sheet at December 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
"going  concern"  opinion issued by the Company's  independent  auditors for the
1999  fiscal  year and the fact that  stockholders'  equity  has  dropped  below
$20,000,000.  In  anticipation of the December 31, 1999 exit date, all remaining
related  capitalized loan costs (totaling  $61,000) have been fully amortized as
of December 31, 1999.  These costs were previously being amortized over the life
of the Agreement since July 1998.

     At December 31, 1999,  the remaining  available  credit under the Agreement
was  calculated by the lender to be $42,000.  This amount  excludes the facility
for the acquisition of new machinery and equipment which requires the Company to
maintain a Debt  Service  Coverage  ratio of at least 1.25 : 1 for the two prior
full consecutive quarters.




                                       16

<PAGE>



     In January 2000,  the lender  amended its letter of October 8, 1999 and has
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  will  be  made  on  eligible  collateral  at a rate  of 75% for
receivables,  a decrease of 5% from the original  Agreement dated July 28, 1998.
The receivable  advance rate will be reduced on the 24th day of each  subsequent
month by 5%  until  the  exit  date of March  31,  2000.  Advances  on  eligible
inventories will follow the schedule set in the letter dated October 8, 1999 and
decrease  by 1% each  subsequent  month  until the exit date of March 31,  2000.
Repayment of the equipment term loan, with a balance of $538,000 at December 31,
1999,  will  increase to $20,000 per month from $12,500 per month as  originally
set forth in the Agreement dated July 28, 1998.

     The Company is currently  seeking alternate sources of financing to replace
this Agreement and has reason to believe that it will be successful.  In January
2000, the Company entered into a letter of intent with a new lender to refinance
its  existing  debt and  provide  working  capital  to the  Company.  Subject to
favorable  completion  by the lender of its due diligence  process,  the Company
expects  this new credit  facility to be in place  within 90 days of the date of
application.  There can,  however,  be no  assurance  that the  Company  will be
successful,  or that if successful,  that it will be able to obtain  replacement
financing under favorable terms.  Failure to obtain alternative  financing would
have a material adverse effect on the Company's financial  position,  results of
operations and liquidity.

Norsk Hydro Joint Venture

     In June  1999,  we reached a  preliminary  agreement  with Norsk  Hydro ASA
("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. Under the terms of this Agreement, Norsk Hydro
was  to  fund  the  optimization  of  Cyanotech's   production   technology  for
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 astaxanthin  production  technology,  and
subsequently  made  significant  improvements.  Due to the  improved  production
economics,  and the  initial  interest  in the human  astaxanthin  product,  the
Company has decided not to finalize the joint venture relationship. Negotiations
are,  however,  continuing  with  Norsk  Hydro to find a basis  for some kind of
long-term cooperation.

     As a result of ending the joint venture negotiations,  the projected future
cash flows that were  expected  from the Norsk Hydro joint venture are now zero.
In accordance with the provisions of Statement of Financial accounting standards
No. 121 - Accounting for the Impairment of Long-Lived  Assets and for Long-Lived
Assets  to Be  Disposed  Of,  an  impairment  loss is  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 amounting to
$2,796,000  on the  construction-in-progress  balance  related  to  the  93-acre
astaxanthin  project. The impaired asset consists primarily of the cost incurred
to date to level the 93-acre  facility  and  construction  contract  termination
costs.

Construction Commitment

     The Company has a commitment  with a contractor for this 93-acre  expansion
project  which was  suspended in February  1998. On June 15, 1999, we reached an
agreement  with the  contractor  to resume  work on the  suspended  construction
project on or before June 1, 2000.  In  consideration  of this  extension of the
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 all work not  completed by September  30, 2000.  If work does
not resume on or before June 1, 2000,  then the contract  will be  considered to
have been terminated by Cyanotech.


                                       17

<PAGE>



     On September  17, 1999,  we reached a further  agreement  with this project
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.  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 agreement
with the  contractor  for  completion  of the  project,  we may proceed  with an
alternate  contractor after paying the remaining  $168,000 plus interest.  As of
December 31, 1999, the credit  facilities  available to Cyanotech,  as described
above, unless supplemented by funds from other sources,  would not be sufficient
to finance this construction work.

Going Concern Status

     The unaudited  consolidated  financial statements at December 31, 1999 have
been prepared on a going concern basis,  which assumes  continuity of operations
and  realization of assets and liquidation of liabilities in the ordinary course
of business. The Company's continuation as a going concern is dependent upon its
ability to generate  sufficient  cash flow to meet its  obligations  on a timely
basis, to comply with the terms of its financing agreement, to obtain additional
financing as may be required, to attain profitability, or a combination thereof.
The Company is actively  seeking other possible  sources of external  financing,
but  unless  it is  successful,  there  may be  liquidity  shortfalls  in future
periods.  There can be no  assurance  that the  Company  will be  successful  in
obtaining additional financing or will have sufficient cash resources to support
its continued operations.


Year 2000 Compliance

     The Company has not experienced any significant disruptions to financial or
operating  activities  caused by failure of its computer systems  resulting from
Year 2000 issues. Management does not expect Year 2000 issues to have a material
effect on the Company's operations or financial condition.


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.












                                       18

<PAGE>



Outlook

     This outlook section contains a number of forward-looking  statements,  all
of  which  are  based  on  current  expectations.   Actual  results  may  differ
materially. See also the note at the beginning of this Item 2.

     The Company  continues to experience  positive  results from the downsizing
and asset  management  program put in place during the fourth  quarter of fiscal
1999. We are balancing our production resources between our primary products and
plan to allocate  more  resources to natural  astaxanthin  production  in future
quarters to meet the anticipated  demand of customers for NatuRose,  our natural
astaxanthin  product for the  aquaculture  and animal  pigmentation  markets and
BioAstin, our natural astaxanthin product for the human nutrition market.

     During the three months ended December 31, 1999, our gross profit margin on
sales  of  NatuRose   improved   significantly   due   primarily  to  production
efficiencies  resulting from the optimization program begun in the first quarter
of  this  fiscal  year  on  natural  astaxanthin  production.  We  expect  these
improvements  to continue into future periods but there can be no assurance that
the  gross  profit  margin  of our  natural  astaxanthin  products  will  not be
adversely affected by higher production costs related to operating at lower than
optimal production  levels. We are continuing our optimization  program targeted
at our PhytoDome CCS(TM) processing systems and production throughput;  however,
we  may  experience  increased  costs  related  to  production  of  our  natural
astaxanthin  products in future periods.  During the three months ended December
31, 1999, the Company  returned to operating at near capacity for both Spirulina
and astaxanthin products.

     In line with our goal of returning to profitability as quickly as possible,
the  Company  suspended  development  activities  directed  at  the  genetically
engineered  mosquitocide project and the Aldolase Catalytic Antibody 38C2 during
the three months ended December 31, 1999. As a result,  research and development
costs are  expected  to  decline  during the rest of this  fiscal  year and into
fiscal 2001.

     During the three months ended  December  31,  1999,  the Company  initiated
sales  through a  distribution  channel  into Chile of its  natural  astaxanthin
pigment product,  NatuRose. Chile is the world's second largest salmon producing
country.  Negotiations  are also continuing with Norsk Hydro to find a basis for
some kind of long-term  cooperation.  The Company  believes that  continuing its
sales efforts in the world's two largest  salmon  producing  regions may lead to
increased sales of its natural astaxanthin pigment product, NatuRose.

     Cyanotech believes it is the only company for which natural astaxanthin has
been reviewed without objection by the U.S. Food and Drug Administration  (FDA),
allowing the Company to offer the product for sale and use in the United  States
as a human  dietary  supplement.  In December  1999, we entered into a licensing
agreement with Banner Pharmacaps  ("Banner") for manufacture and distribution of
softgel capsules containing BioAstin. Banner's customers in the United State and
Canada represent many of the major North American pharmaceutical and nutritional
companies.  This agreement is aligned with  Cyanotech's  strategy to address the
health  care   applications   market  for  its  natural   astaxanthin   product.
Concurrently,  Cyanotech filed a U.S. patent application based on the protective
properties of astaxanthin  to retard and ameliorate  fever blisters (cold sores)
and canker sores and, subsequent to the end of the quarter,  filed a U.S. patent
application  for retarding and  ameliorating  carpal tunnel  syndrome  (CTS) and
tenosynovitis also based on the protective properties of astaxanthin.





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<PAGE>



     Cyanotech's strategy has been, and continues to be, to produce higher value
natural  products  from  microalgae.  To  continue  the  implementation  of this
strategy, we have broadened our product offerings with the addition of BioAstin,
our natural astaxanthin product for the human nutrition market.

     The Company's  future results of operations  and the other  forward-looking
statements  contained in this Outlook,  in particular the  statements  regarding
revenues, gross margin, research and development,  and capital spending, 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.

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<PAGE>



PART II.       OTHER INFORMATION

Item 1.        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  regarding  its  alleged
               intellectual  property rights.  Aquasearch 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 United  States  District  Court denied
               Cyanotech's motion for summary judgment of  non-infringement  and
               patent  invalidity as to Aquasearch,  Inc's  ("Aquasearch")  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.  The Company  intends to continue  pursuing
               its claim that Aquasearch  misappropriated and utilizes Cyanotech
               trade  secrets.  In  the  opinion  of  management,  the  ultimate
               disposition  of this  matter  will  not have a  material  adverse
               effect on the Company's consolidated financial position,  results
               of operations or liquidity.


Item 3.        In July  1998,  the  Company  entered  into a Loan  and  Security
               Agreement  (Agreement) with a lender which is described in detail
               in the discussion on Liquidity and Capital Resources in Item 2 of
               this  report.   The  Agreement   contains   certain   restrictive
               covenants,  which include, among other things, the maintenance of
               minimum  consolidated net worth, as defined,  and an acceleration
               clause  to take  effect  on the  occurrence  of an  event  with a
               material adverse effect on the Company,  as defined.  On July 13,
               1999, the lender declared the Company to be in technical  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%.  On  October  8, 1999,  the
               lender  informed  the  Company  of its  intent to  terminate  its
               agreement with Cyanotech, effective December 31, 1999, due to the
               Company  being in default on certain  financial  covenants.  This
               resulted from the "going concern" opinion issued by the Company's
               independent  auditors  for the 1999 fiscal year and the fact that
               stockholders' equity has dropped below $20,000,000. Consequently,
               the Company has classified the aggregate  outstanding  balance on
               this Agreement of $1,697,000,  representing  outstanding  working
               capital loans on a revolving basis of $1,159,000 and an equipment
               term loan of $538,000, as a current liability in the consolidated
               balance sheet at December 31, 1999.





                                       21

<PAGE>



               In January 2000, the lender amended its letter of October 8, 1999
               and has  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 will be
               made on eligible  collateral at a rate of 75% for receivables,  a
               decrease of 5% from the original  Agreement  dated July 28, 1998.
               The  receivable  advance  rate will be reduced on the 24th day of
               each  subsequent  month by 5% until  the exit  date of March  31,
               2000.  Advances on eligible  inventories will follow the schedule
               set in the letter  dated  October 8, 1999 and decrease by 1% each
               subsequent month until the exit date of March 31, 2000. Repayment
               of the  equipment  term  loan,  with a  balance  of  $538,000  at
               December  31,  1999,  will  increase  to  $20,000  per month from
               $12,500 per month as originally set forth in the Agreement  dated
               July 28, 1998.

               The Company is currently  seeking  alternate sources of financing
               to replace this  Agreement and has reason to believe that it will
               be successful. In January 2000, the Company entered into a letter
               of intent with a new lender to refinance  its  existing  debt and
               provide  working  capital to the  Company.  Subject to  favorable
               completion  by the  lender  of its  due  diligence  process,  the
               Company expects this new credit facility to be in place within 90
               days  of  the  date  of  application.  However,  there  can be no
               assurance  that  the  Company  will  be  successful,  or  that if
               successful,  that it will be able to obtain replacement financing
               under favorable terms.  Failure to obtain  alternative  financing
               would have a material  adverse effect on the Company's  financial
               position, results of operations and liquidity.


Item 6.        Exhibits and Reports on Form 8-K

               (a)  The following exhibits are furnished with this report:

                    Exhibit 27.1 - Financial Data Schedule

               (b)  Reports on Form 8-K

                    No reports on Form 8-K were filed  during the quarter  ended
                    December 31, 1999.


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<PAGE>


                                   SIGNATURES

     In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



                                   CYANOTECH CORPORATION (Registrant)



      February 11, 1999            By: /s/ Gerald R. Cysewski
---------------------------            ------------------------------
           (Date)                          Gerald R. Cysewski
                                           Chairman of the Board,
                                           President and Chief Executive Officer



                                   By: /s/ Ronald P. Scott
                                       ------------------------------
                                           Ronald P. Scott
                                           Executive Vice President - Finance &
                                           Administration
                                           (Principal Financial and
                                           Accounting Officer)















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