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 June 30, 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 July 31, 1998:

            Title of Class                                    Shares Outstanding

    Common stock - $.005 par value stock                          13,599,572


                                        1

<PAGE>
                              CYANOTECH CORPORATION
                                    FORM 10-Q

                                      INDEX

<TABLE>
<CAPTION>
PART I.   FINANCIAL INFORMATION


Item 1.  Financial Statements                                                                                Page
<S>      <C>                                                                                                 <C>
         Consolidated Balance Sheets (unaudited)
                  June 30, 1998 and March 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

         Consolidated Statements of Operations (unaudited)
                  Three month periods ended
                  June 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

         Consolidated Statements of Cash Flows (unaudited)
                  Three month periods ended
                  June 30, 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 1.   Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16

Item 5.   Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16

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


SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>






                                        2

<PAGE>

PART I. FINANCIAL INFORMATION
     Item 1.   Financial Statements
<TABLE>
                              CYANOTECH CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                 (Dollars in thousands except per share amounts)
<S>                                                                               <C>                    <C> 
                                                                                   June 30,               March 31,
                                                                                      1998                   1998
Assets                                                                            (Unaudited)             (Audited)
                                                                                  -----------            ----------
Current assets:
     Cash and cash equivalents                                                    $      770             $   1,397
     Accounts receivable, net                                                          1,219                 1,246
     Inventories  (note 2)                                                             1,882                 2,229
     Prepaid expenses                                                                    116                    88
                                                                                  -----------            ----------
              Total current assets                                                     3,987                 4,960

Equipment and leasehold improvements, net (note 3)                                    20,260                20,544
Other assets                                                                             182                   163
                                                                                  -----------            ----------
              Total assets                                                        $   24,429             $  25,667
                                                                                  ===========            ==========
Current liabilities:
     Current maturities of long-term debt                                         $       50             $      50
     Note payable                                                                         90                   975
     Current maturities of capital lease obligations                                     119                   129
     Accounts payable                                                                    608                   938
     Other accrued liabilities                                                           250                   272
                                                                                  -----------            ----------
              Total current liabilities                                                1,117                 2,364

Long-term debt, excluding current maturities                                              50                    62
Note payable, refinanced on a long-term basis                                            675                     -
Obligations under capital leases, excluding current maturities                            44                    67
                                                                                  -----------            ----------
              Total liabilities                                                        1,886                 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 June 30, 1998 and March 31, 1998                                    1                     1    
     Common Stock of $0.05 par value, authorized 25,000,000 
     shares at June 30, 1998 and March 31, 1998; issued and 
     outstanding 13,599,572 shares at June 30, 1998 and 
     March 31, 1998                                                                       68                    68
     Additional paid-in capital                                                       23,866                23,866
     Accumulated deficit                                                              (1,392)                 (761)
                                                                                  -----------            ----------
              Total stockholders' equity                                              22,543                23,174
                                                                                  -----------            ----------
             
                    Total liabilities and stockholders' equity                    $   24,429             $  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
                                                                                               June 30,
                                                                                  ---------------------------------   
<S>                                                                               <C>                    <C> 
                                                                                    1998                    1997
                                                                                  ----------             ----------
NET SALES                                                                         $   1,763              $   1,774
COST OF PRODUCT SALES                                                                 1,584                    902
                                                                                  ----------             ----------
        Gross Profit                                                                    179                    872

OPERATING EXPENSES:
        Research and development                                                        222                    141
        General and administrative                                                      331                    331
        Sales and marketing                                                             257                    381
                                                                                  ----------             ----------
               Total operating expenses                                                 810                    853
                                                                                  ----------             ----------
        Income (loss) from operations                                                  (631)                    19
                                                                                  ----------             ----------
OTHER INCOME (EXPENSE):
        Interest income                                                                   2                    117
        Interest expense                                                                (35)                   (11)
        Other income (expense), net                                                      (7)                     -
                                                                                  ----------             ----------
                   Total other income (expense)                                         (40)                   106
                                                                                  ----------             ----------
                   Income (loss) before income taxes                                   (671)                   125
                   Income tax benefit                                                    40                      -
                                                                                  ----------             ----------               
NET INCOME (LOSS)                                                                      (631)                   125
Other comprehensive income (loss)                                                         -                      -
                                                                                  ----------             ----------
COMPREHENSIVE INCOME (LOSS)                                                       $    (631)             $     125
                                                                                  ===========            ==========
NET INCOME (LOSS) PER COMMON SHARE
     Basic                                                                        $   (0.05)             $    0.00
     Diluted                                                                      $   (0.05)             $    0.00

SHARES USED IN CALCULATION OF:
     Basic                                                                           13,600                 12,804
     Diluted                                                                         13,600                 12,804
</TABLE>
          See accompanying notes to consolidated financial statements.


                                        4

<PAGE>





<TABLE>
<CAPTION>
                              CYANOTECH CORPORATION

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

                                                                                          Three Months Ended
                                                                                               June 30,
                                                                                  ---------------------------------
<S>                                                                               <C>                    <C> 
                                                                                     1998                   1997
                                                                                  ----------             ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
          Net income (loss)                                                       $    (631)             $     125
          Adjustments to reconcile net income (loss) to net cash
          provided by (used in) operating activities:
                    Deferred income taxes                                                 -                    (20)
                    Depreciation and amortization                                        343                   201
                    Net (increase) decrease in:
                            Accounts receivable                                           27                 1,025
                            Inventories                                                  347                  (471)
                            Prepaid expenses and other assets                            (47)                  (58)
                    Net increase (decrease) in:
                            Accounts payable                                            (330)                   61
                            Other accrued liabilities                                    (22)                 (153)
                                                                                  -----------            ----------
Net cash provided by (used in) operating activities                                     (313)                  710
                                                                                  -----------            ----------
CASH FLOWS FROM INVESTING ACTIVITIES:   
          Investment in equipment and leasehold improvements                             (59)               (3,007)
                                                                                  -----------            ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
          Net proceeds from exercise of warrants and options                               -                    51
          Principal payments on note payable                                            (210)                    -
          Principal payments on capital lease obligations                                (33)                  (49)
          Principal payments on long-term debt                                           (12)                  (25)
                                                                                  -----------            ----------
Net cash used in financing activities                                                   (255)                  (23)
                                                                                  -----------            ----------

Net decrease in cash and cash equivalents                                               (627)               (2,320)
Cash and cash equivalents at beginning of period                                       1,397                 2,775
                                                                                  -----------            ----------

Cash and cash equivalents at end of period                                        $      770             $     455
                                                                                  ===========            ==========

</TABLE>

          See accompanying notes to consolidated financial statements.

                                        5

<PAGE>



                              CYANOTECH CORPORATION
                                    FORM 10-Q
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 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 month period ended June 30, 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>
                                                 June 30, 1998        March 31, 1998
                                                 -------------        --------------
               Raw materials                     $          79        $          103
               Work in process                             332                   362
               Finished goods                            1,227                 1,524
               Supplies                                    244                   240
                                                 -------------        --------------
                                                 $       1,882        $        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:


         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>
<CAPTION>
         Equipment and leasehold  improvements consist of the following (dollars
         in thousands):
<S>                                                         <C>                <C>          
                                                            June 30, 1998      March 31, 1998
                                                            -------------      --------------                                     
         Equipment                                          $       7,931       $       7,791
         Leasehold improvements                                    13,288              13,285
         Furniture and fixtures                                        94                  94
         Equipment under capital lease                                569                 569
                                                            --------------      --------------
                                                                   21,882              21,739
                                                            --------------      --------------          
         Less accumulated depreciation and amortization            (5,050)             (4,707)
         Construction in-progress                                   3,428               3,512
                                                            --------------      --------------          
         Equipment and leasehold improvements, net          $      20,260       $      20,544
                                                            ==============      ==============
</TABLE>
         
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
         June 30, 1998 amount to $2,120 ($3.563 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 months ended June 30, 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 compu-
         tation of Diluted net  income  (loss)  per  common  share  because  the
         inclusion of these securities would have had an antidilutive  effect on
         the net income (loss) per common share.  As of June 30, 1998,  warrants
         and options to acquire 638,425 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  EPS  computations  for  the periods presented  (in
         thousands except share data):
<TABLE>
<CAPTION>

<S>                                                                               <C>                    <C>
                                                                                       June 30,               June 30,
     Basic Earnings per share                                                            1998                   1997
                                                                                  -------------          -------------
     Net income (loss)                                                            $       (631)          $        125
     Less: Requirement for Preferred Stock dividends                                       (60)                   (73)
                                                                                  -------------          -------------
     Income (loss) available to Common stockholders                               $       (691)          $         52
                                                                                  =============          =============
     Weighted average Common Shares outstanding                                     13,599,572             12,803,790
                                                                                  =============          =============       
     Net Income (loss) per Common Share                                           $      (0.05)          $       0.00
                                                                                  =============          =============
     Diluted Earnings per share

     Income (loss) available to Common stockholders                               $       (691)          $         52
     Plus: Requirement for Preferred Stock dividends                                         -                      -
                                                                                  -------------          -------------    
     Net income (loss) available to Common stockholders as adjusted               $       (691)          $         52

                                                                                  =============          =============
     Weighted average Common Shares outstanding                                     13,599,572             12,803,790
     Effect of dilutive securities:
          Stock options and warrants                                                         -                       -
          Convertible preferred stock                                                        -                       -
                                                                                  -------------          --------------
     Weighted average Common Shares outstanding as adjusted                         13,599,572              12,803,790
                                                                                  =============          ==============
     Net income (loss) per Common Share                                           $      (0.05)          $        0.00
                                                                                  =============          ==============
</TABLE>

                                        8

<PAGE>



6.       ACCOUNTING CHANGES

         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 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 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  adopted the
         provisions  of SFAS No.  131  effective  April 1,  1998.  SFAS No.  131
         requires restatement of comparative  information  presented for earlier
         periods.  Adoption  of SFAS  No.  131 had no  impact  on the  Company's
         segment disclosures.

         EMPLOYERS' DISCLOSURES ABOUT PENSIONS  AND  OTHER  POSTRETIREMENT BENE-
         FITS.  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 recog-
         nition 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.

         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.

                                        9

<PAGE>



         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.
         Management  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.


                                       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 our  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>
                                                                        Three Months Ended 
                                                                             June 30,
<S>                                                              <C>                 <C> 
                                                                    1998                 1997
                                                                 ----------          ----------
               Net Sales                                            100.0  %             100.0 %
               Cost of product sales                                 89.8                 50.8
                                                                 ----------          ----------

                    Gross profit                                     10.2                 49.2
                                                                 ----------          ----------

               Operating expenses:
                    Research and development                         12.6                  7.9
                    General and administrative                       18.8                 18.7
                    Sales and marketing                              14.6                 21.5
                                                                 ----------          ----------
                    Total operating expenses                         46.0                 48.1
                                                                 ----------          ----------
                    Income (loss) from operations                   (35.8)                 1.1
                                                                 ----------          ----------

               Other income (expense):  
                    Interest income                                   0.1                  6.6
                    Interest expense                                 (2.0)                (0.6)
                    Other income (expense), net                      (0.4)                   -
                                                                 ----------          ----------

                    Total other income (expense)                     (2.3)                 6.0
                                                                 ----------          ----------

                    Income (loss) before income taxes               (38.1)                 7.1
                    Income tax benefit                                2.3                    -
                                                                 ----------          ----------

               Net Income (Loss)                                    (35.8)                  7.1
               Other comprehensive income (loss)                        -                     -
                                                                 ----------          ----------
               Comprehensive income (Loss)                          (35.8) %                7.1 %
                                                                 ==========          ==========

</TABLE>


                                       11

<PAGE>



First Quarter of Fiscal 1999 Compared to First Quarter of Fiscal 1998

Net Sales

         Net sales for the three  month  period  ended June 30,  1998  decreased
slightly. This decrease is primarily due to lower sales of bulk Spirulina powder
and  tablets,  offset  by an  increase  in sales of  NatuRose(TM),  our  natural
astaxanthin product.

         International  sales represented 50% and 34% of total net sales for the
three month  periods ended June 30, 1998 and 1997,  respectively.  This increase
was due to sales to new customers,  including those for NatuRose, resulting from
our expanded NatuRose marketing efforts in fiscal 1998.

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  79% to
$179,000 for the three month period  ended June 30, 1998,  from  $872,000 in the
comparable  period of fiscal 1998. Our gross profit margin  decreased to 10% for
the three month period ended June 30, 1998,  compared to 49% for the  comparable
period of fiscal 1998.  This decrease in gross profit margin from the prior year
period is primarily attributable to negative margins on sales of NatuRose caused
by high initial production costs of the product, plus one-time costs incurred to
optimize the  NatuRose  production  process.  Also  contributing  to lower gross
profit  were  higher  depreciation  expense  and  additional  costs  incurred in
re-starting previously idled Spirulina culture ponds.

Operating Expenses

         Operating  expenses were  $810,000  during the three month period ended
June 30, 1998, a decrease of 5% from $853,000 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 costs.

         Research and Development. Research and development expenses amounted to
$222,000 for the three month period ended June 30, 1998, an increase of 57% from
$141,000 for the comparable  period of fiscal 1998. This increase from the prior
year was primarily due to higher personnel related  expenditures for the ongoing
development work done on our genetically engineered mosquitocide project.

         Sales and Marketing.  Sales and marketing expenses amounted to $257,000
for the three month period ended June 30, 1998, a decrease of 33% from  $381,000
for the comparable  period of fiscal 1998.  This decrease from the prior year is
primarily due to reduced  expenditures  during the three month period ended June
30, 1998 for outside consulting services,  decreased trade show costs and travel
expenses, and decreased sales personnel costs.

Other Income (Expense)

         Other expense amounted to $40,000 for the first three months  of fiscal
1999,  compared to other income of $106,000 for the comparable  period of fiscal
1998.  This  fluctuation  is  primarily  attributable  to a decrease in interest
income  on  investment  securities  and  an  increase in interest expense due to
higher average outstanding balances for notes payable.

                                       12

<PAGE>



Income Taxes

         The Company  presently  expects  that its fiscal year 1999 results will
require a provision for Hawaii State income taxes.  Accordingly,  an interperiod
tax benefit of $40,000 has been  recorded  for the three  months  ended June 30,
1998.

Net Income (Loss)

         The Company  recorded a net loss after taxes of $631,000  for the first
quarter of fiscal 1999,  compared to net income of $125,000  for the  comparable
period of fiscal 1998. This decrease in net income is primarily  attributable to
lower  sales of  Spirulina  powder  and  tablets,  negative  margins on sales of
NatuRose and the effect of unfilled orders for Spirulina  caused by the delay in
restarting culture ponds previously idled.


Variability of Results

         The Company has experienced quarterly fluctuations in operating results
and anticipates that these  fluctuations may continue in future periods.  Future
operating  results may  fluctuate  as a result of changes in sales levels to the
Company's  largest  customers,  new product  introductions,  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 in response to market  conditions,  which may have a material
adverse effect on financial condition and results of operations.


Liquidity and Capital Resources

         Our working capital increased $274,000 during the first three months of
fiscal 1999 to $2,870,000  primarily due to the  refinancing  of a note payable,
$675,000 of which was previously  classified as a current liability at March 31,
1998. Our cash and cash equivalents  balances  decreased by $627,000 to $770,000
and is  primarily  attributable  to cash flows used in operating  and  financing
activities of $313,000 and $255,000, respectively.

         Cash used in  operating  activities  during the first  three  months of
fiscal  1999  amounted  to  $313,000  compared  to cash  provided  by  operating
activities of $710,000 in the comparable period of fiscal 1998. The primary uses
of cash flows from operating  activities during the first three months of fiscal
1999 were the net loss of  $631,000  and a  reduction  in  accounts  payable  of
$330,000,  offset  in  part  by  a  decrease  in  inventories  of  $347,000  and
depreciation and amortization of $343,000.

         Cash used in investing activities (for capital expenditures) during the
first  three  months  of  fiscal  1999  amounted  to only  $59,000  compared  to
$3,007,000 for the comparable period of fiscal 1998.


                                       13

<PAGE>

         Cash used in  financing  activities  during the first  three  months of
fiscal  1999  amounted to  $255,000,  compared  to $23,000 in fiscal  1998.  The
primary uses of cash flows in financing  activities  during the first quarter of
fiscal  1999  were for  principal  payments  on a note  payable,  capital  lease
obligations and long-term debt.

         As of March 31,  1998,  the  Company  had  agreed  with a  construction
contractor to resume work on a suspended  expansion project on or before January
1, 1999 in a reasonable and customary manner in accordance with the terms of the
contract and at a minimum  billable  rate of $150,000 per month.  The  remaining
balance on the construction contract is approximately $1.9 million. If work does
not resume on or before January 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 or liquidity.  Total costs incurred as of June
30,  1998  with  respect  to  this  expansion  project  approximate  $2,643,000.
Management expects to resume work on the project, on or before January 1, 1999.


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 by the end of fiscal
1999,  to resolve  the issue.  The Year 2000  problem is the result of  computer
programs  being  written  using  two  digits  rather  than  four to  define  the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations.  The Company believes
that, with  modifications  to existing  software and converting to new software,
the Year 2000 problem  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 be material.  However, if such
modifications  and  conversions  are not completed in a timely manner,  the Year
2000 problem may have a material impact on the operations of the Company.


Subsequent Event

         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  credit  facility
includes 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.  On
the closing date of the loan,  August 5, 1998, the Company drew down $750,000 on
the equipment  term loan and  approximately  $250,000 on the  revolving  working
capital  facility.  The interest rate on the credit  facility is prime plus 2.5%
(currently 11%) until the Company achieves certain financial performance levels,
at which time the interest rate will decrease to prime plus 1.25%. Approximately
$675,000 of the aggregate  loan  proceeds were used to retire a short-term  note
payable,  and the remaining $325,000 was used for working capital purposes.  The
portion of the  short-term  note  payable  retired  using the loan  proceeds  of
$675,000 has been  classified  as a  non-current  liability in the  consolidated
balance sheet at June 30, 1998.
         
                                       14
<PAGE>


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  resolved the  Spirulina  production
problems  which resulted from  restarting the Spirulina  culture ponds that were
idle from December 1997 to February 1998. At June 30, 1998 Spirulina  production
had returned to 90% of full capacity  compared to the full  production  capacity
achieved in the  comparable  period of fiscal 1998. We plan to balance Spirulina
production  with  NatuRose  production resources to meet our customers' require-
ments  during  the  remainder  of  fiscal  1999.  On July 7, 1998, we received a
purchase  contract  from  our agent  in  Japan for a minimum commitment of $1.5
million of NatuRose, our natural astaxanthin product,  over the 12 months ending
May 31, 1999.  As a result of increasing  acceptance  and  promotion,  we expect
second  quarter  sales of NatuRose to be  approximately  $500,000.  Gross profit
margin for NatuRose is  currently  negative  due to the high  initial production
costs,  but  is expected to improve as current  high-cost  inventory is reduced.
Gross profit margin on NatuRose production is expected to improve as we optimize
processing systems and production throughput;  however, the higher costs related
to production of NatuRose may persist into the near future.

         Research and development costs are expected to increase throughout this
fiscal year as we continue to optimize the PhytoMax PCS(sm) technology, continue
the research and development  activities directed at the genetically  engineered
mosquitocide project and begin work on production of Aldolase Catalytic Antibody
38C2  as a  result  of our  April  1998  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  project  which  we plan to have in limited
production  for  worldwide  testing  by  the  end of the  current  fiscal  year.
Additionally,  development  work is scheduled to begin in the second  quarter on
production of Aldolase  Catalytic  Antibody 38C2. 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   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 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.

                                       15

<PAGE>



PART II.       OTHER INFORMATION

Item 1.        Legal Proceedings

               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 their  alleged intellectual
               property  rights.  Aquasearch  has  not yet responded to the com-
               plaint. The Company intends to pursue this litigation vigorously.

Item 5.        Pursuant to SEC Rule 14a-4(c)(1)  management proxies for the 1999
               Annual Meeting of  Stockholders will exercise their discretionary
               authority to be presented at such meeting of which the Registrant
               has not received  notice by June 12, 1999.

Item 6.        Exhibits and Reports on Form 8-K

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

                        Exhibit 10.1 - Loan and Security Agreement  and Schedule
                                       to the  Loan and Security Agreement dated
                                       July 28, 1998  between the registrant and
                                       Coast Business Credit.

                        Exhibit 27.1 - Financial Data Schedule

               (b)      Reports on Form 8-K

                        No reports on Form 8-K were filed  during the quarter
                        ended June 30, 1998.



                                       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)



August 13 , 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