<PAGE>

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

                             FORM 10-QSB

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

            For Quarterly Period Ended September 30, 1996

                   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
                    (Issuer's telephone number)



     Check whether the issuer (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 November 5, 1996:

                 Title of Class              Shares Outstanding

          Common stock - $.005 par value stock        12,691,570



Transitional Small Business Disclosure Format: Yes    ; No  X 


<PAGE>

                    CYANOTECH CORPORATION
                         FORM 10-QSB
                              
                            INDEX

PART I.   FINANCIAL INFORMATION


Item 1.  Financial Statements                                       Page

     Consolidated Balance Sheets (unaudited)
          September 30, 1996 and March 31, 1996....................   3

     Consolidated Statements of Income (unaudited)
          Three and six month periods ended 
          September 30, 1996 and 1995..............................   4

     Consolidated Statements of Cash Flows (unaudited)
          Six month periods ended
          September 30, 1996 and 1995..............................   5
          

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


Item 2.   Management's Discussion and Analysis of Financial 
          Condition and Results of Operations......................   9


PART II.  OTHER INFORMATION

Item 4.   Submission of Matters to a Vote of Security Holders......  15

Item 6.   Exhibits and Reports on Form 8-K.........................  15


SIGNATURES ........................................................  16



                                       2


<PAGE>

PART I. FINANCIAL INFORMATION
   Item 1.   Financial Statements

                            CYANOTECH CORPORATION
                         CONSOLIDATED BALANCE SHEETS
                            (Dollars in thousands)
                                 (unaudited)

<TABLE>
<CAPTION>
                                                               September 30, March 31,
                                                                    1996        1996
                                                               ------------- ---------
<S>                                                            <C>           <C>
ASSETS
Current assets:
   Cash and cash equivalents                                    $    8,469   $   9,409
   Accounts receivable                                               1,981       1,288
   Inventories  (note 2)                                               858         494
   Prepaid expenses                                                    112         120
                                                               ------------- ---------
       Total current assets                                         11,420      11,311

Equipment and leasehold improvements, net (note 4)                  11,535       8,349
Other assets                                                           127          56
                                                               ------------- ---------
       Total assets                                             $   23,082   $  19,716
                                                               ------------- ---------
                                                               ------------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current maturities of long-term debt                         $      150   $     150
   Current maturities of capital lease obligations                     130         126
   Accounts payable                                                    705         852
   Other accrued liabilities (note 5)                                  406         434
                                                               ------------- ---------
       Total current liabilities                                     1,391       1,562

Long-term debt, excluding current maturities                           438         513
Obligations under capital leases, excluding
   current maturities                                                  259         325
                                                               ------------- ---------
       Total liabilities                                             2,088       2,400
                                                               ------------- ---------
                                                                
Stockholders' equity:
   Preferred stock (note 6)                                              1           1
   Common Stock - 12,691,570 shares issued and outstanding
       on September 30, 1996 and 11,755,650 shares issued 
       and outstanding on March 31, 1996                                63          59
   Additional paid-in capital                                       23,601      21,876
   Accumulated deficit                                              (2,671)     (4,620)
                                                               ------------- ---------
       Total stockholders' equity                                   20,994      17,316
                                                               ------------- ---------

             Total liabilities and stockholders' equity         $   23,082   $  19,716
                                                               ------------- ---------
                                                               ------------- ---------
</TABLE>

        See accompanying notes to consolidated financial statements. (unaudited)

                                       3


<PAGE>

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


<TABLE>
<CAPTION>

                                        Three months ended   Six months ended
                                           September 30,       September 30,
                                         ----------------    ----------------
                                          1996     1995         1996   1995
                                         -------  -------    -------- -------
<S>                                     <C>      <C>         <C>      <C>
NET SALES                                 $2,812  $2,056      $5,267  $3,624
COST OF PRODUCT SALES                      1,072     944       2,057   1,734
                                         -------  -------    -------- -------
     Gross Profit                          1,740   1,112       3,210   1,890
                                         -------  -------    -------- -------

OPERATING EXPENSES:
   Research and development                  172      89         333     158
   General and administrative                338     315         696     521
   Sales and marketing                       222      87         414     172
                                         -------  -------    -------- -------
     Total operating expenses                732     491       1,443     851
                                         -------  -------    -------- -------
     Income from operations                1,008     621       1,767   1,039
                                         -------  -------    -------- -------
OTHER INCOME (EXPENSE):
   Interest income                           116       4         224      10
   Interest expense                          (22)    (21)        (44)    (31)
   Other income, net                           2       1           2       -
                                         -------  -------    -------- -------
     Total other income (expense)             96     (16)        182     (21)
                                         -------  -------    -------- -------
NET INCOME                                $1,104    $605      $1,949  $1,018
                                         -------  -------    -------- -------
                                         -------  -------    -------- -------

NET INCOME PER COMMON SHARE                $0.07   $0.04       $0.12   $0.07
                                         -------  -------    -------- -------
                                         -------  -------    -------- -------
                                                                
Weighted average number of common
     shares outstanding and
     common stock equivalents (note 3)    16,703  14,534      16,528  14,388
                                         -------  -------    -------- -------
                                         -------  -------    -------- -------

</TABLE>

        See accompanying notes to consolidated financial statements. (unaudited)

                                       4


<PAGE>

                            CYANOTECH CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Dollars in thousands)
                                 (unaudited)

<TABLE>
<CAPTION>
                                                                  Six Months Ended
                                                                    September 30,
                                                                --------------------
                                                                 1996          1995
                                                                --------     -------
<S>                                                            <C>           <C>
   CASH FLOWS FROM OPERATING ACTIVITIES:
        Net income                                              $1,949        $1,018
        Adjustments to reconcile net income to net
          cash provided by operating activities: 
             Depreciation and amortization                         327           229
             Net (increase) decrease in:
                 Accounts receivable                              (693)         (494)
                 Inventories                                      (364)           36
                 Prepaid expenses and other assets                 (63)          (59)
             Net decrease in:
                 Accounts payable                                 (147)          (54)
                 Other accrued liabilities                         (28)          (24)
                                                                --------     -------
   Net cash provided by operating activities                       981           652
                                                                --------     -------
   CASH FLOWS FROM INVESTING ACTIVITIES -
        Investment in equipment and leasehold improvements      (3,513)       (1,270)
                                                                --------     -------
   CASH FLOWS FROM FINANCING ACTIVITIES:
        Net proceeds from issuance of common stock               1,398            -
        Net proceeds from exercise of warrants and options         331           386
        Proceeds from issuance of long-term debt                    -            750
        Principal payments on capital lease obligations            (62)          (36)
        Principal payments on long-term debt                       (75)          (18)
                                                                --------     -------
   Net cash provided by financing activities                     1,592         1,082
                                                                --------     -------
                                                               
   Net increase (decrease) in cash and cash equivalents           (940)          464
   Cash and cash equivalents at beginning of period              9,409           496
                                                                --------     -------
   Cash and cash equivalents at end of period                   $8,469          $960
                                                                --------     -------
                                                                --------     -------
   Supplemental schedule of noncash investing and
         financing activities:
        Purchase of equipment under 
                capital lease obligation                            -           $303
                                                                --------     -------
                                                                --------     -------
</TABLE>

      See accompanying notes to consolidated financial statements (unaudited).

                                       5


<PAGE>


                            CYANOTECH CORPORATION
                                 FORM 10-QSB
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                             September 30, 1996
                                 (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-QSB and
     Regulation S-B.  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-KSB for the year ended
     March 31, 1996.

     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 and six month periods ended
     September 30, 1996 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, 1997.

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


2.   INVENTORIES

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

                                         September 30,              March 31,
                                            1996                      1996
                                         -------------              ----------
          Raw materials                  $     91                   $     73
          Work in process                     232                        200
          Finished goods                      406                        105
          Supplies                            129                        116
                                         -------------              ----------
                                         $    858                   $    494
                                         -------------              ----------


                                       6


<PAGE>

                              CYANOTECH CORPORATION
                                  FORM 10-QSB
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued 

3.   NET INCOME PER COMMON SHARE INFORMATION

     Net income per common share for the three and six  month periods ended
     September 30, 1996 and 1995 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 had a dilutive effect on the
     computation. Primary and fully diluted net income per share herein are
     the same. 

4.   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 at the inception of the lease.
     Equipment and furniture and fixtures are depreciated using the
     straight-line method over the estimated useful lives of the assets.
     Leasehold improvements and equipment under capital lease are amortized
     using the straight-line method over the remaining term of the lease.
     Equipment and leasehold improvements consist of the following (dollars in
     thousands):
                                                  September 30,      March 31,
                                                      1996              1996
                                                  -------------     -----------
     Equipment                                       $ 4,193        $   3,538
     Leasehold improvements                            9,651            6,815
     Furniture and fixtures                               52               36
     Equipment under capital lease                       602              602
                                                  -------------     -----------
                                                      14,498           10,991

     Less accumulated depreciation
          and amortization                            (3,365)          (3,038)
     Construction in-progress                            402              396 
                                                  -------------     -----------
     Equipment and leasehold improvements, net       $11,535        $   8,349 
                                                  -------------     -----------
                                                  -------------     -----------

5.   OTHER ACCRUED LIABILITIES

     Other accrued liabilities as of September 30, 1996 and March 31, 1996
     consist of the following (dollars in thousands):
                                                  September 30,       March 31,
                                                      1996              1996
                                                  -------------     -----------
                                   
     Accrued payroll and related benefits            $  303           $  341
     Accrued directors' fees                             30               30
     Other accrued expenses                              73               63
                                                  -------------     -----------
                                                     $  406           $  434
                                                  -------------     -----------
                                                  -------------     -----------


                                       7


<PAGE>



                            CYANOTECH CORPORATION
                                FORM 10-QSB
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued 

6.   PREFERRED STOCK

     Preferred stock as of September 30, 1996 and March 31, 1996 consists of
     the following (dollars in thousands):

                                                  September 30,      March 31,
                                                     1996              1996
                                                  -------------      ---------
     Preferred stock, authorized 5,000,000 
     shares; $.001 par value, issued 
     and outstanding:

       Series C, 8% cumulative, convertible; 
       734,977 shares on September 30 and 
       March 31, 1996; liquidation value $5.00 
       per share plus unpaid accumulated dividends   $     1         $     1
                                                  -------------      ---------
                                                  -------------      ---------

7.   ACCOUNTING CHANGES

     LONG-LIVED ASSETS  In March 1995, the Financial Accounting Standards
     Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
     No. 121, "Accounting for the Impairment of Long-Lived Assets and for
     Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that
     long-lived assets and certain identifiable intangibles held and used
     by an entity be reviewed for impairment whenever events or changes in
     circumstances indicate that the carrying amount of an asset may not be
     recoverable. If the sum of the expected future cash flows (undiscounted
     and without interest charges) is less than the carrying amount of the
     asset, an impairment loss is recognized. Measurement of that loss would
     be based on the fair value of the asset.

     Generally, SFAS No. 121 requires that long-lived assets and certain
     identifiable intangibles to be disposed of be reported at the lower of
     carrying amount or fair value less cost to sell.

     The Company adopted the provisions of SFAS No. 121 effective April 1, 1996.
     The adoption of SFAS No. 121 did not have a material effect on the
     Company's financial condition or results of operations.

     STOCK-BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123,
     "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair
     value based method of accounting for stock-based compensation, but does not
     require an entity to adopt the new method for purposes of preparing its
     basic financial statements. For entities not adopting the new method, SFAS
     No. 123 requires footnote disclosure of pro forma net income and earnings
     per share information as if the fair value based method had been adopted.
     The disclosure requirements of SFAS No. 123 are effective for financial
     statements for fiscal years beginning after December 15, 1995. The Company
     will comply with the disclosure requirements of SFAS No. 123 in its
     consolidated financial statements as of and for the year ending March 31,
     1997.

                                       8


<PAGE>


                             CYANOTECH CORPORATION

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

OVERVIEW

     THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS REGARDING 
THE FUTURE PERFORMANCE OF THE COMPANY 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-KSB, FORM 10-QSB, FORM 8-KSB, AND 
ITS PROXY MATERIALS, CONTAIN ADDITIONAL IMPORTANT FACTORS THAT COULD CAUSE 
ACTUAL RESULTS TO DIFFER FROM THE COMPANY'S CURRENT EXPECTATIONS AND THE 
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.

     Substantially all of the Company's resources are currently dedicated to 
the production of SPIRULINA PACIFICA, a beta carotene-rich nutritional 
microalgae. The Company sells SPIRULINA PACIFICA to health food 
manufacturers, health food distributors and retail consumers on a worldwide 
basis. Through the application of its Integrated Culture Biology Management 
("ICBM") technology, the Company maintains continuous algae cultures and 
produces a new crop from each of its fifty-one algae culture ponds 
(aggregating approximately forty acres as of September 30, 1996) 
approximately every week on average.

      Historically, a majority of the Company's net sales have been derived 
from the Company's bulk SPIRULINA PACIFICA products, which have lower 
associated gross profit (measured in dollars) but higher associated gross 
margin (measured as a percentage of net sales) than the Company's packaged 
consumer products. Accordingly, an increase in the percentage of net sales 
attributable to bulk products would increase the Company's gross margin. 
Conversely, an increase in the percentage of net sales attributable to the 
Company's packaged consumer products would decrease its gross margin but 
likely increase gross profit. The Company expects that its product mix will 
vary from period to period, and a decrease in orders from a customer such as 
the Company's largest current customer which purchases primarily packaged 
consumer products could require the Company to reallocate greater portions of 
its production capacity to its lower gross profit bulk products.

     During the second quarter of fiscal 1997, the Company was producing 
SPIRULINA PACIFICA at full capacity from its forty acres of ponds.  In early 
November, 1996, the Company increased the total pond area from forty to sixty 
acres.  Although there can be no assurance in this regard, the Company 
expects to sell the additional output from these new ponds 1) to new 
customers, 2) in new markets/geographic areas and, to a lesser extent, 3) to 
its existing customers.  During the second quarter of fiscal 1997, the 
Company experienced increased competition from Asian producers which resulted 
in downward pricing pressure in certain markets.  In future periods, the 
Company may need to further reduce the selling prices of its SPIRULINA 
PACIFICA products in order to maintain and increase its market share.  The 
Company believes that it will continue to realize further per unit production 
cost reductions as a result of economies of scale and production process 
changes, and that such production cost reductions may partially or wholly 
offset any possible future selling price decreases, although there can be no 
assurance in this regard.

     The Company is moving forward on its astaxanthin product with the 
construction beginning in October 1996 on a new 3200-square foot astaxanthin 
processing plant.  In addition, the Company is continuing work on a 
genetically-engineered mosquitocide.  There can be no assurance that the 

                                       9

<PAGE>


Company 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.

RESULTS OF OPERATIONS

     The following table sets forth certain consolidated statement of income 
data as a percentage of net sales for the periods indicated:

                                        Three Months Ended     Six Months Ended
                                           September 30,         September 30,
                                          1996       1995       1996      1995
                                         -------   -------     -------   ------
     Net sales                           100.0%     100.0%     100.0%    100.0%
     Cost of product sales                38.1       45.9       39.1      47.9
                                         -------   -------     -------   ------
          Gross profit                    61.9       54.1       60.9      52.1
                                         -------   -------     -------   ------

     Operating expenses:
          Research and development         6.1        4.3        6.3       4.4
          General and administrative      12.0       15.3       13.2      14.4
          Sales and marketing              7.9        4.2        7.9       4.7
                                         -------   -------     -------   ------
          Total operating expenses        26.0       23.9       27.4      23.5
                                         -------   -------     -------   ------
          Income from operations          35.9       30.2       33.5      28.6
                                         -------   -------     -------   ------

     Other income (expense):
          Interest income                  4.1        0.2        4.3       0.3
          Interest expense                (0.8)      (1.0)      (0.8)     (0.9)
                                         -------   -------     -------   ------
          Total other income (expense)     3.4       (0.8)       3.5      (0.6)
                                         -------   -------     -------   ------

     Net income                           39.3%      29.4%      37.0%     28.1%
                                         -------   -------     -------   ------
                                         -------   -------     -------   ------



THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

NET SALES

     Net sales for the three months ended September 30, 1996 increased 37% to 
$2,812,000 from the $2,056,000 reported for the three months ended September 
30, 1995.  The increase is attributable to significantly higher production 
and sales of bulk Spirulina powder and tablets and increased sales of 
packaged consumer products, which carry a higher sales price than bulk 
Spirulina Pacifica products. The increased production is a result of the 
Spirulina production expansions that were completed in September and December 
of 1995 and February of 1996.

     International sales represented 56% and 51% of total net sales for the 
three month periods ended September 30, 1996 and 1995, respectively. The 
Company's largest customer, a Hong Kong-

                                       10


<PAGE>

based natural products marketing and distribution company, accounted for 
approximately 43% and 32% of Cyanotech's net sales in the second quarter of 
fiscal 1997 and 1996, respectively. The Hong Kong-based company is a 
multilevel marketing organization which purchases the Company's packaged 
consumer products and sells them under a private label, primarily in mainland 
China.  The Company anticipates that sales of Spirulina to this customer will 
continue to represent a significant portion of the Company's total net sales 
in the year ending March 31, 1997.

GROSS PROFIT

     Gross profit increased 56% to $1,740,000 for the three month period 
ended September 30, from $1,112,000 in the comparable period of fiscal 1996.  
The Company's gross margin increased to  62% for the three months ended 
September 30, 1996 compared to 54% for the comparable period of fiscal 1996.  
This increase in gross margin from the prior year period is attributable to 
increased economies of scale related to the production of both bulk and 
packaged consumer SPIRULINA PACIFICA products.

OPERATING EXPENSES

     Operating expenses were $732,000 during the three months ended September 
30, 1996, an increase of 49% from $491,000 in the comparable period of fiscal 
1996, and represented 26% of net sales compared to 24% of net sales for the 
three months ended September 30, 1995. The increase as a percentage of net 
sales is attributable to higher expenses in all areas.

     RESEARCH AND DEVELOPMENT.     Expenditures for  research and development 
were $172,000 for the three months ended September 30, 1996, an increase of 
93% from $89,000 for the comparable period of fiscal 1996.  The increase from 
the prior year was primarily the result of the research work being done on 
the natural astaxanthin product which has been in pilot production since 
January of 1996. Research and development costs are expected to increase 
further during fiscal 1997 and through fiscal 1998 as the Company continues 
work on commercializing the astaxanthin product and the mosquitocidal 
microalgae product.

     GENERAL AND ADMINISTRATIVE.   General and administrative expenses 
increased to $338,000 for the three months ended September 30, 1996, an 
increase of 7% from $315,000 for the comparable period of fiscal 1996.  The 
increase from the prior year was due to higher payroll costs, the payment of 
associate incentive bonuses indexed to the Company's profitability during the 
second quarter, higher insurance costs, and estimated compensation expense 
associated with future grants of Common Stock to non-employee directors.

     SALES AND MARKETING.     Sales and marketing expenses increased to 
$222,000 for the three months ended September 30, 1996, an increase of 155% 
from $87,000 for the comparable period of fiscal 1996. The increase from the 
prior year was due to higher payroll, travel, advertising and promotion costs 
related to increasing domestic and international marketing efforts.  

NET INCOME

     The Company recorded $499,000  more net income for the second quarter of 
fiscal 1997 than for the comparable period of fiscal 1996.  The increase is 
primarily attributable to significantly higher production and sales of bulk 
Spirulina powder and tablets and increased sales of packaged consumer 
products.

                                       11


<PAGE>


SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

NET SALES

     Net sales for the six months ended September 30, 1996 increased 45% to 
$5,267,000 from $3,624,000 for the comparable period of fiscal 1996. The 
increase is attributable to significantly higher production and sales of bulk 
Spirulina powder and tablets and increased sales of packaged consumer 
products, which carry a higher sales price than bulk Spirulina Pacifica 
products. The increased production is a result of the Spirulina production 
expansions that were completed in September and December of 1995 and February 
of 1996.

     International sales represented 60% and 57% of total net sales for the 
six month periods ended September 30, 1996 and 1995, respectively. The 
Company's largest customer, a Hong Kong-based natural products marketing and 
distribution company, accounted for approximately 34% and 23% of Cyanotech's 
net sales in the first six months of fiscal 1997 and 1996, respectively. The 
Hong Kong-based company is a multilevel marketing organization which 
purchases the Company's packaged consumer products and sells them under a 
private label, primarily in mainland China.  The Company anticipates that 
sales of Spirulina to this customer will continue to represent a significant 
portion of the Company's total net sales in the year ending March 31, 1997.

GROSS PROFIT

     Gross profit increased 70% to $3,210,000 for the six month period ended 
September 30, 1996 from $1,890,000 in the comparable period of fiscal 1996.  
The Company's gross margin increased to 61% for the six months ended 
September 30, 1996 compared to 52% for the comparable period of fiscal 1996.  
This increase in gross margin from the prior year period is attributable to 
increased economies of scale related to the production of both bulk and 
packaged consumer SPIRULINA PACIFICA products.

OPERATING EXPENSES

     Operating expenses were $1,443,000 during the six months ended September 
30, 1996, an increase of 70% from $851,000 in the comparable period of fiscal 
1996, and represented 27% of net sales for the six months ended September 30, 
1996 compared to 24% of net sales for the six months ended September 30, 
1995.  The increase as a percentage of net sales is attributable to higher 
expenses in all areas.

     RESEARCH AND DEVELOPMENT.     Expenditures for  research and development 
were $333,000 for the six months ended September 30, 1996, an increase of 
111% from $158,000 for the comparable period of fiscal 1996.  The increase 
from the prior year was primarily the result of the research work being done 
on the natural astaxanthin product which has been in pilot production since 
January of 1996. Research and development costs are expected to increase 
further during fiscal 1997 and through fiscal 1998 as the Company continues 
work on commercializing the astaxanthin product and the mosquitocidal 
microalgae product.

                                       12


<PAGE>


     GENERAL AND ADMINISTRATIVE.   General and administrative expenses 
increased to $696,000 for the six months ended September 30, 1996, an 
increase of 34% from $521,000 for the comparable period of fiscal 1996.   The 
increase from the prior year was due to higher payroll costs, the payment of 
associate incentive bonuses indexed to the Company's profitability during the 
first and second quarters, higher insurance costs, and estimated compensation 
expense associated with future grants of Common Stock to non-employee 
directors.

     SALES AND MARKETING.     Sales and marketing expenses increased to 
$414,000 for the six months ended September 30, 1996, an increase of 141% 
from $172,000 for the comparable period of fiscal 1996.  The increase from 
the prior year was  due to higher payroll, travel, advertising and promotion 
costs related to increasing domestic and international marketing efforts.

NET INCOME

     The Company recorded $931,000 more net income for the first six months 
of fiscal 1997 than for the comparable period of fiscal 1996. The increase is 
primarily attributable to significantly higher production and sales of bulk 
Spirulina powder and tablets and increased sales of packaged consumer 
products.

MANAGEMENT

     In June of 1996, Cyanotech successfully recruited Walter Rick to become 
the  National Sales Manager for Nutrex, Incorporated.  Mr. Rick has extensive 
experience in the natural foods industry and was previously employed by one 
of Cyanotech's largest competitors. In August of 1996, the Company expanded 
its management staff with the hiring of Brent F. Kunimoto as Vice President, 
Sales and Marketing.  Prior to joining the Company, Mr. Kunimoto was in 
marketing management at Nestle Food Co., brand manager for General Mills and 
a senior consultant for Arthur Anderson & Co.   Kelly Moorhead, who 
previously held the position of Vice President, Sales and Marketing, assumed 
the newly created position of Vice President, International Sales.

VARIABILITY OF RESULTS

     The Company was formed in 1983 and did not become profitable on an 
annual basis until fiscal 1992. As of September  30, 1996, the Company's 
accumulated deficit was $2.7 million. There can be no assurance that the 
Company will be consistently profitable on either a quarterly or an annual 
basis. The Company has experienced 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 the Company's largest customers, new product introductions, 
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 the Company's competitors, 
changes in the Company's customer mix, and overall trends in the market for 
Spirulina products. While a significant portion of the Company's expense 
levels are relatively fixed, and the timing of increases in expense levels is 
based in large part on the Company's 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 the Company's inability to adjust spending 
quickly enough to compensate for the sales shortfall. The Company may also 
choose to reduce prices or increase spending in response to market 
conditions, which may have a material adverse effect on the Company's 
financial condition and results of operations.

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<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

     The Company's working capital increased $280,000 during the first six 
months of fiscal 1997 to $10,029,000 while its cash and cash equivalents 
balance decreased by $940,000 during the first six months of fiscal 1997 to 
$8,469,000.  The major sources of cash other than that provided by operating 
activities during the six months ended September 30, 1996 were:  $1,398,000 
in net proceeds from the sale of 225,000 shares of common stock to the 
underwriters and $331,000 from the exercise of common stock warrants and 
options.  The major uses of cash during the first six months of fiscal 1997 
were: $3,513,000 invested in capital equipment and leasehold improvements 
(including process enhancements and a 21-acre capacity expansion project), 
$693,000 in additional accounts receivable  and $364,000 in increased 
inventory balances.  The Company believes that its existing cash balances, 
together with cash expected to be provided by operations, will provide 
adequate funding for its financial requirements, during fiscal 1997 and 1998. 
The Company has current commitments for capital expenditures totaling 
$1,741,000. As of the date of this report, the Company has available a $1 
million bank line of credit secured by a time deposit.


                                      14


<PAGE>

PART II.  OTHER INFORMATION


Item 4.   Submission of Matters to a Vote of Security Holders

     On September 19, 1996, the following matters were submitted to a vote of
     stockholders entitled to vote at the Company's Annual Meeting of
     Stockholders:

     a) Election of the following directors by the holders of Common Stock, to
     serve until the next Annual Meeting or until their successors are elected:
     Julian C. Baker, Gerald R. Cysewski, Eva R. Reichl, Ronald P. Scott,
     John T. Ushijima, Paul C. Yuen.

     b) Approve an amendment to the Company's Articles of Incorporation to
     increase the number of authorized shares of Common Stock from 18,000,000
     to 25,000,000.

     For: 13,376,699 Against: 679,866 Abstain: 55,246 Broker non-votes: 48,600

     c) Ratification of the selection of KPMG Peat Marwick LLP as the Company's
     independent auditors for the fiscal year ending March 31, 1997.


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
          September 30, 1996.


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<PAGE>

 

                                   SIGNATURES

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

                                  CYANOTECH CORPORATION (Registrant)



 November 11, 1996                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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