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

# FORM 10-Q

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

For Quarterly Period Ended December 31, 2001

Commission File Number 0-14602

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

|NEVADA(State or other jurisdictionof incorporation or organization) |  | 91-1206026(IRS EmployerIdentification 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 January 31, 2002:

|Title of Class                       |  | Shares Outstanding
|------------------------------------ |  | ------------------
|Common stock - $.005 par value stock |  | 17,043,701        

1

CYANOTECH CORPORATION
FORM 10-Q

INDEX

|PART I.  FINANCIAL INFORMATION                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1.  Financial Statements                                                                                                                    
|Consolidated Balance Sheets (unaudited)
             
   December 31, 2001 and March 31, 2001                                                    
|Consolidated Statements of Operations (unaudited)
             
   Three and nine month periods ended
             
   December 31, 2001 and 2000
|Consolidated Statements of Cash Flows (unaudited)
             
   Nine month periods ended
             
   December 31, 2001 and 2000          
|Notes to Consolidated Financial Statements (unaudited)                                                                                           
|Item 2.  Management's Discussion and Analysis of Financial
             
  Condition and Results of Operations                                   
|PART II.  OTHER INFORMATION                                                                                                                      
|Item 6.  Exhibits and Reports on Form 8-K                                                                                                        
|SIGNATURES                                                                                                                                       

2

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 (Unaudited)

|                                                                                                                                                                              |  |   | December 31,2001 |  |   | March 31,2001
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------------- |  | - | -------------
|Assets                                                                                                                                                                       
|Current Assets                                                                                                                                                               
|Cash and cash equivalents                                                                                                                                                     |  | $ | 1,698            |  | $ | 2,269        
|Accounts receivable, net                                                                                                                                                      |  |   | 1,191            |  |   | 1,110        
|Refundable income taxes                                                                                                                                                       |  |   |                 |  |   | 8            
|Inventories (note 2)                                                                                                                                                          |  |   | 1,081            |  |   | 2,004        
|Prepaid expenses                                                                                                                                                              |  |   | 109              |  |   | 49           
|Total current assets                                                                                                                                                          |  |   | 4,079            |  |   | 5,440        
|Equipment and leasehold improvements, net (note 3)                                                                                                                            |  |   | 14,207           |  |   | 14,861       
|Other assets                                                                                                                                                                  |  |   | 990              |  |   | 1,122        
|Total assets                                                                                                                                                                  |  | $ | 19,276           |  | $ | 21,423       
|Liabilities and Stockholders' Equity                                                                                                                                         
|Current liabilities:                                                                                                                                                         
|Current maturities of
long-term debt                                                                                                                                          |  | $ | 1,480            |  | $ | 242          
|Accounts payable                                                                                                                                                              |  |   | 637              |  |   | 772          
|Accrued expenses                                                                                                                                                              |  |   | 336              |  |   | 249          
|Total current liabilities                                                                                                                                                     |  |   | 2,453            |  |   | 1,263        
|Long-term debt, excluding current maturities                                                                                                                                 
|Term Loan                                                                                                                                                                     |  |   | 2,900            |  |   | 3,086        
|Convertible debentures                                                                                                                                                        |  |   |                 |  |   | 1,250        
|Deferred revenue                                                                                                                                                              |  |   |                 |  |   | 129          
|Total liabilities                                                                                                                                                             |  |   | 5,353            |  |   | 5,728        
|Stockholders' equity:                                                                                                                                                        
|Common Stock of $0.005 par
value, authorized 25,000,000     shares; issued and outstanding 17,043,701 shares
at     December 31, 2001 and 16,949,702 shares at March 31, 2001 |  |   | 85               |  |   | 85           
|Additional paid-in capital                                                                                                                                                    |  |   | 24,567           |  |   | 24,480       
|Accumulated deficit                                                                                                                                                           |  |   | (10,729)         |  |   | (8,870)      
|Total stockholders' equity                                                                                                                                                    |  |   | 13,923           |  |   | 15,695       
|Total liabilities and stockholders' equity                                                                                                                                    |  | $ | 19,276           |  | $ | 21,423       

See accompanying notes to consolidated financial statements.

3

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

|                               | Three Months EndedDecember 31, | Nine Months EndedDecember 31,
|------------------------------ | ------------------------------ | -----------------------------
|                               |                                | 2001                         
|NET SALES                      | $                              | 1,916                        
|COST OF PRODUCT SALES          |                                | 1,863                        
|Gross Profit                   |                                | 53                           
|OPERATING EXPENSES:            |                                |                              
|Research and development       |                                | 48                           
|General and administrative     |                                | 371                          
|Sales and marketing            |                                | 474                          
|Total operating expenses       |                                | 893                          
|Loss from operations           |                                | (840)                        
|OTHER INCOME (EXPENSE):        |                                |                              
|Interest income                |                                | 13                           
|Interest expense               |                                | (121)                        
|Other income, net              |                                | 11                           
|Total other expense            |                                | (97)                         
|Loss before income taxes       |                                | (937)                        
|Income taxes                   |                                |                             
|NET LOSS                       | $                              | (937)                        
|NET LOSS PER COMMON SHARE     
|Basic and Diluted              | $                              | (0.05)                       
|SHARES USED IN CALCULATION OF:
|Basic and Diluted              |                                | 17,044                       

See accompanying notes to consolidated financial statements.

4

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

|                                                                                | Nine Months EndedDecember 31,
|------------------------------------------------------------------------------- | -----------------------------
|                                                                                |                              
|CASH FLOWS FROM OPERATING ACTIVITIES:                                          
|Net loss                                                                        | $                            
|Adjustments to reconcile net
loss to net cash used in     operating activities:
|Depreciation and amortization                                                   |                              
|Amortization of debt issue costs                                                |                              
|Issuance of stock in exchange for services                                      |                              
|Net (increase) decrease in:                                                    
|Accounts receivable                                                             |                              
|Refundable income taxes                                                         |                              
|Inventories                                                                     |                              
|Prepaid expenses and other assets                                               |                              
|Net increase (decrease) in:                                                    
|Accounts payable                                                                |                              
|Deferred revenue                                                                |                              
|Accrued expenses                                                                |                              
|Net cash used in operating activities                                           |                              
|CASH FLOWS FROM INVESTING ACTIVITIES:                                          
|Investment in equipment and leasehold
improvements                              |                              
|CASH FLOWS FROM FINANCING ACTIVITIES:                                          
|Proceeds from issuance of term loan
debt                                        |                              
|Proceeds from issuance of
convertible debentures                                |                              
|Net proceeds from exercise of
warrants and options                              |                              
|Principal payments on long-term
debt                                            |                              
|Debt issue costs                                                                |                              
|Stock issuance costs                                                            |                              
|Restricted cash deposit                                                         |                              
|Cost of conversion of series C
preferred        stock to common stock           |                              
|Net cash provided by (used in) financing activities                             |                              
|Net increase (decrease) in cash and cash equivalents                            |                              
|Cash and cash equivalents at beginning of period                                |                              
|Cash and cash equivalents at end of period                                      | $                            
|Supplemental disclosure of non-cash financing activities:                      
|Issuance of warrants in connection with
issuance of      long-term debt         | $                            
|Conversion of convertible debentures to
      common stock                      | $                            

See accompanying
notes to consolidated financial statements.

5

# CYANOTECH
CORPORATION

FORM 10­Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember
31, 2001(Unaudited)

| | The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America 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, 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 wholly­owned subsidiary, Nutrex
Hawaii, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation. While the financial information furnished for the
three and nine month periods ended December 31, 2001 and 2000 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, 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inventories
are stated at the lower of cost (which approximates first­in, first­out) or
market and consist of the following (dollars in thousands):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

|                | December 31, 2001 |       | March 31, 2001
|--------------- | ----------------- | ----- | --------------
|Raw materials   | $                 | 112   |               
|Work in process |                   | 191   |               
|Finished goods  |                   | 655   |               
|Supplies        |                   | 123   |               
|                | $                 | 1,081 |               

6

| | Owned
equipment and leasehold improvements are stated at cost. 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 as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Equipment              | 3 to 10 years 
|---------------------- | --------------
|Leasehold improvements | 10 to 25 years
|Furniture and fixtures | 7 years       

Equipment and leasehold improvements consist of the
following (dollars in thousands):

|                                               |  |   | December 31, 2001 |  |   | March 31, 2001
|---------------------------------------------- |  | - | ----------------- |  | - | --------------
|Equipment                                      |  | $ | 9,275             |  | $ | 9,164         
|Leasehold improvements                         |  |   | 13,978            |  |   | 13,926        
|Furniture and fixtures                         |  |   | 83                |  |   | 83            
|                                               |  |   | 23,336            |  |   | 23,173        
|Less accumulated depreciation and amortization |  |   | (9,687)           |  |   | (8,705)       
|Construction in-progress                       |  |   | 558               |  |   | 393           
|Equipment and leasehold improvements, net      |  | $ | 14,207            |  | $ | 14,861        

| | During
the three and nine months ended December 31, 2001 and 2000, warrants and options
to purchase shares of Common Stock of the Company, and convertible debentures
were outstanding, but were not included in the computation of Diluted net loss
per common share because the inclusion of these securities would have had an
antidilutive effect on the net loss per common share. During the three and nine
months ended December 31, 2000, convertible preferred stock was also
outstanding, but was not included in the computation of diluted net loss per
common share because the inclusion of these instruments would have had an
antidilutive effect on the net loss per common share. As of December 31, 2001,
warrants and options to acquire 956,030 shares of the Companys common
stock and debentures convertible into 825,333 shares of the Companys
common stock were outstanding. As of December 31, 2000, warrants and options to
acquire 1,003,830 shares of the Companys common stock and debentures
convertible into 833,333 shares of the Companys common stock were
outstanding.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

| | 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):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Basic and Diluted Net LossPer Common Share     | Three Months EndedDecember 31, | Nine Months EndedDecember 31,
|---------------------------------------------- | ------------------------------ | -----------------------------
|                                               |                                | 2001                         
|Net loss                                       | $                              | (937)                        
|Less: Requirement forPreferred Stock dividends |                                |                             
|Loss to Common stockholders                    | $                              | (937)                        
|Weighted average Common Sharesoutstanding      |                                | 17,043,701                   
|Net Loss per Common Share                      | $                              | (0.05)                       

| | Accounting
for Derivative Instruments and Hedging Activities.  In June 1998,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (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. In July 1999, the FASB issued SFAS No. 137, 
Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date for FASB Statement No. 133, an Amendment of FASB Statement
No. 133, which defers the effective date of SFAS No. 133 to be effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, An Amendment of FASB Statement No
133, which addresses a limited number of issues causing implementation
difficulties for certain entities that apply SFAS No. 133. The Company currently
holds no derivative instruments, nor is it currently participating in hedging
activities. The adoption of SFAS No. 133, as amended by SFAS No. 137 and SFAS
No. 138, did not have a material effect on the Companys financial
condition, results of operations or liquidity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Business
Combination  In July 2001, the FASB issued SFAS No. 141, 
Business Combinations. SFAS No.141 requires that all business
combinations be accounted for under the purchase method of accounting. SFAS No.
141 also changes the criteria for the separate recognition of intangible assets
acquired in a business combination.  SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001.  The adoption of SFAS No. 141 did
not have a material effect on the Company's financial condition, results of
operations or liquidity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

| | Goodwill
and Other Intangible Assets In July 2001, the FASB Issued SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
individually or as part of a group of other assets not constituting a business.
SFAS No. 142 also addresses, regardless of how acquired, the subsequent
accounting and measurement of goodwill and intangible assets. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No.142. SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 142
is effective for fiscal years beginning after December 31, 2001. The adoption of
SFAS No. 142 is not expected to have a material effect on the Companys
financial condition, results of operations or liquidity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Asset
Retirement Obligations In June 2001, the FASB issued SFAS No.
143, Accounting for Asset Retirement Obligations, which requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs would be
capitalized as part of the carrying amount of the long-lived asset and
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability, the Company will recognize
a gain or loss on settlement. The provisions of SFAS No. 143 are effective for
fiscal years beginning after June 15, 2002. Management has not yet determined
the impact, if any, of adoption of SFAS No. 143.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
for the Impairment of Disposal of Long-Lived Assets In August
2001, the FASB issued SFAS No. 144,  Accounting for the Impairment or
Disposal of Long-Lived Assets. For the long­lived assets to be held and
used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure an impairment loss
as the difference between the carrying amount and fair value. Further, SFAS No.
144 eliminates the requirement to allocate goodwill to long-lived assets to be
tested for impairment, describes a probability-weighted cash flow estimation
approach to deal with situations in which alternative courses of action to
recover the carrying amount of a long-lived are under consideration or a range
is estimated for the amount of possible future cash flows, and establishes a  
primary-asset  approach to determine the cash flow estimation period.
For long-lived assets to be disposed of other than by sale (e.g., assets
abandoned, exchanged or distributed to owners in a spinoff), SFAS No. 144
requires that such assets be considered held and used until disposed of.
Further, an impairment loss should be recognized at the date an asset is
exchanged for a similar productive asset or distributed to owners in a spinoff
if the carrying amount exceeds its fair value. For long-lived assets to be
disposed of by sale, SFAS No. 144 retains the requirement of SFAS No. 121 to
measure a long-lived asset classified as held for sale at the lower of its
carrying amount or fair value less cost to sell and to cease depreciation.
Discontinued operations would no longer be measured on a net realizable value
basis, and future operating losses would no longer be recognized before they
occur. SFAS No. 144 broadens the presentation of discontinued operations to
include a component of an entity, establishes criteria to determine when a
long-lived asset is held for sale, prohibits retroactive reclassification of the
asset as held for sale at the balance sheet date if the criteria are met after
the balance sheet date but before issuance of the financial statements, and
provides accounting guidance for the reclassification of an asset from  
held for sale  to  held and used.  The provisions of SFAS
No. 144 are effective for fiscal years beginning after December 15, 2001.
Management has not yet determined the impact, if any, of adoption of SFAS No.
144.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

| | The
Company has engaged an investment bank to renegotiate the terms of the
Convertible Subordinated Debentures totaling $1,238,000 at December 31, 2001 and
due on April 30, 2002, with the holders of such securities. Such renegotiation
may include an extension of the conversion deadline and/or a change in the
conversion price and/or a change in the interest rate. The Company expects to
complete such renegotiation prior to the maturity date of April 30, 2002.
However, there can be no assurance that the Company will be successful in
reaching an agreement with the holders of the Convertible Subordinated
Debentures, or if successful, that such agreement will be on terms favorable to
the Company. If the holders of the Convertible Subordinated Debentures do not
accept the renegotiated terms and demand repayment on April 30, 2002, and no
alternate financing is then available, such action would have a material adverse
effect on the Companys financial position, results of operations and
liquidity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

# CYANOTECH
CORPORATION

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

This
report on Form 10-Q contains forward-looking statements regarding the future
performance of Cyanotech and future events that involve risks and uncertainties
that could cause actual results to differ materially from the statements
contained herein. This document, and the other documents that the Company files
from time to time with the Securities and Exchange Commission, such as its
reports on Form 10-K, Form 10-Q, Form 8-K, and its proxy materials, contain
additional important factors that could cause actual results to differ from the
Companys current expectations and the forward-looking statements contained
herein.

## Critical Accounting
Policies

In response to the Security and Exchange Commission Release No. 33-8040,  
Cautionary Advice Regarding Disclosure About Critical Accounting Policies,
 the Company identified the most critical accounting principles upon which
our financialstatus depends.  We determined the critical principles by considering
accountingpolicies that involve the most complex or subjective decisions or assessments.
We identified our most critical accounting policies to be those related to revenue
recognition and inventory valuation.  We state these accounting policies in the notes
to the consolidated financial statements in the Companys previously filed
report on Form 10K for the fiscal year ended March 31, 2001.  This discussion and
analysis should be read in conjunction with our consolidated financial statements
and related notes included elsewhere in this report.

## Results of
Operations

The following table sets forth certain consolidated statement of operations data as a percentage of net
sales for the periods indicated:

|                           | Three Months EndedDecember 31, | Nine Months EndedDecember 31,
|-------------------------- | ------------------------------ | -----------------------------
|                           |                                | 2001                         
|Net Sales                  |                                | 100.0                        
|Cost of product sales      |                                | 97.2                         
|Gross profit               |                                | 2.8                          
|Operating expenses:       
|Research and development   |                                | 2.5                          
|General and administrative |                                | 19.4                         
|Sales and marketing        |                                | 24.7                         
|Total operating expenses   |                                | 46.6                         
|Loss from operations       |                                | (43.8)                       
|Other income (expense):   
|Interest income            |                                | 0.7                          
|Interest expense           |                                | (6.3)                        
|Other income, net          |                                | 0.5                          
|Total other expense        |                                | (5.1)                        
|Loss before income taxes   |                                | (48.9)                       
|Income taxes               |                                |                             
|Net loss                   |                                | (48.9)                       

11

## Third Quarter of Fiscal 2002 Compared to Third Quarter of Fiscal 2001

Net Sales

Net
sales for the three month period ended December 31, 2001 were $1,916,000, an
increase of 9% from the comparable period of fiscal 2001. This increase is
primarily attributable to higher domestic sales of packaged consumer products,
both BioAstin® and Spirulina Pacifica®, higher sales of bulk
NatuRose® products and inclusion of $204,000 of non-recurring product
distribution license fees, offset in part by lower sales of bulk Spirulina
powder.

International
sales as a percent of total net sales decreased slightly to 49% compared to 52%
for the comparable period of the prior fiscal year. Sales to the Companys
largest customer, Spirulina International B.V. (Spirulina International),
continued at reduced levels, accounting for less than 10% of total product
shipments for the quarter ended December 31, 2001. This customer accounted for
less than 10% of net sales during the same quarter of the prior fiscal year.

Gross Profit

Gross
profit represents net sales less the cost of product sales, which includes the cost
of materials, manufacturing overhead costs, direct labor expenses and
depreciation and amortization. Gross profit decreased significantly to $53,000
for the quarter ended December 31, 2001, from $467,000 in the comparable period
of fiscal 2001. Gross profit margins were materially adversely impacted during
the quarter by increased production costs caused by unusually high rainfall in
November and December affecting production levels. Gross profit was reduced
further by finished goods inventory write-offs and adjustments totaling
$454,000. If the inventory write-offs and adjustments are omitted from the gross
profit for comparison, gross profit for the quarter ended December 31, 2001
would have amounted to $507,000. Such adjusted gross profit when applied to net
sales, adjusted for the $204,000 of non-recurring product distribution licensing
fees, shows our gross profit margin for the quarter ended December 31, 2001 would
have increased slightly to 30% from the 27% recorded for the comparable prior
year period.

Operating Expenses

Operating
expenses were $893,000 during the quarter ended December 31, 2001, an increase
of 25% from the comparable period of fiscal 2001. This increase was primarily
due to increased sales and marketing expenses.

Research
and Development   Research and development expenses amounted to $48,000 for
the fiscal 2001 quarter ended December 31, 2001. This includes a $53,000
reimbursement for clinical trial expenses from one of our business partners in
Japan. If this reimbursement is omitted from the comparison, research and
development expenses amounted to $101,000, an increase of 60% from the
comparable prior year quarter. Higher expenditures for clinical studies and
related outside service expenses were the primary cause of the increase.

General
and Administrative   General and administrative expenses decreased slightly to
$371,000 from $400,000 for the comparable period of fiscal 2001. This decrease
is primarily attributable to lower legal expenses.

Sales
and Marketing   Sales and marketing expenses were $474,000 for the quarter
ended December 31, 2001, an increase of 87% from the comparable period of fiscal
2001. Higher advertising and promotional expenses for all products accounted for
this increase.

12

Other Expense

Other
expense for the quarter ended December 31, 2001 increased by $24,000 from the
comparable prior year quarter, primarily from a decrease in other income, offset
in part by reduced interest expense.

Income Taxes

Net Loss

The
Company recorded a net loss of $937,000 for the three months ended December 31,
2001, compared to a net loss of $322,000 for the comparable quarter of fiscal
2001. Of the $937,000 net loss reported for the quarter, $454,000 represents the
effect of the write-offs and adjustments to finished goods inventory. These
write-offs and adjustments were offset in part by recognition of non-recurring
product distribution license fees and reimbursement for clinical trial expenses
totaling $257,000. If the effect of these events are omitted for comparison, the
Company would have recorded a loss of $740,000 for the quarter ended December
31, 2001. Such loss is primarily attributable to reduced sales revenues and
significantly higher sales and marketing expenses.

## Nine Months Ended December
31, 2001 Compared to Nine Months Ended December 31, 2000

Net Sales

Net
sales for the nine month period ended December 31, 2001 amounted to $6,180,000,
a decrease of $118,000 from the comparable period of fiscal 2001, primarily due
to decreased bulk sales of Spirulina Pacifica products offset in large part by
significantly increased sales of packaged consumer products. The non-recurring
product distribution license fees of $204,000, is included in the fiscal 2002 net
sales amount.

International
sales represented 51% and 56% of total net sales for the nine month periods
ended December 31, 2001 and 2000, respectively. Sales to the Companys
largest customer, Spirulina International continued at reduced levels and
accounted for less than 10% of net sales for the nine months ended December 31,
2001, compared to 21% for the comparable period of fiscal 2001.

Gross Profit

Gross
profit decreased by 38% to $1,222,000 for the nine month period ended December
31, 2001, from the comparable prior year period. Included in cost of sales for
this calculation are finished goods inventory write-offs and adjustments of
$454,000. If these inventory effects are omitted for comparison, gross profit
for the nine month period ended December 31, 2001 would have amounted to
$1,676,000. Such adjusted gross profit and net sales, adjusted for the $204,000
non-recurring product distribution license fees, would show our gross profit
margin for the nine month period ended December 31, 2001 decreased to 25% from
the 31% recorded for the comparable prior year period.

13

Operating Expenses

Operating
expenses were $2,759,000 during the nine month period ended December 31, 2001,
an increase of 32% from the comparable period of fiscal 2001, with increased
expenditures in all categories.

Research
and Development   Research and development expenses increased 17% to $238,000
during the nine month period ended December 31, 2001, from the comparable prior
year period. Higher expenditures for clinical studies and related outside
service expenses were the primary cause.

General
and Administrative   General and administrative expenses increased 13% to
$1,251,000 for the nine month period ended December 31, 2001, from $1,104,000
for the comparable prior year period because of higher corporate insurance and
outside service cost increases.

Sales
and Marketing   Sales and marketing expenses increased 62% to $1,270,000
for the nine month period ended December 31, 2001, from $782,000 for the
comparable prior year period. Higher advertising and promotional expenses for
all products accounted for this increase.

Other Expense

Other
expense increased 24% to $322,000 for the current nine month fiscal period from
the comparable prior year period, primarily from a decrease in other income,
offset in part by reduced interest expense.

Income Taxes

A provision for income taxes was not recorded in either nine month period due to the Company's taxable
loss position.

Net Loss

The
Company recorded a net loss of $1,859,000 for the nine months ended December 31,
2001, much higher than the net loss of $384,000 for the comparable period of
fiscal 2001. This change is accounted for by decreased sales, increased
production costs caused by reduced production levels and unfavorable growing
conditions during November and December, the effect of finished good inventory
write-offs and adjustments, and increased operating expenses.

14

## Variability of
Results

The
Company has experienced significant quarterly fluctuations in operating results
and anticipates that these fluctuations may continue in future periods. Future
operating results may fluctuate as a result of changes in sales levels to our
largest customers, new product introductions, production difficulties, 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, foreign exchange fluctuations,
the announcement or introduction of new products by competitors, changes in our
customer mix, overall trends in the market for our products, government
regulations and other factors beyond our control. 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 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 financial condition and results of operations.

## Liquidity and
Capital Resources

Our
working capital for the nine month period decreased by $2,551,000 from
$4,177,000 at March 31, 2001 to $1,626,000 at December 31, 2001, largely from
reclassification of the convertible debentures, due April 30, 2002, from
long-term debt at March 31, 2001 to current liabilities at December 31, 2001,
and inventory reductions of $923,000. For the nine month period ended December
31, 2001, cash and cash equivalents decreased, by $571,000 to $1,698,000 at
December 31, 2001, due to negative cash flows from operating activities of
$46,000, capital expenditures of $328,000, and principal payments on long-term
debt of $186,000.

Cash
used in operating activities during the first nine months of fiscal 2002 was
$420,000 lower than the $466,000 used in the comparable period of fiscal 2001.
The primary use of cash flows in operating activities during the first nine
months of fiscal 2002 was a result of the net loss of $1,859,000, offset mainly
by a $923,000 reduction in inventories, and by depreciation and amortization
expense.

Cash
used in investing activities (for capital expenditures) during the first nine
months of fiscal 2002 was $62,000 higher than the $266,000 used in the
comparable period of fiscal 2001.

Cash
used in financing activities during the first nine months of fiscal 2002
amounted to $197,000, compared to cash provided by financing activities of
$2,141,000 for the comparable period of fiscal 2001, primarily as a result of
the prior years term loan and convertible debentures financings.

Term Loan Agreement

On
April 21, 2000, the Company executed a Term Loan Agreement (Term Loan) which
provided up to $3.5 million in credit facilities, secured by substantially all
the assets of the Company. The Term Loan has a maturity date of May 1, 2010 and
is payable in 120 equal monthly principal and interest payments of approximately
$48,000, commencing June 1, 2000. The interest rate under this Term Loan, in the
absence of a default under the agreement, is the prime rate, as defined, in
effect as of the close of business on the first day of each calendar quarter,
plus 1% (at December 31, 2001, the prime rate was 4.75%). Interest is calculated
on the unpaid balance of principal based on a straight-line amortization
schedule commencing May 1, 2000. Based on the terms of the agreement, $500,000
of the loan proceeds has been deposited in an interest-bearing restricted cash
account, with such amount included in other assets in the consolidated balance
sheets at December 31, 2001 and March 31, 2001.

15

A
warrant to purchase 20,000 shares of the Companys common stock was issued
in conjunction with this Term Loan agreement. The warrant expires in April 2011
and has an exercise price of $2.55 per share. The warrant may only be exercised
after the Company has repaid the Term Loan in full.

Convertible Debentures

On
May 2, 2000, the Company completed a private placement of $1,250,000 principal
amount 6% Convertible Subordinated Debentures due April 30, 2002. This
transaction provided net proceeds to the Company of approximately $1.1 million.
Interest on these debentures is payable quarterly, in arrears, on April 1, July
1, October 1, and January 2 in each year commencing on July 1, 2000, at a rate
of 6% per annum. The debentures are convertible into shares of common stock of
the Company at a conversion price equal to $1.50 per share, the market price of
the Companys common stock at the date of issuance. Warrants to purchase
83,334 shares of the Companys common stock were issued to the placement
agent of the debentures, exercisable for five years from the issue date, at
$1.80 per share.

The
Company has engaged an investment bank to renegotiate the terms of the
Convertible Subordinated Debentures totaling $1,238,000 at December 31, 2001 and
due on April 30, 2002 with the holders of such securities. Such renegotiation
may include an extension of the conversion deadline and/or a change in the
conversion price and/or a change in the interest rate. The Company expects to
complete such renegotiation prior to the maturity date of April 30, 2002.
However, there can be no assurance that the Company will be successful in
reaching an agreement with the holders of the Convertible Subordinated
Debentures, or if successful, that such agreement will be on terms favorable to
the Company. If the holders of the Convertible Subordinated Debentures do not
accept the renegotiated terms and demand repayment on April 30, 2002, and no
alternate financing is then available, such action would have a material adverse
effect on the Companys financial position, results of operations and
liquidity.

The
Company believes that its working capital provided by its Term Loan Agreement,
convertible debentures and estimated cash flows from operations will be
sufficient to sustain operations for fiscal 2002.

## Recent
Accounting Pronouncements

See note 5 of notes to consolidated financial statements.

## Quantitative
and Qualitative Disclosures About Market Risk

We
have not entered into any transactions using derivative financial instruments or
derivative commodity instruments and believe that our exposure to market risk
associated with other financial instruments has not changed substantially from
March 31, 2001.

16

## 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.

Cyanotech's strategy has been, and continues to be, to produce higher value natural products from
microalgae.

The
enhanced marketing effort which we initiated in the last quarter of fiscal 2001
continues to show results in the form of increased sales of packaged consumer
products through the first nine months of fiscal 2002 and an increase in orders
for our natural astaxanthin products. During this nine month period, packaged
consumer product sales increased 69% over the comparable period of fiscal 2001.
To further support this effort, in October 2001 we began production of a
national television marketing campaign to promote BioAstin, our all-natural
antioxidant product based on natural astaxanthin. The 30-minute infomercial is
scheduled to begin airing in March 2002. We are committed to continue this
expanded marketing program into the foreseeable future as part of our strategic
plan to increase our sales and return the Company to profitability.

In
the international nutraceutical market, we are working closely with our
marketing partner, OTC Pharma B.V. (OTC Pharma), towards the launch of BioAstin
natural astaxanthin in Europe. OTC Pharma has over 90 sales representatives
throughout Europe and presently distributes products in pharmacies and natural
product outlets. OTC Pharma is the parent company of Spirulina International,
B.V., our largest customer for Spirulina Pacifica.

Our
expanded effort in promoting our bulk natural astaxanthin products have begun to
yield significant increases in orders for our NatuRose products. During the nine
months ended December 31, 2001, the Company continued its aquaculture industry
sales efforts for NatuRose natural astaxanthin into Japan and Chile. Combined
with positive results from ongoing feeding trials confirming the efficacy of
NatuRose, we are beginning to see an increase in orders from Japan which we
believe should continue into future periods.

For
the six months ended December 31, 2001, orders from our largest customer,
Spirulina International decreased significantly from the levels experienced
during the prior two fiscal quarters. Spirulina International has indicated that
it expects its purchases to continue to fluctuate from quarter to quarter in
response to seasonal business conditions and other factors. Our expanded
marketing efforts in the domestic market has partially offset the effect of this
customers seasonal buying pattern, broadening our customer base and
lessening our reliance on a few large customers. We intend to continue our
marketing efforts in the domestic bulk market as another facet of our
Companys strategic plan to increase our revenue base.

Our strategic marketing effort is comprised of:

| |   Increased advertising and promotion of packaged consumer and bulk products in
North America. 
  Ongoing research into new applications for BioAstin and validation through scientific studies. 
  Launch of our BioAstin product in Europe through our marketing partner OTC Pharma. 
  Revitalization of our NatuRose distribution channels in Japan and, to a lesser extent, Chile.
  Production and placement of a 30-minute television infomercial for BioAstin and
other packaged consumer products in North America.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

Our increased worldwide marketing effort has been further enhanced by three actions taken subsequent to
December 31, 2001:

In January 2002, we added Robert J. Capelli to our executive group as the Director of Sales.  Mr. Capelli
has over eleven years of experience in the natural food and supplement industry and will oversee our worldwide
sales.

Also
in January 2002, in response to projected demand for NatuRose and BioAstin, we
initiated a project to expand our astaxanthin production which, when complete,
will increase our capacity by approximately 60%.

Finally,
in order to improve our ability to service our increasing customer base in Asia
we formed Cyanotech Japan YK, a new business unit with an office in Tokyo.
Through this unit we will be able to economize on shipping costs, ensure timely
delivery to our customers in Asia and allow our Japanese customers to conduct
business in Yen rather than US dollars. Established initially to sell NatuRose
and Spirulina Pacifica to the animal nutrition market, we plan to offer BioAstin
and Spirulina Pacifica to the human nutrition market in Japan and Asia. Our
current customers for animal nutrition products will transition to this business
unit by the end of March 2002.

Our
plan is to broaden our sales and marketing effort in anticipation of increased
sales in the future periods. There can, however, be no assurance that the
projected growth in sales will actually occur or that profitability will be
attained.

As mentioned earlier in this report in the discussion of liquidity
and capital resources, we have engaged an investment bank to renegotiate the terms
of the Convertible Subordinated Debentures due on April 30, 2002 and totaling $1,238,000
at December 31, 2001, with the holders of such securities.  We expect to complete
such renegotiation prior to the maturity date of April 30, 2002.  However, there
can be no assurance that we will be successful in reaching an agreement with the
holders of the Convertible Subordinated Debentures, or if successful, that such
agreement will be on terms favorable to the Company.  If the holders of the Convertible
Subordinated Debentures do not accept the renegotiated terms and demand repayment
on April 30, 2002, and no alternate financing is then available, such action would
have a material adverse effect on the Company's financial position, results of
operation and liquidity.

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; foreign exchange fluctuations; 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.

18

## PART II. OTHER
INFORMATION

Item 6    
  Exhibits and Reports on Form 8-K

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

None

(b)    Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended December 31, 2001.

19

# SIGNATURES

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

|                        |  | CYANOTECH CORPORATION (Registrant)                                                                                                                              
|----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|February 12, 2002(Date) |  | By:/s/Gerald R. Cysewski
      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)
|                        |  |                                                                                                                                                                 
|                        |  |                                                                                                                                                                 
|                        |  |                                                                                                                                                                 
|                        |  |                                                                                                                                                                 
|                        |  |                                                                                                                                                                 

20