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, 1997

                         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 July 31, 1997:

         Title of Class                       Shares Outstanding
         --------------                       ------------------
Common stock - $.005 par value stock              12,848,962






                                        1

<PAGE>



                              CYANOTECH CORPORATION
                                    FORM 10-Q

                                      INDEX

PART I.   FINANCIAL INFORMATION


Item 1.  Financial Statements                                               Page

         Consolidated Balance Sheets (unaudited)
                  June 30, 1997 and March 31, 1997.............................3

         Consolidated Statements of Income (unaudited)
                  Three month periods ended
                  June 30, 1997 and 1996.......................................4

         Consolidated Statements of Cash Flows (unaudited)
                  Three month periods ended
                  June 30, 1997 and 1996.......................................5


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


Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations.........................10


PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K.....................................14


SIGNATURES        ............................................................15










                                        2

<PAGE>




PART I. FINANCIAL INFORMATION
        Item 1.   Financial Statements

                              CYANOTECH CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
<S>                                                                    <C>            <C> 
                                                                       June 30,       March 31,
                                                                          1997            1997
                                                                    (Unaudited)       (Audited)
Assets
Current assets:
   Cash and cash equivalents                                           $    455       $ 2,775
   Investment securities (note 2)                                         3,954         3,954
   Accounts receivable                                                    1,766         2,791
   Inventories  (note 3)                                                  1,609         1,138
   Prepaid expenses                                                         127           155
   Deferred tax assets                                                      393           373
                                                                        --------      --------
           Total current assets                                           8,304        11,186

Equipment and leasehold improvements, net (note 5)                       17,472        14,666
Other assets                                                                249           163
                                                                        --------       -------
           Total assets                                                 $26,025       $26,015
                                                                        ========      ========

Liabilities and Stockholders' Equity
Current liabilities:
   Current maturities of long-term debt                                 $   150       $   150
   Current maturities of capital lease obligations                          130           130
   Accounts payable                                                       1,569         1,508
   Other accrued liabilities                                                180           333
                                                                        --------      --------
           Total current liabilities                                      2,029         2,121
Long-term debt, excluding current maturities                                325           363
Obligations under capital leases, excluding
   current maturities                                                       160           196
                                                                        --------      --------
           Total liabilities                                              2,514         2,680
                                                                        --------      --------

Stockholders' equity:
   Preferred stock (note 6)                                                   1             1
   Common Stock - 12,847,312 shares issued and outstanding
           on June 30, 1997 and 12,712,682 shares issued and
           outstanding on March 31, 1997                                     64            63
   Additional paid-in capital                                            23,782        23,732
   Accumulated deficit                                                     (336)         (461)
                                                                        --------       -------
           Total stockholders' equity                                    23,511        23,335
                                                                        --------       -------

              Total liabilities and stockholders' equity                $26,025       $26,015
                                                                        ========      ========

          See accompanying notes to consolidated financial statements.
</TABLE>
                                       3
<PAGE>
                              CYANOTECH CORPORATION

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


<TABLE>
<CAPTION>
<S>                                                  <C>             <C>
                                                        Three Months Ended
                                                     June 30,         June 30,
                                                        1997             1996
                                                     ---------        ----------

NET SALES                                               $1,774           $2,455
COST OF PRODUCT SALES                                      902              985
                                                     ----------      -----------
              Gross Profit                                 872            1,470
                                                     ----------      -----------

OPERATING EXPENSES:
         Research and development                          141              161
         General and administrative                        331              358
         Sales and marketing                               381              192

              Total operating expenses                     853              711          
                                                     ----------       ----------

              Income from operations                        19              759
                                                     ----------       ----------

OTHER INCOME (EXPENSE):
         Interest income                                   117              108
         Interest expense                                  (11)             (22)
                                                     ----------      -----------

              Total other income                           106               86
                                                     ----------      -----------

NET INCOME                                                $125             $845
                                                     ==========      ===========


NET INCOME PER COMMON SHARE                              $0.01            $0.05
                                                     ==========      ===========

Weighted average number of common shares
    outstanding and common stock equivalents
    (note 4)                                            16,721           16,353
                                                     ==========      ===========

</TABLE>
         See accompanying notes to consolidated financial statements


                                        4
<PAGE>





                              CYANOTECH CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

                                                                                
<TABLE>
<CAPTION>
<S>                                                          <C>        <C>
     
                                                              Three Months Ended
                                                             June 30,   June 30,
                                                               1997       1996
                                                             --------   --------
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                              $125          $845
     Adjustments to reconcile net income to net cash 
     provided by (used in) operating activities:
         Deferred income taxes                                (20)            -
         Depreciation and amortization                        201           163
         Net (increase) decrease in:
              Accounts receivable                           1,025          (684)
              Inventories                                    (471)         (129)
              Prepaid expenses and other assets               (58)          (94)
         Net increase (decrease) in:
              Accounts payable                                 61           (49)
              Other accrued liabilities                       (153)          (56)
                                                           -------       -------

Net cash provided by (used in) operating activities           710            (4)
                                                           -------       -------

CASH FLOWS FROM INVESTING ACTIVIES:
     Investment in equipment and leasehold improvements    (3,007)       (1,254)
                                                           -------       -------

Net cash used in investing activities                      (3,007)       (1,254)
                                                           -------       -------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Net proceeds from issuance of common stock                 -         1,398
     Net proceeds from exercise of warrants and options        51           318
     Principal payments on capital lease obligations          (36)          (31)
     Principal payments on long-term debt                     (38)          (38)
                                                           -------       -------

Net cash provided by (used in) financing activities           (23)        1,647
                                                           -------       -------

Net increase (decrease) in cash and cash equivalents       (2,320)          389
Cash and cash equivalents at beginning of period            2,775         9,409
                                                           -------       -------

Cash and cash equivalents at end of period                 $  455        $9,798
                                                           =======       =======

</TABLE>

           See accompanying notes to consolidated financial statements

                                       5

<PAGE>



                              CYANOTECH CORPORATION
                                    FORM 10-Q
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30,1997
                                   (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-K.  Accordingly,  they do not include all of the
         information  and footnotes  required by generally  accepted  accounting
         principles  for  complete   financial   statements.   These   financial
         statements and notes should be read in  conjunction  with the Company's
         financial statements contained in the Company's previously filed report
         on Form 10-K for the year ended March 31, 1997.

         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,  Inc. All  significant  intercompany  balances and
         transactions have been eliminated in consolidation. While the financial
         information furnished for the three month period ended June 30, 1997 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, 1998.

         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.       INVESTMENT SECURITIES

         Investment  securities  held  as  available-for-sale  consist  of  the
         following (fair value approximates amortized cost):
         <TABLE>
         <CAPTION>
         <S>                                      <C>                  <C>
                                                  June 30,           March 31,
                                                    1997                1997
                                                  --------           ---------
                                              
         U.S. Treasury securities                 $  2,454           $   2,454
         Mortgage-backed securities                    500                 500
         Other interest bearing securities           1,000               1,000
                                                 ---------           ---------
                                                  $  3,954           $   3,954
                                                 =========           =========
         </TABLE>
                                              
                                        6

<PAGE>

3.        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):
          <TABLE>
          <CAPTION>
          <S>                                 <C>                  <C>
                                               June 30              March 31,
                                                1997                  1997
                                              ---------            ---------
               Raw Materials                  $    147             $    166
               Work in process                     362                  362
               Finished goods                      802                  346
               Supplies                            298                  264
                                              ---------            ---------
                                              $  1,609             $  1,138
                                              =========            =========
          </TABLE>


4.        NET INCOME PER COMMON SHARE INFORMATION

          Net  income  per  common  share  for  the  three  month  periods ended
          June 30, 1997 and 1996 is computed based on net income after preferred
          stock dividend  requirements and the weighted average number of common
          shares outstanding during the period,  adjusted to reflect the assumed
          exercise of outstanding  stock options and warrants and the conversion
          of preferred stock to the extent these items have a dilutive effect on
          the computation. Primary and fully diluted net income per share herein
          are the same.


5.        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:
          <TABLE>
          <CAPTION>
          <S>                              <C>
          Equipment                                               3 to 10 years
          Leasehold improvements           Remaining  lease term (3 to 29 years)
          Furniture and fixtures                                        7 years 
          Equipment under capital                      lease term (3 to 5 years)
          </TABLE>

                                       7
<PAGE>

5.        EQUIPMENT AND LEASEHOLD IMPROVEMENTS (continued)

          Equipment and leasehold improvements consist of the following (dollars
          in thousands):
          <TABLE>
          <CAPTION>
          <S>                                     <C>               <C>
                                                  June 30,          March 31,
                                                    1997               1997
                                                  --------          ---------

          Equipment                               $ 6,678           $  5,715
          Leasehold improvements                   12,743             10,935
          Furniture and fixtures                       71                 67
          Equipment under capital lease               602                602
                                                  --------          ---------
                                                   20,095             17,319
          Less accumulated depreciation
              and amortization                     (3,930)            (3,729)
          Construction in-progress                  1,307              1,076
                                                  --------          ---------
          Equipment and leasehold 
               improvements, net                  $17,472           $ 14,666
                                                  ========          =========
          </TABLE>


6.        SERIES C PREFERRED STOCK

          Series C  preferred  stock as of June 30,  1997  and  March  31,  1997
          consists of the following (dollars in thousands):
          <TABLE>
          <CAPTION>
          <S>                                               <C>        <C>
                                                            June 30,   March 31,
                                                              1997        1997
                                                            --------   ---------
          Preferred  stock,  authorized  5,000,000
          shares;  $.001 par  value,  issued and
          outstanding:
             Series C, 8% cumulative, convertible;
             734,977 shares on June 30 and
             March 31, 1997; liquidation value $5.00
             per share plus unpaid accumulated dividends    $    1     $    1
                                                            ========   =========
</TABLE>
                                                      
                                                                                


7.       ACCOUNTING CHANGES

         TRANSFERS  AND  SERVICING OF  FINANCIAL  ASSETS AND  EXTINGUISHMENT  OF
         LIABILITIES. In June 1996, the FASB issued SFAS No.125, "Accounting for
         Transfers  and  Servicing of  Financial  Assets and  Extinguishment  of
         Liabilities".  SFAS No. 125  generally is effective  for  transfers and
         servicing  of  financial  assets  and   extinguishment  of  liabilities
         occurring after December 31, 1996, and is to be applied  prospectively.
         This  Statement  provides   accounting  and  reporting   standards  for
         transfers  and  servicing of  financial  assets and  extinguishment  of
         liabilities based on consistent  application of a  financial-components
         approach  that  focuses  on  control.  It  distinguishes  transfers  of
         financial  assets  that are  sales  from  transfers  that  are  secured
         borrowings.  Management of the Company does not expect that adoption of
         SFAS No. 125 will have a  material  impact on the  Company's  financial
         position, results of operations or liquidity.

                                       8
<PAGE>

         EARNINGS PER SHARE. In  February  1997,  the FASB  issued SFAS No. 128,
         "Earnings  per Share".  SFAS No. 128 is effective  for both interim and
         annual  periods  ending after December 15, 1997. The Company will adopt
         SFAS No. 128 in the third quarter of fiscal 1998. SFAS No. 128 requires
         the  presentation of "Basic"  earnings per share,  representing  income
         available to common shareholders divided by the weighted average number
         of common shares  outstanding during the period, and "Diluted" earnings
         per  share,  which is  similar  to the  current  presentation  of fully
         diluted  earnings per share.  SFAS No. 128 requires  restatement of all
         prior period earnings per share  presented.  Management does not expect
         adoption  of SFAS No.  128 to have a material  impact on the  Company's
         previously reported earnings per share, financial position,  results of
         operations or liquidity.

         COMPREHENSIVE  INCOME.  In June 1997,  the FASB  issued  SFAS No. 130,
         "Reporting  Comprehensive Income," which establishes standards for the
         reporting and display of comprehensive  income and its components in a
         full set of general-  purpose  financial  statements.  SFAS No. 130 is
         effective  for fiscal years  beginning  after  December 15, 1997.  The
         Company  will adopt the  provisions  of SFAS No. 130 on April 1, 1998.
         SFAS No. 130 requires  reclassification  of financial  statements  for
         earlier periods provided for comparative purposes. Management does not
         expect  adoption  of SFAS No. 130 will have a  material  effect of the
         Company's  financial  statements,   financial  condition,  results  of
         operations or liquidity.

         SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In June 1997, the
         FASB issued SFAS No. 131,  "Disclosures about Segments of an Enterprise
         and Related  Information," which establishes standards for the way that
         public business enterprises report information about operating segments
         in annual  financial  statements  and requires  that those  enterprises
         report  selected   information  about  operating  segments  in  interim
         financial reports issued to shareholders. SFAS No. 131 is effective for
         periods  beginning  after December 15, 1997. The Company will adopt the
         provisions  of SFAS No. 131 on January 1, 1998.  SFAS No. 131  requires
         restatement of comparative information presented for earlier periods.
         Management  does  not  expect  adoption  of SFAS No.  131  will  have a
         material  effect  of  the  Company's  financial  statements,  financial
         condition, results of operations or liquidity.


                                     9
<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 our  current  expectations  and the  forward-looking  statements  contained
herein.


RESULTS OF OPERATIONS - FIRST QUARTER OF 1998 COMPARED TO FIRST QUARTER OF 1997

         The following table sets forth certain consolidated statement of income
data as a percentage of net sales for the periods indicated:
     <TABLE>
     <CAPTION>
     <S>                                              <C>             <C>
                                                       Three Months Ended
                                                            June 30,           
                                                       1997            1996                  
                                                      ------          ------

     Net Sales                                        100.0%          100.0%
     Cost of product sales                             50.8            40.1
                                                      ------          ------

     Gross profit                                      49.2            59.9
                                                      ------          ------

     Operating expenses:
          Research and development                      7.9             6.6
          General and administrative                   18.7            14.6
          Sales and marketing                          21.5             7.8
                                                      ------          ------
          Total operating expenses                     48.1            29.0
                                                      ------          ------

          Income from operations                        1.1            30.9
                                                      ------          ------

     Other income (expense):
          Interest income                               6.6             4.4
          Interest expense                             (0.6)           (0.9)
                                                      ------          ------

          Total other income (expense)                  6.0             3.5
                                                      ------          ------

     Net Income                                         7.0%           34.4%
                                                      ======          ======
</TABLE>
                                       10

<PAGE>
NET SALES

         Net sales for the three month period ended June 30, 1997  decreased 28%
to $1,774,000 from the $2,455,000 reported for the three month period ended June
30,  1996.  This  decrease  is  primarily  due to a lack of sales to our largest
customer, a Hong Kong-based natural products marketing and distribution company,
and, to a lesser extent, lower sales to certain customers in Europe and Canada.

         International  sales represented 34% and 62% of total net sales for the
three  month  periods  ended June 30, 1997 and 1996,  respectively.  Our largest
customer,  a Hong  Kong-  based  natural  products  marketing  and  distribution
company, purchases our packaged consumer products and sells them under a private
label through their  multilevel  marketing  organization,  primarily in mainland
China. This customer experienced a delay in its annual  recertification  process
and has been restricted by local governmental authorities from hosting any large
scale distributor meetings since May. These regulatory issues adversely impacted
our customer's ability to sell and, consequently, this customer did not purchase
any products from us during the first quarter.  Based on recent discussions with
this customer, we anticipate that these regulatory issues may be resolved in the
near term and, if so, that this customer would resume its  purchases,  but there
can be no assurance in this regard.  Moreover,  this  customer has  indicated it
still is holding  significant  quantities  of our products as inventory and that
future  purchases  from us would  first  require a reduction  in such  inventory
levels. As of the date of this report,  this customer has not placed any product
orders for shipment in the second fiscal quarter and  Management  cannot predict
when, or to what extent,  this customer  will again resume  purchasing  products
from the Company.


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  41% to
$872,000 for the three month period ended June 30, 1997,  from $1,470,000 in the
comparable  period of fiscal 1997. Our gross profit margin  decreased to 49% for
the three month  period ended June 30, 1997  compared to 60% for the  comparable
period of fiscal 1996.  This decrease in gross profit margin from the prior year
period is primarily attributable to lower bulk product selling prices in certain
market areas, an increase in Spirulina production costs, and start-up production
costs associated with our natural astaxanthin product, NatuRose.


OPERATING EXPENSES

         Operating  expenses were  $853,000  during the three month period ended
June 30,  1997,  an increase of 20% from  $711,000 in the  comparable  period of
fiscal  1997,  primarily  because of  increased  Sales and  Marketing  expenses.
Operating  expenses as a percentage of net sales were 48%,  compared with 29% in
the prior year, primarily due to lower net sales.

         RESEARCH AND DEVELOPMENT.  Expenditures  for research and  development
were  $141,000 for the three month period ended June 30, 1997, a decrease of 12%
from $161,000 for the comparable  period of fiscal 1997.  This decrease from the
prior year was primarily due to the transfer of certain  personnel from research
and  development to production with the  commencement of NatuRose  production in
March, 1997.


                                       11
<PAGE>
          GENERAL AND ADMINISTRATIVE.   General  and  administrative   expenses
decreased to $331,000 for the three month period ended June 30, 1997, a decrease
of 8% from $358,000 for the comparable period of fiscal 1997. This decrease from
the prior  year was  primarily  due to a lower  accrual of  associate  incentive
bonuses which are indexed to the Company's profitability.

          SALES  AND  MARKETING.  Sales  and  marketing  expenses  increased  to
$381,000 for the three month period ended June 30, 1997, an increase of 98% from
$192,000 for the comparable period of fiscal 1997.  This increase from the prior
year  is  primarily  due  to  increased  domestic  and  international  sales and
promotion efforts.

NET INCOME

         The Company  recorded net income of $125,000  for the first  quarter of
fiscal 1998, a decrease of 85% from $845,000 for the comparable period of fiscal
1997.  This decrease is primarily  attributable to lower sales of Spirulina bulk
and packaged consumer products,  higher Spirulina production costs, and start-up
costs associated with our natural astaxanthin product, NatuRose.


VARIABILITY OF RESULTS

     The Company was formed in 1983 and did not become  profitable  on an annual
basis until fiscal 1992. As of June 30, 1997, the Company's  accumulated deficit
was $336,000.  There can be no assurance that we will be consistently profitable
on  either  a  quarterly  or an  annual  basis.  We have  experienced  quarterly
fluctuations  in operating  results and anticipate that these  fluctuations  may
continue in future periods.  Future operating  results may fluctuate as a result
of changes in sales levels to our largest customers,  new product introductions,
government action,  weather patterns, the mix between sales of bulk products and
packaged  consumer  products,  start-up costs  associated  with new  facilities,
expansion into new markets,  sales  promotions,  competition,  increased  energy
costs,  the  announcement or  introduction  of new products by our  competitors,
changes in our  customer  mix,  and overall  trends in the market for  Spirulina
products and astaxanthin.  While a significant portion of our expense levels are
relatively  fixed,  and the timing of  increases  in expense  levels is based in
large part on our forecasts of future sales, if net sales are below expectations
in any  given  period,  the  adverse  impact on  results  of  operations  may be
magnified by our inability to adjust  spending  quickly enough to compensate for
the sales shortfall. 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

         Our working capital decreased  $2,790,000 during the first three months
of fiscal 1998 to $6,275,000  while our cash,  cash  equivalents  and investment
securities  balance  decreased  by  $2,320,000  to  $4,409,000.  The decrease is
primarily  attributable  to increased  capital  expenditures  for  equipment and
leasehold improvements.

         Cash flows provided by operating  activities were $710,000  compared to
cash used by operating  activities of $4,000 in fiscal 1997.  The primary source
of first  quarter  fiscal  1998  cash  flows  from  operating  activities  was a
reduction in accounts  receivable  offset  primarily by an increase in inventory
and a reduction in other accrued liabilities.

                                       12
<PAGE>

        Cash flows used in investing  activities  during the first quarter were
$3,007,000 in fiscal 1998  compared to  $1,254,000  in fiscal 1997.  The primary
uses of cash  flows  in  investing  activities  during  1998  were  for  capital
expenditures.

         Cash flows used in  financing  activities  were only  $23,000 in fiscal
1998  compared to cash flows  provided by financing  activities of $1,647,000 in
fiscal 1997, primarily from the sale of common stock.

         As  of  June  30,  1997,  we  had  construction   commitments  totaling
$2,303,000,  which we intend to fund from cash reserves,  investment securities,
and anticipated cash flows from future  operations.  We presently  estimate that
our existing capital  resources,  anticipated cash flows from future operations,
and existing credit  facilities  will be sufficient to fund current  operations.
However, we plan to spend, subject to available  financing,  approximately $11.5
million on capital  expenditures during the next two fiscal years,  primarily to
continue the expansion of NatuRose  production on the newly leased 88 acres, and
existing  capital  resources and anticipated  cash flows from future  operations
will not be  sufficient  to fund these  capital  expenditures.  We are currently
seeking an increase in our credit facility to meet any anticipated shortfall. We
currently  have a $1,000,000  bank line of credit which is  collateralized  by a
certificate of deposit and an additional $1,000,000 bank line of credit which is
collateralized by all the assets of the Company. As of June 30, 1997, there were
no borrowings under either of these credit lines.


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  expects net sales for the second  quarter to be slightly above
the prior years second fiscal quarter net sales of $2,812,000 assuming there are
no  significant  shipments to our  customer in  Hong-Kong.  However,  a shift in
product mix to greater sales of bulk products (for which average  selling prices
have decreased since last year),  and continued  start-up costs  associated with
the operation of the NatuRose  production  facility,  are expected to reduce the
gross profit margin for the second quarter of fiscal 1998 below the 62% reported
during the  comparable  period of fiscal  1997.  Gross  profit  margins  for the
astaxanthin product are expected to be comparable to the current Spirulina gross
profit margins once the additional five acres of culture ponds (described below)
are in full production.

     Cyanotech's  strategy has been, and continues to be, to produce ever-higher
value natural products from microalgae.  To continue the  implementation of this
strategy,  we plan to continue  our emphasis on selling  higher  value  packaged
Spirulina consumer products over Spirulina bulk products. Also in line with this
strategy,  we introduced our natural astaxanthin product,  NatuRose,  during the
fourth  quarter of fiscal 1997 and began full  commercial  production  in March,
1997.  During the second  quarter of fiscal  1998,  we will expand our  NatuRose
capacity  from  five  acres of  culture  ponds to 10  acres  of  culture  ponds.
Construction  is also underway on an additional  88-acre  expansion for NatuRose
production.  The first phase  involves the rough  leveling of the entire 88 acre
site, which should be completed by the end of September,  1997. The second phase
will include the  construction of 25 acres of culture  systems,  together with a
processing  facility  sufficient to  accommodate  the entire 88 acre site.  This
second  phase is  scheduled  for  completion  in the Fall of  1998,  subject  to
obtaining additional financing on terms that are acceptable to the Company.

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     Research and  development  costs are expected to increase  throughout  this
fiscal year as we continue to optimize the PhytoMax PCS(sm)  technology and also
increase the research activities directed at the mosquitocide project.

     In addition  to  expanding  the  production  capacity  and sales of natural
astaxanthin,  we are continuing  work on a  genetically-engineered  mosquitocide
product.  During the first quarter, we successfully recruited Dr. Scott Franklin
from the  University  of Wyoming.  At the  University of Wyoming,  Dr.  Franklin
conducted  extensive  research  on  natural  bacterial  toxins  for use  against
mosquitoes  and black flies and he will be leading the team to develop a natural
mosquitocide product. There can be no assurance that we can successfully develop
these or any other additional  products,  that any such products will be capable
of being produced in commercial  quantities at reasonable cost, or that any such
products will achieve market acceptance.

     The Company's  future results of operations  and the other  forward-looking
statements  contained in the outlook,  in particular  the  statements  regarding
revenues, gross margin, research and development,  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 action in foreign countries;  shortage of manufacturing capacity; and
unanticipated delays by contractors.

     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.






PART II.          OTHER INFORMATION



Item 6.           Exhibits and Reports on Form 8-K

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

                  Exhibit 27 - Financial Data Schedule

         (b)      Reports on Form 8-K

                  No  reports on Form 8-K were filed  during the  quarter  ended
                  June 30, 1997.




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                                   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 12, 1997                 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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