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 December 31, 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 Identification Number)
 of incorporation or organization)



            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 January 31, 1997:

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

Common stock - $.005 par value stock        12,693,195



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)
               December 31, 1996 and March 31, 1996........................3

          Consolidated Statements of Income (unaudited)
               Three and nine month periods ended
               December 31, 1996 and 1995..................................4

          Consolidated Statements of Cash Flows (unaudited)
               Nine month periods ended
               December 31, 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 6.   Exhibits and Reports on Form 8-K................................15


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










                                        2
<PAGE>


PART I. FINANCIAL INFORMATION
     Item 1.   Financial Statements

<TABLE>
<CAPTION>
                              CYANOTECH CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
                                   (unaudited)
                                                   December 31,      March 31,
                                                       1996            1996
                                                   ------------      ----------
<S>                                                <C>               <C>        
ASSETS
Current assets:
     Cash and cash equivalents                     $     7,349       $   9,409
     Accounts receivable                                 2,469           1,288
     Inventories  (note 2)                               1,202             494
     Prepaid expenses                                       49             120
                                                   ------------      ----------
          Total current assets                          11,069          11,311

Equipment and leasehold improvements, net (note 4)      12,790           8,349
Other assets                                               206              56
                                                   ------------      ----------
          Total assets                             $    24,065       $  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                                      811             852
     Other accrued liabilities (note 5)                    352             434
                                                   ------------      ----------
          Total current liabilities                $     1,443       $   1,562

Long-term debt, excluding current maturities               400             513
Obligations under capital leases, excluding
     current maturities                                    234             325
                                                   ------------      ----------
          Total liabilities                              2,077           2,400
                                                   ------------      ----------
Stockholders' equity:
     Preferred stock (note 6)                                1               1
     Common Stock - 12,693,195 shares issued
          and outstanding on December 31, 1996 
          and 11,755,650 shares issued and 
          outstanding on March 31, 1996                     63              59
     Additional paid-in capital                         23,639          21,876
                                                   ------------      ----------
     Accumulated deficit                                (1,715)         (4,620)
          Total stockholders' equity                    21,988          17,316
                                                   ------------      ----------

Total liabilities and stockholders' equity         $    24,065       $  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       Nine months ended
                                      December 31,              December 31,
                                   ------------------       -----------------
                                     1996       1995          1996        1995
                                   -------   --------       -------      ------

<S>                               <C>        <C>           <C>         <C> 
NET SALES                           $2,782     $2,348        $8,049      $5,972
COST OF PRODUCT SALES                1,051      1,050         3,108       2,784
                                  --------   --------      --------    --------
         Gross Profit                1,731      1,298         4,941       3,188
                                  --------   --------      --------    --------

OPERATING EXPENSES:
     Research and development          121         85           454         243
     General and administrative        367        341         1,063         862
     Sales and marketing               255        130           669         302
                                   -------    -------      --------    --------

         Total operating expenses      743        556         2,186       1,407
                                   -------    -------      --------    --------

         Income from operations        988        742         2,755       1,781
                                   -------    -------      --------    --------

OTHER INCOME (EXPENSE):
     Interest income                   153          9           377          19
     Interest expense                  (17)       (32)          (61)        (63)
     Other income, net                   7          -             9           -
                                   -------    -------      --------    --------

     Total other income (expense)      143       (23)           325         (44)
                                   -------    -------      --------    --------

     Income before income taxes      1,131        719         3,080       1,737

     Income taxes                      175          8           175           8
                                   -------    -------      --------    --------

NET INCOME                            $956       $711        $2,905      $1,729
                                   =======    =======      ========    ========

NET INCOME PER COMMON SHARE          $0.06      $0.05         $0.18       $0.12
                                   =======    =======      ========    ========
Weighted average number of common
     shares outstanding and
     common stock equivalents
     (note 3)                       16,662     14,831        16,573      14,702
                                   =======    =======      ========    ======== 
</TABLE>

    See accompanying notes to consolidated financial statements (unaudited).

                                        4


<PAGE>

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

<TABLE>
<CAPTION>
                                                           Nine Months Ended
                                                              December 31,
                                                       -----------------------
                                                          1996          1995
                                                       ----------    ---------
<S>                                                    <C>          <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                            $2,905       $1,729
     Adjustments to reconcile net income to net
       cash provided by operating activities:
         Depreciation and amortization                        506          356
         Common stock issued for services                      37           -
         Net (increase) decrease in:
            Accounts receivable                            (1,181)        (643)
            Inventories                                      (708)         100
            Prepaid expenses and other assets                 (79)         (45)
         Net increase (decrease) in:
            Accounts payable                                  (41)          71
            Other accrued liabilities                         (82)         142
                                                       ----------    ---------

Net cash provided by operating activities                   1,357        1,710
                                                       ----------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES -
   Investment in equipment and leasehold improvements      (4,947)      (2,622)
                                                       ----------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from issuance of common stock               1,398           -
   Net proceeds from exercise of warrants and options         332          538
   Proceeds from issuance of long-term debt                    -           750
   Principal payments on capital lease obligations            (87)         (64)
   Principal payments on long-term debt                      (113)         (32)
                                                       ----------    ---------

Net cash provided by financing activities                   1,530        1,192
                                                       ----------    ---------

Net increase (decrease) in cash and cash equivalents       (2,060)         280
Cash and cash equivalents at beginning of period            9,409          496
                                                       ----------    ---------

Cash and cash equivalents at end of period                 $7,349         $776
                                                       ==========    =========

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
                                December 31, 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 nine month periods ended  December
     31, 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):

                                             December 31,             March 31,
                                                 1996                   1996
                                             ------------             ---------

     Raw materials                              $   129               $    73
     Work in process                                277                   200
     Finished goods                                 658                   105
     Supplies                                       138                   116
                                                --------              --------
                                                $ 1,202               $   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 nine month periods ended
     December 31, 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 have 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):

                                               December 31,           March 31,
                                                 1996                 1996
                                               ------------           ---------

     Equipment                                     $ 5,269             $ 3,538
     Leasehold improvements                         10,120               6,815
     Furniture and fixtures                             64                  36
     Equipment under capital lease                     602                 602
                                              ------------           ---------
                                                   $16,055             $10,991

     Less accumulated depreciation
         and amortization                           (3,544)             (3,038)
     Construction in-progress                          279                 396
                                              ------------           ---------
     Equipment and leasehold
         improvements, net                         $12,790             $ 8,349
                                              ============           =========

5.   OTHER ACCRUED LIABILITIES

     Other accrued  liabilities  as of December 31, 1996 and March 31, 1996
     consist of the following (dollars in thousands):

                                             December 31,             March 31,
                                                 1996                   1996
                                             ------------             ---------

     Accrued payroll and related benefits    $   263                  $   341
     Accrued directors' fees                      30                       30
     Other accrued expenses                       59                       63
                                             --------                 --------
                                             $   352                  $   434
                                             ========                 ========



                                        7
<PAGE>

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

6.   PREFERRED STOCK

     Preferred stock as of December 31, 1996 and March 31, 1996 consists of
     the following (dollars in thousands):
                                           December 31,              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 December 31 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
sixty- seven algae culture ponds  (aggregating  approximately  sixty acres as of
December 31, 1996) approximately every week, on average.

     In early  November,  1996,  the Company  increased its total pond area from
forty acres to sixty acres,  resulting in a 50% increase in production capacity.
As a result of increasing  competition and downward  pricing pressure in certain
market areas from lower cost/quality Asian spirulina producers,  the Company was
unable to realize a corresponding increase in net sales of bulk Spirulina powder
and  tablets,  and ended  the  third  quarter  with  approximately  six weeks of
Spirulina  production in inventory.  Although  there can be no assurance in this
regard,  the Company  expects to sell this inventory and 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.  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 construction
having begun in October 1996 on a new 3200-square  foot  astaxanthin  processing
plant.  The Company expects to complete the astaxanthin  processing plant by the
end of February 1997 and be in full commercial production with six acres of pond
area by the end of March 1997. In addition,  the Company is continuing work on a
genetically-engineered  mosquitocide. There can be no assurance that the 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.







                                        9
<PAGE>

RESULTS OF OPERATIONS

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

                                   Three Months Ended         Nine Months Ended
                                       December 31,               December 31,
                                      1996     1995              1996     1995
                                     -----    -----             -----    -----
<S>                                <C>      <C>               <C>      <C>
Net sales                            100.0%   100.0%            100.0%   100.0%
Cost of product sales                 37.8     44.7              38.6    46.6
                                     -----    -----             -----    -----
    Gross profit                      62.2     55.3              61.4    53.4
                                     -----    -----             -----    -----
 
    Operating expenses:
      Research and development         4.3      3.6               5.7     4.1
      General and administrative      13.2     14.5              13.2    14.4
      Sales and marketing              9.2      5.6               8.3     5.1
                                     ------   -----            ------    -----
    Total operating expenses          26.7     23.7              27.2    23.6
                                     ------   -----            ------    -----

    Income from operations            35.5     31.6              34.2    29.8
                                     ------   -----            ------    -----

    Other income (expense):
      Interest income                  5.5       0.4             4.7      0.3
      Interest expense                (0.4)     (1.4)           (0.7)    (1.0)
                                     ------    ------          ------   ------

      Total other income (expense)     5.1      (1.0)            4.0     (0.7)

    Income before income taxes        40.6      30.6            38.2     29.1
                                     ------    ------          ------   ------

    Income taxes                      (6.2)    ( 0.3)           (2.1)    (0.1)
                                     ------    ------          ------   ------

    Net income                        34.4%     30.3%           36.1%    29.0%
                                     ======    ======          ======   ======
</TABLE>


THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995

NET SALES

     Net sales for the three month period ended  December 31, 1996 increased 18%
to  $2,782,000  from the  $2,348,000  reported  for the three month period ended
December  31,  1995.  This  increase is  attributable  to  significantly  higher
production and sales of packaged consumer  products,  which carry a higher sales
price than bulk Spirulina Pacifica  products.  The increase in sales of packaged
consumer  products  was  partially  offset by lower net sales of bulk  Spirulina
powder  and  tablets.  Compared  to the prior year third  quarter,  the  Company
shipped greater  quantities of bulk Spirulina powder and tablets but, because of
the decreases in the average selling  prices,  recorded lower net sales of these
products.  The  increased  production  is a result of the  Spirulina  production
expansions  that were completed in December of 1995 and February and November of
1996.

                                       10
<PAGE>
     International  sales  represented  71% and 51% of total  net  sales for the
three month period ended December 31, 1996 and 1995, respectively. The Company's
largest customer, a Hong Kong- based natural products marketing and distribution
company, accounted for approximately 54% and 32% of Cyanotech's net sales in the
third 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
during the current calendar year.

GROSS PROFIT

     Gross profit  increased 33% to $1,731,000  for the three month period ended
December 31, 1996, from $1,298,000 in the comparable  period of fiscal 1996. The
Company's  gross  margin  increased  to 62% for the  three  month  period  ended
December 31, 1996 compared to 55% for the comparable period of fiscal 1996. This
increase in gross margin from the prior year period is primarily attributable to
increased  economies of scale  related to the  production  of packaged  consumer
Spirulina Pacifica products.

OPERATING EXPENSES

     Operating  expenses  were  $743,000  during the three  month  period  ended
December 31, 1996, an increase of 34% from $556,000 in the comparable  period of
fiscal 1996, and  represented  27% of net sales compared to 24% of net sales for
the three months ended  December 31, 1995.  This increase as a percentage of net
sales is attributable to higher expenses in all areas.

          RESEARCH AND  DEVELOPMENT.  Expenditures  for research and development
     were  $121,000  for the three month period  ended  December  31,  1996,  an
     increase of 42% from $85,000 for the comparable period of fiscal 1996. This
     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 $367,000  for the three month period ended  December 31, 1996,
     an increase of 8% from $341,000 for the  comparable  period of fiscal 1996.
     This  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  third  quarter,  higher  insurance  costs,  and
     estimated  compensation  expense  associated with expected future grants of
     Common Stock to non-employee directors. However, general and administrative
     expenses  as a  percentage  of net sales  decreased  to 13.2% for the three
     month period ended December 31, 1996 from 14.5% for the  comparable  period
     of fiscal 1996.

SALES AND MARKETING. Sales and marketing expenses increased to $255,000 for
the three month period ended December 31, 1996, an increase of 96% from $130,000
for the comparable  period of fiscal 1996. This increase from the prior year was
due to higher  payroll,  travel,  advertising  and  promotion  costs  related to
increased domestic and international marketing efforts.




                                       11
<PAGE>

NET INCOME

     The  Company  recorded  $245,000  more net income for the third  quarter of
fiscal 1997 than for the  comparable  period of fiscal  1996.  This  increase is
primarily attributable to increased economies of scale related to the production
of packaged consumer Spirulina Pacifica products and increased sales of packaged
consumer products.


NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995

NET SALES

     Net sales for the nine month period ended  December 31, 1996  increased 35%
to $8,049,000  from  $5,972,000 for the comparable  period of fiscal 1996.  This
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 and November of
1996.

     International sales represented 63% and 56% of total net sales for the nine
month  period  ended  December 31, 1996 and 1995,  respectively.  The  Company's
largest customer, a Hong Kong- based natural products marketing and distribution
company, accounted for approximately 39% and 23% of Cyanotech's net sales in the
first nine 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 during the current calendar year.

GROSS PROFIT

     Gross profit  increased 55% to  $4,941,000  for the nine month period ended
December 31, 1996 from  $3,188,000 in the comparable  period of fiscal 1996. The
Company's gross margin increased to 61% for the nine month period ended December
31, 1996 compared to 53% 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  $2,186,000  during the nine month  period  ended
December 31, 1996, an increase of 55% from  $1,407,000 in the comparable  period
of fiscal 1996, and represented 27% of net sales for the nine month period ended
December  31, 1996  compared to 24% of net sales for the nine month period ended
December 31, 1995. This increase as a percentage of net sales is attributable to
higher expenses in all areas.





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<PAGE>

     RESEARCH AND  DEVELOPMENT.  Expenditures  for research and development were
$454,000 for the nine month period ended  December 31, 1996,  an increase of 87%
from $243,000 for the comparable  period of fiscal 1996.  This 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 $1,063,000  for the nine month period ended December 31, 1996, an increase of
23% from $862,000 for the comparable  period of fiscal 1996.  This 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 nine
months of fiscal  1997,  higher  insurance  costs,  and  estimated  compensation
expense  associated  with expected future grants of Common Stock to non-employee
directors.  However,  general and administrative expenses as a percentage of net
sales  decreased to 13.2% for the nine month period ended December 31, 1996 from
14.4% for the comparable period of fiscal 1996.

     SALES AND MARKETING. Sales and marketing expenses increased to $669,000 for
the nine month period ended December 31, 1996, an increase of 122% from $302,000
for the comparable  period of fiscal 1996. This increase from the prior year was
due to higher  payroll,  travel,  advertising  and  promotion  costs  related to
increased domestic and international marketing efforts.

NET INCOME

     The Company  recorded  $1,176,000 more net income for the first nine months
of fiscal 1997 than for the comparable  period of fiscal 1996.  This increase is
primarily attributable to increased economies of scale related to the production
of packaged consumer Spirulina Pacifica products,  significantly higher sales of
packaged  consumer  products and, to a lesser extent,  increased  production and
sales of bulk Spirulina powder and tablets.

VARIABILITY OF RESULTS

     The Company was formed in 1983 and did not become  profitable  on an annual
basis until fiscal 1992.  As of December 31,  1996,  the  Company's  accumulated
deficit was $1.7  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.

                                       13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     The Company's  working  capital  decreased  $119,000  during the first nine
months of fiscal 1997 to $9,630,000 while its cash and cash equivalents  balance
decreased  by  $2,060,000  during  the  first  nine  months  of  fiscal  1997 to
$7,349,000.  The major  sources of cash other than that  provided  by  operating
activities during the nine month period ended December 31, 1996 were: $1,398,000
in net  proceeds  from  the  sale of  225,000  shares  of  common  stock  to the
underwriters  and  $332,000  from the  exercise  of common  stock  warrants  and
options.  The major uses of cash  during the first  nine  months of fiscal  1997
were:  $4,947,000  invested  in capital  equipment  and  leasehold  improvements
(including  process  enhancements,  a 20-acre  capacity  expansion  project  and
construction of an astaxanthin  production  facility),  $1,181,000 in additional
accounts receivable and $708,000 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 the remainder of fiscal 1997 and throughout fiscal 1998. As
of December  31,  1996,  the Company has  commitments  for capital  expenditures
totaling $1,237,000.  As of the date of this report, the Company has available a
$1 million bank line of credit secured by a time deposit.



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<PAGE>

PART II.  OTHER INFORMATION



Item 6.   Exhibits and Reports on Form 8-K

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

               Exhibit 3.1 - Restated Articles of Incorporation
               Exhibit 27 -  Financial Data Schedule

          (b)  Reports on Form 8-K

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



 February 13, 1997                 By: /s/   Gerald R. Cysewski
 -----------------                     -------------------------------
    (Date)                                 Gerald R. Cysewski
                                           Chairman of the Board,
                                           President and Chief Executive Officer



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











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