<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                     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, 1997

                                            Commission File Number  0-14602


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


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



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

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



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



                              Number of common shares outstanding as of February 9, 1998:

                             Title of Class                                     Shares Outstanding

                  Common stock - $.005 par value stock                                 12,863,912


</TABLE>




                                                           1

<PAGE>



                                           CYANOTECH CORPORATION
                                                 FORM 10-Q

                                                   INDEX

PART I.   FINANCIAL INFORMATION
<TABLE>
<CAPTION>

Item 1.  Financial Statements                                                                                Page
<S>     <C>                                                                                                   <C>

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

         Consolidated Statements of Operations (unaudited)
                  Three and nine month periods ended
                  December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

         Consolidated Statements of Cash Flows (unaudited)
                  Nine month periods ended
                  December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5


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


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


PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16


SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 17

</TABLE>













                                                    2

<PAGE>





PART I. FINANCIAL INFORMATION
        Item 1.   Financial Statements

 <TABLE>
<CAPTION>
                                                 CYANOTECH CORPORATION
                                               CONSOLIDATED BALANCE SHEETS
                                                 (Dollars in thousands)

<S>                                                                            <C>                       <C>
                                                                                   December 31,              March 31,
                                                                                        1997                    1997
                                                                                    (Unaudited)              (Audited)
                                                                               -----------------         -----------------
Assets
Current assets:
        Cash and cash equivalents                                              $            284          $          2,775
        Investment securities (note 2)                                                    1,000                     3,954
        Accounts receivable                                                               1,051                     2,791
        Inventories  (note 3)                                                             2,419                     1,138
        Prepaid expenses                                                                     98                       155
        Deferred tax assets                                                                 411                       373
                                                                               -----------------         -----------------
                Total current assets                                                      5,263                    11,186

Equipment and leasehold improvements, net (note 4)                                       19,905                    14,666
Other assets                                                                                173                       163
                                                                               -----------------         -----------------
                Total assets                                                   $         25,341          $         26,015
                                                                               =================         =================

Liabilities and Stockholders' Equity
Current liabilities:
        Current maturities of long-term debt                                   $             50          $            150
        Current maturities of capital lease obligations                                     132                       130
        Accounts payable                                                                  1,559                     1,508
        Other accrued liabilities                                                           198                       333
                                                                               -----------------         -----------------
                Total current liabilities                                                 1,939                     2,121

Long-term debt, excluding current maturities                                                 75                       363
Obligations under capital leases, excluding current maturities                               96                       196
                                                                               -----------------         -----------------

                Total liabilities                                                         2,110                     2,680
                                                                               -----------------         -----------------

Stockholders' equity:
        Preferred stock (note 5)                                                              1                         1
        Common Stock - 12,863,912 shares issued and outstanding
        on December 31, 1997 and 12,712,682 shares issued and
        outstanding on March 31, 1997                                                        64                        63
        Additional paid-in capital                                                       23,842                    23,732
        Accumulated deficit                                                                (676)                     (461)
                                                                               -----------------         -----------------
                Total stockholders' equity                                               23,231                    23,335
                                                                               -----------------         -----------------

                      Total liabilities and stockholders' equity               $         25,341          $         26,015
                                                                               =================         =================
</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,
                                                              1997           1996              1997            1996
                                                            --------      --------           --------        --------

<S>                                                         <C>           <C>                <C>             <C>     
NET SALES                                                   $  1,564       $  2,782            $  5,391        $  8,049
COST OF PRODUCT SALES                                          1,022          1,051               3,092           3,108
                                                            ---------      ---------           ---------       ---------
         Gross Profit                                            542          1,731               2,299           4,941
                                                            ---------      ---------           ---------       ---------

OPERATING EXPENSES:
         Research and development                                183            121                 497             454
         General and administrative                              336            367               1,042           1,063
         Sales and marketing                                     342            255               1,133             669
                                                            ---------      ---------           ---------       ---------

         Total operating expenses                                861            743               2,672           2,186
                                                            ---------      ---------           ---------       ---------

         Income (loss) from operations                          (319)           988                (373)          2,755
                                                            ---------      ---------           ---------       ---------

OTHER INCOME (EXPENSE):
         Interest income                                          39             153                191             377
         Interest expense                                        (14)            (17)               (41)            (61)
         Other income, net                                         8               7                  8               9
                                                            ---------       ---------          ---------       ---------
                    Total other income                            33             143                158             325
                                                            ---------       ---------          ---------       ---------

                    Income (loss) before income 
                       taxes                                    (286)          1,131               (215)          3,080
                                                            ---------       ---------          ---------       ---------
                    Income taxes                                   -             175                  -             175
                                                            ---------       ---------          ---------       ---------
NET INCOME (LOSS)                                           $   (286)       $    956           $   (215)       $  2,905
                                                            =========       =========          =========       =========

NET INCOME (LOSS) PER COMMON
SHARE
     Basic                                                    $(0.02)          $0.08            $ (0.02)         $0.23
                                                            =========       =========           ========       ========
     Diluted                                                  $(0.02)          $0.06            $ (0.02)         $0.18
                                                            =========       =========           ========       ========

For detailed description of EPS calculations, see Note 6.
          
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       4

<PAGE>
<TABLE>
<CAPTION>
                              CYANOTECH CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

                                                                                               Nine Months Ended
                                                                                     December 31,             December 31,
                                                                                         1997                     1996
                                                                                     ------------             ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                  <C>                      <C>           
           Net income (loss)                                                         $      (215)             $     2,905
           Adjustments to reconcile net income (loss) to net cash
           provided by operating activities:
                     Deferred income taxes                                                   (38)                       -
                     Depreciation and amortization                                           678                      506
                     Common stock issued for services                                         47                       37
                     Net (increase) decrease in:
                             Accounts receivable                                           1,440                   (1,181)
                             Inventories                                                  (1,281)                    (708)
                             Prepaid expenses and other assets                                47                      (79)
                     Net increase (decrease) in:
                             Accounts payable                                                 51                      (41)
                             Other accrued liabilities                                      (135)                     (82)
                                                                                      -----------             ------------

Net cash provided by operating activities                                                    594                    1,357
                                                                                      -----------             ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
           Investment in equipment and leasehold improvements                             (5,917)                  (4,947)
           Proceeds from sales of investment securities                                    2,954                        -
                                                                                      -----------             ------------
Net cash used in investing activities                                                     (2,963)                  (4,947)
                                                                                      -----------             ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
           Net proceeds from issuance of common stock                                          -                    1,398
           Net proceeds from exercise of warrants and options                                 64                      332
           Principal payments on capital lease obligations                                   (98)                     (87)
           Principal payments on long-term debt                                              (88)                    (113)
                                                                                      -----------             ------------

Net cash provided by (used in) financing activities                                         (122)                   1,530
                                                                                      -----------             ------------

Net decrease in cash and cash equivalents                                                 (2,491)                  (2,060)
Cash and cash equivalents at beginning of period                                           2,775                    9,409
                                                                                      -----------             ------------

Cash and cash equivalents at end of period                                            $      284              $     7,349
                                                                                      ===========             ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       5

<PAGE>



                              CYANOTECH CORPORATION
                                    FORM 10-Q
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1997
                                   (Unaudited)

1.       BASIS OF PRESENTATION

         The accompanying  unaudited consolidated financial statements have been
         prepared in accordance with generally  accepted  accounting  principles
         for interim  financial  information  and with the  instructions to Form
         10-Q and Regulation  S-X.  Accordingly,  they do not include all of the
         information  and footnotes  required by generally  accepted  accounting
         principles  for  complete   financial   statements.   These   financial
         statements and notes should be read in  conjunction  with the Company's
         financial statements contained in the Company's previously filed report
         on Form 10-K for the year ended March 31, 1997.

         The  Company  consolidates  enterprises  in which it has a  controlling
         financial interest. The accompanying  consolidated financial statements
         include the  accounts of  Cyanotech  Corporation  and its  wholly-owned
         subsidiary,  Nutrex,  Inc. All  significant  intercompany  balances and
         transactions have been eliminated in consolidation. While the financial
         information  furnished  for the  three  and nine  month  periods  ended
         December 31, 1997 is unaudited,  the  statements in this report reflect
         all material items which,  in the opinion of management,  are necessary
         for a fair  presentation  of the results of operations  for the interim
         periods  covered and of the  financial  condition of the Company at the
         dates of the consolidated balance sheets. The operating results for the
         interim period presented are not necessarily  indicative of the results
         that may be expected for the year ending March 31, 1998.

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


2.       INVESTMENT SECURITIES

         Investment  securities  held  as  available-for-sale   consist  of  the
         following (dollars in thousands):

<TABLE>
<CAPTION>
                                                            December 31,           March 31,
                                                                1997                 1997
                                                            ------------        ------------
         <S>                                                <C>                 <C>           
         U.S. Treasury securities                           $         -         $     2,454
         Mortgage-backed securities                                   -                 500
         Other interest bearing securities                        1,000               1,000
                                                            ------------        ------------
                                                            $     1,000         $     3,954
                                                            ============        ============
</TABLE>
                                       6

<PAGE>
3.       INVENTORIES

         Inventories  are  stated  at the  lower  of  cost  (which  approximates
         first-in, first-out) or market and consist of the following (dollars in
         thousands):
<TABLE>
<CAPTION>
                                                December 31,                  March 31,
                                                    1997                        1997
                                                ------------               ------------
<S>                                             <C>                        <C>           
         Raw Materials                          $        97                 $      166
         Work in process                                362                        362
         Finished goods                               1,666                        346
         Supplies                                       294                        264
                                                ------------               ------------
                                                $     2,419                 $    1,138
                                                ============               ============
</TABLE>

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 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>       
         Equipment                                                 3 to 10 years  
         Leasehold  improvements           Remaining  lease term (3 to 29 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>
                                                    December  31,          March 31,
                                                        1997                 1997
                                                    -------------       -------------
<S>                                                 <C>                 <C>             
         Equipment                                  $      7,680        $      5,715
         Leasehold improvements                           12,977              10,935
         Furniture and fixtures                               81                  67
         Equipment under capital lease                       602                 602
                                                    -------------       -------------
                                                          21,340              17,319
                                                   
Less accumulated depreciation and amortization            (4,407)             (3,729)
Construction in-progress                                   2,972               1,076
                                                    -------------       -------------
Equipment and leasehold improvements, net           $     19,905        $     14,666
                                                    =============       =============
</TABLE>
                                      

5.       SERIES C PREFERRED STOCK

         Series C  preferred  stock as of  December  31, 1997 and March 31, 1997
         consists of the following (dollars in thousands):
                                        7
<PAGE>
<TABLE>
<CAPTION>
                                                                 December 31,              March 31,
                                                                     1997                    1997
                                                                 -------------          -------------
<S>                                      <C>               <C>                    
         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, 1997; liquidation value $5.00 per share
                plus unpaid accumulated dividends                $          1           $         1
                                                                 =============          =============
</TABLE>
6.       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. SFAS 128 requires presentation of both Basic EPS and
         Diluted EPS on the face of the statemen of operations. Basic EPS, which
         replaces  primary EPS, is computed by dividing net income  available to
         stockholders  (numerator)  by the  weighted  average  number  of common
         shares  outstanding   (denominator)  during  the  period.   Unlike  the
         computation of primary EPS,  Basic EPS excludes the dilutive  effect of
         common stock  equivalents.  Diluted EPS replaces  fully diluted EPS and
         gives effect to all potential dilutive common shares outstanding during
         a period.  In computing  Diluted  EPS, the average  stock price for the
         period  is used in  determining  the  number of  shares  assumed  to be
         purchased  from exercise of stock options rather than the higher of the
         average  or  ending  stock  price as used in the  computation  of fully
         diluted EPS.  The  computation  of  Diluted  EPS assumes no conversion,
         exercise,  or  contingent  issuance  of  securities  that would have an
         antidilutive  effect  on earnings per share.  All prior period earnings
         per  share  information  has been restated to reflect the provisions of
         SFAS No. 128.

         Following is a reconciliation of the numerators and denominators of the
         Basic  and  Diluted  EPS  computations  for  the periods  presented (in
         thousands except per share amounts):



<TABLE>
<CAPTION>
                                                            Three Months Ended                    Nine Months Ended
                                                                 December 31,                         December 31,
                                                          1997               1996             1997                1996
                                                       ----------         ----------        ---------           ---------
        Numerator:
<S>                                                    <C>                <C>               <C>                 <C>     
        Net income (loss)                              $    (286)        $      956         $   (215)           $  2,905
                                                       ==========        ===========        =========           =========
        Denominator for basic earnings per
           common share                                   12,863             12,692           12,846              12,558
        Effect of dilutive securities:
        Stock options and warrants                             -              3,970                -               4,019
                                                      -----------        -----------        ---------           ---------
        Denominator for diluted earnings
           per common share                               12,863             16,662           12,846              16,577
                                                      ===========        ===========        =========           =========
        Net income (loss) per common share:
        Basic                                             $(0.02)             $0.08           $(0.02)              $0.23
                                                      ===========        ===========        =========           =========
        Diluted                                           $(0.02)             $0.06           $(0.02)              $0.18
                                                      ===========        ===========        =========           =========
</TABLE>

                                       8

<PAGE>




7.       ACCOUNTING CHANGES

         TRANSFERS  AND  SERVICING OF  FINANCIAL  ASSETS AND  EXTINGUISHMENT  OF
         LIABILITIES. In June 1996, the FASB issued SFAS No.125, "Accounting for
         Transfers  and  Servicing of  Financial  Assets and  Extinguishment  of
         Liabilities".  SFAS No. 125  generally is effective  for  transfers and
         servicing  of  financial  assets  and   extinguishment  of  liabilities
         occurring after December 31, 1996, and is to be applied  prospectively.
         This  Statement  provides   accounting  and  reporting   standards  for
         transfers  and  servicing of  financial  assets and  extinguishment  of
         liabilities based on consistent  application of a  financial-components
         approach  that  focuses  on  control.  It  distinguishes  transfers  of
         financial  assets  that are  sales  from  transfers  that  are  secured
         borrowings.  The  company  adopted  the  provisions  of  SFAS  No.  125
         effective  January 1, 1997. The adoption of SFAS No. 125 did not have a
         material  effect  on the  Company's  financial  condition,  results  of
         operations of liquidity.

         EARNINGS PER SHARE.  In February 1997, the FASB  issued  SFAS No.  128,
         "Earnings  per  Share".  SFAS No. 128  is  effective  for both  interim
         and annual periods ending after December 15, 1997.  The Company adopted
         SFAS No. 128 for the quarter  ended  December  31,  1997  (see Note 6).
         SFAS No. 128 requires  the presentation of "Basic"  earnings per share,
         representing income available  to  common  shareholders  divided by the
         weighted average number of common shares outstanding during the period,
         and  "Diluted"  earnings  per share,  which  is  similar to the current
         presentation of fully diluted earnings per share. SFAS No. 128 requires
         restatement  of  all  prior period earnings per share  presented.  The 
         adoption  of  SFAS  No. 128  did  not  have  a  material  effect on the
         Company's reported earnings per share data.

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

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

                                       9
<PAGE>
                              CYANOTECH CORPORATION

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

         THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING  STATEMENTS REGARDING
THE FUTURE  PERFORMANCE  OF CYANOTECH  AND FUTURE  EVENTS THAT INVOLVE RISKS AND
UNCERTAINTIES  THAT COULD CAUSE  ACTUAL  RESULTS TO DIFFER  MATERIALLY  FROM THE
STATEMENTS  CONTAINED  HEREIN.  THIS DOCUMENT,  AND THE OTHER DOCUMENTS THAT THE
COMPANY  FILES FROM TIME TO TIME WITH THE  SECURITIES  AND EXCHANGE  COMMISSION,
SUCH AS ITS REPORTS ON FORM 10-K, FORM 10-Q, FORM 8-K, AND ITS PROXY  MATERIALS,
CONTAIN  ADDITIONAL  IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
FROM OUR  CURRENT  EXPECTATIONS  AND THE  FORWARD-LOOKING  STATEMENTS  CONTAINED
HEREIN.


RESULTS OF OPERATIONS

         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,
                                                                     1997          1996           1997          1996
                                                                   --------      --------       --------      --------
<S>                                                                <C>           <C>            <C>           <C>    
         Net Sales                                                 100.0 %       100.0 %        100.0 %       100.0 %
         Cost of product sales                                      65.3          37.8           57.4          38.6
                                                                   -------       -------        -------       -------
                  Gross profit                                      34.7          62.2           42.6          61.4
                                                                   -------       -------        -------       -------
         Operating expenses:
                  Research and development                          11.7           4.4            9.2           5.7
                  General and administrative                        21.5          13.2           19.3          13.2
                  Sales and marketing                               21.9           9.2           21.0           8.3
                                                                  --------       -------       -------        -------
                  Total operating expenses                          55.1          26.8           49.5          27.2
                                                                  --------       -------       -------        -------
                  Income (loss) from operations                    (20.4)         35.4           (6.9)         34.2
                                                                  --------       -------       -------        -------
         Other income (expense):
                  Interest income                                    2.5           5.5            3.6           4.7
                  Interest expense                                  (0.9)         (0.6)          (0.8)         (0.8)
                  Miscellaneous other income                         0.5           0.3            0.1           0.1
                                                                  --------       -------       -------        -------
                  Total other income                                 2.1           5.2            2.9           4.0
                                                                  --------       -------       -------        -------
                  Income taxes                                       0.0           6.3            0.0           2.2
                                                                  --------       -------       -------        -------
         Net Income (Loss)                                         (18.3)%        34.3 %        (4.0)%         36.0 %
                                                                  ========       =======       =======        =======
</TABLE>
                                       10

<PAGE>
THIRD QUARTER OF FISCAL 1998 COMPARED TO THIRD QUARTER OF FISCAL 1997

NET SALES

         Net sales for the three month period ended  December 31, 1997 decreased
44% to $1,564,000 from the $2,782,000  reported for the three month period ended
December 31, 1996.  This decrease is primarily due to lower sales to our largest
customer, a Hong Kong-based natural products marketing and distribution company,
as described in the following paragraph.

         International  sales represented 39% and 71% of total net sales for the
three month periods ended December 31, 1997 and 1996, respectively.  Our largest
customer, a Hong Kong-based natural products marketing and distribution company,
purchases  our packaged  consumer  products and sells them under a private label
through their multilevel  marketing  organization,  primarily in mainland China.
This customer experienced a delay in its annual  recertification  process by the
Chinese  government and has been  restricted by local  governmental  authorities
from  hosting  any large scale  distributor  meetings  since  March 1997.  These
regulatory  factors  adversely  impacted  our  customer's  ability  to sell and,
consequently,  this  customer's  need for our  packaged  consumer  products  was
severely  reduced.  In September 1997, we were informed by this customer that it
had  obtained  licenses to operate in six  provinces  in China and, as a result,
placed an order for approximately  $140,000 of packaged consumer products during
the second quarter of fiscal 1998. During the third quarter of fiscal 1998, this
customer  ordered $160,000 of products,  of which $73,000 was packaged  consumer
products.  This level of purchases,  however, was significantly below the orders
for approximately  $1.5 million of products in the third quarter of fiscal 1997.
See OUTLOOK section below for additional information regarding this customer.

GROSS PROFIT

         Gross profit  represents  net sales less the cost of goods sold,  which
includes  the cost of  materials,  manufacturing  overhead  costs,  direct labor
expenses  and  depreciation  and  amortization.  Gross profit  decreased  69% to
$542,000 for the three month period ended December 31, 1997,  from $1,731,000 in
the comparable  period of fiscal 1997. Our gross profit margin  decreased to 35%
for the three month  period ended  December  31,  1997,  compared to 62% for the
comparable  period of fiscal 1997. This decrease in gross profit margin from the
prior year  period is  primarily  attributable  to lower net sales,  a Spirulina
production slowdown, a shift in the product mix to greater sales of lower priced
bulk  Spirulina  products,   and  higher  depreciation  expense.  The  Spirulina
production  slowdown  during  December  resulted  in  an  additional  charge  of
approximately $125,000 during the three month period ended December 31, 1997.

OPERATING EXPENSES

         Operating  expenses were  $861,000  during the three month period ended
December 31, 1997, an increase of 16% from $743,000 in the comparable  period of
fiscal  1997,  primarily  due to  increased  sales and  marketing  expenses  and
research and development costs.  Operating expenses as a percentage of net sales
were 55%, compared with 27% in the prior year,  primarily due to the lower sales
and higher sales and marketing expenses in the third quarter of fiscal 1998.

         RESEARCH AND DEVELOPMENT.   Research and development expenses increased
to $183,000  for the three month period ended December 31, 1997,  an increase of
51% from $121,000 for the comparable period of fiscal 1997.   This increase from
the prior  year  was  primarily  due  to  higher personnel related  expenditures
and development costs associated with our natural astaxanthin product, NATUROSE,
and our natural mosquitocide development program.

                                       11

<PAGE>
         GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses
decreased  to $336,000  for the three month  period  ended  December 31, 1997, a
decrease of 8% from  $367,000 for the  comparable  period of fiscal  1997.  This
decrease from the prior year was primarily due to lower profit  sharing  expense
and was partially offset by higher insurance and facilities costs.

         SALES AND MARKETING. Sales and marketing expenses increased to $342,000
for the three month  period ended  December  31,  1997,  an increase of 34% from
$255,000 for the comparable  period of fiscal 1997. This increase from the prior
year  is  primarily  due to  increased  domestic  and  international  sales  and
promotion efforts.

NET INCOME (LOSS)

         The Company  recorded a net loss of $286,000  for the third  quarter of
fiscal 1998, compared to a net income of $956,000 for the comparable period of
fiscal 1997.  This decrease in net earnings is primarily  attributable  to lower
sales of Spirulina bulk and packaged  consumer  products,  lower average selling
prices for bulk Spirulina products,  increased sales and marketing expenses, and
the December 1997 Spirulina production slowdown.


NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996

NET SALES

         Net sales for the nine month period ended  December 31, 1997  decreased
33% to $5,391,000  from the $8,049,000  reported for the nine month period ended
December 31, 1996.  This decrease is primarily due to lower sales to our largest
customer, a Hong Kong-based natural products marketing and distribution company,
as described above.

GROSS PROFIT

         Gross  profit  decreased  54% to  $2,299,000  for the nine month period
ended December 31, 1997 from $4,941,000 in the comparable period of fiscal 1997.
Our  gross  profit  margin  decreased  to 43% for the nine  month  period  ended
December 31,  1997,  compared to 61% for the  comparable  period of fiscal 1997.
This decrease in gross profit from the prior year is primarily  attributable  to
lower net sales,  a shift in the  product mix to greater  sales of lower  priced
bulk  Spirulina  products,  unexpected  costs  associated  with the  ramp-up  in
production of our natural astaxanthin product, NATUROSE, and higher depreciation
expense.

OPERATING EXPENSES

         Operating  expenses were $2,672,000  during the nine month period ended
December 31, 1997, an increase of 22% from  $2,186,000 in the comparable  period
of fiscal 1997, primarily due to increased sales and marketing expenses.


                                       12

<PAGE>
         RESEARCH AND DEVELOPMENT.  Research and development  expenses increased
to $497,000 for the nine month period ended December 31, 1997, an increase of 9%
from $454,000 for the comparable  period of fiscal 1997.  This increase from the
prior  year was  primarily  due to higher  personnel  related  expenditures  and
development costs associated with our natural astaxanthin product, NATUROSE, and
our natural mosquitocide development program.

         GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses
decreased  slightly to $1,042,000  for the nine month period ended  December 31,
1997,  from  $1,063,000 for the comparable  period of fiscal 1997. This decrease
from the prior year was  primarily due to lower profit  sharing  expense and was
partially offset by higher insurance and facilities costs.

         SALES  AND  MARKETING.  Sales  and  marketing   expenses  increased  to
$1,133,000 for the nine month period ended December 31, 1997, an increase of 69%
from $669,000 for the comparable  period of fiscal 1997.  This increase from the
prior year is primarily due to increased  domestic and  international  sales and
promotion efforts.

NET INCOME

         The Company  recorded net loss of $215,000 for the first three quarters
of fiscal 1998, compared to a net income of $2,905,000 for the comparable period
of fiscal  1997.  This  decrease  is  primarily  attributable  to lower sales of
Spirulina bulk and packaged consumer products,  lower average selling prices for
bulk Spirulina products,  increased sales and marketing expenses, and unexpected
start-up  costs  associated  with  the  ramp-up  in  production  of our  natural
astaxanthin product, NATUROSE.


VARIABILITY OF RESULTS

         The  Company  was  formed in 1983 and did not become  profitable  on an
annual basis until fiscal 1992 and  maintained  profitability  until the quarter
ended  September  30, 1997. As of December 31, 1997,  the Company's  accumulated
deficit was $676,000.  We have experienced  quarterly  fluctuations in operating
results and anticipate that these  fluctuations  may continue in future periods.
Future operating results may fluctuate as a result of changes in sales levels to
our largest customers,  new product  introductions,  government action,  weather
patterns, the mix between sales of bulk products and packaged consumer products,
start-up costs associated with new facilities, expansion into new markets, sales
promotions,   competition,   increased   energy  costs,   the   announcement  or
introduction  of new products by our  competitors,  changes in our customer mix,
and  overall  trends  in  the  market for Spirulina and astaxanthin products.  A
significant  portion of our expense levels are relatively  fixed, and the timing
of increases in expense levels is based in large part on our forecasts of future
sales.  If net sales are below  expectations  in any given  period,  the adverse
impact on results of  operations  may be  magnified  by our  inability to adjust
spending  quickly  enough to  compensate  for the sales  shortfall.  We may also
choose to reduce prices or increase  spending in response to market  conditions,
which may have a material adverse effect on our financial  condition and results
of operations.

LIQUIDITY AND CAPITAL RESOURCES

         Our working capital  decreased  $5,741,000 during the first nine months
of fiscal 1998 to $3,324,000  while our cash,  cash  equivalents  and investment
securities  balances  decreased  by  $5,445,000  to $1,284,000.  The decrease is
primarily  attributable  to  capital  expenditures  for  equipment and leasehold
improvements.
                                       13

<PAGE>
         Cash  flows  provided  by  operating  activities  during the first nine
months  of fiscal  1998  amounted  to  $594,000  compared  to cash  provided  by
operating  activities of $1,357,000 in fiscal 1997,  most of the decrease  being
accounted  for by reduced  net income.  The primary  sources of fiscal 1998 cash
flows from operating  activities were a reduction in accounts  receivable and an
increase  in  accounts  payable,  offset  in  large  part  by  the  increase  in
inventories.

         At December 31,  1997,  the Company had  approximately  twelve weeks of
Spirulina production in finished goods inventory.  See OUTLOOK section below for
information on the Company's plans for reducing  Spirulina  production  capacity
and inventory.

         Cash flows used in investing activities during the first nine months of
fiscal  1998 were  $2,963,000  compared  to  $4,947,000  in fiscal  1997,  being
provided by sales of investment  securities in fiscal 1998.  The primary uses of
cash flows in  investing  activities  during 1998 were for capital  expenditures
totaling $5,917,000.

         Cash flows used in financing activities during the first nine months of
fiscal 1998 were only  $122,000,  compared to cash flows  provided by  financing
activities  of  $1,530,000  in fiscal  1997,  primarily  from the sale of common
stock.

         As of December  31,  1997,  the Company  had  construction  commitments
totaling $55,000,  which we intend to fund from cash and investment  securities.
We presently  estimate that our existing  capital  resources,  anticipated  cash
flows from future operations,  and existing credit facilities will be sufficient
to fund  current  operations.  However,  we plan to spend,  subject to available
financing and increased  product  demand,  approximately  $11 million on capital
expenditures,  primarily to continue the expansion of NATUROSE production on the
newly leased 88 acres.  Existing  capital  resources and anticipated  cash flows
from  future   operations   will  not  be   sufficient  to  fund  these  capital
expenditures. As of December 31, 1997, the Company had a $1,000,000 bank line of
credit which was collateralized  by a  certificate  of deposit and an additional
$1,000,000 bank line of credit which was collateralized by all the assets of the
Company. As of December 31, 1997, there were no borrowings under either of these
credit lines. The bank lines of credit expired on January 31, 1998 and are being
renegotiated  with current and additional lenders for new bank lines of up to $2
million.


OUTLOOK

         THIS OUTLOOK SECTION CONTAINS A NUMBER OF  FORWARD-LOOKING  STATEMENTS,
ALL OF WHICH  ARE BASED ON  CURRENT  EXPECTATIONS.  ACTUAL  RESULTS  MAY  DIFFER
MATERIALLY. SEE ALSO THE NOTE AT THE BEGINNING OF THIS ITEM 2.

         The Company  expects net sales for the fourth quarter of fiscal 1998 to
be approximately $2.6 million, which is 21% below the prior year's fourth fiscal
quarter net sales of  $3,350,000.  This forecast  assumes that packaged  product
shipments to our customer in Hong Kong will continue to increase slowly over the
fourth quarter of fiscal 1998. With the reinstatement of their business license,
and based on recent discussions with this customer,  we anticipate sales to them
of approximately  $200,000 during the fourth quarter of fiscal 1998. As a result
of  increasing  acceptance  and  promotion of our natural  astaxanthin  product,
NATUROSE,  during the second and third quarters of fiscal 1998, we expect fourth
quarter  sales of  NATUROSE  to be  approximately  $275,000.  However,  industry
acceptance  and  sales  of  NATUROSE are,  to a large extent, dependent upon the
completion  of  aquaculture  feeding  trials by  potential  customers,  and such
feeding  trials  may  take longer than  anticipated to complete or may not yield
positive  results.  As a  result,  the  timing of future  sales of  NATUROSE  is
uncertain.

                                       14

<PAGE>

         A shift in product  mix to greater  sales of bulk  products  (for which
average  selling prices have  decreased  since last year together with lower net
sales),  and continued  development  costs  associated with the operation of the
NATUROSE production facility, are expected to reduce the gross profit margin for
the fourth  quarter  of fiscal  1998  below the 56%  reported  during the fourth
quarter of fiscal  1997.  Gross  profit  margins for NATUROSE are expected to be
comparable  to the  current  Spirulina  gross  profit  margins  as  the  Company
optimizes processing systems and production throughput; however, increased costs
related to production of NATUROSE may continue into the near future.

         Cyanotech's  strategy  has  been,  and  continues  to  be,  to  produce
ever-higher   value   natural   products  from   microalgae.   To  continue  the
implementation  of this  strategy,  we plan to continue  our emphasis on selling
higher value packaged  Spirulina consumer products over Spirulina bulk products.
Also in line with this strategy,  we introduced our natural astaxanthin product,
NATUROSE,  during the fourth  quarter of fiscal  1997 and began full  commercial
production in March, 1997.

         At the  beginning  of the third  quarter of fiscal  1998,  we completed
expansion of our NATUROSE capacity from five acres of culture ponds to ten acres
of culture  ponds and began  conversion  of  approximately  15% of our Spirulina
culture ponds to produce astaxanthin. This action is in response to our changing
Spirulina  sales mix and should allow us to balance  production  resources  with
market demand for our products. The cost for this conversion, which is scheduled
for  completion by the end of February 1998, has been funded from cash reserves,
investment  securities,  and  cash  flows  from  operations.  Construction  also
continues on an additional 88-acre expansion for NATUROSE production.  The first
phase of this expansion  involves the rough leveling of the entire 88 acre site,
which  is  scheduled  to  be  completed by the end of February, 1998. The second
phase  will  include  the  construction of 25 acres of culture systems, together
with a processing facility  sufficient to  accommodate  the entire 88 acre site.
This second phase is scheduled for completion in the Spring of 1999,  subject to
obtaining additional financing on terms that are acceptable to the Company.

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

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

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

                                       15
<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 - Financial Data Schedule

         (b)      Reports on Form 8-K

                  No  reports on Form 8-K were filed  during the  quarter  ended
                  December 31, 1997.


                                       16

<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 12, 1998               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)











                                       17