UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C.  20549

                                    FORM 10-Q

                   Quarterly Report Under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For Quarterly Period Ended September 30, 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 October 31, 1997:

                 Title of Class                   Shares Outstanding

      Common stock - $.005 par value stock            12,848,962



                                       
<PAGE>






                              CYANOTECH CORPORATION
                                    FORM 10-Q

                                      INDEX

PART I.   FINANCIAL INFORMATION


Item 1.  Financial Statements                                               Page

         Consolidated Balance Sheets (unaudited)
                  September 30, 1997 and March 31, 1997........................3

         Consolidated Statements of Operations (unaudited)
                  Three and six month periods ended
                  September 30, 1997 and 1996..................................4

         Consolidated Statements of Cash Flows (unaudited)
                  Six month periods ended
                  September 30, 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 4.  Submission of Matters to a Vote of Security Holders..................16

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


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












                                        2

<PAGE>
PART I. FINANCIAL INFORMATION
        Item 1.   Financial Statements
<TABLE>
<CAPTION>
                              CYANOTECH CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
<S>                                                                   <C>                     <C>
                                                                      September 30,           March 31,
                                                                           1997                 1997
                                                                      (Unaudited)             (Audited)
                                                                      -------------           -------------
Assets
Current assets:
        Cash and cash equivalents                                     $        346            $      2,775
        Investment securities (note 2)                                       1,500                   3,954
        Accounts receivable                                                  1,696                   2,791
        Inventories  (note 3)                                                2,011                   1,138
        Prepaid expenses                                                       173                     155
        Deferred tax assets                                                    411                     373
                                                                      -------------           -------------
                Total current assets                                         6,137                  11,186

Equipment and leasehold improvements, net (note 5)                          19,692                  14,666
Other assets                                                                   261                     163
                                                                      -------------           -------------
                Total assets                                          $     26,090            $     26,015
                                                                      =============           =============

Liabilities and Stockholders' Equity
Current liabilities:
        Current maturities of long-term debt                          $         91            $        150
        Current maturities of capital lease obligations                        130                     130
        Accounts payable                                                     1,918                   1,508
        Other accrued liabilities                                              217                     333
                                                                      -------------           -------------
                Total current liabilities                                    2,356                   2,121

Long-term debt, excluding current maturities                                    88                     363
Obligations under capital leases, excluding current maturities                 130                     196
                                                                      -------------           -------------

                Total liabilities                                            2,574                   2,680
                                                                      -------------           -------------

Stockholders' equity:
        Preferred stock (note 6)                                                 1                       1
        Common Stock - 12,847,312 shares issued and outstanding 
          on September 30, 1997 and 12,712,682 shares issued and 
          outstanding on March 31, 1997                                         64                      63
        Additional paid-in capital                                          23,841                  23,732
        Accumulated deficit                                                   (390)                   (461)
                                                                      -------------           -------------
                Total stockholders' equity                                  23,516                  23,335
                                                                      -------------           -------------

                      Total liabilities and stockholders' equity      $     26,090            $     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)
<S>                                                  <C>            <C>            <C>            <C>
                                                        Three Months Ended              Six Months Ended
                                                          September 30,                  September 30,
                                                        1997           1996           1997           1996
                                                     ----------     ----------     ----------     ----------

NET SALES                                            $   2,053     $    2,812       $   3,827      $   5,267
COST OF PRODUCT SALES                                    1,168          1,072           2,070          2,057
                                                     ----------     ----------      ----------     ---------
         Gross Profit                                      885          1,740           1,757          3,210
                                                     ----------     ----------      ----------     ---------

OPERATING EXPENSES:
         Research and development                          173            172             314            333
         General and administrative                        375            338             706            696
         Sales and marketing                               410            222             791            414
                                                     ----------     ----------      ----------     ----------

         Total operating expenses                          958            732           1,811          1,443
                                                     ----------     ----------      ----------     ----------

         Income (Loss) from operations                     (73)         1,008             (54)         1,767
                                                     ----------     ----------      ----------     ----------

OTHER INCOME (EXPENSE):
         Interest income                                    35            116             152            224
         Interest expense                                  (16)           (22)            (27)           (44)
         Other income, net                                   -              2               -              2
                                                     ----------     ----------      ----------     ----------

         Total other income                                 19             96             125            182
                                                     ----------     ----------      ----------     ----------

NET INCOME (LOSS)                                    $     (54)     $   1,104       $      71      $   1,949
                                                     ==========     ==========      ==========     ==========


NET INCOME (LOSS)PER COMMON SHARE                       $(0.00)         $0.07           $0.00          $0.12
                                                     ==========     ==========      ==========     ==========

Weighted average number of common shares
outstanding and common stock equivalents
(note 4)                                                12,863         16,703          16,639         16,528
                                                     ==========     ==========      ==========     ==========
</TABLE>





                See accompanying notes to consolidated financial statements.



                                        4

<PAGE>
<TABLE>
<CAPTION>
                              CYANOTECH CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<S>                                                                                  <C>                        <C>

                                                                                                 Six Months Ended
                                                                                     September 30,              September 30,
                                                                                          1997                       1996
                                                                                     -------------              -------------

CASH FLOWS FROM OPERATING ACTIVITIES:
           Net income                                                                $         71               $      1,949
           Adjustments to reconcile net income to net cash provided
           by operating activities:
                     Deferred income taxes                                                    (38)                         -
                     Depreciation and amortization                                            434                        327
                     Net (increase) decrease in:
                             Accounts receivable                                              853                       (693)
                             Inventories                                                     (873)                      (364)
                             Prepaid expenses and other assets                               (116)                       (63)
                     Net increase (decrease) in:
                             Accounts payable                                                 410                       (147)
                             Other accrued liabilities                                        (69)                       (28)
                                                                                     -------------              -------------

Net cash provided by operating activities                                                     672                        981
                                                                                     -------------              -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
           Investment in equipment and leasehold improvements                              (5,460)                    (3,513)
           Proceeds from sales of investment securities                                     2,454                          -
                                                                                     -------------              -------------
Net cash used in investing activities                                                      (3,006)                    (3,513)
                                                                                     -------------              -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
           Net proceeds from issuance of common stock                                           -                      1,398
           Net proceeds from exercise of warrants and options                                  63                        331
           Principal payments on capital lease obligations                                   (108)                       (62)
           Principal payments on long-term debt                                               (50)                       (75)
                                                                                     -------------              -------------

Net cash provided by (used in) financing activities                                           (95)                     1,592
                                                                                     -------------              -------------

Net decrease in cash and cash equivalents                                                  (2,429)                      (940)
Cash and cash equivalents at beginning of period                                            2,775                      9,409
                                                                                     -------------              -------------

Cash and cash equivalents at end of period                                           $        346               $      8,469
                                                                                     =============              =============

</TABLE>

           See accompanying notes to consolidated financial statements

                                        5

<PAGE>



                              CYANOTECH CORPORATION
                                    FORM 10-Q
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 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  six  month  periods  ended
         September 30, 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 (fair value approximates amortized cost):
<TABLE>
<CAPTION>
<S>                                               <C>                 <C>

                                                  September 30,         March 31,
                                                       1997               1997
                                                  -------------       -------------
U.S. Treasury securities                          $        500        $      2,454
Mortgage-backed securities                                   -                 500
Other interest bearing securities                        1,000               1,000
                                                  -------------       -------------
                                                  $      1,500        $      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>
<S>                                           <C>                          <C>
                                              September 30,                    March 31,
                                                   1997                          1997
                                              -------------                -------------
               Raw Materials                  $        116                 $        166
               Work in process                         362                          362
               Finished goods                        1,242                          346
               Supplies                                295                          264
                                              -------------                -------------
                                              $      2,011                 $      1,138
                                              =============                =============
</TABLE>

4.       NET INCOME PER COMMON SHARE INFORMATION

         Net income per common share for the three and six month  periods  ended
         September  30,  1997 and 1996 is  computed  based on net  income  after
         preferred stock dividend  requirements  and the weighted average number
         of common shares outstanding during the period, adjusted to reflect the
         assumed  exercise of  outstanding  stock  options and  warrants and the
         conversion of preferred stock to the extent these items have a dilutive
         effect on the  computation.  Primary  and fully  diluted net income per
         share herein are the same.


5.       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>    
         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>

                                        7

<PAGE>

5.       EQUIPMENT AND LEASEHOLD IMPROVEMENTS (continued)

         Equipment and leasehold improvements consist of the following (dollars
         in thousands):
<TABLE>
<CAPTION>
         <S>                                                        <C>                      <C>
                                                                    September 30,                March 31,
                                                                         1997                       1997
                                                                    -------------           -------------
         Equipment                                                  $      7,266            $      5,715
         Leasehold improvements                                           14,615                  10,935
         Furniture and fixtures                                               80                      67
         Equipment under capital lease                                       602                     602
                                                                    -------------           -------------
                                                                          22,563                  17,319
         Less accumulated depreciation
              and amortization                                            (4,163)                 (3,729)
         Construction in-progress                                          1,292                   1,076
                                                                    -------------           -------------
         Equipment and leasehold improvements, net                  $     19,692            $     14,666
                                                                    =============           =============
</TABLE>


6.       SERIES C PREFERRED STOCK

         Series C preferred  stock as of  September  30, 1997 and March 31, 1997
         consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
         <S>                                                        <C>                     <C>
         

                                                                    September 30,              March 31,
                                                                         1997                    1997
                                                                    -------------           --------------
         Preferred stock,  authorized  5,000,000 shares; 
         $.001 par value, issued and outstanding:
               Series C, 8% cumulative, convertible;
                734,977 shares on September 30 and March
                31, 1997; liquidation value $5.00 per share
                plus unpaid accumulated dividends                   $          1            $           1
                                                                    =============           ==============
</TABLE>


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.



                                        8

<PAGE>
         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 will adopt
         SFAS No. 128 in the third quarter of fiscal 1998. 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.  Management does not expect
         adoption  of SFAS No.  128 to have a material  impact on the  Company's
         previously 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 of
         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 on 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  of  the  Company's  financial  statements,  financial
         condition, results of operations or liquidity.


                                        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                 Six Months Ended
                                                                        September 30,                    September 30,
<S>                                                                <C>            <C>                <C>           <C>    
                                                                     1997           1996               1997          1996
                                                                   --------       --------           --------      --------

Net Sales                                                           100.0 %        100.0 %            100.0 %       100.0 %
Cost of product sales                                                56.9           38.1               54.1          39.1
                                                                   --------       --------           --------      --------

Gross profit                                                         43.1           61.9               45.9          60.9
                                                                   --------       --------           --------      --------

Operating expenses:
Research and development                                              8.4            6.1                8.2           6.3
General and administrative                                           18.2           12.0               18.4          13.2
Sales and marketing                                                  20.0            7.9               20.7           7.9
                                                                   --------       ---------          --------      --------
Total operating expenses                                             46.6           26.0               47.3          27.4
                                                                   --------       ---------          --------      --------

Income (loss) from operations                                        (3.5)          35.9               (1.4)         33.5
                                                                   --------       ---------          --------      --------

Other income (expense):
Interest income                                                       1.7            4.1                4.0           4.4
Interest expense                                                     (0.8)          (0.8)              (0.7)         (0.9)
                                                                   --------       ---------         ---------       -------

Total other income (expense)                                          0.9            3.3                3.3           3.5
                                                                   --------       ---------         ---------       -------

Net Income (Loss)                                                    (2.6)%         39.2 %              1.9 %        37.0 %
                                                                   ========       =========         =========       =======
</TABLE>
                                       10

<PAGE>

SECOND QUARTER OF FISCAL 1998 COMPARED TO SECOND QUARTER OF FISCAL 1997

NET SALES

         Net sales for the three month period ended September 30, 1997 decreased
27% to $2,053,000 from the $2,812,000  reported for the three month period ended
September 30, 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 34% and 56% of total net sales for the
three month periods ended September 30, 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
severly  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 prouducts.  This
level  of  purchases,   however,   was   significantly   below  the  orders  for
approximately $1.2 million of products in the second 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  49% to
$885,000 for the three month period ended September 30, 1997, from $1,740,000 in
the comparable  period of fiscal 1997. Our gross profit margin  decreased to 43%
for the three month period  ended  September  30, 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 shift in the
product mix to greater  sales of lower priced bulk  Spirulina  products,  and to
unexpected  costs  associated  with the  ramp-up in  production  of our  natural
astaxanthin  product,  NatuRose.  Without these additional  astaxanthin  product
costs, totaling  approximately  $180,000, the gross profit margin for the second
quarter 1998 would have been approximately 52%.


OPERATING EXPENSES

         Operating  expenses were  $958,000  during the three month period ended
September 30, 1997, an increase of 31% from $732,000 in the comparable period of
fiscal  1997,  primarily  because of  increased  sales and  marketing  expenses.
Operating  expenses as a percentage of net sales were 47%,  compared with 26% in
the prior year,  primarily due to the lower second  quarter net sales and higher
sales and marketing expenses.

         GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses
increased to $375,000 for the three month  period  ended  September  30, 1997, a
increase of 11% from  $338,000 for the  comparable  period of fiscal 1997.  This
increase  from the prior  year was  primarily  due to higher  personnel  related
expenditures and increased insurance premiums resulting from increased insurance
coverage.

                                       11

<PAGE>
         SALES AND MARKETING. Sales and marketing expenses increased to $410,000
for the three month period  ended  September  30, 1997,  an increase of 85% from
$222,000 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 a net loss of $54,000  for the second  quarter of
fiscal 1998, compared to a net income of $1,104,000 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
unexpected  costs  associated  with the  ramp-up in  production  of our  natural
astaxanthin product, NatuRose.


SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

NET SALES

         Net sales for the six month period ended  September 30, 1997  decreased
27% to $3,827,000  from the  $5,267,000  reported for the six month period ended
September 30, 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 45% to $1,757,000 for the six month period ended
September 30, 1997 from $3,210,000 in the comparable  period of fiscal 1997. Our
gross profit  margin  decreased to 46% for the six month period ended  September
30,  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,  and to  unexpected  costs  associated  with the ramp-up in
production of our natural astaxanthin product, NatuRose.


OPERATING EXPENSES

         Operating  expenses were  $1,811,000  during the six month period ended
September 30, 1997, an increase of 26% from $1,443,000 in the comparable  period
of fiscal 1997, primarily because of increased sales and marketing expenses.

         SALES AND MARKETING. Sales and marketing expenses increased to $791,000
for the six month  period  ended  September  30,  1997,  an increase of 91% from
$414,000 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.

                                       12

<PAGE>

NET INCOME

         The Company rccorded net income of $71,000 for the first half of fiscal
1998,  a decrease of 96% from  $1,949,000  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.  As of  September  30,  1997,  the  Company's
accumulated deficit was $390,000. 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. While a
significant  portion of our expense levels are relatively  fixed, and the timing
of increases in expense levels is based in large part on 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 $5,284,000 during the first six months of
fiscal  1998 to  $3,781,000  while our cash,  cash  equivalents  and  investment
securities  balances  decreased by  $4,883,000  to  $1,846,000.  The decrease is
primarily  attributable  to capital  expenditures  for  equipment  and leasehold
improvements and higher operating costs.

         Cash flows provided by operating activities during the first six months
of fiscal  1998  amounted to $672,000  compared  to cash  provided by  operating
activities  of $981,000 in fiscal 1997.  The primary  sources of second  quarter
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 September 30, 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.

         Cash flows used in investing  activities during the first six months of
fiscal 1998 were  $3,006,000  compared to $3,513,000 in fiscal 1997. The primary
uses of cash  flows  in  investing  activities  during  1998  were  for  capital
expenditures totaling $5,460,000.

         Cash flows used in financing activities  during the first six months of
fiscal  1998 were only  $95,000,  compared to cash flows  provided by  financing
activities  of  $1,592,000  in fiscal  1997,  primarily  from the sale of common
stock. 
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<PAGE>

         As of September  30,  1997,  the Company had  construction  commitments
totaling  $610,000,  which we  intend to fund  from  cash  reserves,  investment
securities,  and  anticipated  cash flows from future  operations.  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,
approximately  $11  million on capital  expenditures  during the next two fiscal
years,  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.  We
are  seeking  an  increase  in our  credit  facility  to  meet  any  anticipated
shortfall.  We  currently  have a  $1,000,000  bank  line  of  credit  which  is
collateralized  by a certificate  of deposit and an additional  $1,000,000  bank
line of credit which is collateralized  by all the assets of the Company.  As of
September 30, 1997, there were no borrowings under either of these credit lines.


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 third  quarter of fiscal 1998 to
be  slightly  below  the  prior  year's  fourth  fiscal  quarter  net  sales  of
$3,350,000,  assuming  there  are  significant  shipments  to  our  customer  in
Hong-Kong.  During the fourth  quarter of fiscal 1997,  our  Hong-Kong  customer
purchased  approximately  $700,000  of  Spirulina  products  from  us.  With the
reinstatement of their business  license,  and based on recent  discussions with
this customer, we anticipate sales to them of approximately  $500,000 during the
third quarter of fiscal 1998. As a result of increasing our Naturose  production
during the second  quarter of fiscal  1998,  we expect  third  quarter  sales of
Naturose to be greater than $400,000.

         A shift in product  mix to greater  sales of bulk  products  (for which
average selling prices have decreased since last year),  and continued  start-up
costs  associated with the operation of the NatuRose  production  facility,  are
expected to reduce the gross profit  margin for the third 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 increases production throughput and installs
additional  processing  equipment.  Such  throughput  increases  and  processing
equipment installations are expected to occur during the third and fourth fiscal
quarter, 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. During the secondquarter of fiscal 1998, we expanded
our NatuRose  capacity  from five acres of culture  ponds to 10 acres of culture
ponds.  Beginning in November 1997, we plan to convert  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 expected to be completed by February  1998, is estimated to be $500,000
and will be funded from cash reserves,  investment  securities,  and anticipated
cash  flows  from  future  operations.  Construction  is  also  underway  on  an
                                       14

<PAGE>




additional  88-acre expansion for NatuRose  production.  The first phase of this
expansion  involves the rough leveling of the entire 88 acre site,  which should
be  completed by the end of  November,  1997.  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 Fall of 1998,  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  action in  foreign  countries;  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.

























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<PAGE>



PART II.          OTHER INFORMATION


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

         On September 17, 1997,  the following  matters were submitted to a vote
         of  stockholders  entitled to vote at the Company's  Annual  Meeting of
         Stockholders:

         a) The following directors were elected to serve  until the next Annual
         Meeting  or  until  their  successors  are  elected:  Julian C.  Baker,
         Gerald R. Cysewski,  Eva R. Reichl,  Ronald P. Scott, John T. Ushijima,
         and Paul C. Yuen, all directors receiving at least 13,948,418 votes and
         no more than 614,196 votes against or abstaining.

         b) Approval of an  amendment  to the  Company's  1995 Stock Option Plan
         increasing  the number of shares  reserved for issuance of options from
         400,000 to 800,000.

         For: 13,414,825  Against: 987,121  Abstain: 160,688 Broker non-votes: 0

         c)  Ratification  of the  selection  of KPMG  Peat  Marwick  LLP as the
         Company's  independent  auditors  for the fiscal year ending  March 31,
         1998.

         For: 14,483,349  Against: 33,418  Abstain: 29,147


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
             September 30, 1997.




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<PAGE>
                                   SIGNATURES

         In accordance with the  requirements of the Securities  Exchange Act of
1934,  the  registrant  caused  this  report to be  signed on its  behalf by the
undersigned, thereunto duly authorized.



                                   CYANOTECH CORPORATION (Registrant)



November 10, 1997                  By: /s/ Gerald R. Cysewski
-----------------                      ---------------------------
    (Date)                                 Gerald R. Cysewski
                                           Chairman of the Board,
                                           President and Chief Executive Officer



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











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