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 June 30, 2001

Commission File Number  0-14602

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

|NEVADA
(State or other jurisdiction
of incorporation or organization) |  |  |  |  | 91-1206026
(IRS Employer
Identification No.)
|--------------------------------------------------------------------- |  |  |  |  | --------------------------------------------

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 xxNo

Number of common shares outstanding as of July 31, 2001:

|Title of Class                       |  |  |  |  |  |  | Shares Outstanding
|------------------------------------ |  |  |  |  |  |  | ------------------
|Common stock - $.005 par value stock |  |  |  |  |  |  | 17,031,034        

1

CYANOTECH CORPORATION
FORM 10-Q

INDEX

PART I. FINANCIAL
INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (unaudited)
June 30, 2001 and March 31, 2001

Consolidated Statements of Operations (unaudited)
Three-month periods ended June 30, 2001 and 2000

Consolidated Statements of Cash Flows
(unaudited) Three-month periods ended June 30, 2001 and 2000

Notes to Consolidated Financial Statements (unaudited)

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

CYANOTECH CORPORATIONCONSOLIDATED BALANCE SHEETS
                                      (Dollars in thousands except share amounts)
(Unaudited)

`June 30,               March 31,
                                                                                     2001                   2001
                                                                              -------------------     -----------------
Current assets:
     Cash and cash equivalents                                                $            1,428      $          2,269
     Accounts receivable, net                                                              1,978                 1,110
     Refundable income taxes                                                                   8                     8
     Inventories  (note 2)                                                                 1,656                 2,004
     Prepaid expenses                                                                        105                    49
                                                                              -------------------     -----------------
              Total current assets                                                         5,175                 5,440

Equipment and leasehold improvements, net (note 3)                                        14,606                14,861
Other assets                                                                               1,084                 1,122
                                                                              -------------------     -----------------
              Total assets                                                    $           20,865      $         21,423
                                                                              ===================     =================


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Current maturities of long-term debt                                     $            1,490      $            242
     Accounts payable                                                                        621                   772
     Accrued expenses                                                                        256                   249
                                                                              -------------------     -----------------
              Total current liabilities                                                    2,367                 1,263
Long-term debt, excluding current maturities
     Term loan                                                                             3,029                 3,086
     Convertible debentures                                                                   --                 1,250
Deferred revenue                                                                             116                   129
                                                                              -------------------     -----------------
              Total liabilities                                                            5,512                 5,728
                                                                              -------------------     -----------------
Stockholders' equity:
     Common Stock of $0.005 par value, authorized 25,000,000
         shares at March 31, 2001;  issued and outstanding
         17,031,034 shares at June 30, 2001 and 16,949,702 shares
         at March 31, 2001

                                                                                              85                    85
     Additional paid-in capital                                                           24,551                24,480
     Accumulated deficit                                                                  (9,283)               (8,870)
                                                                              -------------------     -----------------
              Total stockholders' equity                                                  15,353                15,695
                                                                              -------------------     -----------------

                    Total liabilities and stockholders' equity                $           20,865     $          21,423
                                                                              ===================     =================`

See accompanying notes to consolidated financial statements.

3

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

`Three Months Ended
                                                                      June 30,
                                                             2001                 2000
                                                       ----------------     ----------------

NET SALES                                              $         2,313      $         2,166
COST OF PRODUCT SALES                                            1,635                1,462
                                                       ----------------     ----------------
        Gross Profit                                               678                  704
                                                       ----------------     ----------------

OPERATING EXPENSES
        Research and development                                    97                   74
        General and administrative                                 484                  325
        Sales and marketing                                        395                  259
                                                       ----------------     ----------------
        Total operating expenses                                   976                  658
                                                       ----------------     ----------------
        Income (loss) from operations                             (298)                  46
                                                       ----------------     ----------------

OTHER INCOME (EXPENSE):
        Interest income                                             21                   24
        Interest expense                                          (140)                 (98)
        Other income, net                                            4                    6
                                                       ----------------     ----------------
                   Total other expense                            (115)                 (68)
                                                       ----------------     ----------------
                   Loss before income taxes                       (413)                 (22)
INCOME TAXES                                                        --                   --
                                                       ----------------     ----------------
NET LOSS                                               $          (413)     $           (22)
                                                       ================     ================

NET LOSS PER COMMON SHARE
     Basic and Diluted                                 $         (0.02)     $           0.00

SHARES USED IN CALCULATION OF:
     Basic and Diluted                                           17,008               14,951`

See accompanying notes to consolidated financial statements.

4

CYANOTECH CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS
                                                     (Dollars in thousands)
                                                           (Unaudited)

`Three Months Ended
                                                                                         June 30,
                                                                                 2001              2000
                                                                             ------------      ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                $      (413)      $       (22)
     Adjustments to reconcile net loss to net cash used in
     operating activities:
             Depreciation and amortization                                           328               339
             Amortization of debt issue costs                                         33                23
             Issuance of stock in exchange for services                               80                --
             Net (increase) decrease in:
                     Accounts receivable                                            (868)               49
                     Inventories                                                     348              (147)
                     Refundable income taxes                                          --                (8)
                     Prepaid expenses and other assets                               (51)               20
             Net increase (decrease) in:
                     Accounts payable                                               (151)             (618)
                     Deferred revenue                                                (13)               --
                     Accrued expenses                                                  7              (142)
                                                                             ------------      ------------
Net cash used in operating activities                                               (700)             (506)
                                                                             ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Investment in equipment and leasehold improvements                              (73)              (87)
                                                                             ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of term loan                                              --             3,500
     Proceeds from issuance of convertible debentures                                 --             1,250
     Net proceeds from exercise of stock options                                      --                 5
     Principal payments on long-term debt                                            (57)           (1,509)
     Debt issue costs                                                                 --              (488)
     Stock issuance costs                                                            (11)               --
     Restricted cash requirement                                                      --              (500)
                                                                             ------------      ------------
Net cash provided by (used in) financing activities                                  (68)            2,258
                                                                             ------------      ------------
Net increase (decrease) in cash and cash equivalents                                (841)            1,665
Cash and cash equivalents at beginning of period                                   2,269               405
                                                                             ------------      ------------
Cash and cash equivalents at end of period                                   $     1,428       $     2,070
                                                                             ============      ============
Supplemental disclosure of non-cash financing activities:
     -issuance of warrants in connection with issuance of
         long-term debt                                                      $        --       $       121
                                                                             ============      ============
     -conversion of convertible debentures to common stock                   $         2       $        --
                                                                             ============      ============`

See accompanying notes to consolidated financial statements.

5

CYANOTECH CORPORATION
                                                        FORM 10-QNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      June 30, 2001
                                                       (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,
2001.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 subsidiary,
Nutrex-Hawaii, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation. While the financial information furnished as
of and for the three month period ended June 30, 2001 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, 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

`June 30, 2001        March 31, 2001
                                        ---------------      ----------------
                Raw materials           $           96       $            82
                Work in process                    174                   174
                Finished goods                   1,231                 1,607
                Supplies                           155                   141
                                        ---------------      ----------------
                                        $        1,656       $         2,004
                                        ===============      ================`

6

3.  
     EQUIPMENT AND LEASEHOLD IMPROVEMENTS

| | Owned
equipment and leasehold improvements are stated at cost. 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 as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`Equipment                                         3 to 10 years
        Leasehold improvements                           10 to 25 years
        Furniture and fixture                                   7 years`

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

`June 30, 2001     March 31, 2001
                                                             --------------    --------------
        Equipment                                            $       9,235     $       9,164
        Leasehold improvements                                      13,956            13,926
        Furniture and fixtures                                          83                83
                                                             --------------    --------------
                                                                    23,274            23,173
        Less accumulated depreciation and amortization              (9,033)           (8,705)
        Construction in-progress                                       365               393
                                                             --------------    --------------
        Equipment and leasehold improvements, net            $      14,606     $       14,861
                                                             ==============    ==============`

4.    
   EARNINGS PER SHARE

| | For
the three months ended June 30, 2001 and 2000, warrants and options to purchase
Common Stock of the Company and convertible debentures 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. For the three months ended June 30, 2000,
convertible preferred stock was outstanding, but were not included in the
computation of Diluted net loss per common share because the inclusion of these
instruments would have had an antidilutive effect on the net loss per common
share. As of June 30, 2001, warrants and options to acquire 994,030 shares of
the Companys common stock and debentures convertible into 832,000 shares
of the Companys common stock were outstanding. As of June 30, 2000,
warrants and options to acquire 918,430 shares of the Companys common
stock, preferred stock convertible into 1,855,155 shares of the Companys
common stock and debentures convertible into 833,333 shares of the
Companys common stock were outstanding.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`June 30,           June 30,
        BASIC AND DILUTED LOSS PER SHARE                                   2001               2000
                                                                      -------------       -------------
        Net loss                                                      $       (413)       $        (22)
        Less: Requirement for Preferred Stock dividends                         --                 (39)
                                                                      -------------       -------------
        Loss attributable to Common stockholders                      $       (413)       $        (61)
                                                                      =============       =============
        Weighted average Common Shares outstanding                      17,007,797          14,951,363
                                                                      =============       =============
        Net loss per common share                                     $      (0.02)       $       0.00
                                                                      =============       =============`

7

5.    
   RECENT ACCOUNTING PRONOUNCEMENTS

| | Accounting
for Derivative Instruments and Hedging Activities In June 1998, the
Financial Accounting Standards Board (FASB), issued Statement of Financial
Accounting Standards (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 of
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 Certain 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.
In June 2000, the FASB Issued SFAS No 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, An Amendment of FASB
Statement No. 133, which addresses a limited number of issues causing
implementation difficulties for certain entities that apply SFAS No. 133. The
Company currently holds no derivative instruments, nor is it currently
participating in hedging activities. The adoption of SFAS No. 133, as amended by
SFAS No. 137 and SFAS No. 138, did not have a material effect on the
Companys financial condition, results of operations or liquidity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Business
Combinations In July 2001, the FASB issued SFAS No. 141, "Business
Combinations."  SFAS No. 141 requires that all business combinations be
accounted for under the purchase method of accounting. SFAS No. 141 also changes
the criteria for the separate recognition of intangible assets acquired in a
business combination.  SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001.  The adoption of SFAS No. 141 is not expected to
have a material effect on the Company's financial condition, results of
operations or liquidity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Goodwill
and Other Intangible Assets In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 addresses the
initial recognition and measurement of intangible assets acquired individually
or as part of a group of other assets not constituting a business. SFAS No. 142
also addresses, regardless of how acquired, the subsequent accounting and
measurement of goodwill and intangible assets. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 142 is
effective for fiscal years beginning after December 31, 2001. The adoption of
SFAS No. 142 is not expected to have a material effect on the Companys
financial condition, results of operations or liquidity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

# 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 our 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:

`Three Months Ended
                                                                           June 30,
                                                                     2001           2000
                                                                 ------------   ------------
        Net sales                                                    100.0  %       100.0  %
        Cost of product sales                                         70.7           67.5
                                                                 ------------   ------------
                Gross profit                                          29.3           32.5
                                                                 ------------   ------------
        Operating expenses:
                Research and development                               4.2            3.4
                General and administrative                            20.9           15.0
                Sales and marketing                                   17.1           12.0
                                                                 ------------   ------------
                Total operating expenses                              42.2           30.4
                                                                 ------------   ------------
                Income (loss) from operations                        (12.9)           2.1
                                                                 ------------   ------------
        Other income (expense):
                Interest income                                        0.9            1.1
                Interest expense                                      (6.1)          (4.5)
                Other income, net                                      0.2            0.3
                                                                 ------------   ------------
                Total other expense                                   (5.0)          (3.1)
                                                                 ------------   ------------
                Loss before income taxes                             (17.9)          (1.0)
        Income taxes                                                    --             --
                                                                 ------------   ------------
        Net loss                                                     (17.9) %        (1.0) %
                                                                 ============   ============`

9

First Quarter of Fiscal 2002 Compared to First Quarter of
Fiscal 2001

Net Sales

Net
sales for the three month period ended June 30, 2001 were $2,313,000, 7% higher
than the $2,166,000 recorded in the comparable period in fiscal 2001. This
increase is primarily due to increased sales of packaged consumer products,
packaged private label products and bulk Spirulina products, partially offset by
decreased sales of bulk natural astaxanthin products. The increase in sales of
packaged consumer products resulted primarily from our increased sales and
marketing effort in the consumer market. The increase in sales of bulk Spirulina
products is due primarily to greater sales of powder and tablets to our largest
customer, a European distributor of natural products. Sales to this customer,
Spirulina International, B.V., accounted for 15% and 13% of total net sales for
the three month periods ended June 30, 2001 and 2000, respectively.

International
sales as a percent of net sales for the three month period ended June 30, 2001,
increased slightly to 50% from the comparable period of fiscal 2001.

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 decreased slightly to $678,000 for
the three months ended June 30, 2001, from $704,000 in the comparable period of
fiscal 2001. Our gross profit margin decreased to 29% for the three month period
ended June 30, 2001, compared to 33% for the comparable period of fiscal 2001.
This decreased percentage is primarily attributable to increased production
costs resulting from reduced production levels.

Operating Expenses

Operating
expenses were $976,000 during the three month period ended June 30, 2001, an
increase of 48% from $658,000 in the comparable period of fiscal 2001. This
increase was due to increased expenditures in all categories, as described
below.

Research
and Development. Research and development expenses of $97,000 in the current
period were an increase of 31% from $74,000 for the comparable period of fiscal
2001. Higher expenditures for clinical studies and related outside service
expenses were the primary cause of the increase.

Sales
and Marketing. Sales and marketing expenses were up 53% to $395,000 in the
current period from $259,000 for the comparable period of fiscal 2001. Higher
advertising and promotion expenses for all products accounted for this increase.

General
and Administrative.General and administrative expenses of $484,000 for the
current period were an increase of 49% from the comparable period of fiscal
2001. Higher corporate insurance and consulting service costs caused nearly all
of this increase.

Other Expense

Other
expense of $115,000 for the current period increased 69% from the comparable
period of fiscal 2001, primarily from increased interest expense on higher
outstanding debt and amortization of capitalized debt issue costs.

10

Income Taxes

A provision for income taxes was not recorded in either three month period due to the Company's taxable
loss position.

Net Loss

The
Company recorded a net loss of $413,000 for the first quarter of fiscal 2002,
compared to the net loss of $22,000 for the comparable period of fiscal 2001.
The change is primarily attributable to increased operating expenses and
interest expenses.

## 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, foreign exchange fluctuations,
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 our financial condition and results of operations.

## Liquidity and
Capital Resources

Working
capital at June 30, 2001 decreased by $1,369,000 to $2,808,000 from $4,177,000
at March 31, 2001, primarily from reclassification of convertible debentures
from long-term to current liabilities, as such debentures are due April 30,
2002. Cash and cash equivalents decreased by $841,000 to $1,428,000 at June 30,
2001 from March 31, 2001 and is primarily because of cash flows used in
operating activities of $700,000.

Cash
used in operating activities during the first three months of fiscal 2002 was
$194,000 higher than the $506,000 used in the comparable period of fiscal 2001.
The primary use of cash flows during the three months ended June 30, 2001 was
due to the net loss of $413,000 and timing differences in the settlement of
current assets and current liabilities.

Cash
used in investing activities (for capital expenditures) during the first three
months of fiscal 2002 decreased to $73,000 from $87,000 for the comparable
period of fiscal 2001.

Cash
used in financing activities during the current period amounted to $68,000,
compared to cash provided by financing activities of $2,258,000 for the
comparable period of fiscal 2001. The primary uses of cash flows for financing
activities during the first quarter of fiscal 2002 were payments on the
Companys exiting term loan agreement.

11

Term Loan Agreement

On
April 21, 2000, the Company executed a Term Loan Agreement (Term Loan) with a
lender which provided for up to $3.5 million in 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 Term Loan, 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 June 30, 2001, the prime rate was 6.75%).
Interest is calculated on the unpaid balance of principal based on a normal
amortization schedule commencing May 1, 2000. Of the loan proceeds, $500,000 has
been deposited in an interest-bearing restricted cash account per the terms of
the loan.

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.

Convertible Debentures

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, 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. Warrants to purchase
83,334 shares of the Companys common stock were issued to the placement
agent of the debentures, exercisable for five years from the issue date, at
$1.80 per share.

The
Company believes that working capital provided by its Term Loan Agreement and
estimated cash flows from operations will be sufficient to sustain operations
for fiscal 2002.

## Recent
Accounting Pronouncements

See note 5 of notes to consolidated financial statements.

## 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 has not changed substantially from
March 31, 2001.

12

## 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.

Cyanotechs
strategy has been, and continues to be, to successfully produce and market,
higher value natural products from microalgae. Beginning in the last quarter of
fiscal 2001, the Company took action to increase sales of all of its products by
expanding its own marketing effort and that of its marketing consultants. These
measures included the addition of in-house, telemarketing associates for our
packaged consumer products and the retention of two experienced nutraceutical
sales agents to represent our bulk products throughout North America. Already,
the Company is realizing higher sales of packaged consumer products, up 62% from
the comparable period of the prior fiscal year. We plan to continue this program
with a greater commitment to sales and marketing.

In
the international nutraceutical market, we are working closely with our
marketing partner, OTC Pharma BV, for the launch of BioAstin®
natural astaxanthin in Europe. OTC Pharma BV, has over 90 sales representatives
throughout Europe who presently distribute products in pharmacies and natural
product outlets. We are also refocusing our effort in the Chinese market due to
that governments easing of sales regulations. During the three months
ended June 30, sales to one of our former Chinese customers increased to over
$100,000.

In
our aquaculture sales effort, we appointed a new distributor forNatuRose® at the beginning of this fiscal year to represent that
product in Chile, the worlds second largest salmon producing country. This
distributor is familiar with the application of our NatuRose product and
we expect increased sales into this market in the coming quarters. In the Asian
aquaculture market, one of Japans largest feed manufacturers is conducting
tests with NatuRose which are providing encouraging results finding
NatuRose far superior to synthetic astaxanthin in coloring the flesh of
pen-raised fish. Based on these results, among other factors, this company has
begun purchasing quantities of NatuRose for inclusion in certain feed
formulations and we also expect increased sales into this market in the near
term.

Due
to our increased investment in sales and marketing, we expect to report a loss
for the second quarter of fiscal 2002. However, we anticipate increased sales
for the third and fourth quarters which could return the Company to
profitability. The growth in sales and a return to profitability from commitment
to expanded marketing effort which is comprised of:

| | -
Increased advertising and promotion of packaged consumer and bulk products in
North America. - The launch of our BioAstin product in Europe. -
Revitalization of our NatuRose distribution programs in Chile and Japan.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There can be no assurance
that such growth in sales will actually occur or that profitability will be
attained.

In
January 2001, we decided to reduce our production rate of Spirulina Pacifica and
astaxanthin in order to lower finished goods inventory. As the summer growing
season has historically resulted in increased production levels per individual
ponds, the focus is on optimizing the volume of finished product according to
our forecasted sales. While the gross profit margin for the quarter ended June
30, 2001 was reduced slightly as a result of the lower production levels, the
action does not affect Cyanotechs ability to resume full production when
increased demand warrants.

13

BioAstin
is Cyanotechs natural astaxanthin product for human nutrition. During the
three months ended June 30, 2001, the Company refocused its marketing effort on
this product as we believe its use as a human dietary supplement carries
significant potential. Sales of BioAstin have progressively increased
since its introduction in the spring of calendar 2000. Sales of BioAstin
during the first quarter of this fiscal year increased as a percentage of total
revenues and contributed to the improvement in net sales compared to the results
of the first quarter of the prior fiscal year. The Company has filed four patent
applications for the use of natural astaxanthin in (1) treatment of fever
blisters (cold sores) and canker sores, (2) carpal tunnel syndrome, (3)
ultraviolet (UV) radiation (sunburn) sensitivity, and (4) relief of delayed
onset muscle soreness. During June 2001, we were notified by the U.S. Patent and
Trademark Office that it had issued patent number 6,258,855, entitled,
Method for Retarding and Ameliorating Carpal Tunnel Syndrome, based
on the protective properties of BioAstin. Patent filings contribute to
our business goal of developing proprietary positions for our present and future
products and support our strategic plan. 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 our product application.

During
the quarter ended June 30, 2001, the Company initiated another clinical trial of
BioAstin to measure its effectiveness in reducing LDL (bad) cholesterol
while concurrently increasing HDL (good) cholesterol. The study, which involves
40 patients with high cholesterol levels above 220 mg/deciliter, is co-sponsored
by Kyowa Engineering, Cyanotechs marketing partner forBioAstin in
Japan. This clinical trial is expected to produce preliminary results as early
as October of this year. Also during this first quarter, a product testing
laboratory performing the initial clinical evaluation on the use of
BioAstin for reducing sensitivity to UV radiation (sunburn) reported
preliminary results. This evaluation showed that when ingested daily for two
weeks, BioAstin significantly increased the amount of ultraviolet light
energy required to produce skin reddening. The Company is developing the
protocol for a follow-on study using an improved BioAstin formulation.
The new product formulation should be completed by August and the new protocol
is expected to be finalized by the end of September. The follow-on study is
planned to begin in October and its results may reconfirm BioAstins
efficacy as a systemic sunscreen. The Company has two other clinical studies
still in process for use of BioAstin alleviating carpal tunnel syndrome
and for relief from delayed onset muscle soreness (DOMS). We expect results from
the DOMS trial by the end of August. Preliminary findings from these two studies
will be reported when received from the respective testing laboratories. We will
be monitoring these studies closely for other potential applications of
BioAstin.

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
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, outcome of the clinical trials for
BioAstin, and changes in demand for natural products in general; changes
in weather conditions; competitive factors, such as competing Spirulina and
astaxanthin producers increasing their production capacity and their impact on
world market prices for Spirulina and astaxanthin; 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.

14

## PART II. OTHER
INFORMATION

Item 1. Legal Proceedings.

None

Item 6. Exhibits and Reports on Form 8-K

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

None

(b)        Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended June 30, 2001.

15

# 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)                                                                                                                            
|--------------------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|August 10, 2001(Date) |  |  | By: /s/  Gerald R. Cysewski
       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)

16