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

                                    FORM 10-Q

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

                  For Quarterly Period Ended September 30, 1998

                         Commission File Number 0-14602


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


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



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

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



     Check whether the registrant (1) filed all reports required to be filed by
Section  13 or 15(d) of the Exchange Act during the past 12 months  (or for such
shorter period that the registrant  was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes xx No___


           Number of common shares outstanding as of October 31, 1998:

              Title of Class                                Shares Outstanding
     
       Common stock - $.005 par value stock                      13,603,572



                                        1

<PAGE>





                              CYANOTECH CORPORATION
                                    FORM 10-Q

                                      INDEX

<TABLE>
<CAPTION>
PART I.   FINANCIAL INFORMATION

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

         Consolidated Balance Sheets (unaudited)
                  September 30, 1998 and March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

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

         Consolidated Statements of Cash Flows (unaudited)
                  Six month periods ended
                  September 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

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

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11


PART II.  OTHER INFORMATION

Item 1.           Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Item 4.           Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . .18

Item 5.           Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Item 6.           Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18



SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>

                                                            2

<PAGE>




<TABLE>
<CAPTION>

PART I. FINANCIAL INFORMATION
     Item 1.   Financial Statements
                                                 CYANOTECH CORPORATION
                                              CONSOLIDATED BALANCE SHEETS
                                   (Dollars in thousands, except per share amounts)
<S>                                                                             <C>                        <C>
                                                                                 September 30,              March 31,
                                                                                      1998                    1998
Assets                                                                            (Unaudited)               (Audited)
Current assets:                                                                 --------------           --------------
     Cash and cash equivalents                                                  $         345            $      1,397
     Accounts receivable, net                                                           1,187                   1,246
     Inventories  (note 2)                                                              2,267                   2,229
     Prepaid expenses                                                                      94                      88
                                                                                --------------           --------------
              Total current assets                                                      3,893                   4,960

Equipment and leasehold improvements, net (note 3)                                     20,146                  20,544
Other assets                                                                              278                     163
                                                                                --------------           --------------
              Total assets                                                      $      24,317            $     25,667
                                                                                ==============           ==============
                                                                                
Liabilities and Stockholders' Equity
Current liabilities:
     Current maturities of long-term debt                                       $         200            $          50
     Short-term revolving line of credit                                                  209                        0
     Note payable                                                                           0                      975
     Current maturities of capital lease obligations                                      129                      129
     Accounts payable                                                                     788                      938
     Other accrued liabilities                                                            277                      272
                                                                                --------------           --------------
              Total current liabilities                                                 1,603                    2,364

Long-term debt, excluding current maturities                                              612                       62
Obligations under capital leases, excluding current maturities                              1                       67
                                                                                --------------           --------------
              Total liabilities                                                         2,216                    2,493

Stockholders' equity:
     Cumulative  preferred  stock,  Series C, of  $.001  par  value
     (aggregate  involuntary liquidation  preference $2,975 ($5 per 
     share), plus unpaid cumulative dividends). Authorized 5,000,000
     shares; issued and outstanding 595,031 shares at September 30, 
     1998 and March 31, 1998                                                               1                        1
     Common Stock of $0.05 par value, authorized 25,000,000 shares;
     issued and outstanding 13,603,572 shares at September 30, 1998
     and 13,599,572 shares at  March 31, 1998                                              68                       68
     Additional paid-in capital                                                        23,866                   23,866
     Accumulated deficit                                                               (1,834)                    (761)
                                                                                --------------           --------------
              Total stockholders' equity                                               22,101                   23,174
                                                                                --------------           --------------
                    Total liabilities and stockholders' equity                  $      24,317            $      25,667
                                                                                ==============           ==============
                                                                               
  
          See accompanying notes to consolidated financial statements.
</TABLE>
                                       3
<PAGE>




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

                                                                  Three Months Ended                  Six Months Ended
                                                                    September 30,                      September 30,
<S>                                                         <C>            <C>                 <C>            <C> 
                                                                1998           1997                1998           1997
                                                            ------------   ------------        ------------   ------------
NET SALES                                                   $     1,525    $     2,053         $     3,288    $     3,827
COST OF PRODUCT SALES                                             1,124          1,168               2,708          2,070
                                                            ------------   ------------        ------------   ------------
        Gross Profit                                                401            885                 580          1,757
                                                            ------------   ------------        ------------   ------------

OPERATING EXPENSES:
        Research and development                                    245            173                 467            314
        General and administrative                                  358            375                 689            706
        Sales and marketing                                         242            410                 499            791
                                                            ------------   ------------        ------------   ------------
        Total operating expenses                                    845            958               1,655          1,811
                                                            ------------   ------------        ------------   ------------
        Loss from operations                                       (444)           (73)             (1,075)           (54)
                                                            ------------   ------------        ------------   ------------

OTHER INCOME (EXPENSE):
        Interest income                                               1             35                   3            152
        Interest expense                                            (35)           (16)                (70)           (27)
        Other income (expense), net                                   2              -                  (5)             -
                                                            ------------   ------------        ------------   ------------

                   Total other income (expense)                     (32)            19                 (72)           125
                                                            ------------   ------------        ------------   ------------

                   Income (loss) before income taxes               (476)           (54)             (1,147)            71
                   Income taxes                                      34              -                  74              -
                                                            ------------   ------------        ------------   ------------
NET INCOME (LOSS)                                                  (442)           (54)             (1,073)            71

Other comprehensive income                                            -              -                   -              -
                                                            ------------   ------------        ------------   ------------
COMPREHENSIVE INCOME (LOSS)                                 $      (442)   $       (54)        $    (1,073)   $        71
                                                            ============   ============        ============   ============

NET LOSS PER COMMON SHARE

     Basic                                                  $     (0.04)   $     (0.01)         $    (0.09)   $     (0.01)
     Diluted                                                $     (0.04)   $     (0.01)         $    (0.09)   $     (0.01)


SHARES USED IN CALCULATION OF:
     Basic                                                       13,600         12,852              13,600         12,830
     Diluted                                                     13,600         12,852              13,600         12,830

                                      

          See accompanying notes to consolidated financial statements.
</TABLE>                                       
                                       4
<PAGE>

                              CYANOTECH CORPORATION
<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (Unaudited)

                                                                                                 Six Months Ended
                                                                                                   September 30,
                                                                                         1998                     1997
<S>                                                                                  <C>                      <C>
                                                                                     ------------             ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
          Net income (loss)                                                          $    (1,073)             $        71
          Adjustments to reconcile net income (loss) to net cash
          provided by (used in) operating activities:
                    Deferred income taxes                                                      -                      (38)
                    Depreciation and amortization                                             687                     434
                    Amortization of debt issue costs                                            6                       -
                    Net (increase) decrease in:
                            Accounts receivable                                                59                     853
                            Inventories                                                       (38)                   (873)
                            Prepaid expenses and other assets                                 (24)                   (116)
                    Net increase (decrease) in:
                            Accounts payable                                                 (150)                    410
                            Other accrued liabilities                                           5                     (69)
                                                                                     -------------            ------------ 

Net cash provided by (used in) operating activities                                          (528)                    672
                                                                                     -------------            ------------ 

CASH FLOWS FROM INVESTING ACTIVITIES:
          Investment in equipment and leasehold improvements                                 (289)                 (5,460)
          Proceeds from sales of investment securities                                          -                   2,454
                                                                                     -------------            ------------ 
Net cash used in investing activities                                                        (289)                 (3,006)
                                                                                     -------------            ------------ 

CASH FLOWS FROM FINANCING ACTIVITIES:
          Net proceeds from exercise of warrants and options                                    -                      63
          Debt issue costs paid                                                              (103)                      -
          Proceeds from issuance of long-term debt                                            750                       -
          Principal payments on long-term debt                                                (25)                    (50)
          Borrowings on short-term revolving line of credit, net                              184                       -
          Principal payments on note payable                                                 (975)                      -
          Principal payments on capital lease obligations                                     (66)                   (108)
                                                                                     -------------            ------------ 

Net cash used in financing activities                                                        (235)                    (95)
                                                                                     -------------            ------------ 

Net decrease in cash and cash equivalents                                                  (1,052)                 (2,429)
Cash and cash equivalents at beginning of period                                            1,397                   2,775
                                                                                     -------------            ------------ 

Cash and cash equivalents at end of period                                           $        345             $       346
                                                                                     =============            ============


          See accompanying notes to consolidated financial statements.
</TABLE>
                                        5
<PAGE>
                              CYANOTECH CORPORATION
                                    FORM 10-Q
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1998
                                   (Unaudited)

1.       BASIS OF PRESENTATION

         The accompanying  unaudited consolidated financial statements have been
         prepared in accordance with generally  accepted  accounting  principles
         for interim  financial  information  and with the  instructions to Form
         10-Q and Regulation  S-X.  Accordingly,  they do not include all of the
         information  and footnotes  required by generally  accepted  accounting
         principles  for  complete  financial  statements.   These  consolidated
         financial  statements and notes should be read in conjunction  with the
         Company's  consolidated financial statements contained in the Company's
         previously filed report on Form 10-K for the year ended March 31, 1998.

         The  Company  consolidates  enterprises  in which it has a  controlling
         financial interest. The accompanying  consolidated financial statements
         include the  accounts of  Cyanotech  Corporation  and its  wholly-owned
         subsidiaries,  Nutrex,  Inc. and Cyanotech  International FSC, Inc. All
         significant intercompany balances and transactions have been eliminated
         in  consolidation.  While the financial  information  furnished for the
         three and six month periods ended September 30, 1998 is unaudited,  the
         statements  in this report  reflect all material  items  which,  in the
         opinion of  management,  are necessary for a fair  presentation  of the
         results  of  operations  for the  interim  periods  covered  and of the
         financial  condition  of the  Company at the dates of the  consolidated
         balance sheets.  The operating results for the interim period presented
         are not necessarily  indicative of the results that may be expected for
         the year ending March 31, 1999.

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


2.       INVENTORIES

         Inventories  are  stated  at the  lower  of  cost  (which  approximates
         first-in, first-out) or market and consist of the following (dollars in
         thousands):
<TABLE>
<CAPTION>
<S>            <C>                                <C>                           <C>
                                                  September 30, 1998              March 31, 1998
                                                  ------------------            ----------------
               Raw materials                      $               54            $            103
               Work in process                                   324                         362
               Finished goods                                  1,658                       1,524
               Supplies                                          231                         240
                                                  ------------------            ----------------
                                                  $            2,267            $          2,229
                                                  ==================            ================
</TABLE>


                                        6

<PAGE>



3.       EQUIPMENT AND LEASEHOLD IMPROVEMENTS

         Owned  equipment  and  leasehold   improvements  are  stated  at  cost.
         Equipment  under  capital  lease is stated at the lower of the  present
         value of the minimum  lease  payments or fair value of the equipment at
         the inception of the lease.  Depreciation and amortization are provided
         using the  straight-line  method over the  estimated  useful  lives for
         furniture  and fixtures and the shorter of the lease terms or estimated
         useful lives for leasehold  improvements  and  equipment  under capital
         lease as follows:

<TABLE>
<CAPTION>
<S>      <C>                                                                   <C>
         Equipment                                                             3 to 10 years
         Leasehold improvements                         Remaining lease term (10 to 28 years)
         Furniture and fixtures                                                      7 years
         Equipment under capital lease                              Lease term (3 to 5 years)
</TABLE>


         Equipment and leasehold  improvements consist of the following (dollars
         in thousands):
<TABLE>
<CAPTION>
<S>                                                         <C>                           <C>                           
                                                            September 30, 1998             March 31, 1998
                                                            ------------------           -----------------
         Equipment                                          $           7,952            $          7,791
         Leasehold improvements                                        13,311                      13,285
         Furniture and fixtures                                            94                          94
         Equipment under capital lease                                    569                         569
                                                            ------------------           -----------------          
                                                                       21,926                      21,739
         Less accumulated depreciation and amortization                (5,394)                     (4,707)
         Construction in-progress                                       3,614                       3,512
                                                            ------------------           -----------------
         Equipment and leasehold improvements, net          $          20,146            $         20,544
                                                            ==================           =================
</TABLE>

         Construction  in-progress  includes  costs  incurred  with respect to a
         suspended  production facility expansion project. As of March 31, 1998,
         the Company had agreed with a construction contractor to resume work on
         the  suspended  expansion  project  on or before  January  1, 1999 in a
         reasonable  and customary  manner in  accordance  with the terms of the
         contract and at a minimum billable rate of $150 per month.  Total costs
         incurred  as of  September  30,  1998 with  respect  to this  expansion
         project approximate $2,643.

4.       SERIES C PREFERRED STOCK

         Series C preferred  stock is convertible  into common stock at the rate
         of one share of preferred stock for five shares of common stock through
         February 23, 2000, after which date the conversion feature is no longer
         applicable.  Series C preferred  stock has voting  rights  equal to the
         number of shares of common stock into which it is convertible and has a
         preference in liquidation  over all other series of preferred  stock of
         $5 per share  plus any  accumulated  but unpaid  dividends.  Holders of
         Series C preferred stock are entitled to 8% cumulative annual dividends
         at the rate of $.40 per share;  cumulative  dividends  in arrears as of
         September 30, 1998 amount to $2,180 ($3.663 per share). Upon conversion
         of  Series C  preferred  stock,  cumulative  dividends  in  arrears  on
         converted  shares  are no  longer  payable.  The  consent  of  Series C
         preferred  stockholders  is required to modify their present  rights or
         sell all or substantially all of the Company's assets.

                                       7
<PAGE>
5.       EARNINGS PER SHARE

         The  company  adopted  Statement  of Financial Accounting Standards No.
         128,  "Earnings  Per  Share"  ("SFAS 128")  during  the  quarter  ended
         December 31, 1997.  All prior period earnings per share information has
         been restated to reflect the provisions of SFAS No. 128.

         For the  three  and six  months  ended  September  30,  1998 and  1997,
         warrants and options to purchase Common Stock shares of the Company and
         convertible preferred stock were outstanding,  but were not included in
         the  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.  As of September 30, 1998,  warrants and
         options to acquire  638,925  shares of the  Company's  common stock and
         preferred  stock  convertible  into  2,975,155  shares of the Company's
         common stock were outstanding.

         Following is a reconciliation of the numerators and denominators of the
         Basic and  Diluted  EPS  computations  for the  periods  presented  (in
         thousands except share data):
<TABLE>
<CAPTION>
                                                          Three Months Ended                            Six Months Ended
BASIC EARNINGS PER SHARE                                    September 30,                                 September 30,
<S>                                               <C>                 <C>                      <C>                 <C> 
                                                        1998               1997                      1998                 1997
                                                  ---------------     ---------------          ---------------     ---------------
Net income (loss)                                 $         (442)     $          (54)          $       (1,073)     $           71
Less: Requirement for Preferred Stock
dividends                                                    (59)                (73)                    (119)               (146)
                                                  ---------------     ---------------          ---------------     ---------------
Loss to Common stockholders                       $         (501)     $         (127)          $       (1,192)     $          (75)
                                                  ===============     ===============          ===============     ===============

Weighted average Common Shares outstanding            13,600,143          12,851,730               13,599,858          12,829,787
                                                  ===============     ===============          ===============     ===============  
Net Loss per Common Share                         $        (0.04)     $        (0.01)          $        (0.09)     $        (0.01)
                                                  ===============     ===============          ===============     ===============
DILUTED EARNINGS PER SHARE

Loss to Common stockholders                       $         (501)     $         (127)          $       (1,192)     $          (75)
Plus: Requirement for Preferred Stock
dividends                                                      -                   -                        -                   -
                                                  ---------------     ---------------          ---------------     ---------------
Loss to Common stockholders, as adjusted          $         (501)     $         (127)          $       (1,192)     $          (75)
                                                  ===============     ===============          ===============     ===============

Weighted average Common Shares outstanding            13,600,143          12,851,730               13,599,858          12,829,787
Effect of dilutive securities:
     Stock options and warrants                                -                   -                        -                   -
     Convertible preferred stock                               -                   -                        -                   -
                                                  ---------------     ---------------          ---------------     ---------------
Weighted average Common Shares 
outstanding, as adjusted                              13,600,143          12,851,730               13,599,858          12,829,787
                                                  ===============     ===============          ===============     ===============
Net loss per Common Share                         $        (0.04)     $        (0.01)          $        (0.09)     $        (0.01)
                                                  ===============     ===============          ===============     ===============
</TABLE>

                                        8

<PAGE>

6.       ACCOUNTING CHANGES

         Comprehensive Income.  In June 1997, the  FASB  issued  SFAS  No.  130,
         "Reporting  Comprehensive Income,"  which establishes standards for the
         reporting and  display  of  comprehensive  income  and  its  components
         in a full  set of general-purpose financial statements. SFAS No. 130 is
         effective  for  fiscal  years  beginning  after December 15, 1997.  The
         Company adopted the provisions of SFAS No. 130 effective April 1, 1998.
         SFAS  No.  130  requires  reclassification  of financial statements for
         earlier periods provided for comparative purposes. Adoption of SFAS No.
         130 did not  affect  the  Company's  reported  financial information.

         Segments of an Enterprise  and Related  Information.  In June 1997, the
         FASB issued SFAS No. 131,  "Disclosures about Segments of an Enterprise
         and Related  Information," which establishes standards for the way that
         public business enterprises report information about operating segments
         in annual  financial  statements  and requires  that those  enterprises
         report  selected   information  about  operating  segments  in  interim
         financial reports issued to shareholders. SFAS No. 131 is effective for
         periods  beginning  after  December 15, 1997.  The Company  adopted the
         provisions  of SFAS No.  131  effective  April 1,  1998.  SFAS No.  131
         requires restatement of comparative  information  presented for earlier
         periods.  Adoption  of SFAS  No.  131 had no  impact  on the  Company's
         segment disclosures.

         Employers'   Disclosures   about   Pensions  and  Other  Postretirement
         Benefits.  In February 1998,  the FASB issued SFAS No. 132, "Employers'
         Disclosures about Pensions and Other  Postretirement  Benefits,"  which
         amends  the  disclosure  requirements  of   SFAS  No.  87,  "Employers'
         Accounting  for  Pensions,"  SFAS  No.  88,  "Employers' Accounting for
         Settlements and Curtailments of Defined  Benefit Pension  Plans and for
         Termination  Benefits,"  and SFAS No.  106,  "Employers' Accounting for
         Postretirement Benefits Other  Than  Pensions."  SFAS No. 132 addresses
         disclosure  only  and  does  not  change  any  of  the  measurement  or
         recognition  provisions  provided  for in SFAS Nos. 87, 88 or 106. SFAS
         No. 132 is effective for fiscal  years  beginning  after  December  15,
         1997 and  requires restatement  of  comparative  information  presented
         for earlier periods. The Company will adopt the provisions  of SFAS No.
         132 for its  fiscal  year 1999 financial statements.

         Accounting for Derivative  Instruments and Hedging Activities.  In June
         1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
         Instruments and Hedging  Activities," which establishes  accounting and
         reporting   standards  for  derivative   instruments  and  for  hedging
         activities.  SFAS  No.  133  requires  that  an  entity  recognize  all
         derivatives  as  either  assets  or  liabilities  in the  statement  of
         financial  position and measure those  instruments at fair value.  SFAS
         No. 133 is effective for all fiscal  quarters of fiscal years beginning
         after June 15, 1999.  Management  does not expect  adoption of SFAS No.
         133 will have a material effect on the Company's  financial  condition,
         results of operations or liquidity.

         Accounting for the Costs of Computer Software Developed or Obtained for
         Internal Use. In March 1998, the American Institute of Certified Public
         Accountants  ("AICPA")  Accounting Standards Executive Committee issued
         Statement  of  Position  ("SOP")  98-1,  "Accounting  for the  Costs of
         Computer  Software  Developed  or  Obtained  for  Internal  Use," which
         requires   that   certain   costs,   including   certain   payroll  and
         payroll-related  costs, be capitalized and amortized over the estimated
         useful life of the software.  The  provisions of SOP 98-1 are effective
         for fiscal years beginning after December 15, 1998. The Company has not
         determined when it will adopt SOP 98-1. Management does not expect that
         adoption  of SOP 98-1 will  have a  material  effect  on the  Company's
         financial condition, results of operations or liquidity.


                                        9

<PAGE>



         Reporting on the Costs of Start-up Activities. In April 1998, the AICPA
         Accounting Standards Executive Committee issued SOP 98-5, "Reporting on
         the Costs of  Start-up  Activities."  SOP 98-5  requires  that costs of
         start-up  activities,  including  organization  costs,  be  expensed as
         incurred.  The  provisions  of SOP 98-5 are  effective for fiscal years
         beginning   after   December  15,  1998  and  earlier   application  is
         encouraged. The Company has not determined when it will adopt SOP 98-5.
         Management  does not  expect  that  adoption  of SOP 98-5  will  have a
         material  effect  on the  Company's  financial  condition,  results  of
         operations or liquidity.

7.       CONTINGENCY

         On July 13,  1998,  the  Company  filed a  complaint  in United  States
         District Court for the District of Hawaii (Case No. CV98-00600) against
         Aquasearch,  Inc.  ("Aquasearch"),  seeking  declaratory  judgement  of
         patent noninfringement,  patent invalidity, and non-misappropriation of
         trade secrets relating to closed culture production of astaxanthin. The
         complaint was filed in response to  assertions by Aquasearch  regarding
         their alleged intellectual property rights. Aquasearch has answered the
         complaint and filed counter claims alleging patent infringement,  trade
         secret misappropriation, unfair competition and breach of contract. The
         Company is pursuing  this litigation  vigorously.  In  the  opinion  of
         management,  the  ultimate  disposition  of this matter will not have a
         material adverse  effect on the Company's  financial condition, results
         of operations or liquidity.



                                       10

<PAGE>



                              CYANOTECH CORPORATION

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

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

RESULTS OF OPERATIONS

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

                                                                  Three Months Ended            Six Months Ended
                                                                     September 30,                September 30,
<S>                                                              <C>         <C>               <C>         <C> 
                                                                   1998        1997              1998        1997
                                                                 --------    --------          --------    --------
               Net Sales                                          100.0 %     100.0 %           100.0 %     100.0 %
               Cost of product sales                               73.7        56.9              82.4        54.1
                                                                 --------    --------          --------    --------
                         Gross profit                              26.3        43.1              17.6        45.9
                                                                 --------    --------          --------    --------
               Operating expenses:
                         Research and development                  16.1         8.4              14.2         8.2
                         General and administrative                23.4        18.2              20.9        18.4
                         Sales and marketing                       15.9        20.0              15.2        20.7
                         Total operating expenses                  55.4        46.6              50.3        47.3
                                                                 --------    --------          --------    --------
                         Loss from operations                     (29.1)       (3.5)            (32.7)       (1.4)
                                                                 --------    --------          --------    --------
               Other income (expense):
                         Interest income                            0.1         1.7               0.1         4.0
                         Interest expense                          (2.3)       (0.8)             (2.1)       (0.7)
                         Other income (expense), net                0.1          -               (0.2)         -
                                                                 --------    --------          --------    --------

                         Total other income (expense)              (2.1)        0.9              (2.2)        3.3
                                                                 --------    --------          --------    --------

                         Income (loss)
                         before income taxes                      (31.2)        2.6             (34.9)        1.9
                         Income taxes                               2.2          -                2.3          -
                                                                 --------    --------          --------    --------

               Net income (loss)                                  (29.0)       (2.6)            (32.6)         1.9
               Other comprehensive income                             -          -                 -            -
                                                                 --------    --------          --------    --------
               Comprehensive income (loss)                        (29.0)%      (2.6)%           (32.6)%        1.9%
                                                                 ========    ========          ========    ========


</TABLE>
                                       11

<PAGE>






SECOND QUARTER OF FISCAL 1999 COMPARED TO SECOND QUARTER OF FISCAL 1998

Net Sales

         Net sales for the three month period ended September 30, 1998 decreased
26% to $1,525,000 from $2,053,000 in the comparable  period of fiscal 1998. This
decrease in net sales is primarily  due to reduced  sales of bulk  Spirulina and
packaged consumer products.

         International  sales represented 37% and 34% of total net sales for the
three month periods ended September 30, 1998 and 1997, respectively.

         Anticipated  sales  of  NatuRose(TM)  during  the  quarter were delayed
due to the cancellation of our sales agreement with a distributor in Japan.  The
Company has established new sales arrangements in  Japan and continues to  see a
significant  opportunity  there. Total annual astaxanthin usage by the specialty
fish market in Japan is estimated to exceed $30 million.

Gross Profit

         Gross profit  represents  net sales less the cost of goods sold,  which
includes  the cost of  materials,  manufacturing  overhead  costs,  direct labor
expenses  and  depreciation  and  amortization.  Gross profit  decreased  55% to
$401,000 for the three month period ended  September 30, 1998,  from $885,000 in
the comparable  period of fiscal 1998. Our gross profit margin  decreased to 26%
for the three month period  ended  September  30, 1998,  compared to 43% for the
comparable  period of fiscal 1998. This decrease in gross profit margin from the
prior  year  period is  primarily  attributable  to a change in  product  mix to
greater  sales of lower  margin bulk  Spirulina  products,  increased  Spirulina
production  costs  and  increased  depreciation  expense.  Depreciation  expense
included as a cost of product  sales for the three  months ended  September  30,
1998  increased to $300,000  from $184,000 for the  comparable  period of fiscal
1998.

Operating Expenses

         Operating  expenses were  $845,000  during the three month period ended
September 30, 1998, a decrease of 12% from $958,000 in the comparable  period of
fiscal 1998.  This decrease was  primarily due to decreased  sales and marketing
expenses, partially offset by increased research and development expenses.

         Research and Development. Research and development expenses amounted to
$245,000 for the three month period ended September 30, 1998, an increase of 42%
from $173,000 for the comparable  period of fiscal 1998.  This increase from the
prior year was primarily due to higher  personnel  expenditures  for the ongoing
development work done on our genetically  engineered  mosquitocide  project, and
work on the Aldolase Catalytic Antibody project.

         Sales and Marketing.  Sales and marketing expenses amounted to $242,000
for the three month  period  ended  September  30,  1998, a decrease of 41% from
$410,000 for the comparable  period of fiscal 1998. This decrease from the prior
year is primarily due to reduced  personnel,  advertising and consulting service
costs dictated by lower revenues.

                                       12

<PAGE>



Other Income (Expense)

         Other income (expense) amounted to ($32,000) for the three month period
ended  September  30,  1998,  compared to $19,000 for the  comparable  period of
fiscal 1998. This fluctuation is primarily attributable to a $34,000 decrease in
interest  income on investment  securities  coupled with an increase in interest
expense of $19,000 due to higher average outstanding balances of long-term debt.

Income Taxes

         The Company  presently  expects  that its fiscal year 1999 results will
provide for a tax refund of Hawaii State income  taxes from net  operating  loss
carryback availability.  Accordingly,  an interperiod tax benefit of $34,000 has
been recorded for the three months ended September 30, 1998.

Net Income (Loss)

         The Company  recorded a net loss after taxes of $442,000  for the three
months  ended  September  30,  1998,  compared  to a net loss of $54,000 for the
comparable  period  of  fiscal  1998.  This  increase  in net loss is  primarily
attributable to lower sales of Spirulina  powder and tablets,  as well as higher
cost of product sales, operating expenses, and interest expense in proportion to
net sales.


SIX  MONTHS ENDED  SEPTEMBER 30, 1998 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1997

Net Sales

         Net sales for the six month period ended  September 30, 1998  decreased
14% to $3,288,000 from $3,827,000 in the comparable  period of fiscal 1998. This
decrease is primarily due to lower sales of packaged  consumer  products,  lower
sales of bulk Spirulina powder and tablets,  partially offset by increased sales
of NatuRose, our natural astaxanthin product.

         International  sales represented 40% and 33% of total net sales for the
six month periods ended September 30, 1998 and 1997, respectively.

Gross Profit

         Gross profit  decreased  67% to $580,000 for the six month period ended
September 30, 1998, from $1,757,000 in the comparable period of fiscal 1998. Our
gross profit  margin  decreased to 18% for the six month period ended  September
30,  1998,  compared  to 46% for the  comparable  period  of fiscal  1998.  This
decrease  in gross  profit  margin  from the  prior  year  period  is  primarily
attributable  to a change in product mix to greater  sales of lower  margin bulk
Spirulina  products,   increased   Spirulina   production  costs  and  increased
depreciation  expense.  Depreciation expense included as a cost of product sales
for the six months ended  September 30, 1998 increased to $587,000 from $389,000
for the comparable period of fiscal 1998.






                                       13

<PAGE>

Operating Expenses

         Operating  expenses were  $1,655,000  during the six month period ended
September 30, 1998, a decrease of 9% from $1,811,000 in the comparable period of
fiscal 1998.  This decrease was  primarily due to decreased  sales and marketing
expenses, partially offset by increased research and development expenses.

         Research and Development. Research and development expenses amounted to
$467,000 for the six month period ended  September  30, 1998, an increase of 49%
from $314,000 for the comparable  period of fiscal 1998.  This increase from the
prior year was primarily due to higher  personnel  expenditures  for the ongoing
development  work done on our genetically  engineered  mosquitocide  project and
work on the Aldolase Catalytic Antibody project.

         Sales and Marketing.  Sales and marketing expenses amounted to $499,000
for the six month  period  ended  September  30,  1998,  a decrease  of 37% from
$791,000 for the comparable  period of fiscal 1998. This decrease from the prior
year is primarily due to reduced  personnel,  advertising and consulting service
costs dictated by lower revenues.

Other Income (Expense)

         Other income  (expense)  amounted to ($72,000) for the six month period
ended  September  30, 1998,  compared to $125,000 for the  comparable  period of
fiscal  1998.  This  fluctuation  is  primarily  attributable  to a decrease  in
interest  income on investment  securities  coupled with an increase in interest
expense due to higher average outstanding balances of long-term debt.

Income Taxes

         The Company  presently  expects  that its fiscal year 1999 results will
provide for a tax refund of Hawaii State income  taxes from net  operating  loss
carryback availability.  Accordingly,  an interperiod tax benefit of $74,000 has
been recorded for the six months ended September 30, 1998.

Net Income (Loss)

         The Company  recorded a net loss after taxes of $1,073,000  for the six
months  ended  September  30,  1998,  compared  to net income of $71,000 for the
comparable  period  of  fiscal  1998.  This  increase  in net loss is  primarily
attributable  to reduced sales of bulk Spirulina  powder and tablets,  decreased
interest  income from investment  securities,  and increased  depreciation,  and
research and development expenses.

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 the Company's largest customers, new product introductions, government
action,  weather  patterns,  the mix between sales of bulk products and packaged
consumer products, start-up costs associated with new facilities, expansion into
new  markets,  sales  promotions,   competition,  increased  energy  costs,  the
announcement  or  introduction  of new products by  competitors,  changes in the
Company's  customer  mix,  overall  trends  in  the  market  for  Spirulina  and
astaxanthin products,  and other factors. A significant portion of the Company's
expense  levels are  relatively  fixed,  and the timing of  increases in expense
levels is based in large part on forecasts of future sales.  If  net  sales  are
below  expectations  in  any  given  period,  the  adverse  impact on results of
operations may be magnified by an inability to adjust spending quickly enough to
compensate for the sales shortfall. The Company may also choose to reduce prices
or increase spending on sales and marketing  in  response  to market conditions,
which  may  have a material adverse effect on financial condition and results of
operations.


                                       14

<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

         Our working capital  decreased  $306,000 during the first six months of
fiscal 1999 to $2,290,000.  Our cash and cash equivalents  balances decreased by
$1,052,000  to  $345,000  and is  primarily  attributable  to cash flows used in
operating  and  investing  activities  of $528,000 and  $289,000,  respectively,
offset in part by repayment of a note payable of $975,000  which was  classified
as a current liability at March 31, 1998.

         Cash used in operating activities during the first six months of fiscal
1999 amounted to $528,000  compared to cash provided by operating  activities of
$672,000 in the comparable period of fiscal 1998. The primary uses of cash flows
from  operating  activities  during the first six months of fiscal 1999 were the
net loss of $1,073,000 and a decrease in accounts payable of $150,000, offset by
depreciation and amortization of $687,000.

         Cash used in investing  activities for capital  expenditures during the
first six months of fiscal 1999 amounted to $289,000  compared to $5,460,000 for
the comparable period of fiscal 1998.

         Cash used in financing activities during the first six months of fiscal
1999 amounted to $235,000,  compared to $95,000 in fiscal 1998. The primary uses
of cash flows in financing activities during the first six months of fiscal 1999
were for principal  payments of $975,000 on a note payable,  payments on capital
lease  obligations of $66,000 and payments on long-term debt of $25,000;  offset
in part by net proceeds from a short-term  revolving  line of credit of $184,000
and proceeds on issuance of long-term debt of $750,000.

         As of March 31,  1998,  the  Company  had  agreed  with a  construction
contractor to resume work on a suspended  expansion project on or before January
1, 1999 in a reasonable and customary manner in accordance with the terms of the
contract and at a minimum  billable  rate of $150,000 per month.  The  remaining
balance on the construction contract is approximately $1.9 million. If work does
not resume on or before January 1, 1999, the contract will be considered to have
been  terminated by Cyanotech.  Assertion by the  contractor of its  termination
rights  could  have  a  material  adverse  effect  on  the  Company's  financial
condition,  results  of  operations  and/or  liquidity.  The  credit  facilities
available to the Company on September 30, 1998, see below,  unless  supplemented
by funds from other sources,  could be insufficient to finance this construction
work.  Total  costs  incurred  as of  September  30,  1998 with  respect to this
expansion project approximate $2,643,000.

         On  July  28,  1998,  the  Company  entered  into a Loan  and  Security
Agreement  with  a  lender  which  provides  for  up to  $3  million  in  credit
facilities,  secured by all the assets of the Company.  The major  components of
the credit facility include working capital loans on a revolving basis,  subject
to the availability of eligible accounts  receivable and inventory,  a sub-limit
term loan of up to $750,000  (amortized  over sixty months)  secured by eligible
machinery  and  equipment,  and a  sub-limit  term  loan  of  up  to $2  million
(amortized  over  sixty  months  and  subject  to  the  Company   achieving  and
maintaining specific levels of financial performance) for the acquisition of new
machinery and equipment.  The interest rate on the credit facility is prime plus
2.5% (at  September  30,  1998,  the prime  rate was  8.25%)  until the  Company
achieves certain financial  performance  levels, at which time the interest rate
will decrease to prime plus 1.25%. Interest is calculated on a base amount of $1
million or the  outstanding  loan balance,  whichever is greater.  Proceeds from
borrowings  under  the  credit  facility  were used to repay a  short-term  note
payable and fund working capital requirements.

                                       15

<PAGE>



         At September 30, 1998, the aggregate  outstanding balance on the credit
facility  amounted  to  $938,000,  with  remaining  availability  calculated  at
$1,080,000.  The  remaining  availability  amount  excludes the component of the
credit  facility for the  acquisition  of new  machinery  and  equipment as such
component is  contingent  on the  Company's  achievement  of specific  levels of
financial  performance.   This  component,   if  available,   may  increase  the
availability by an additional $1,920,000,  up to the limit of $3 million for the
entire credit facility. The outstanding balance of the equipment term loan, less
current  maturities,  has been  classified  as a  non-current  liability  in the
consolidated  balance  sheet at September  30,  1998.  The  outstanding  working
capital loans on a revolving basis are payable  through the daily  collection of
accounts  receivable  and have been  classified  as a current  liability  in the
consolidated balance sheet at September 30, 1998.

YEAR 2000 COMPLIANCE

         The  Company  has  completed  a  comprehensive  review of its  computer
systems to identify  the systems that could be affected by the "Year 2000" issue
and has developed an  implementation  plan, to be completed by the end of fiscal
1999, to resolve the issue.  The Company  believes that, with  modifications  to
existing  software and converting to new software,  the Year 2000 issue will not
pose significant  operational  problems for the Company's computer systems as so
modified and converted.  The costs of such modifications and conversions are not
expected to exceed $10,000.  However, if such modifications and conversions are
not  completed  in  a timely manner,  the Year 2000 problem may  have a material
impact on the operations of the Company.

         The Company is also  reviewing  and  evaluating  its  reliance on other
third parties (e.g. utilities providers,  distribution channels, major suppliers
and vendors) to determine and minimize the extent to which its operations may be
dependent  on such third  parties  to  remediate  the Year 2000  issues in their
systems. In addition, contingency backup plans will be reviewed for each mission
critical system, with the emphasis on operational and production continuity. The
Company's   business,   operating  results  and  financial  condition  could  be
materially  adversely  affected  by the failure of its systems or those of other
parties to operate properly beyond 1999.


                                       16

<PAGE>



OUTLOOK

         This outlook section contains a number of  forward-looking  statements,
all of which  are based on  current  expectations.  Actual  results  may  differ
materially. See also the note at the beginning of this Item 2.

         The  Company  believes  that  it has  largely  resolved  the  Spirulina
production  problems which resulted from restarting the Spirulina  culture ponds
that were idle from  December  1997 to February  1998.  At  September  30, 1998,
Spirulina  production  remains  consistently at 90% of full capacity compared to
the full production  capacity  achieved in the comparable period of fiscal 1998.
We plan to balance Spirulina  production with NatuRose  production  resources to
meet our  customers'  requirements  during the  remainder of fiscal  1999.  As a
result of increasing acceptance and promotion,  we expect third quarter sales of
NatuRose to be  approximately  $250,000.  Gross  profit  margin for  NatuRose is
currently  nil due to the high  initial  production  costs,  but is  expected to
improve as current  high-cost  inventory  is  reduced.  Gross  profit  margin on
NatuRose  production  is also  expected  to  improve as we  optimize  processing
systems  and  production  throughput;  however,  the  higher  costs  related  to
production of NatuRose may persist into the near future.

         Research and development costs are expected to increase throughout this
fiscal year as we continue to optimize the PhytoMax PCS(sm) technology, continue
the research and development  activities directed at the genetically  engineered
mosquitocide project and on production of Aldolase Catalytic Antibody 38C2 under
our April 1998 agreement with The Scripps Research Institute.

         Cyanotech's  strategy has been,  and continues to be, to produce higher
value natural products from microalgae.  To continue the  implementation of this
strategy, we have broadened our product offerings with the addition of NatuRose,
our natural  astaxanthin  product,  and are continuing  development  work on the
geneticallyengineered  mosquitocide  project which we plan to have available for
initial testing by the end of the current fiscal year. Additionally, development
work on production of Aldolase  Catalytic Antibody 38C2 is scheduled to continue
throughout  this fiscal year. We are  continuing  our emphasis on selling higher
value packaged  Spirulina consumer products over Spirulina bulk products as well
as exploring and developing new markets for our bulk products.

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

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

                                       17

<PAGE>



PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings.

                  On July 13,  1998,  the Company  filed a  complaint  in United
                  States  District  Court for the  District of Hawaii  (Case No.
                  CV98-00600) against Aquasearch,  Inc. ("Aquasearch"),  seeking
                  declaratory  judgement  of  patent   noninfringement,   patent
                  invalidity, and non-misappropriation of trade secrets relating
                  to closed culture production of astaxanthin. The complaint was
                  filed in response to assertions by Aquasearch  regarding their
                  alleged intellectual property rights.  Aquasearch has answered
                  the  complaint  and  filed  counter  claims   alleging  patent
                  infringement,    trade   secret    misappropriation,    unfair
                  competition  and breach of  contract.  The Company is pursuing
                  this litigation vigorously.

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

                  On September 17, 1998, the following matters were submitted to
                  a vote of  stockholders  entitled  to  vote  at the  Company's
                  Annual Meeting of Stockholders:

                  a) The following  directors  were  elected to serve  until the
                  next Annual Meeting or until  their  successors  are  elected:
                  Julian C. Baker, Gerald R. Cysewski, Eric H. Reichl, Ronald P.
                  Scott,  John  T.  Waldron  and  Paul  C.  Yuen,  all directors
                  receiving at least  14,077,331  votes and no more than 110,414
                  votes against or abstaining.

                  b)  Ratification  of the selection of KPMG Peat Marwick LLP as
                  the Company's  independent auditors for the fiscal year ending
                  March 31, 1999.

                  For: 14,145,168     Against: 15,767     Abstaining: 26,810

Item 5.           Other Information

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

Item 6.           Exhibits and Reports on Form 8-K

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

                          Exhibit 27.1 - Financial Data Schedule

                  (b)     Reports on Form 8-K

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

                                       18

<PAGE>


                                   SIGNATURES

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



                                            CYANOTECH CORPORATION (Registrant)



 November 12, 1998                          By: /s/Gerald R. Cysewski
------------------                              ------------------------------
    (Date)                                         Gerald R. Cysewski
                                                   Chairman of the Board,
                                                   President and Chief Executive
                                                   Officer



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











                                       19

<PAGE>