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 September 30, 2001

Commission File Number  0-14602

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

|NEVADA(State or other jurisdictionof incorporation or organization) |  | 91-1206026(IRS EmployerIdentification 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 xxNo

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

|Title of Class                       |  | Shares Outstanding
|------------------------------------ |  | ------------------
|Common stock - $.005 par value stock |  | 17,043,701        

1

CYANOTECH CORPORATION
                                                         FORM 10-Q

INDEX

|PART I.  FINANCIAL INFORMATION                                                                                                                                     |  |     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|Item 1. Financial Statements                                                                                                                                       |  | Page
|Consolidated Balance Sheets (unaudited)
                         September 30, 2001 and March 31, 2001                                                             |  | 3   
|Consolidated Statements of Operations (unaudited)
                         Three and six month periods ended 
                         September 30, 2001 and 2000 |  | 4   
|Consolidated Statements of Cash Flows (unaudited)
                         Six month periods ended September 30, 2001 and 2000                                     |  | 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 1.  Legal Proceedings                                                                                                                                         |  | 17  
|Item 4.  Submission of Matters to a Vote of Security Holders                                                                                                       |  | 17  
|Item 6.  Exhibits and Reports on Form 8-K                                                                                                                          |  | 17  
|SIGNATURES                                                                                                                                                         |  | 18  

2

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

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

|                                                                                                                                                                                                |   | September 30,2001 |   | March 31,2001
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------- | - | -------------
|Assets                                                                                                                                                                                         
|Current assets:                                                                                                                                                                                
|Cash and cash equivalents                                                                                                                                                                       | $ | 1,525             | $ | 2,269        
|Accounts receivable, net                                                                                                                                                                        |   | 1,664             |   | 1,110        
|Refundable income taxes                                                                                                                                                                         |   | 8                 |   | 8            
|Inventories  (note 2)                                                                                                                                                                           |   | 1,477             |   | 2,004        
|Prepaid expenses                                                                                                                                                                                |   | 144               |   | 49           
|Total current assets                                                                                                                                                                            |   | 4,818             |   | 5,440        
|                                                                                                                                                                                               
|Equipment and leasehold improvements, net (note 3)                                                                                                                                              |   | 14,345            |   | 14,861       
|Other assets                                                                                                                                                                                    |   | 1,045             |   | 1,122        
|Total assets                                                                                                                                                                                    | $ | 20,208            | $ | 21,423       
|Liabilities and Stockholders' Equity                                                                                                                                                           
|Current liabilities:                                                                                                                                                                           
|Current maturities of long-term debt                                                                                                                                                            | $ | 1,480             | $ | 242          
|Accounts payable                                                                                                                                                                                |   | 562               |   | 772          
|Accrued expenses                                                                                                                                                                                |   | 235               |   | 249          
|Total current liabilities                                                                                                                                                                       |   | 2,277             |   | 1,263        
|Long-term debt, excluding current maturities:                                                                                                                                                  
|Term loan                                                                                                                                                                                       |   | 2,967             |   | 3,086        
|Convertible debentures                                                                                                                                                                          |   |                  |   | 1,250        
|Deferred revenue                                                                                                                                                                                |   | 104               |   | 129          
|Total liabilities                                                                                                                                                                               |   | 5,348             |   | 5,728        
|Stockholders' equity:                                                                                                                                                                          
|Common Stock of $0.005 par value, authorized
          25,000,000 shares;  issued and outstanding 17,043,701 at
          September 30, 2001 and 16,949,702 shares at  March 31,
          2001 |   | 85                |   | 85           
|Additional paid-in capital                                                                                                                                                                      |   | 24,567            |   | 24,480       
|Accumulated deficit                                                                                                                                                                             |   | (9,792)           |   | (8,870)      
|Total stockholders' equity                                                                                                                                                                      |   | 14,860            |   | 15,695       
|Total liabilities and stockholders' equity                                                                                                                                                      | $ | 20,208            | $ | 21,423       

See accompanying notes to consolidated financial statements.

3

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

|                               | Three Months EndedSeptember 30, | Six Months EndedSeptember 30,
|------------------------------ | ------------------------------- | -----------------------------
|                               |                                 | 2001                         
|NET SALES                      | $                               | 1,951                        
|COST OF PRODUCT SALES          |                                 | 1,460                        
|Gross profit                   |                                 | 491                          
|Research and development       |                                 | 93                           
|General and administrative     |                                 | 396                          
|Sales and marketing            |                                 | 401                          
|Total operating expenses       |                                 | 890                          
|Income (loss) from operations  |                                 | (399)                        
|OTHER INCOME (EXPENSE):       
|Interest income                |                                 | 17                           
|Interest expense               |                                 | (129)                        
|Other income, net              |                                 | 2                            
|Total other expense            |                                 | (110)                        
|Loss before income taxes       |                                 | (509)                        
|Income taxes                   |                                 |                             
|NET LOSS                       | $                               | (509)                        
|NET LOSS PER COMMON SHARE     
|Basic and Diluted              | $                               | (0.03)                       
|SHARES USED IN CALCULATION OF:
|Basic and Diluted              |                                 | 17,038                       

See accompanying notes to consolidated financial statements.

4

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

|                                                                                    | Six Months EndedSeptember 30,
|----------------------------------------------------------------------------------- | -----------------------------
|                                                                                    |                              
|CASH FLOW FROM OPERATING ACTIVITIES:                                               
|Net loss                                                                            | $                            
|Adjustments to reconcile net loss to net cash used in
        operating activities:
|Depreciation and amortization                                                       |                              
|Amortization of debt issue costs                                                    |                              
|Issuance of stock in exchange for services                                          |                              
|Net (increase) decrease in:                                                        
|Accounts receivable                                                                 |                              
|Refundable income taxes                                                             |                              
|Inventories                                                                         |                              
|Prepaid expenses and other assets                                                   |                              
|Net decrease in:                                                                   
|Accounts payable                                                                    |                              
|Deferred revenue                                                                    |                              
|Accrued expenses                                                                    |                              
|Net cash used in operating activities                                               |                              
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              
|Investment
in equipment and leasehold improvements                                  |                              
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              
|Proceeds
from issuance of term loan debt                                            |                              
|Proceeds from
issuance of convertible debentures                                    |                              
|Net proceeds
from exercise of warrants and options                                  |                              
|Principal
payments on long-term debt                                                |                              
|Debt issue
 costs                                                                   |                              
|Stock issuance
costs                                                                |                              
|Restricted
 cash deposit                                                            |                              
|Net cash provided by (used in) financing activities                                 |                              
|Net increase (decrease) in cash and cash equivalents                                |                              
|Cash and cash equivalents at beginning of period                                    |                              
|Cash and cash equivalents at end of period                                          | $                            
|Supplemental disclosure of non-cash financing activities:                          
|Issuance of warrants in
connection with issuance of        
    long-term debt      | $                            
|Conversion of convertible
debentures to           
 common stock                    | $                            

See accompanying notes to consolidated financial statements.

5

CYANOTECH CORPORATION
                                                        FORM 10-Q
                                        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                    September 30, 2001
                                                       (Unaudited)

1.         BASIS OF PRESENTATION

| | The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America 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 for the
three and six month periods ended September 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                 |   | September 30, 2001 |   | March 31, 2001
| | --------------- | - | ------------------ | - | --------------
| | Raw materials   | $ | 86                 | $ | 82            
| | Work in process |   | 215                |   | 174           
| | Finished goods  |   | 1,023              |   | 1,607         
| | Supplies        |   | 153                |   | 141           
| |                 | $ | 1,477              | $ | 2,004         

6

| | 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 fixtures | 7 years       

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

|                                               |   | September 30, 2001 |   | March 31, 2001
|---------------------------------------------- | - | ------------------ | - | --------------
|Equipment                                      | $ | 9,256              | $ | 9,164         
|Leasehold
improvements                         |   | 13,970             |   | 13,926        
|Furniture
and fixtures                         |   | 83                 |   | 83            
|                                               |   | 23,309             |   | 23,173        
|Less
accumulated depreciation and amortization |   | (9,360)            |   | (8,705)       
|Construction in-progress                       |   | 396                |   | 393           
|Equipment
and leasehold improvements, net      | $ | 14,345             | $ | 14,861        

4.        EARNINGS PER SHARE

| | For
the three and six months ended September 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 and six months ended September 30,
2000, convertible preferred stock was outstanding, but was 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 September 30, 2001, warrants and options to acquire 1,021,430 shares
of the Company's common stock and debentures convertible into 825,333 shares of the Company's common
stock were outstanding.  As of September 30, 2000, warrants and options to acquire 1,054,130 shares of the
Company's common stock and preferred stock convertible into 1,105,155 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):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Basic and Diluted Net Loss
Per Common Share     | Three Months EndedSeptember 30, | Six Months EndedSeptember 30,
|----------------------------------------------- | ------------------------------- | -----------------------------
|                                                |                                 | 2001                         
|Net loss                                        | $                               | (509)                        
|Less: Requirement for Preferred Stock dividends |                                 |                             
|Loss attributable to Common stockholders        | $                               | (509)                        
|Weighted average Common Shares outstanding      |                                 | 17,037,569                   
|Net Loss per Common Share                       | $                               | (0.03)                       

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 Standard (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and for hedging activities.  SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial position and measure those instruments
at fair value.  SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date for FASB Statement No. 133, an Amendment of FASB Statement
No. 133", which defers the effective date of SFAS No. 133 to be effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.  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 did not 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

| | Asset
Retirement Obligations.  In June 2001, the FASB issued SFAS No.
143, Accounting for Asset Retirement Obligations, which requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs would be
capitalized as part of the carrying amount of the long-lived asset and
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability, the Company will recognize
a gain or loss on settlement. The provisions of SFAS No. 143 are effective for
fiscal years beginning after June 15, 2002. Management has not yet determined
the impact, if any, of adoption of SFAS No. 143.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
for the Impairment or Disposal of Long-Lived Assets.  In August
2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. For long-lived assets to be held and used,
SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure an impairment loss
as the difference between the carrying amount and fair value. Further, SFAS No.
144 eliminates the requirement to allocate goodwill to long-lived assets to be
tested for impairment, describes a probability-weighted cash flow estimation
approach to deal with situations in which alternative courses of action to
recover the carrying amount of a long-lived asset are under consideration or a
range is estimated for the amount of possible future cash flows, and establishes
a primary-asset approach to determine the cash flow estimation
period. For long-lived assets to be disposed of other than by sale (e.g., assets
abandoned, exchanged or distributed to owners in a spinoff), SFAS No. 144
requires that such assets be considered held and used until disposed of.
Further, an impairment loss should be recognized at the date an asset is
exchanged for a similar productive asset or distributed to owners in a spinoff
if the carrying amount exceeds its fair value. For long-lived assets to be
disposed of by sale, SFAS No. 144 retains the requirement of SFAS No. 121 to
measure a long-lived asset classified as held for sale at the lower of its
carrying amount or fair value less cost to sell and to cease depreciation.
Discontinued operations would no longer be measured on a net realizable value
basis, and future operating losses would no longer be recognized before they
occur. SFAS No. 144 broadens the presentation of discontinued operations to
include a component of an entity, establishes criteria to determine when a
long-lived asset is held for sale, prohibits retroactive reclassification of the
asset as held for sale at the balance sheet date if the criteria are met after
the balance sheet date but before issuance of the financial statements, and
provides accounting guidance for the reclassification of an asset from
held for sale to held and used. The provisions of SFAS
No. 144 are effective for fiscal years beginning after December 15, 2001.
Management has not yet determined the impact, if any, of adoption of SFAS No.
144.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

# CYANOTECH
CORPORATION

Item 2.   
  Management's Discussion and Analysis of Financial Condition and
Results of Operations6

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

## Results of
Operations

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

|                              | Three Months EndedSeptember 30, | Six Months Ended September 30,
|----------------------------- | ------------------------------- | ------------------------------
|                              | 2001                            |                               
|Net Sales                     | 100.0                           | %                             
|Cost of product sales         | 74.8                            |                               
|Gross profit                  | 25.2                            |                               
|Operating expenses:          
|Research and development      | 4.8                             |                               
|General and administrative    | 20.3                            |                               
|Sales and marketing           | 20.6                            |                               
|Total operating expenses      | 45.7                            |                               
|Income (loss) from operations | (20.5)                          |                               
|Other income (expense):      
|Interest income               | 0.9                             |                               
|Interest expense              | (6.6)                           |                               
|Other income, net             | 0.1                             |                               
|Total other expense           | (5.6)                           |                               
|Loss before income taxes      | (26.1)                          |                               
|Income taxes                  |                                |                               
|Net Loss                      | (26.1)                          | %                             

10

Second Quarter of Fiscal
2002 Compared to Second Quarter of Fiscal 2001

Net Sales

Net
sales for the three month period ended September 30, 2001 were $1,951,000, a
decrease of 17% from the comparable prior quarter of fiscal 2001. This decrease
is primarily due to lower bulk sales of Spirulina Pacifica® powder and
tablets, partially offset by increased sales of packaged consumer products and
bulk sales of astaxanthin products.

International
sales represented 46% and 63% of total net sales for the three month periods
ended September 30, 2001 and 2000, respectively. This decrease was primarily due
to lower bulk sales of Spirulina Pacifica products to our largest customer,
Spirulina International B.V., a European distributor of natural products. Sales
to this customer accounted for 8% of net sales during the quarter ended
September 30, 2001, and 41% for the prior fiscal year quarter.

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 to $491,000 for the three
month period ended September 30, 2001, a decrease of 38% from the prior year
comparable quarter. Our gross profit margin decreased to 25% for the three month
period ended September 30, 2001, compared to 34% for the prior year comparable
quarter. The decreased percentage is primarily attributable to increased
production costs resulting from operating at lower than optimal production
levels.

Operating Expenses

Operating
expenses were $890,000 during the quarter ended September 30, 2001, an increase
of 24% from the comparable quarter of fiscal 2001, with increased expenditures
in all categories:

Research
and Development. Research and development expenses of $93,000 in the current
period were up 41% from $66,000 for the prior year comparable quarter. Higher
expenditures for clinical studies and related outside service expenses were the
primary cause of the increase.

General
and Administrative. General and administrative expenses increased slightly
to $396,000 from $379,000 for the comparable period of fiscal 2001. This
increase is attributable to higher outside service expenses, corporate insurance
and stockholder relations expenses, partially offset by lower legal expenses.

Sales
and Marketing. Sales and marketing expenses were $401,000 for the quarter
ended September 30, 2001, an increase of 49% from the comparable period of
fiscal 2001. Higher advertising and promotion expenses for all products
accounted for this increase.

Other Expense

Other expense decreased $9,000 from the comparable period of fiscal 2001, primarily from a decrease in
interest expense.

11

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 $509,000 for the three months ended September 30,
2001, compared to the net loss of $40,000 for the comparable period of fiscal
2001. The change in results is primarily attributable to reduced margin on lower
net sales of bulk Spirulina Pacifica products and increased operating expenses.

Six Months Ended September
30, 2001 Compared to Six Months Ended September 30, 2000

Net Sales

Net
sales for the six month period ended September 30, 2001 were $4,264,000, a
decrease of 6% from the comparable period of fiscal 2001. This decrease is
primarily due to decreased bulk sales of Spirulina Pacific products, partially
offset by higher sales of packaged consumer products and bulk astaxanthin
products.

International sales represented 49% and 55% of total net sales for the six month periods ended September
30, 2001 and 2000, respectively.

Gross Profit

Gross
profit decreased 22% to $1,169,000 for the six month period ended September 30,
2001, from the comparable period of fiscal 2001. Our gross profit margin
decreased to 27% for the six month period ended September 30, 2001, compared to
33% for the comparable period of fiscal 2001. This decrease in gross profit
margin from the prior year comparable period is primarily attributable to
production cost inefficiencies charged to cost of product sales resulting from
reduced production levels.

Operating Expenses

Operating
expenses were up $393,000 during the six month period ended September 30, 2001,
an increase of 36% from $1,373,000 from the prior year comparable period, with
increased expenditures in all categories.

Research
and Development. Research and development expenses increased 36% to $190,000
for the six month period ended September 30, 2001, from the prior year
comparable period. Higher expenditures for clinical studies and related outside
service expenses were the primary cause of the increase.

General
and Administrative. General and administrative expenses increased 25% to
$880,000 for the current six month period from the prior year comparable period.
Higher corporate insurance and outside service costs caused nearly all of this
increase.

Sales
and Marketing. Sales and marketing expenses were up 50% to $796,000 for the
six month period ended September 30, 2001, from the prior year comparable
period. Higher advertising and promotion expenses for all products accounted for
this increase.

12

Other Expense

Other
expense was up 20% to $225,000 for the current six month period, from the prior
year comparable period, primarily from increased interest expense on higher
outstanding debt and amortization of capitalized debt issue costs.

Income Taxes

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

Net Loss

The
Company recorded a net loss of $922,000 for the six months ended September 30,
2001, much higher than the net loss of $62,000 for the comparable period of
fiscal 2001. This change is primarily attributable to decreased sales, increased
production costs due to operating at reduced production levels and increased
operating 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 financial condition and results of operations.

## Liquidity and
Capital Resources

Our
working capital for the six month period ended September 30, 2001 decreased by
$1,636,000 to $2,541,000 from $4,177,000 at March 31, 2001, primarily from
reclassification of the convertible debentures, due April 30, 2002, from
long-term liabilities to current liabilities. For the six month period ended
September 30, 2001, cash and cash equivalents decreased by $744,000 to
$1,525,000 at September 30, 2001 and is because of cash flows used in operating
activities, capital expenditures and principal payments on long-term debt
totaling $733,000 in the aggregate.

Cash
used in operating activities during the first six months of fiscal 2002 was
$66,000 lower than the $541,000 used in the comparable period of fiscal 2001.
The primary uses of cash flows in operating activities during the first six
months of fiscal 2002 were the net loss that increased by $860,000 and timing
differences in the settlement of current assets and liabilities, that was offset
in large part by a decrease in inventories of $527,000.

Cash
used in investing activities (for capital expenditures) did not change
materially.

13

Cash
used in financing activities during the first six months of fiscal 2002 amounted
to $130,000, compared to cash provided by financing activities of $2,207,000 for
the comparable period of fiscal 2001, primarily as a result of the prior
years term loan refinancing and issuance of convertible debentures.

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 September 30, 2001, the prime rate was
6.0%). Interest is calculated on the unpaid balance of principal based on a
normal amortization schedule commencing May 1, 2000. Based on the terms of the
agreement, $500,000 of the loan proceeds have been deposited in an
interest-bearing restricted cash account, with such amount included in other
assets in the consolidated balance sheets at September 30, 2001 and March 31,
2001.

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, convertible
debentures 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.

14

## 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 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. Our enhanced marketing efforts are continuing to show
results as the trend of increased sales of packaged consumer products begun in
the three months ended June 30, 2001 has continued into the quarter ended
September 30, 2001. For the first six months of fiscal 2002, packaged consumer
product sales increased 67% over the comparable period of fiscal 2001. We plan
to continue this program with a consistent commitment to sales and marketing
efforts.

For
the quarter ended September 30, 2001, orders from our largest customer,
Spirulina International decreased significantly from the levels experienced
during the prior two fiscal quarters. Spirulina International has indicated that
it expects its purchases to continue to fluctuate from quarter to quarter in
response to seasonal business conditions and other factors. Due to our expanded
marketing efforts for bulk Spirulina Pacifica products, shipments to other
customers increased during the second quarter of fiscal 2002, partially
offsetting the decreased shipments to Spirulina International. We believe that
our expanded marketing efforts for bulk Spirulina Pacifica products are
broadening our customer base and that this trend may continue into future
quarters.

In
January 2001, we decided to reduce our production rate of Spirulina Pacifica and
astaxanthin in order to lower finished goods inventory. Due to our forecast of
lower shipments in the second quarter of fiscal 2002, we continued this plan for
inventory reduction through the quarter ended September 30, 2001. As the summer
growing season has historically resulted in increased production levels per
individual pond, we focused on optimizing the volume of finished product
according to these forecasts. At September 30, 2001, our Spirulina and natural
astaxanthin production facilities were operating at 60% and 25% of capacity,
respectively. In response to current and anticipated orders for
NatuRose® and BioAstin®, we are currently operating our
astaxanthin production facility at full capacity as of the date of this report.

In the international nutraceutical market, we continue to work closely with our marketing partner, OTC
Pharma B.V., towards the launch of BioAstin natural astaxanthin in Europe.  OTC Pharma B.V. has over 90 sales
representatives throughout Europe who presently distribute products in pharmacies and natural product outlets.
OTC Pharma B.V. is the parent company of Spirulina International, B.V., our largest customer for Spirulina
Pacifica.

Our
South American distributor for NatuRose, appointed in April 2001, has
made substantial progress in Chile, the worlds second largest salmon
producing country. In the Asian aquaculture market, tests performed by one of
Japans largest feed manufacturers are again proving the efficacy of our
NatuRose natural astaxanthin product. Based on the results of these
feeding trials, we anticipate increased sales into this market in the near term.

15

As
we predicted at the end of the first quarter of fiscal 2002, our increased
investment in sales and marketing efforts resulted in a loss for the quarter
ended September 30, 2001. Our plan is to continue these efforts

in anticipation of
increased sales in the third and fourth quarters of fiscal 2002 which could
return the Company to profitability by the fourth quarter of fiscal 2002. Our
expanded marketing effort is comprised of:

| | -
Increased advertising and promotion of packaged consumer and bulk products in
North America. - Ongoing research into new applications for BioAstin and
validation through scientific studies. - The launch of our BioAstin
product in Europe through our marketing partner OTC Pharma , B.V.
- Revitalization of our NatuRose distribution programs in Chile and Japan.
- Production of a 30-minute television infomercial for BioAstin and other
packaged consumer products in North America.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There can, however, be no assurance that the projected growth in sales will actually occur or that profitability will
be attained.

The
Companys future results of operations and the other forward-looking
statements contained in this Outlook, in particular the statements regarding
sales, 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, 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; foreign exchange fluctuations; 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
sales, costs, margins and profits are all influenced by a number of factors, as
discussed above, all of which are inherently difficult to forecast.

The management and associates of Cyanotech Corporation and Nutrex Hawaii, Inc. extend their sympathy
to those affected by the events of September 11, 2001.

14

## PART II. OTHER
INFORMATION

Item 1. 
    Legal Proceedings

None

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

On August 23, 2001, the following matters were submitted to a vote of
stockholders entitled to vote at the Companys Annual Meeting of
Stockholders:

a)     The following
directors were elected to serve until the next Annual Meeting or until their
successors          are
elected: Gerald R. Cysewski, Eric H. Reichl, Ronald P. Scott, John T. Waldron
and Paul C. Yuen,
          all directors
receiving at least 13,304,189 votes and there were no more than 193,012 votes
against or          
abstaining.

b)     Ratification of
the selection of KPMG LLP as the Company's independent auditors for the fiscal year
          ending March 31, 2002.

|For: 13,449,968 | Against: 15,352 | Abstaining: 31,881
|--------------- | --------------- | ------------------

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 September 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)                                                                                                                                
|---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|November 8, 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