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 December 31, 1998

                         Commission File Number 0-14602


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


            NEVADA                                           91-1206026
(State or other jurisdiction                              (IRS Employer
 of incorporation or organization)                        Identification Number)



            73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740
                    (Address of principal executive offices)

                                 (808) 326-1353
                         (Registrant's telephone number)



         Check whether the registrant (1) filed all reports required to be filed
by  Section  13 or 15(d) of the  Exchange  Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),  and
(2) has been subject to such filing requirements for the past 90 days.    Yes xx
No


          Number of common shares outstanding as of February 05, 1999:

             Title of Class                            Shares Outstanding

  Common stock - $.005 par value stock                      13,603,572



                                        1

<PAGE>




<TABLE>
<CAPTION>

                                                   CYANOTECH CORPORATION
                                                         FORM 10-Q

                                                           INDEX

PART I.   FINANCIAL INFORMATION

<S>      <C>                                                                                                     <C>

Item 1.  Financial Statements                                                                                    Page

         Consolidated Balance Sheets (unaudited)
                  December 31, 1998 and March 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

         Consolidated Statements of Operations (unaudited)
                  Three and nine month periods ended
                  December 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

         Consolidated Statements of Cash Flows (unaudited)
                  Nine month periods ended
                  December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

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

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11


PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18



SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . .. . . . . . . 19
</TABLE>

                                        2

<PAGE>

PART I. FINANCIAL INFORMATION
     Item 1.   Financial Statements
<TABLE>
<CAPTION>
                                                 CYANOTECH CORPORATION
                                              CONSOLIDATED BALANCE SHEETS
                                     (Dollars in thousands, except share amounts)
                                                      (Unaudited)
<S>                                                                             <C>                    <C>
                                                                                   December 31,             March 31,
                                                                                        1998                   1998
                                                                                -------------------    -----------------
Assets
Current assets:
     Cash and cash equivalents                                                  $              148     $          1,397
     Accounts receivable, net                                                                  908                1,246
     Inventories  (note 2)                                                                   2,376                2,229
     Prepaid expenses                                                                           68                   88
                                                                                -------------------    -----------------
              Total current assets                                                           3,500                4,960

Equipment and leasehold improvements, net (note 3)                                          20,034               20,544
Other assets                                                                                   299                  163
                                                                                -------------------    -----------------
              Total assets                                                      $           23,833     $         25,667
                                                                                -------------------    -----------------
                                                                                -------------------    -----------------
Liabilities and Stockholders' Equity
Current liabilities:
     Current maturities of long-term debt                                       $            200       $             50
     Short-term revolving line of credit                                                     392                      -
     Note payable                                                                              -                    975
     Current maturities of capital lease obligations                                          96                    129
     Accounts payable                                                                        904                    938
     Other accrued liabilities                                                               296                    272
                                                                                -------------------    -----------------
              Total current liabilities                                                    1,888                  2,364

Long-term debt, excluding current maturities                                                 563                     62
Obligations under capital leases, excluding current maturities                                 -                     67
                                                                                -------------------    -----------------
              Total liabilities                                                            2,451                  2,493

Stockholders' equity:
     Cumulative  preferred  stock,  Series  C, of  $.001  par  value  (aggregate
     involuntary  liquidation  preference  $2,975 ($5 per  share),  plus  unpaid
     cumulative dividends).  Authorized 5,000,000 shares; issued and outstanding
     595,031 shares at December 31, 1998 and March 31, 1998                                    1                      1
     Common Stock of $0.05 par value,  authorized 25,000,000 shares;  issued and
     outstanding 13,603,572 shares at December 31, 1998 and 13,599,572 shares at
     March 31, 1998                                                                           68                     68
     Additional paid-in capital                                                           23,866                 23,866
     Accumulated deficit                                                                  (2,553)                  (761)
                                                                                -------------------    -----------------
              Total stockholders' equity                                                  21,382                 23,174
                                                                                -------------------    -----------------
                    Total liabilities and stockholders' equity                  $         23,833       $         25,667
                                                                                -------------------    -----------------
                                                                                -------------------    -----------------
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       3
<PAGE>

<TABLE>
<CAPTION>
                              CYANOTECH CORPORATION

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


                                                                   Three Months Ended                     Nine Months Ended
                                                                       December 31,                          December 31,
<S>                                                           <C>               <C>                 <C>                <C>    
                                                                  1998              1997                 1998              1997
                                                              ------------      ------------        -------------      -------------
NET SALES                                                     $     1,675       $     1,564         $      4,963       $      5,391
COST OF PRODUCT SALES                                               1,553             1,022                4,261              3,092
                                                              ------------      ------------        -------------      -------------
        Gross Profit                                                  122               542                  702              2,299
                                                              ------------      ------------        -------------      -------------
OPERATING EXPENSES:
        Research and development                                      185               183                  652                497
        General and administrative                                    397               336                1,086              1,042
        Sales and marketing                                           248               342                  747              1,133
                                                              ------------      ------------        -------------      -------------
        Total operating expenses                                      830               861                2,485              2,672
                                                              ------------      ------------        -------------      -------------
        Loss from operations                                         (708)             (319)              (1,783)              (373)
                                                              ------------      ------------        -------------      -------------

OTHER INCOME (EXPENSE):
        Interest income                                                 4                39                    7                191
        Interest expense                                              (51)              (14)                (121)               (41)
        Other income (expense), net                                    (4)                8                   (9)                 8
                                                              ------------      ------------        -------------      -------------

                   Total other income (expense)                       (51)               33                 (123)               158
                                                              ------------      ------------        -------------      -------------

                   Loss before income taxes                          (759)             (286)              (1,906)              (215)
                   Income taxes                                        40                 -                  114                  -
                                                              ------------      ------------        -------------      -------------
NET LOSS                                                             (719)             (286)              (1,792)              (215)
                                                              ------------      ------------        -------------      -------------
                                                              ------------      ------------        -------------      -------------

Other comprehensive income                                              -                 -                   -                   -
                                                              ------------      ------------        -------------      -------------
COMPREHENSIVE LOSS                                            $      (719)      $      (286)        $     (1,792)     $        (215)
                                                              ------------      ------------        -------------      -------------
                                                              ------------      ------------        -------------      -------------
NET LOSS PER COMMON SHARE
     Basic                                                         $(0.06)           $(0.03)              $(0.14)            $(0.03)
     Diluted                                                       $(0.06)           $(0.03)              $(0.14)            $(0.03)

SHARES USED IN CALCULATION OF:
     Basic                                                         13,604            12,864               13,601             12,840
     Diluted                                                       13,604            12,864               13,601             12,840
</TABLE>
                See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
<TABLE>
<CAPTION>
                              CYANOTECH CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (Unaudited)

<S>                                                                             <C>                      <C>
                                                                                          Nine Months Ended
                                                                                             December 31,
                                                                                    1998                      1997
                                                                                -------------            -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
          Net loss                                                              $     (1,792)            $       (215)
          Adjustments to reconcile net loss to net cash provided by
          (used in) operating activities:
                    Deferred income taxes                                                  -                      (38)
                    Depreciation and amortization                                      1,036                      678
                    Amortization of debt issue costs                                      15                        -
                    Common stock issued for services                                       -                       47
                    Net (increase) decrease in:
                            Accounts receivable                                          338                    1,440
                            Inventories                                                 (147)                  (1,281)
                            Prepaid expenses and other assets                            (28)                      47
                    Net increase (decrease) in:
                            Accounts payable                                             (34)                      51
                            Other accrued liabilities                                     24                     (135)
                                                                                -------------            -------------
Net cash provided by (used in) operating activities                                     (588)                     594
                                                                                -------------            -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
          Investment in equipment and leasehold improvements                            (526)                  (5,917)
          Proceeds from sales of investment securities                                     -                    2,454
                                                                                -------------            -------------
Net cash used in investing activities                                                   (526)                  (2,963)
                                                                                -------------            -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Net proceeds from exercise of warrants and options                               -                       64
          Debt issue costs                                                              (103)                       -
          Proceeds from issuance of long-term debt                                       750                        -
          Principal payments on long-term debt                                           (99)                     (88)
          Borrowings on short-term revolving line of credit, net                         392                        -
          Principal payments on note payable                                            (975)                       -
          Principal payments on capital lease obligations                               (100)                     (98)
                                                                                -------------            -------------

Net cash used in financing activities                                                   (135)                    (122)
                                                                                -------------            -------------

Net decrease in cash and cash equivalents                                             (1,249)                  (2,491)
Cash and cash equivalents at beginning of period                                       1,397                    2,775
                                                                                -------------            -------------
Cash and cash equivalents at end of period                                      $        148             $        284
                                                                                -------------            -------------
                                                                                -------------            -------------
</TABLE>
          See accompanying notes to consolidated financial statements.

                                        5
<PAGE>



                              CYANOTECH CORPORATION
                                    FORM 10-Q
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1998
                                   (Unaudited)

1.       BASIS OF PRESENTATION

         The accompanying  unaudited consolidated financial statements have been
         prepared in accordance with generally  accepted  accounting  principles
         for interim  financial  information  and with the  instructions to Form
         10-Q and Regulation  S-X.  Accordingly,  they do not include all of the
         information  and footnotes  required by generally  accepted  accounting
         principles  for  complete  financial  statements.   These  consolidated
         financial  statements and notes should be read in conjunction  with the
         Company's  consolidated financial statements contained in the Company's
         previously filed report on Form 10-K for the year ended March 31, 1998.

         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
         subsidiaries,  Nutrex,  Inc. and Cyanotech  International FSC, 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, 1998 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, 1999.

         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):
<TABLE>
<CAPTION>
<S>                                                         <C>                           <C>
                                                            December 31, 1998               March 31, 1998
                                                            -----------------             -----------------
         Raw materials                                      $              63             $             103
         Work in process                                                  324                           362
         Finished goods                                                 1,751                         1,524
         Supplies                                                         238                           240
                                                            -----------------             -----------------
                                                            $           2,376             $           2,229
                                                            -----------------             -----------------
                                                            -----------------             -----------------
</TABLE>
                                        6

<PAGE>
3.       EQUIPMENT AND LEASEHOLD IMPROVEMENTS

         Owned  equipment  and  leasehold   improvements  are  stated  at  cost.
         Equipment  under  capital  lease is stated at the lower of the  present
         value of the minimum  lease  payments or fair value of the equipment at
         the inception of the lease.  Depreciation and amortization are provided
         using the  straight-line  method over the  estimated  useful  lives for
         furniture  and fixtures and the shorter of the lease terms or estimated
         useful lives for leasehold  improvements  and  equipment  under capital
         lease as follows:
<TABLE>
<CAPTION>
<S>                                                 <C>         <C>        <C>   <C>
         Equipment                                                         3 to 10 years
         Leasehold improvements                     Remaining lease term (10 to 28 years)
         Furniture and fixtures                                                  7 years
         Equipment under capital lease                          Lease term (3 to 5 years)
</TABLE>

         Equipment and leasehold  improvements consist of the following (dollars
         in thousands):
<TABLE>
<CAPTION>
<S>                                                              <C>                           <C>
                                                                 December 31, 1998               March 31, 1998
                                                                 -----------------             -----------------
         Equipment                                               $          8,313              $          7,791
         Leasehold improvements                                            13,695                        13,285
         Furniture and fixtures                                                96                            94
         Equipment under capital lease                                        569                           569
                                                                 -----------------             -----------------
                                                                           22,673                        21,739
         Less accumulated depreciation and amortization                    (5,743)                       (4,707)
         Construction in-progress                                           3,104                         3,512
                                                                 -----------------             -----------------
         Equipment and leasehold improvements, net               $         20,034              $         20,544
                                                                 -----------------             -----------------
                                                                 -----------------             -----------------
</TABLE>
         Construction  in-progress  includes  costs  incurred  with respect to a
         suspended production facility expansion project.  Prior to December 31,
         1998, the Company reached an agreement with its construction contractor
         to resume work on the suspended  expansion project on or before June 1,
         1999.  The   remaining   balance   on   the  construction  contract  is
         approximately  $1.9 million.  Total  costs  incurred as of December 31,
         1998 with respect to this expansion project approximate $2,643. If work
         does  not  resume  on or before June  1, 1999,  the  contract  will  be
         considered  to  have  been  terminated  by Cyanotech.  Assertion by the
         contractor of its termination rights could   have  a  material  adverse
         effect on the Company's financial condition,   results   of  operations
         and/or liquidity. 

4.       SERIES C PREFERRED STOCK

         Series C preferred  stock is convertible  into common stock at the rate
         of one share of preferred stock for five shares of common stock through
         February 23, 2000, after which date the conversion feature is no longer
         applicable.  Series C preferred  stock has voting  rights  equal to the
         number of shares of common stock into which it is convertible and has a
         preference in liquidation  over all other series of preferred  stock of
         $5 per share  plus any  accumulated  but unpaid  dividends.  Holders of
         Series C preferred stock are entitled to 8% cumulative annual dividends
         at the rate of $.40 per share;  cumulative  dividends  in arrears as of
         December 31, 1998 amount to $2,240 ($3.763 per share).  Upon conversion
         of  Series C  preferred  stock,  cumulative  dividends  in  arrears  on
         converted  shares  are no  longer  payable.  The  consent  of  Series C
         preferred  stockholders  is required to modify their present  rights or
         sell all or substantially all of the Company's assets.

                                        7

<PAGE>
5.       EARNINGS PER SHARE

         The  company  adopted  Statement of Financial Accounting  Standards No.
         128,  "Earnings  per Share"  ("SFAS 128"),  during  the  quarter  ended
         December 31, 1997.  All prior period earnings per share information has
         been restated to reflect the provisions of SFAS No. 128.

         For the  three  and nine  months  ended  December  31,  1998 and  1997,
         warrants and options to purchase Common Stock shares of the Company and
         convertible preferred stock 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.  As of December 31, 1998,  warrants and
         options to acquire  638,925  shares of the  Company's  common stock and
         preferred  stock  convertible  into  2,975,155  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):
<TABLE>
<CAPTION>
<S>                                                      <C>          <C>                 <C>            <C>    
                                                            Three Months Ended                  Nine Months Ended
BASIC LOSS PER SHARE                                           December 31,                       December 31,
                                                           1998           1997                1998           1997
                                                       ------------   ------------        ------------   ------------       
Net loss                                               $      (719)   $     (286)         $    (1,792)   $      (215)
Less: Requirement for Preferred Stock
dividends                                                      (59)          (73)                (179)          (219)
                                                       ------------   ------------        ------------   ------------  
Loss to Common stockholders                            $      (778)   $     (359)         $    (1,971)   $      (434)
                                                       ------------   ------------        ------------   ------------ 
                                                       ------------   ------------        ------------   ------------      

Weighted average Common Shares outstanding               13,603,572     12,863,912          13,601,110     12,840,182
                                                       ------------   ------------        ------------   ------------ 
                                                       ------------   ------------        ------------   ------------
Net Loss per Common Share                              $     (0.06)   $     (0.03)        $     (0.14)   $     (0.03)
                                                       ------------   ------------        ------------   ------------ 
                                                       ------------   ------------        ------------   ------------
DILUTED LOSS PER SHARE
Loss to Common stockholders                            $      (778)   $      (359)        $    (1,971)   $      (434)
Plus: Requirement for Preferred Stock
dividends                                                        -              -                   -              -
                                                       ------------   ------------        ------------   ------------
Loss to Common stockholders, as adjusted               $      (778)   $     (359)         $    (1,971)   $      (434)
                                                       ------------   ------------        ------------   ------------ 
                                                       ------------   ------------        ------------   ------------

Weighted average Common Shares outstanding               13,603,572     12,863,912          13,601,110     12,840,182
Effect of dilutive securities: 
     Stock options and warrants                                   -              -                   -              -
     Convertible preferred stock                                  -              -                   -              -
                                                       ------------   ------------        ------------   ------------
Weighted average Common Shares 
outstanding, as adjusted                                 13,603,572     12,863,912          13,601,110     12,840,182
                                                       ------------   ------------        ------------   ------------ 
                                                       ------------   ------------        ------------   ------------
Net Loss per Common Share                               $    (0.06)    $    (0.03)        $     (0.14)   $     (0.03)
                                                       ------------   ------------        ------------   ------------ 
                                                       ------------   ------------        ------------   ------------
</TABLE>


                                        8
<PAGE>

6.       ACCOUNTING CHANGES

         COMPREHENSIVE INCOME.  In June 1997, the Financial Accounting Standards
         Board  (FASB)  issued SFAS No. 130,   "Reporting Comprehensive Income,"
         which   establishes   standards   for  the  reporting  and  display  of
         comprehensive income  and its  components in a  full  set  of  general-
         purpose  financial statements.  SFAS  No. 130 is effective  for  fiscal
         years  beginning  after  December 15, 1997.   The  Company  adopted the
         provisions  of  SFAS  No. 130  effective April 1, 1998.   SFAS  No. 130
         requires reclassification of  financial statements for earlier  periods
         provided  for comparative purposes.  Adoption of  SFAS  No. 130 did not
         affect the Company's reported financial information.

         SEGMENTS OF AN ENTERPRISE  AND RELATED  INFORMATION.  In June 1997, the
         FASB issued SFAS No. 131,  "Disclosures about Segments of an Enterprise
         and Related  Information," which establishes standards for the way that
         public business enterprises report information about operating segments
         in interim financial  statements  and requires  that those  enterprises
         report  selected   information  about  operating  segments  in  interim
         financial reports issued to shareholders. SFAS No. 131 is effective for
         fiscal years  beginning  after December 15, 1997. SFAS No. 131 need not
         be applied to  interim  financial  statements  in the  initial  year of
         application.  The Company will adopt the provisions of SFAS No. 131 for
         its fiscal year 1999 financial statements.

         EMPLOYERS'   DISCLOSURES   ABOUT   PENSIONS  AND  OTHER  POSTRETIREMENT
         BENEFITS.  In February 1998, the FASB issued SFAS No. 132,  "Employers'
         Disclosures about Pensions and Other  Postretirement  Benefits,"  which
         amends  the  disclosure  requirements  of  SFAS  No.  87,   "Employers'
         Accounting  for  Pensions,"  SFAS  No. 88,  "Employers'  Accounting for
         Settlements and Curtailments of Defined Benefit  Pension  Plans and for
         Termination  Benefits,"  and  SFAS No. 106,  "Employers' Accounting for
         Postretirement  Benefits  Other  Than Pensions." SFAS No. 132 addresses
         disclosure  only  and  does  not  change  any  of  the  measurement  or
         recognition  provisions  provided for in SFAS Nos. 87, 88 or 106.  SFAS
         No. 132 is effective for fiscal years beginning after December 15, 1997
         and requires  restatement  of  comparative  information  presented  for
         earlier periods.  The Company will adopt the provisions of SFAS No. 132
         for its fiscal year 1999 financial statements.

         ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES.  In June
         1998,  the  FASB  issued  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.  Management  does not expect  adoption of SFAS No.
         133 will have a material effect on the Company's  financial  condition,
         results of operations or liquidity.

                                       9
<PAGE>

         ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
         INTERNAL USE. In March 1998, the American Institute of Certified Public
         Accountants  ("AICPA")  Accounting Standards Executive Committee issued
         Statement  of  Position  ("SOP")  98-1,  "Accounting  for the  Costs of
         Computer  Software  Developed  or  Obtained  for  Internal  Use," which
         requires   that   certain   costs,   including   certain   payroll  and
         payroll-related  costs, be capitalized and amortized over the estimated
         useful life of the software.  The  provisions of SOP 98-1 are effective
         for fiscal years beginning after December 15, 1998. The Company has not
         determined when it will adopt SOP 98-1. Management does not expect that
         adoption  of SOP 98-1 will  have a  material  effect  on the  Company's
         financial condition, results of operations or liquidity.

         REPORTING ON THE COSTS OF START-UP ACTIVITIES. In April 1998, the AICPA
         Accounting Standards Executive Committee issued SOP 98-5, "Reporting on
         the Costs of  Start-up  Activities."  SOP 98-5  requires  that costs of
         start-up  activities,  including  organization  costs,  be  expensed as
         incurred.  The  provisions  of SOP 98-5 are  effective for fiscal years
         beginning   after   December  15,  1998  and  earlier   application  is
         encouraged.  The Company has not determined when it will adopt SOP 98-5
         and does not  expect  that  adoption  of SOP 98-5 will have a  material
         effect on the Company's financial  condition,  results of operations or
         liquidity.

7.       CONTINGENCY

         On July 13,  1998,  the  Company  filed a  complaint  in United  States
         District Court for the District of Hawaii (Case No. CV98-00600) against
         Aquasearch,  Inc.  ("Aquasearch"),  seeking  declaratory  judgement  of
         patent noninfringement,  patent invalidity, and non-misappropriation of
         trade secrets relating to closed culture production of astaxanthin. The
         complaint was filed in response to  assertions by Aquasearch  regarding
         its alleged intellectual  property rights.  Aquasearch has answered the
         complaint and filed counter claims alleging patent infringement,  trade
         secret misappropriation, unfair competition and breach of contract. The
         Company is  pursuing  this  litigation  vigorously.  In the  opinion of
         management,  the  ultimate  disposition  of this matter will not have a
         material adverse effect on the Company's financial  condition,  results
         of operations or liquidity.

                                        10

<PAGE>



                              CYANOTECH CORPORATION

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

         This report on Form 10-Q  contains forward-looking statements regarding
the future performance of Cyanotech  and future  events  that involve risks  and
uncertainties   that  could cause actual results to differ  materially  from the
statements  contained herein.  This document,  and the other documents  that the
Company  files  from  time to time with the  Securities and Exchange Commission,
such as its reports on Form 10-K, Form 10-Q, Form 8-K,  and its proxy materials,
contain additional important factors  that could cause  actual results to differ
from 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:
<TABLE>
<CAPTION>
<S>                                                                   <C>            <C>                 <C>            <C>
                                                                           Three Months Ended                  Nine Months Ended
                                                                              December 31,                       December 31,
                                                                           1998           1997                1998           1997
                                                                      ------------   ------------        ------------   ------------
               Net Sales                                                   100.0 %        100.0 %             100.0 %        100.0 %
               Cost of product sales                                        92.7           65.3                85.9           57.3
                                                                      ------------   ------------        ------------   ------------
                                                                               
                    Gross profit                                             7.3           34.7                14.1           42.7
                                                                      ------------   ------------        ------------   ------------

               Operating expenses:
                    Research and development                                11.1           11.7                13.1            9.2
                    General and administrative                              23.7           21.5                21.9           19.4
                    Sales and marketing                                     14.8           21.9                15.0           21.0
                                                                      ------------   ------------        ------------   ------------
                    Total operating expenses                                49.6           55.1                50.0           49.6
                                                                      ------------   ------------        ------------   ------------

                    Loss from operations                                   (42.3)         (20.4)              (35.9)          (6.9)
                                                                      ------------   ------------        ------------   ------------
               Other income (expense):
                    Interest income                                          0.2            2.5                 0.1            3.5
                    Interest expense                                        (3.0)          (0.9)               (2.4)          (0.8)
                    Other income (expense), net                             (0.2)           0.5                (0.2)           0.2
                                                                      ------------   ------------        ------------   ------------

                    Total other income (expense)                            (3.0)           2.1                (2.5)           2.9
                                                                      ------------   ------------        ------------   ------------

                    Loss before income taxes                               (45.3)         (18.3)              (38.4)          (4.0)
                    Income taxes                                             2.4              -                 2.3              -
                                                                      ------------   ------------        ------------   ------------

               Net loss                                                    (42.9)         (18.3)              (36.1)          (4.0)
               Other comprehensive income                                      -              -                   -              -
                                                                      ------------   ------------        ------------   ------------
               Comprehensive loss                                          (42.9)%        (18.3)%             (36.1)%         (4.0)%
                                                                      ------------   ------------        ------------   ------------
                                                                      ------------   ------------        ------------   ------------
</TABLE>


                                       11
<PAGE>



THIRD QUARTER OF FISCAL 1999 COMPARED TO THIRD QUARTER OF FISCAL 1998

NET SALES

         Net sales for the three month period ended  December 31, 1998 increased
7% to $1,675,000 from  $1,564,000 in the comparable  period of fiscal 1998. This
increase in net sales was  primarily  due to higher sales of bulk  Spirulina and
packaged consumer products.

         International  sales represented 44% and 39% of total net sales for the
three month periods ended December 31, 1998 and 1997, respectively.

GROSS PROFIT

         Gross  profit  represents  net  sales  less the  product  sales,  which
includes  the cost of  materials,  manufacturing  overhead  costs,  direct labor
expenses  and  depreciation  and  amortization.  Gross profit  decreased  77% to
$122,000 for the three month period ended  December 31, 1998,  from  $542,000 in
the  comparable  period  of fiscal  1998.  The  Company's  gross  profit  margin
decreased to 7% for the three month period ended December 31, 1998,  compared to
35% for the  comparable  period of fiscal  1998.  This  decrease in gross profit
margin  from the prior year  period was  primarily  attributable  to a change in
product mix to greater  sales of lower margin bulk  Spirulina  products,  higher
costs associated  with the optimization of NatuRose(TM) production and increased
depreciation expense. Depreciation expense included in cost of product sales for
the three months ended December 31, 1998 increased to $333,000 from $219,000 for
the  comparable  period  of  fiscal  1998 due to  NatuRose  assets  placed  into
production in the current year.

OPERATING EXPENSES

         Operating  expenses were  $830,000  during the three month period ended
December 31, 1998, a decrease of 4% from  $861,000 in the  comparable  period of
fiscal 1998.  This decrease was  primarily due to decreased  sales and marketing
expenses, partially offset by increased general and administrative expenses.

         General and administrative  expenses amounted to $397,000 for the three
month period ended  December 31, 1998,  an increase of 18% from $336,000 for the
comparable  period  of  fiscal  1998.  This  increase  from the  prior  year was
primarily due to increased legal expenses related to the ongoing litigation with
Aquasearch, Inc. See Note 7.  Contingency.

         Sales and marketing  expenses decreased to $248,000 for the three month
period ended December 31, 1998, down 27% from $342,000 for the comparable period
of  fiscal  1998.  This  decrease  was  primarily  due  to  reduced   personnel,
advertising and consulting service costs dictated by lower revenues.

OTHER INCOME (EXPENSE)

         Other expense was $51,000 for the three month period ended December 31,
1998,  compared to other income of $33,000 for the  comparable  period of fiscal
1998. This resulted from the decrease in investment  securities and the increase
in outstanding, interest-bearing debt.

                                       12

<PAGE>

INCOME TAXES

         The Company  presently  expects  that its fiscal year 1999 results will
provide  for a tax  refund of Hawaii  State  income  taxes  from  available  net
operating loss carryback. Accordingly, an interperiod tax benefit of $40,000 has
been recorded for the three months ended December 31, 1998.

NET LOSS

         The Company  recorded a net loss of $719,000 for the three months ended
December 31, 1998,  compared to a net loss of $286,000 for the comparable period
of fiscal 1998.  This increase in net loss was primarily  attributable to higher
cost of product sales, depreciation, and interest expense.


NINE MONTHS  ENDED DECEMBER 31, 1998  COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1997

NET SALES

         Net sales for the nine month period ended  December 31, 1998  decreased
8% to $4,963,000 from  $5,391,000 in the comparable  period of fiscal 1998. This
decrease was primarily due to lower sales of packaged  consumer  products and of
bulk  Spirulina  powder and  tablets,  partially  offset by  increased  sales of
NatuRose, our natural astaxanthin product.

         International  sales represented 44% and 33% of total net sales for the
nine month periods ended December 31, 1998 and 1997, respectively.

GROSS PROFIT

         Gross profit  decreased 69% to $702,000 for the nine month period ended
December 31, 1998, from $2,299,000 in the comparable  period of fiscal 1998. Our
gross  profit  margin  decreased  to 14% of net sales for the nine month  period
ended  December 31, 1998,  compared to 43% for the  comparable  period of fiscal
1998.  This  decrease  in gross  profit  margin  from the prior year  period was
primarily  attributable  to a change in product  mix to  greater  sales of lower
margin  bulk  Spirulina  products,  increased  production  costs  and  increased
depreciation expense. Depreciation expense included in cost of product sales for
the nine months ended  December 31, 1998 increased to $923,000 from $608,000 for
the comparable period of fiscal 1998.

OPERATING EXPENSES

         Operating  expenses were $2,485,000  during the nine month period ended
December 31, 1998, a decrease of 7% from $2,672,000 in the comparable  period of
fiscal 1998.  This decrease was  primarily due to decreased  sales and marketing
expenses, partially offset by increased research and development expenses.

         Research  and  development  expenses  amounted to $652,000 for the nine
month period ended  December 31, 1998,  an increase of 31% from $497,000 for the
comparable  period of fiscal 1998.  This  increase was  primarily  due to higher
personnel  expenditures for the ongoing development work done on our genetically
engineered mosquitocide project and on the Aldolase Catalytic Antibody project.


                                       13

<PAGE>
         General and administrative expenses amounted to $1,086,000 for the nine
month period ended December 31, 1998, an increase of 4% from  $1,042,000 for the
comparable  period of fiscal 1998.  This increase was primarily due to increased
legal expenses related to the ongoing litigation with Aquasearch,  Inc. See Note
7. Contingency.

         Sales and marketing  expenses  decreased to $747,000 for the nine month
period ended  December 31, 1998,  down 34% from  $1,133,000  for the  comparable
period of fiscal 1998.  This decrease was  primarily  due to reduced  personnel,
advertising and consulting service costs dictated by lower revenues.

OTHER INCOME (EXPENSE)

         Other expense was $123,000 for the nine month period ended December 31,
1998,  compared to other income of $158,000 for the comparable  period of fiscal
1998. This resulted from the decrease in investment  securities and the increase
in outstanding, interest-bearing debt.

INCOME TAXES

         The Company  presently  expects  that its fiscal year 1999 results will
provide  for a tax  refund of Hawaii  State  income  taxes  from  available  net
operating loss  carryback.  Accordingly,  an interperiod tax benefit of $114,000
has been recorded for the nine months ended December 31, 1998.

NET LOSS

         The Company recorded a net loss of $1,792,000 for the nine months ended
December 31, 1998,  compared to a net loss of $215,000 for the comparable period
of fiscal 1998. This increase in net loss was primarily  attributable to reduced
sales  of  bulk  Spirulina  powder  and  tablets,  increased  production  costs,
decreased interest income from investment securities, increased interest expense
due to higher debt, offset in part by lower 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 the Company's largest customers, new product introductions, government
action,  weather  patterns,  the mix between sales of bulk products and packaged
consumer products, start-up costs associated with new facilities, expansion into
new  markets,  sales  promotions,   competition,  increased  energy  costs,  the
announcement  or  introduction  of new products by  competitors,  changes in the
Company's  customer  mix,  overall  trends  in  the  market  for  Spirulina  and
astaxanthin products,  and other factors. 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  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 an inability to adjust spending quickly enough to
compensate for the sales shortfall. The Company may also choose to reduce prices
or increase  spending on sales and  marketing in response to market  conditions,
which may have a material  adverse effect on financial  condition and results of
operations.

                                       14

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Our working capital  decreased by $984,000 during the first nine months
of  fiscal  1999  to  $1,612,000.   Our  cash  and  cash  equivalents  decreased
substantially by $1,249,000, primarily because of  cash flows used in operations
and capital expenditures of $588,000 and $526,000, respectively.

         The primary uses of cash flows in operating activities during the first
nine  months  of  fiscal  1999  were  the net  loss  of  $1,792,000,  offset  by
depreciation and amortization of $1,036,000.

         Cash used for  capital  expenditures  during the first  nine  months of
fiscal 1999 decreased $5,391,000 to $526,000.

         The primary uses of cash flows in financing activities during the first
nine  months of fiscal  1999 were for  repayment  of a $975,000  short term note
payable,  payments on capital lease  obligations and long-term debt of $199,000,
offset in part by  borrowings  under a  short-term  revolving  line of credit of
$392,000 and proceeds from the issuance of long-term debt of $750,000.

         Prior to December 31, 1998,  the Company  reached an agreement with its
construction  contractor to resume work on a suspended  expansion  project on or
before  June 1, 1999.  The  remaining  balance on the  construction  contract is
approximately  $1.9 million.  If work does not resume on or before June 1, 1999,
the contract will be considered to have been terminated by Cyanotech.  Assertion
by the contractor of its termination rights could have a material adverse effect
on the Company's  financial  condition,  results of operations and/or liquidity.
The  credit  facilities  available  to the  Company on  December  31,  1998,  as
described  in the  next  paragraph,  unless  supplemented  by funds  from  other
sources,  may not be sufficient to finance this  construction  work. Total costs
incurred  as of  December  31,  1998  with  respect  to this  expansion  project
approximate  $2,643,000.  Failure by the  Company  to  complete  this  expansion
project  would  have  a  material  adverse  effect  on the  Company's  financial
condition and results of operations.

         On  July  28,  1998,  the  Company  entered  into a Loan  and  Security
Agreement  with  a  lender  which  provides  for  up to  $3  million  in  credit
facilities,  secured by all the assets of the Company.  The major  components of
the credit facility include working capital loans on a revolving basis,  subject
to the availability of eligible accounts  receivable and inventory,  a sub-limit
term loan of up to $750,000  (amortized  over sixty months)  secured by eligible
machinery  and  equipment,  and a  sub-limit  term  loan  of  up  to $2  million
(amortized  over  sixty  months  and  subject  to  the  Company   achieving  and
maintaining specific levels of financial performance) for the acquisition of new
machinery and equipment.  The interest rate on the credit facility is prime plus
2.5% (at December 31, 1998, the prime rate was 7.75%) until the Company achieves
certain  financial  performance  levels,  at which time the  interest  rate will
decrease to prime plus  1.25%.  Interest  is  calculated  on a base amount of $1
million or the  outstanding  loan balance,  whichever is greater.  Proceeds from
borrowings  under  the  credit  facility  were used to repay a  short-term  note
payable and fund working capital requirements.
     
                                       15

<PAGE>
     At December  31,  1998,  the  aggregate  outstanding  balance on the credit
facility amounted to $1,080,000,  with remaining availability  calculated by the
lender at $610,000.  The remaining availability amount excludes the component of
the credit  facility for the  acquisition of new machinery and equipment as such
component is contingent on the Company's  achievement of a Debt Service Coverage
ratio of at least  1.25:1  for the  prior  two full  consecutive  quarters  on a
combined basis. This component,  if available,  may increase the availability by
an  additional  $1,920,000,  up to the limit of $3 million for the entire credit
facility.  The  outstanding  balance  of  the  equipment term loan, less current
maturities,  has been classified as a non-current liability in the  consolidated
balance sheet at December 31, 1998.  The outstanding working  capital loans on a
revolving basis are payable  through the daily collection of accounts receivable
and  have  been classified  as a current  liability  in the consolidated balance
sheet at December 31, 1998.


YEAR 2000 COMPLIANCE

         The  Company  has  completed  a  comprehensive  review of its  computer
systems to identify  the systems that could be affected by the "Year 2000" issue
and has  developed an  implementation  plan,  to be completed  before the end of
calendar  1999,  to  resolve  the  issue.   The  Company   believes  that,  with
modifications to existing software and converting to new software, the Year 2000
issue will not pose significant  operational problems for the Company's computer
systems  as so  modified  and  converted.  The costs of such  modifications  and
conversions are not expected to exceed $10,000.  However,  if such modifications
and conversions are not completed in a timely manner,  the Year 2000 problem may
have a material adverse impact on the operations of the Company.

         The Company is continuing  the review and evaluation of its reliance on
other third parties (e.g.  utilities  providers,  distribution  channels,  major
suppliers  and  vendors)  to  determine  and  minimize  the  extent to which its
operations may be dependent on such third parties to remedy the Year 2000 issues
in their  systems.  In addition,  contingency  backup plans will be reviewed for
each mission  critical  system,  with the emphasis on operational and production
continuity.  The Company's  business,  operating results and financial condition
could be materially adversely affected by the failure of its systems or those of
other parties to operate properly beyond 1999.


OUTLOOK

         This outlook section contains a number of  forward-looking  statements,
all of which  are based on  current  expectations.  Actual  results  may  differ
materially. See also the note at the beginning of this Item 2.

         The  Company  believes  that  it has  largely  resolved  the  Spirulina
production  problems which resulted from restarting the Spirulina  culture ponds
that were idle from  December 1997 to February  1998. At December 31, 1998,  the
ponds are at 100% of the capacity allocated to Spirulina production.  We plan to
balance  Spirulina  production  with NatuRose  production  resources to meet our
customers' requirements during the remainder of fiscal 1999. Gross profit margin
for NatuRose is currently  nil due to high initial  production  costs  exceeding
unit selling price, but is expected to improve as current high-cost inventory is
reduced.  Such gross  profit  margins  are  expected  to improve as we  optimize
processing systems and production throughput;  however, at the currently reduced
production levels,  such high production costs,  presently related to production
of NatuRose, may persist into the near future.

                                       16
<PAGE>
     As  of  December  31, 1998,  the  Company's  available  borrowing  capacity
amounted to $610,000.   Absent a significant improvement in operating results, a
reduction  in  costs,  additional  debt  or  equity  financing, or a combination
thereof, the Company may experience liquidity shortages in the near term.

     In  order  to  address  this  potential  liquidity  issue,  the  Company is
continuing  to develop  new and  broader distribution channels for its products,
but until this effort results in increased  sales, the Company is reducing costs
to be  more in line with  current  sales  levels.  In January 1999,  the Company
implemented  a plan to improve liquidity  and reduce or deter operating costs by
$1.1  million  annually.  The  plan  includes  a  deferral  of land rent for the
suspended  pond  expansion project,  significant reductions in capital spending,
elimination of all temporary labor agreements related to NatuRose production and
a  reduction  in  workforce which is expected to result in an annual decrease in
labor cost of approximately 15%.  

     In  conjunction with implementation of this plan,  the Company  has  scaled
back  production  of  NatuRose  until  such time as sales of NatuRose dictate an
increase  in  inventory.  The  objective  of  the  cost  reduction  plan  is  to
significantly  reduce cash required  for  operating  activities.    However,  if
sales  do  not increase as projected or the cost reductions and deferrals do not
yield  the  desired  results,  further actions to reduce operating costs will be
taken by management.

         Research  and  development   costs  are  expected  to  remain  constant
throughout  this  calendar  year as we work to  optimize  the  PhytoMax  PCS(SM)
technology,  as well as the research  and  development  of both the  genetically
engineered  mosquitocide  project and the Aldolase Catalytic Antibody 38C2 under
an agreement with The Scripps Research Institute.

         Cyanotech's  strategy has been,  and continues to be, to produce higher
value natural products from microalgae.  To continue the  implementation of this
strategy, we have broadened our product offerings with the addition of NatuRose,
our natural  astaxanthin  product,  and are continuing  development  work on the
genetically-engineered  mosquitocide which we plan to have available for initial
testing by the end of the current  quarter.  Additionally,  development  work on
production  of  Aldolase  Catalytic  Antibody  38C2  is  scheduled  to  continue
throughout  this calendar year. We are continuing our emphasis on selling higher
value packaged  Spirulina consumer products over Spirulina bulk products as well
as exploring and developing new markets for our bulk products.

         The  Company's  future  results of operations  and the  forward-looking
statements  contained in this Outlook,  in particular the  statements  regarding
revenues, gross margin, research and development, cost reductions and deferrals,
and capital spending,  involve a number of risks and uncertainties.  In addition
to the factors discussed above,  among the other factors that could cause actual
results to differ materially are the following:  business  conditions and growth
in the natural products industry and in the general economy; changes in customer
order patterns, and changes in demand for natural products in  general;  changes
in  weather  conditions;   competitive  factors,  such  as  competing  Spirulina
producers increasing their production capacity and their impact on world  market
prices  for  Spirulina; government  actions; shortage of manufacturing capacity;
and other factors beyond our control.

         Cyanotech  believes  that it has  the  product  offerings,  facilities,
personnel,  and  competitive  and financial  resources  for  continued  business
success, but future revenues, costs, margins and profits are all influenced by a
number of factors, as discussed above, all of which are inherently  difficult to
forecast.

                                       17

<PAGE>
PART II.  OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K

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

                 Exhibit 27.1 - Financial Data Schedule

          (b)    Reports on Form 8-K

                 No  reports  on Form 8-K  were filed  during  the quarter ended
                 December 31, 1998.






                                       18

<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 11, 1999                   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)











                                       19