<PAGE>

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

                                   FORM 10-QSB

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

                  For Quarterly Period Ended December 31, 1996

                         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
                           (Issuer's telephone number)



     Check whether the issuer (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  X  No
    ---    ---


           Number of common shares outstanding as of January 31, 1997:

                 Title of Class                   Shares Outstanding
                 --------------                   ------------------

          Common stock - $.005 par value stock        12,693,195


         Transitional Small Business Disclosure Format: Yes     ; No  X
                                                            ---      ---

<PAGE>

                              CYANOTECH CORPORATION
                                   FORM 10-QSB

                                      INDEX

PART I.   FINANCIAL INFORMATION


Item 1.   Financial Statements                                            Page
                                                                          ----
          Consolidated Balance Sheets (unaudited)
               December 31, 1996 and March 31, 1996. . . . . . . . . . .    3

          Consolidated Statements of Income (unaudited)
               Three and nine month periods ended
               December 31, 1996 and 1995. . . . . . . . . . . . . . . .    4

          Consolidated Statements of Cash Flows (unaudited)
               Nine month periods ended
               December 31, 1996 and 1995. . . . . . . . . . . . . . . .    5


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


Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations. . . . . . . . . . . . . .    9


PART II.  OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .   15


SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16


                                        2

<PAGE>

PART I. FINANCIAL INFORMATION
     Item 1.   Financial Statements

                              CYANOTECH CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                         December 31,     March 31,
                                                                             1996           1996
                                                                         -----------    -----------
<S>                                                                     <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents                                             $      7,349   $      9,409
   Accounts receivable                                                          2,469          1,288
   Inventories  (note 2)                                                        1,202            494
   Prepaid expenses                                                                49            120
                                                                          -----------    -----------
      Total current assets                                                     11,069         11,311

Equipment and leasehold improvements, net (note 4)                             12,790          8,349
Other assets                                                                      206             56
                                                                          -----------    -----------
      Total assets                                                       $     24,065   $     19,716
                                                                          -----------    -----------
                                                                          -----------    -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current maturities of long-term debt                                  $        150   $        150
   Current maturities of capital lease obligations                                130            126
   Accounts payable                                                               811            852
   Other accrued liabilities (note 5)                                             352            434
                                                                          -----------    -----------
      Total current liabilities                                                 1,443          1,562

Long-term debt, excluding current maturities                                      400            513
Obligations under capital leases, excluding
   current maturities                                                             234            325
                                                                          -----------    -----------
      Total liabilities                                                         2,077          2,400
                                                                          -----------    -----------

Stockholders' equity:
   Preferred stock (note 6)                                                         1              1
   Common Stock - 12,693,195 shares issued and outstanding
      on December 31, 1996 and 11,755,650 shares issued
      and outstanding on March 31, 1996                                            63             59
   Additional paid-in capital                                                  23,639         21,876
   Accumulated deficit                                                         (1,715)        (4,620)
                                                                          -----------    -----------
      Total stockholders' equity                                               21,988         17,316
                                                                          -----------    -----------

         Total liabilities and stockholders' equity                      $     24,065   $     19,716
                                                                          -----------    -----------
                                                                          -----------    -----------
</TABLE>

    See accompanying notes to consolidated financial statements (unaudited).

                                        3

<PAGE>

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

<TABLE>
<CAPTION>
                                                  Three months ended            Nine months ended
                                                     December 31,                  December 31,
                                               -----------------------       -----------------------
                                                 1996           1995           1996           1995
                                               --------       --------       --------       --------
<S>                                            <C>            <C>            <C>            <C>
NET SALES                                        $2,782         $2,348         $8,049         $5,972
COST OF PRODUCT SALES                             1,051          1,050          3,108          2,784
                                               --------       --------       --------       --------
      Gross Profit                                1,731          1,298          4,941          3,188
                                               --------       --------       --------       --------

OPERATING EXPENSES:
   Research and development                         121             85            454            243
   General and administrative                       367            341          1,063            862
   Sales and marketing                              255            130            669            302
                                               --------       --------       --------       --------

      Total operating expenses                      743            556          2,186          1,407
                                               --------       --------       --------       --------

      Income from operations                        988            742          2,755          1,781
                                               --------       --------       --------       --------

OTHER INCOME (EXPENSE):
   Interest income                                  153              9            377             19
   Interest expense                                 (17)           (32)           (61)           (63)
   Other income, net                                  7              -              9             -
                                               --------       --------       --------       --------

      Total other income (expense)                  143            (23)           325            (44)
                                               --------       --------       --------       --------

      Income before income taxes                  1,131            719          3,080          1,737

      Income taxes                                  175              8            175               8
                                               --------       --------       --------       --------

NET INCOME                                         $956           $711         $2,905         $1,729
                                               --------       --------       --------       --------
                                               --------       --------       --------       --------

NET INCOME PER COMMON SHARE                       $0.06          $0.05          $0.18          $0.12
                                               --------       --------       --------       --------
                                               --------       --------       --------       --------

Weighted average number of common
      shares outstanding and
      common stock equivalents (note 3)          16,662         14,831         16,573         14,702
                                               --------       --------       --------       --------
                                               --------       --------       --------       --------
</TABLE>


   See accompanying notes to consolidated financial statements (unaudited).


                                        4

<PAGE>

                             CYANOTECH CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                               Nine Months Ended
                                                                                  December 31,
                                                                           -------------------------
                                                                              1996           1995
                                                                           ----------     ----------
<S>                                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                  $2,905         $1,729
   Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization                                               506            356
      Common stock issued for services                                             37            -
      Net (increase) decrease in:
         Accounts receivable                                                   (1,181)          (643)
         Inventories                                                             (708)           100
         Prepaid expenses and other assets                                        (79)           (45)
      Net increase (decrease) in:
         Accounts payable                                                         (41)            71
         Other accrued liabilities                                                (82)           142
                                                                           ----------     ----------

Net cash provided by operating activities                                       1,357          1,710
                                                                           ----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES -
   Investment in equipment and leasehold improvements                          (4,947)        (2,622)
                                                                           ----------     ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from issuance of common stock                                   1,398            -
   Net proceeds from exercise of warrants and options                             332            538
   Proceeds from issuance of long-term debt                                         -            750
   Principal payments on capital lease obligations                                (87)           (64)
   Principal payments on long-term debt                                          (113)           (32)
                                                                           ----------     ----------

Net cash provided by financing activities                                       1,530          1,192
                                                                           ----------     ----------

Net increase (decrease) in cash and cash equivalents                           (2,060)           280
Cash and cash equivalents at beginning of period                                9,409            496
                                                                           ----------     ----------

Cash and cash equivalents at end of period                                     $7,349           $776
                                                                           ----------     ----------
                                                                           ----------     ----------

Supplemental schedule of noncash investing and
  financing activities:
      Purchase of equipment under
         capital lease obligation                                                   -           $303
                                                                           ----------     ----------
                                                                           ----------     ----------
</TABLE>


   See accompanying notes to consolidated financial statements (unaudited).

                                        5


<PAGE>

                              CYANOTECH CORPORATION
                                   FORM 10-QSB
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1996
                                   (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-QSB and
     Regulation S-B.  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-KSB for the year ended
     March 31, 1996.

     The Company consolidates enterprises in which it has a controlling
     financial interest. The accompanying consolidated financial statements
     include the accounts of Cyanotech Corporation and its wholly-owned
     subsidiary, Nutrex, Inc.  All significant intercompany balances and
     transactions have been eliminated in consolidation. While the financial
     information furnished for the three and nine month periods ended
     December 31, 1996 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, 1997.

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


2.   INVENTORIES

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

                                      December 31,      March 31,
                                          1996            1996
                                      -----------      -----------

          Raw materials               $       129      $        73
          Work in process                     277              200
          Finished goods                      658              105
          Supplies                            138              116
                                      -----------      -----------
                                      $     1,202      $       494
                                      -----------      -----------
                                      -----------      -----------


                                        6

<PAGE>

                              CYANOTECH CORPORATION
                                   FORM 10-QSB
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

3.   NET INCOME PER COMMON SHARE INFORMATION

     Net income per common share for the three and nine month periods ended
     December 31, 1996 and 1995 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.

4.   EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     Owned equipment and leasehold improvements are stated at cost. Equipment
     under capital lease is stated at the lower of the present value of the
     minimum lease payments or fair value at the inception of the lease.
     Equipment and furniture and fixtures are depreciated using the straight-
     line method over the estimated useful lives of the assets. Leasehold
     improvements and equipment under capital lease are amortized using the
     straight-line method over the remaining term of the lease. Equipment and
     leasehold improvements consist of the following (dollars in thousands):

                                                December 31,       March 31,
                                                    1996             1996
                                                -----------      -----------

     Equipment                                  $     5,269      $     3,538
     Leasehold improvements                          10,120            6,815
     Furniture and fixtures                              64               36
     Equipment under capital lease                      602              602
                                                -----------      -----------
                                                     16,055           10,991
     Less accumulated depreciation
          and amortization                           (3,544)          (3,038)
     Construction in-progress                           279              396
     Equipment and leasehold improvements, net  $    12,790      $     8,349
                                                -----------      -----------
                                                -----------      -----------

5.   OTHER ACCRUED LIABILITIES

     Other accrued liabilities as of December 31, 1996 and March 31, 1996
     consist of the following (dollars in thousands):

                                                December 31,       March 31,
                                                    1996             1996
                                                -----------      -----------

     Accrued payroll and related benefits       $       263      $       341
     Accrued directors' fees                             30               30
     Other accrued expenses                              59               63
                                                -----------      -----------
                                                $       352      $       434
                                                -----------      -----------
                                                -----------      -----------


                                        7

<PAGE>

                              CYANOTECH CORPORATION
                                   FORM 10-QSB
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

6.   PREFERRED STOCK

     Preferred stock as of December 31, 1996 and March 31, 1996 consists of the
     following (dollars in thousands):

                                                December 31,       March 31,
                                                    1996             1996
                                                -----------      -----------
     Preferred stock, authorized 5,000,000
     shares; $.001 par value, issued
     and outstanding:

          Series C, 8% cumulative, convertible;
          734,977 shares on December 31 and
          March 31, 1996; liquidation value
          $5.00 per share plus unpaid
          accumulated dividends                 $         1      $        1
                                                -----------      -----------
                                                -----------      -----------

7.   ACCOUNTING CHANGES

     LONG-LIVED ASSETS  In March 1995, the Financial Accounting Standards Board
     (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121,
     "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
     Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
     certain identifiable intangibles held and used by an entity be reviewed for
     impairment whenever events or changes in circumstances indicate that the
     carrying amount of an asset may not be recoverable. If the sum of the
     expected future cash flows (undiscounted and without interest charges) is
     less than the carrying amount of the asset, an impairment loss is
     recognized. Measurement of that loss would be based on the fair value of
     the asset.

     Generally, SFAS No. 121 requires that long-lived assets and certain
     identifiable intangibles to be disposed of be reported at the lower of
     carrying amount or fair value less cost to sell.

     The Company adopted the provisions of SFAS No. 121 effective April 1, 1996.
     The adoption of SFAS No. 121 did not have a material effect on the
     Company's financial condition or results of operations.

     STOCK-BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123,
     "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair
     value based method of accounting for stock-based compensation, but does not
     require an entity to adopt the new method for purposes of preparing its
     basic financial statements. For entities not adopting the new method, SFAS
     No. 123 requires footnote disclosure of pro forma net income and earnings
     per share information as if the fair value based method had been adopted.
     The disclosure requirements of SFAS No. 123 are effective for financial
     statements for fiscal years beginning after December 15, 1995. The Company
     will comply with the disclosure requirements of SFAS No. 123 in its
     consolidated financial statements as of and for the year ending March 31,
     1997.


                                        8

<PAGE>

                              CYANOTECH CORPORATION

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

OVERVIEW

     THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS REGARDING
THE FUTURE PERFORMANCE OF THE COMPANY 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-KSB, FORM 10-QSB, FORM 8-KSB, 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.

     Substantially all of the Company's resources are currently dedicated to the
production of SPIRULINA PACIFICA, a beta carotene-rich nutritional microalgae.
The Company sells SPIRULINA PACIFICA to health food manufacturers, health food
distributors and retail consumers on a worldwide basis. Through the application
of its Integrated Culture Biology Management ("ICBM") technology, the Company
maintains continuous algae cultures and produces a new crop from each of its
sixty-seven algae culture ponds (aggregating approximately sixty acres as of
December 31, 1996) approximately every week, on average.

     In early November, 1996, the Company increased its total pond area from
forty acres to sixty acres, resulting in a 50% increase in production capacity.
As a result of increasing competition and downward pricing pressure in certain
market areas from lower cost/quality Asian spirulina producers, the Company was
unable to realize a corresponding increase in net sales of bulk Spirulina powder
and tablets, and ended the third quarter with approximately six weeks of
Spirulina production in inventory.  Although there can be no assurance in this
regard, the Company expects to sell this inventory and the additional output
from these new ponds 1) to new customers, 2) in new markets/geographic areas
and, to a lesser extent, 3) to its existing customers.  In future periods, the
Company may need to further reduce the selling prices of its SPIRULINA PACIFICA
products in order to maintain and increase its market share.  The Company
believes that it will continue to realize further per unit production cost
reductions as a result of economies of scale and production process changes, and
that such production cost reductions may partially or wholly offset any possible
future selling price decreases, although there can be no assurance in this
regard.

     The Company is moving forward on its astaxanthin product with construction
having begun  in October 1996 on a new 3200-square foot astaxanthin processing
plant.  The Company expects to complete the astaxanthin processing plant by the
end of February 1997 and be in full commercial production with six acres of pond
area by the end of March 1997. In addition, the Company is continuing work on a
genetically-engineered mosquitocide.  There can be no assurance that the Company
can successfully develop these or any other additional products, that any such
products will be capable of being produced in commercial quantities at
reasonable cost, or that any such products will achieve market acceptance.


                                        9

<PAGE>

RESULTS OF OPERATIONS

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

                                      Three Months Ended     Nine Months Ended
                                      December 31,           December 31,
                                       1996      1995         1996      1995
                                       ----      ----         ----      ----

       Net sales                       100.0%    100.0%       100.0%    100.0%
       Cost of product sales            37.8      44.7         38.6      46.6
                                      ------    ------       ------    ------
         Gross profit                   62.2      55.3         61.4      53.4
                                      ------    ------       ------    ------
                                      ------    ------       ------    ------

       Operating expenses:
         Research and development        4.3       3.6          5.7       4.1
         General and administrative     13.2      14.5         13.2      14.4
         Sales and marketing             9.2       5.6          8.3       5.1
                                      ------    ------       ------    ------

         Total operating expenses       26.7      23.7         27.2      23.6
                                      ------    ------       ------    ------

         Income from operations         35.5      31.6         34.2      29.8
                                      ------    ------       ------    ------

       Other income (expense):
         Interest income                 5.5       0.4          4.7       0.3
         Interest expense               (0.4)     (1.4)        (0.7)     (1.0)
                                      ------    ------       ------    ------

         Total other income (expense)    5.1      (1.0)         4.0      (0.7)
                                      ------    ------       ------    ------

       Income before income taxes       40.6      30.6         38.2      29.1
                                      ------    ------       ------    ------

       Income taxes                    ( 6.2)    ( 0.3)        (2.1)     (0.1)
                                      ------    ------       ------    ------

       Net income                       34.4%     30.3%        36.1%     29.0%
                                      ------    ------       ------    ------
                                      ------    ------       ------    ------


THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995

NET SALES

     Net sales for the three month period ended December 31, 1996 increased 18%
to $2,782,000 from the $2,348,000 reported for the three month period ended
December 31, 1995.  This increase is attributable to significantly higher
production and sales of packaged consumer products, which carry a higher sales
price than bulk Spirulina Pacifica products. The increase in sales of packaged
consumer products was partially offset by lower net sales of bulk Spirulina
powder and tablets.  Compared to the prior year third quarter, the Company
shipped greater quantities of bulk Spirulina powder and tablets but, because of
the decreases in the average selling prices, recorded lower net sales of these
products.  The increased production is a result of the Spirulina production
expansions that were completed in December of 1995 and February and November of
1996.


                                       10

<PAGE>

     International sales represented 71% and 51% of total net sales for the
three month period ended December 31, 1996 and 1995, respectively. The Company's
largest customer, a Hong Kong-based natural products marketing and distribution
company, accounted for approximately 54% and 32% of Cyanotech's net sales in the
third quarter of fiscal 1997 and 1996, respectively. The Hong Kong-based company
is a multilevel marketing organization which purchases the Company's packaged
consumer products and sells them under a private label, primarily in mainland
China.  The Company anticipates that sales of Spirulina to this customer will
continue to represent a significant portion of the Company's total net sales
during the current calendar year.

GROSS PROFIT

     Gross profit increased 33% to $1,731,000 for the three month period ended
December 31, 1996, from $1,298,000 in the comparable period of fiscal 1996.  The
Company's gross margin increased to  62% for the three month period ended
December 31, 1996 compared to 55% for the comparable period of fiscal 1996.
This increase in gross margin from the prior year period is primarily
attributable to increased economies of scale related to the production of
packaged consumer SPIRULINA PACIFICA products.

OPERATING EXPENSES

     Operating expenses were $743,000 during the three month period ended
December 31, 1996, an increase of 34% from $556,000 in the comparable period of
fiscal 1996, and represented 27% of net sales compared to 24% of net sales for
the three months ended December 31, 1995. This increase as a percentage of net
sales is attributable to higher expenses in all areas.

     RESEARCH AND DEVELOPMENT.     Expenditures for  research and development
were $121,000 for the three month period ended December 31, 1996, an increase of
42% from $85,000 for the comparable period of fiscal 1996.  This increase from
the prior year was primarily the result of the research work being done on the
natural astaxanthin product which has been in pilot production since January of
1996.  Research and development costs are expected to increase further during
fiscal 1997 and through fiscal 1998 as the Company continues work on
commercializing the astaxanthin product and the mosquitocidal microalgae
product.

     GENERAL AND ADMINISTRATIVE.   General and administrative expenses increased
to $367,000 for the three month period ended December 31, 1996, an increase of
8% from $341,000 for the comparable period of fiscal 1996.  This increase from
the prior year was due to higher payroll costs, the payment of associate
incentive bonuses indexed to the Company's profitability during the third
quarter, higher insurance costs, and estimated compensation expense associated
with expected future grants of Common Stock to non-employee directors.  However,
general and administrative expenses as a percentage of net sales decreased to
13.2% for the three month period ended December 31, 1996 from 14.5% for the
comparable period of fiscal 1996.

     SALES AND MARKETING.      Sales and marketing expenses increased to
$255,000 for the three month period ended December 31, 1996, an increase of 96%
from $130,000 for the comparable period of fiscal 1996. This increase from the
prior year was due to higher payroll, travel, advertising and promotion costs
related to increased domestic and international marketing efforts.


                                       11

<PAGE>

NET INCOME

     The Company recorded $245,000  more net income for the third quarter of
fiscal 1997 than for the comparable period of fiscal 1996.  This increase is
primarily attributable to increased economies of scale related to the production
of packaged consumer SPIRULINA PACIFICA products and increased sales of packaged
consumer products.



NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995

NET SALES

     Net sales for the nine month period ended December 31, 1996 increased 35%
to $8,049,000 from $5,972,000 for the comparable period of fiscal 1996. This
increase is attributable to significantly higher production and sales of bulk
Spirulina powder and tablets and increased sales of packaged consumer products,
which carry a higher sales price than bulk SPIRULINA PACIFICA products. The
increased production is a result of the Spirulina production expansions that
were completed in December of 1995 and February and November of
1996.

     International sales represented 63% and 56% of total net sales for the nine
month period ended December 31, 1996 and 1995, respectively. The Company's
largest customer, a Hong Kong-based natural products marketing and distribution
company, accounted for approximately 39% and 23% of Cyanotech's net sales in the
first nine months of fiscal 1997 and 1996, respectively. The Hong Kong-based
company is a multilevel marketing organization which purchases the Company's
packaged consumer products and sells them under a private label, primarily in
mainland China.  The Company anticipates that sales of Spirulina to this
customer will continue to represent a significant portion of the Company's total
net sales during the current calendar year.

GROSS PROFIT

     Gross profit increased 55% to $4,941,000 for the nine month period ended
December 31, 1996 from $3,188,000 in the comparable period of fiscal 1996.  The
Company's gross margin increased to 61% for the nine month period ended December
31, 1996 compared to 53% for the comparable period of fiscal 1996.  This
increase in gross margin from the prior year period is attributable to increased
economies of scale related to the production of both bulk and packaged consumer
SPIRULINA PACIFICA products.

OPERATING EXPENSES

     Operating expenses were $2,186,000 during the nine month period ended
December 31, 1996, an increase of 55% from $1,407,000 in the comparable period
of fiscal 1996, and represented 27% of net sales for the nine month period ended
December 31, 1996 compared to 24% of net sales for the nine month period ended
December 31, 1995.  This increase as a percentage of net sales is attributable
to higher expenses in all areas.


                                       12

<PAGE>

     RESEARCH AND DEVELOPMENT.     Expenditures for  research and development
were $454,000 for the nine month period ended December 31, 1996, an increase of
87% from $243,000 for the comparable period of fiscal 1996.  This increase from
the prior year was primarily the result of the research work being done on the
natural astaxanthin product which has been in pilot production since January of
1996.  Research and development costs are expected to increase further during
fiscal 1997 and through fiscal 1998 as the Company continues work on
commercializing the astaxanthin product and the mosquitocidal microalgae
product.

     GENERAL AND ADMINISTRATIVE.   General and administrative expenses increased
to $1,063,000 for the nine month period ended December 31, 1996, an increase of
23% from $862,000 for the comparable period of fiscal 1996.   This increase from
the prior year was due to higher payroll costs, the payment of associate
incentive bonuses indexed to the Company's profitability during the first nine
months of fiscal 1997, higher insurance costs, and estimated compensation
expense associated with expected future grants of Common Stock to non-employee
directors.  However, general and administrative expenses as a percentage of net
sales decreased to 13.2% for the nine month period ended December 31, 1996 from
14.4% for the comparable period of fiscal 1996.

     SALES AND MARKETING.      Sales and marketing expenses increased to
$669,000 for the nine month period ended December 31, 1996, an increase of 122%
from $302,000 for the comparable period of fiscal 1996.  This increase from the
prior year was  due to higher payroll, travel, advertising and promotion costs
related to increased domestic and international marketing efforts.

NET INCOME

     The Company recorded $1,176,000 more net income for the first nine months
of fiscal 1997 than for the comparable period of fiscal 1996. This increase is
primarily attributable to increased economies of scale related to the production
of packaged consumer SPIRULINA PACIFICA products, significantly higher sales of
packaged consumer products and, to a lesser extent, increased production and
sales of bulk Spirulina powder and tablets.

VARIABILITY OF RESULTS

     The Company was formed in 1983 and did not become profitable on an annual
basis until fiscal 1992. As of December  31, 1996, the Company's accumulated
deficit was $1.7 million. There can be no assurance that the Company will be
consistently profitable on either a quarterly or an annual basis. The Company
has experienced quarterly fluctuations in operating results and anticipates that
these fluctuations may continue in future periods. Future operating results may
fluctuate as a result of changes in sales levels to the Company's largest
customers, new product introductions, 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 the Company's
competitors, changes in the Company's customer mix, and overall trends in the
market for Spirulina products. While a significant portion of the Company's
expense levels are relatively fixed, and the timing of increases in expense
levels is based in large part on the Company's 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 the Company's inability to adjust spending
quickly enough to compensate for the sales shortfall. The Company may also
choose to reduce prices or increase spending in response to market conditions,
which may have a material adverse effect on the Company's financial condition
and results of operations.


                                       13

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     The Company's working capital decreased $119,000 during the first nine
months of fiscal 1997 to $9,630,000 while its cash and cash equivalents balance
decreased by $2,060,000 during the first nine months of fiscal 1997 to
$7,349,000.  The major sources of cash other than that provided by operating
activities during the nine month period ended December 31, 1996 were:
$1,398,000 in net proceeds from the sale of 225,000 shares of common stock to
the underwriters and $332,000 from the exercise of common stock warrants and
options.  The major uses of cash during the first nine months of fiscal 1997
were: $4,947,000 invested in capital equipment and leasehold improvements
(including process enhancements, a 20-acre capacity expansion project and
construction of an astaxanthin production facility), $1,181,000 in additional
accounts receivable  and $708,000 in increased inventory balances.  The Company
believes that its existing cash balances, together with cash expected to be
provided by operations, will provide adequate funding for its financial
requirements, during the remainder of fiscal 1997 and throughout fiscal 1998. As
of December 31, 1996, the Company has commitments for capital expenditures
totaling $1,237,000. As of the date of this report, the Company has available a
$1 million bank line of credit secured by a time deposit.


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<PAGE>

PART II.  OTHER INFORMATION



Item 6.   Exhibits and Reports on Form 8-K

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

          Exhibit 3.1 - Restated Articles of Incorporation
          Exhibit 27 -  Financial Data Schedule

     (b)  Reports on Form 8-K

          No reports on Form 8-K were filed during the quarter ended
          December 31, 1996.


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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)



February 13, 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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