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

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the fiscal year ended March 31, 1998 Commission file 0-146-02

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

Nevada 91-1206026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Exchange Act:
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:

Title of class
Common Stock, Par value $.005 per share

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

At June 5, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $ 37,564,631.

At June 5, 1998, the number of shares outstanding of registrant's Common
Stock was 13,599,572.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Annual Report to Stockholders for the fiscal year
ended March 31, 1998 are incorporated by reference into Part II and Part IV of
this Report. Portions of the Registrant's Definitive Proxy Statement for its
1998 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission on or prior to July 29, 1998 and to be used in connection
with the Annual Meeting of Stockholders expected to be held September 17, 1998,
are incorporated by reference in Part III of this Form 10-K.

PART I

Item 1. Description of Business

Except for historical information contained in this document, the matters
discussed in this report contain forward looking statements that involve risks
and uncertainties. These future risks and uncertainties could cause actual
results to differ materially.

General

Cyanotech Corporation is a leader in the development and commercialization
of high value products derived from microalgae. Microalgae are a diverse group
of over 30,000 species of microscopic plants which have a wide range of
physiological and biochemical characteristics and naturally contain high levels
of proteins, amino acids, vitamins, pigments and enzymes. Since 1983, we have
designed, developed and implemented proprietary production and harvesting
technologies, systems and processes which eliminate many of the stability and
contamination problems frequently encountered in the production of microalgae.
We believe that our technology, systems, processes and favorable growing
location permit year-round harvesting of our microalgal products in a cost
effective manner.

We currently produce natural products from microalgae for the nutritional
supplement, aquaculture feed, and immunological diagnostics markets. Since 1985,
Cyanotech has been producing microalgae-based "Spirulina" products for the
vitamin and supplement market. Spirulina Pacifica(TM), which is our principal
source of revenue, is a unique strain of Spirulina developed by us which
provides a vegetable-based, highly absorbable source of natural beta-carotene,
mixed carotenoids, B vitamins, gamma linolenic acid ("GLA"), protein, essential
amino acids and other phytonutrients. We currently market our Spirulina products
in the United States and thirty-seven other countries though a combination of
retail, wholesale, and private label channels. In early 1997, we introduced
NatuRose(TM) to the worldwide aquaculture industry. NatuRose is our brand name
for natural astaxanthin (pronounced "as-ta-zan-thin"). Astaxanthin is a red
pigment from the microalgae, Haematococcus, and is used in aquaculture to impart
a pink to red color to pen-raised fish and shrimp. NatuRose competes with
synthetic astaxanthin whose worldwide annual sales are estimated at more
than $150 million.

Cyanotech has recently increased its commitment to developing microalgae
for the expression of native as well as heterologous proteins through molecular
biology. Because microalgae naturally contain high levels of protein, because
they have a uniform cell structure, and because they can grow up to 100 times
faster than land plants, they offer unique advantages over plant, bacterial or
mammalian systems for the expression of proteins. Like higher plants, algal
expression systems can be produced on a large-scale with culture volumes of up
to 600,000 liters without problems of contamination by bacterial endotoxins or
animal viruses. Unlike higher plants, however, the time required to grow
transgenic algae expressing the desired protein is on the order of one to two
months rather than the one to two years that would be required in corn or
soybeans, for example. Since 1996, Cyanotech has been developing a genetically
engineered biopesticide for the control of mosquitoes. A natural toxin gene from
Bacillus thuringiensis var. israelensis (Bti) is being transformed into a
blue-green algae, Synechococcus, a food for mosquito larvae. When applied to a
mosquito-infested body of water, the algae could act as an effective and
environmentally safe means of control. In April 1998, we announced the signing
of a licensing agreement and collaboration with The Scripps Research Institute
in La Jolla, California to produce a new compound for use in chiral chemistry.
Under the terms of this agreement, Cyanotech will be responsible for the large
scale production and purification of a catalytic antibody which was generated in
the Scripps laboratory and subsequently expressed as a transgene in algae by
Scripps scientists. Cyanotech intends to continue to exploit the largely
untapped commercial opportunities of microalgae by producing natural products
and also genetically engineered products through molecular biology.

Cyanotech Corporation is incorporated in Nevada. Our principal executive
offices are located at 73-4460 Queen Kaahumanu Highway, Suite 102, Kailua-Kona,
Hawaii 96740, and our telephone number is (808) 326-1353. Unless otherwise
indicated, all references in this report to the "Company", "we", and "Cyanotech"
refer to Cyanotech Corporation, a Nevada corporation, its wholly owned
subsidiaries, Nutrex, Inc., a Hawaii corporation, and Cyanotech International
FSC, Inc., a Barbados corporation.

Industry Background

Microalgae are a diverse group of microscopic plants that have a wide
range of physiological and biochemical characteristics and naturally contain,
among other things, high levels of proteins, amino acids, vitamins, pigments and
enzymes. Microalgae have the following properties that make commercial
production attractive: (1) microalgae grow much faster than land grown plants,
often up to 100 times faster; (2) microalgae have a uniform cell structure with
no bark, stems, branches or leaves, which permits easier extraction of products
and higher utilization of the microalgae cells; (3) the cellular uniformity of
microalgae makes it practical to manipulate and control growing conditions in
order to optimize a particular cell characteristic; (4) microalgae contain a
wide array of vitamins and other important nutrients; (5) microalgae contain
natural pigments; and (6) are a potential source of medical products.

Current commercial applications for these microscopic plants include
nutritional products, diagnostic products, aquaculture feed and pigments,
natural food colorings and research grade chemicals. The Company believes that
microalgae could potentially be used for other commercial applications,
including genetically engineered products for the biopesticide and
pharmaceutical industries. The most significant microalgae products produced
today are algae utilized as food supplements.

While many unique compounds have been identified in microalgae, the
efficient and cost effective commercial production of microalgae is elusive.
Many microalgae culture systems over the last 20 years have failed. Because
microalgae produced for food supplements are typically cultivated and harvested
outdoors, production is significantly affected by climate, weather conditions
and the chemical composition of the culture media. Without consistent sunlight,
warm temperature, low rainfall and proper chemical balance, microalgae will not
grow quickly, resulting in longer harvesting cycles, decreased pond utilization
and increased cost. Furthermore, microalgal growth requires a very nutrient rich
environment. The high nutrient levels in the ponds promote the growth of
unwanted organisms, or "weeds," if the chemical composition of the ponds changes
from its required balance. Once contamination occurs, a pond must be emptied,
cleaned and refilled, a process that further decreases pond utilization and
increases production costs.

Cyanotech's Technology

Since 1983, we have designed, developed and implemented proprietary
production and harvesting technologies, systems and processes which reduce many
of the stability and contamination problems frequently encountered in the
production of microalgae. This proprietary production system is known as
Integrated Culture Biology Management (or "ICBM"). Through the application of
this technology, our Spirulina culture ponds can be productive year-round
without any significant loss in productivity due to contamination and many of
our production ponds, all based in Hawaii, have been in continuous production
since 1988. We believe that such an accomplishment remains unique to Cyanotech.

In addition to the advantages of our ICBM technology, we have developed
a patented system for the recovery of carbon dioxide from our drying system
exhaust gas, called Ocean-Chill Drying. Since microalgae are essentially
microscopic "plants", they require sunlight, water, carbon dioxide and nutrients
for optimal growth. By recovering carbon dioxide that would otherwise be
released into the atmosphere, we can divert the recovered carbon dioxide back to
the algae cultures. This process provides us with another significant cost
advantage over other microalgae producers who must purchase carbon dioxide.
Moreover, Ocean-Chill Drying dries microalgal products in a low oxygen
environment, which protects oxygen sensitive nutrients. In addition, we have
developed an automated Spirulina processing system, which enables a single
operator to harvest and dry the Spirulina powder.

Another major advantage for us is the location of our production
facility at the Hawaii Ocean Science and Technology ("HOST") Park at Keahole
Point, Hawaii. We believe that the combination of consistent warm temperature,
abundant sunlight, and low rainfall at this facility makes this a highly
favorable location for the economical, large-scale cultivation of microalgae. In
contrast to our facility, microalgae producers in other areas lacking these
favorable characteristics stop producing for up to four months a year because of
less favorable climate or weather conditions. At the HOST Park, we have access
to cold, clean, deep sea water that is pumped from a depth of 2,000 feet. This
sea water is used both as a source of nutrients for microalgae culture and as a
cooling agent in the Ocean-Chill Drying process. Additionally, our facility has
access to a complete industrial infrastructure and is located 30 miles from a
deep water port and adjacent to an international airport.

Applying our experience in cultivating and harvesting Spirulina, we
began commercial production of our natural astaxanthin product, NatuRose, during
the fourth quarter of fiscal 1997. The product is produced using our large-scale
photo-bioreactor system, referred to as the PhytoMax Pure Culture System, or
PhytoMax PCS, which incorporates closed-culture technology and allows for the
large-scale commercial cultivation of microalgae strains that are otherwise
highly susceptible to environmental contamination. With the PhytoMax PCS, we now
have the potential to produce a broader range of new products from microalgae.
Such products could include genetically-engineered biopesticides,
nutraceuticals, additional nutritional products, pharmaceuticals,
poly-unsaturated fatty acids, anti-microbial agents, plant growth regulators,
and anti-viral compounds.

Our primary objective is to be the leading developer and producer of
microalgal products in our existing and future markets. We believe that the
combination of our ICBM technology, our PhytoMax PCS technology, our Ocean-Chill
Drying process, our automated processing system and a favorable growing location
with year-round production capabilities, can be successfully applied to the
commercial cultivation of many species of microalgae.

Products

Spirulina

Our principal product, accounting for 95% and 98% of net sales for the
years ended March 31, 1998 and 1997, respectively, is a nutritional microalgae
marketed as Spirulina Pacifica. Developed by us and sold worldwide to the health
and natural foods market, Spirulina Pacifica is a unique strain of microalgae
that is a highly absorbable source of natural beta carotene, mixed carotenoids,
B vitamins, GLA, protein, essential amino acids and other phytonutrients. We
believe we were the first Spirulina producer to have its products and processes
certified organic and we are the only microalgae producer to have its quality
system registered under the ISO 9002-94 standards.

Cyanotech produces Spirulina Pacifica in three forms: powder, flake and
tablets. Powder is used as an ingredient in nutritional supplements and health
food drinks while flakes are used as a seasoning on various foods. Tablets are
consumed daily as a dietary supplement. We also produce and market two products
under the Hawaiian Energizer name. Hawaiian Energizer sports drink contains
complex carbohydrates and vegetarian protein in combination with Spirulina
Pacifica, Bee Pollen and Siberian Ginseng. Hawaiian Energizer tablets contain
Spirulina Pacifica, Bee Pollen and Siberian Ginseng.

We anticipate that sales of our Spirulina Pacifica products will
continue to constitute a substantial portion of net sales during fiscal 1999.
Any decrease in the overall level of sales of, or the prices for, our Spirulina
Pacifica products, whether as a result of competition, change in consumer
demand, increased worldwide supply of Spirulina or any other factors, would have
a material adverse effect on our business, financial condition and results of
operations.

Natural Astaxanthin

The fiscal year ended March 31, 1998 was the first full year of
commercial production for our natural astaxanthin product, NatuRose. Astaxanthin
is a red pigment used primarily in the aquaculture industry to impart pink color
to the flesh of pen-raised fish and shrimp. The astaxanthin market currently is
dominated by a single producer, Hoffmann-LaRoche, who produces synthetic
astaxanthin from petrochemicals. Hoffmann-LaRoche currently sells synthetic
astaxanthin to the aquaculture industry at approximately $2,500 per pure
kilogram. As a result of continued growth in the world aquaculture industry, the
world market for astaxanthin is estimated to currently exceed $150 million per
year. Although sales of NatuRose for the fiscal year ended March 31, 1998 were
nominal, we anticipate that such sales will constitute a significant portion of
total sales in future periods.

Phycobiliproteins

Cyanotech also produces phycobiliproteins which are sold to the medical
and biotechnology research industry. Phycobiliproteins are highly fluorescent
pigments purified from microalgae. Their spectral properties make them useful as
tags or markers in many kinds of biological assays, such as flow cytometry,
fluorescence immunoassays and fluorescence microscopy. We anticipate that sales
of phycobiliproteins will not represent a significant component of total sales
in future periods.

Products Under Development

A new product which we are continuing to develop is a genetically
engineered mosquitocide from microalgae. The toxin gene from Bacillus
thuringiensis var. israelensis (Bti) is being cloned into the blue-green algae
Synechococcus. The bacterial toxin Bti is very specific to mosquitoes and black
flies, while the blue-green algae is a food for mosquito larvae. We believe
that, when applied to a mosquito-infested body of water, this algae could act as
an effective and environmentally safe means of control.

In April 1998, we signed an exclusive agreement with The Scripps
Research Institute to produce the Institute's patented Aldolase Catalytic
Antibody 38C2 in microalgae. The genetically engineered aldolase catalytic
antibody may have numerous potential applications in industrial synthesis,
including the synthesis of certain anti-cancer compounds. Under the terms of the
exclusive license agreement, Scripps will provide the genetically engineered,
live microalgae containing the catalytic aldolase protein to Cyanotech.
Production of reagent quantities is expected to be available within eight months
if development tests prove its feasibility.

Development of these products is continuing and there is no assurance
that commercial products will be achieved. Our inability to successfully develop
or commercialize additional products could have a material adverse effect on our
business, financial condition and results of operations.

Research & Development

Cyanotech's expertise is in the development of efficient, stable and
cost-effective production systems for microalgal products. Our researchers
investigate specific microalgae identified in scientific literature for
potentially marketable products and then develop the technology to grow such
microalgae on a commercial scale.

During fiscal 1998, the Company incurred $677,000 in research and
development expenses, compared with $587,000 and $351,000 in the years 1997 and
1996, respectively. The Company intends to continue to develop new products and
prioritizes its research and development activities to focus on projects that it
believes will have the greatest market acceptance and achieve the highest return
on the Company's investment. Successful microalgal product development is highly
uncertain and is dependent on numerous factors, many of which are beyond the
Company's control. Products that appear promising in early phases of development
may be found to be ineffective, may be uneconomical because of manufacturing
costs or other factors, may be precluded from commercialization due to the
proprietary rights of other companies, or may fail to receive necessary
regulatory approvals.

Distribution

The majority of our bulk Spirulina sales are to companies with their
own Spirulina product lines. Many of these companies identify and promote
Cyanotech's Hawaiian Spirulina in their products. In the United States, we sell
directly to health food manufacturers and health food formulators. Packaged
consumer products sell in the domestic market through an established health food
distribution network. Orders for packaged consumer products are taken at the
store level by one of 23 regional broker representatives and shipped through one
of 36 distributors. In selected foreign markets, we have appointed exclusive
sales distributors for both bulk Spirulina and packaged consumer products.

In the years ended March 31, 1998, 1997 and 1996, international sales
accounted for approximately 44%, 62% and 55%, respectively, of our net sales. We
expect that international sales will continue to represent a significant portion
of our net sales. Our business, financial condition and results of operations
may be materially adversely affected by any difficulties associated with
managing accounts receivable from international customers, tariff regulations,
imposition of governmental controls, political and economic instability or other
trade restrictions. Although our international sales are currently denominated
in United States dollars, fluctuations in currency exchange rates could cause
our products to become relatively more expensive to customers in the affected
country, leading to a reduction in sales in that country.

Customers

Spirulina

No single customer accounted for more than 10% of net sales during the
year ended March 31, 1998. Our largest customer during 1997 and 1996 was a Hong
Kong-based network marketing company which purchases both bulk Spirulina and our
packaged consumer products for distribution, primarily in mainland China. From
March through September 1997, this customer was restricted from hosting any
large scale distributor meetings due to a delay in receiving recertification
from the Chinese government. As a result, orders from this customer were
significantly reduced from previous periods. For the year ended March 31, 1998,
this customer accounted for less than 5% of Cyanotech's net sales, down from
approximately 34% and 29% of sales in the years ended March 31, 1997 and 1996,
respectively. Subsequent to the end of fiscal 1998, the Chinese government
imposed a ban on all network market organizations, effective October 1, 1998.
Sales to this customer are expected to be minimal.

We market and sell our Spirulina products to a variety of other
customers, including:

Health Food Manufacturers. Health food manufacturers often use
Cyanotech's Spirulina products as a key ingredient in their Spirulina-based
products, or as an ingredient in their health food formulations. These customers
purchase bulk powder or bulk tablets and package the products under their brand
label for sale to the health and natural food markets. Many of the products
produced by these customers are often marketed and sold domestically in direct
competition with our Nutrex line of retail consumer products. However, we
differentiate our Nutrex products from those of our bulk customers by reserving
the certified organic line of products for sale in the United States exclusively
under our Nutrex label.

Private Label Customers. We currently provide private label retail
consumer products to two international customers. Products for these customers
are manufactured only upon receipt of an order and no finished product
inventories are maintained.

Retail Distributors. Retail distributors act as product wholesalers to
independent and chain retailers. The majority of domestic Nutrex sales in the
year ended March 31, 1998 were to 36 distributors.

Natural Products Distributors. In the year ended March 31, 1998, we
sold bulk Spirulina products to ten domestic and seven foreign customers engaged
in the business of distributing natural raw materials to health and natural food
manufacturers. These distributors provide their customers with standardized
quality control, warehousing and distribution services, and charge a mark-up on
the products for providing these services. These distributors may differentiate
the products they sell, but they generally treat the products as commodities,
with price being the major determining factor in their purchasing decision.

Natural Astaxanthin

Our NatuRose product is being sold through a network of agents and
distributors directly to aquaculture farmers, vitamin suppliers, aquaculture
feed manufacturers and other end users in 15 countries for use in aquaculture
feed, poultry feed and pet feed industries. In March 1998, the Company signed a
letter of intent with a major European life sciences company operating in over
150 countries for sales and distribution of NatuRose and other Cyanotech
products in certain European countries. This distributor posesses significant
expertise and worldwide marketing experience in animal nutrition products.
Initially, the distributor will test NatuRose and Spirulina for use in animal
feeds for up to six months and, if the testing is successful, we would negotiate
a definitive sales and distribution agreement.

Competition

Spirulina

Our Spirulina Pacifica products compete with a variety of vitamins,
dietary supplements, other algal products and similar nutritional products
available to consumers. The nutritional products market is highly competitive.
It includes international, national, regional and local producers and
distributors, many of whom have greater resources than Cyanotech, and many of
whom offer a greater variety of products. Our direct competition in the
Spirulina market currently is from Dainippon Ink and Chemical Company's facility
in California and several farms in China. To a lesser extent, we compete with
numerous smaller farms in China, India, Thailand, Brazil and South Africa.
Packaged consumer products marketed under our Nutrex brand also compete with
products marketed by health food manufacturing customers of Cyanotech who
purchase bulk Spirulina from us and package it for retail sales. A decision by
another company to focus on Cyanotech's existing or target markets or a
substantial increase in the overall supply of Spirulina could have a material
adverse effect on our business, financial condition and results of operations.
There can be no assurance that we will not experience competitive pressure,
particularly with respect to pricing, that could adversely affect our business,
financial condition and results of operations.

Natural Astaxanthin

Our natural astaxanthin product, NatuRose, competes directly with the
synthetic astaxanthin product produced and marketed worldwide by
Hoffmann-LaRoche. In addition, several other companies have announced plans to
produce commercial quantities of natural astaxanthin from microalgae and Phaffia
yeast. We believe that these companies are only producing small quantities for
test purposes. Although we are unaware of any studies indicating that natural
astaxanthin has any benefits not otherwise provided by synthetic astaxanthin, we
believe there is commercial demand for a natural astaxanthin product and that
our NatuRose product can compete on the basis of product performance and price.

Phycobiliproteins

Four major competitors manufacture phycobiliprotein products for sale,
including Molecular Probes, Inc., Quantify Inc., Martek Biosciences Corporation
and Prozyme Inc. Cyanotech competes with these companies on the basis of price
and quality. New synthetic fluorescent compounds have been developed by a third
party which are superior to phycobiliproteins in some applications. The
advantage of the synthetic compounds is their lower molecular weight and, in
some cases, their lower cost. While our phycobiliprotein products may not be
able to compete effectively against synthetic compounds in some applications,
Cyanotech's phycobiliproteins have gained a reputation for high quality at a
competitive price.

Government Regulation

Cyanotech's products, potential products and its manufacturing and
research activities are subject to varying degrees of regulation by a number of
government authorities in the United States and in other countries, including
the Food and Drug Administration (the "FDA") pursuant to the Federal Food, Drug
and Cosmetic Act and by the Environmental Protection Agency ("EPA") under the
Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"). The FDA
regulates, to varying degrees and in different ways, dietary supplements, other
food products, diagnostic medical devices and pharmaceutical products, including
their manufacture, testing, exportation, labeling, and, in some cases,
advertising. Generally, prescription pharmaceuticals and certain types of
diagnostic products, such as medical devices, are regulated more rigorously than
dietary supplements. The EPA also rigorously regulates pesticides, among other
types of products.

Cyanotech is also subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of its products, importation
of organisms, and occupational safety, among others. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. We work with foreign
distributors to ensure our compliance with foreign laws, regulations and
policies. There can be no assurance that any changes with respect to federal,
state and foreign laws, regulations and policies, and, particularly with respect
to the FDA and EPA or other such regulatory bodies, with possible retroactive
effect, will not have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that any of our
potential products will satisfy applicable regulatory requirements.

The Federal Dietary Supplement Health and Education Act ("DSHEA")
regulates the use and marketing of dietary supplements, including vitamin
products. The DSHEA covers only dietary supplements and contains a number of
provisions that differentiate dietary supplements from other foods. The DSHEA
also sets forth standards for adulteration of dietary supplements or ingredients
thereof and establishes current food Good Manufacturing Practices ("cGMP")
requirements for dietary supplements. It also provides detailed requirements for
the labeling of dietary supplements, including nutrition and ingredient
labeling. We currently believe that Spirulina Pacifica, marketed as a dietary
supplement, is exempt from FDA regulation as a food additive.

Our Spirulina manufacturing processes and our contract bottlers are
required to adhere to cGMP as prescribed by the FDA. We believe that we are
currently in compliance with all applicable cGMP and other food regulations.
Compliance with relevant cGMP requirements can be onerous and time consuming,
and there can be no assurance that Cyanotech can continue to meet relevant FDA
manufacturing requirements for existing products or meet such requirements for
any future products. Ongoing compliance with food cGMP and other applicable
regulatory requirements are monitored through periodic inspections by state and
federal agencies, including the FDA, the Hawaii Department of Health and
comparable agencies in other countries. Our processing facility is also
inspected annually for organic certification by Quality Assurance International
and for Kosher certification by the Kosher Overseers Association. The use of
Spirulina as a food additive for seasoning on salads or pasta or for such other
food uses has not been cleared by the FDA, however, the FDA has recognized
Spirulina as a safe food. We currently market the product for these food uses on
the basis of our belief that its use in these food applications is generally
recognized as safe and therefore is not subject to FDA pre-market clearances as
a food additive.

Our natural astaxanthin product, NatuRose, has received clearance for
use as a feed and food color additive in Japan but will need clearance for use
as a feed color additive in the United States and Canada. We are actively
pursuing clearance for use in the U.S. markets and in February 1998, submitted
our petition for FDA approval. We are presently assembling our petition for
approval for the Canadian Food Industry Agency, and expect to submit this
petition by the end of calendar 1998. The process of obtaining clearances for a
new color additive is expensive and time consuming. Extensive information is
required on the toxicity of the additive, including carcinogenicity studies and
other animal testing. No assurances can be given that any of our proposed
products intended for use as a feed additive will be approved for use in the
United States or Canada on a timely basis, if at all.

As in vitro diagnostic medical device components, phycobiliprotein
products do not currently require pre-market clearances by the FDA. However, as
a component of a medical device, they can be subject to other various medical
device requirements, including cGMP requirements.

Work is continuing on our genetically-engineered mosquitocide project.
We are aware that any resulting product will be subject to validation of
efficacy though field trials. If proven effective, any potential commercial
product will be subject to regulatory approval by the EPA for use in the United
States. However, Bti is currently approved for use as a biopesticide by the EPA
and the World Health Organization. We are uncertain of regulatory requirements
in other potential markets at this point.

Patents, Licenses and Trademarks

Although we regard our proprietary technology, trade secrets,
trademarks and similar intellectual property as critical to our success, we rely
on a combination of trade secret, contract, patent, copyright and trademark law
to establish and protect our rights in our products and technology. There can be
no assurance that we will be able to protect our technology adequately or that
competitors will not be able to develop similar technology independently. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States. Cyanotech has had two United States patents issued to it. Litigation in
the United States or abroad may be necessary to enforce our patent or other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Such litigation, even if successful, could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, results of operations and financial condition.
Additionally, although currently there are no pending claims or lawsuits that
have been brought against us, if any such claims are asserted against us, we may
seek to obtain a license under the third party's intellectual property rights.
There can be no assurance, however, that a license would be available on terms
acceptable or favorable to us, if at all.

Associates

Cyanotech employed 65 associates as of March 31, 1998, of which 64 are
full-time. Approximately 31 associates are involved in the harvesting and
production process, 16 are involved in research and product development, and the
remainder are involved in sales, administration and support. Management believes
that its relations with its associates are good. We have not experienced
difficulty in attracting personnel and none of our associates are represented by
a labor union.

Industry Segments and Export Sales

The Company has no assets oustide of the United States. The Company's
business consists of one industry segment and is grouped into five geographic
areas: United States, Canada/South America, Europe, China and Asia/Pacific,
excluding China. The following table summarizes the product sales revenues from
unaffiliated customers in each of the five geographic regions:

1998 1997 1996
---------------------- ---------------------- ----------------------
United States $ 4,297 56% $ 4,303 38% $ 3,614 45%
Canada/South America 404 5% 851 8% 896 11%
Europe 1,284 17% 1,292 11% 747 9%
China 358 5% 3,905 34% 2,375 29%
Asia/Pacific, excluding China 1,284 17% 1,048 9% 449 6%
------------ --------- ----------- ---------- ------------ ----------
Total Product Sales Revenues $ 7,627 100% $ 11,399 100% $ 8,081 100%
============ ========= =========== ========== ============ ==========

The Company believes that its profit margin on export sales is not
significantly different from that realized on sales in the United States. All
foreign product sales transactions are consummated in U.S. dollars.

Item 2. Description of Properties

Cyanotech Corporation is located in Kailua-Kona, Hawaii, at the HOST
Park and also owns a 2,500 square foot sales office in a light industrial area
located approximately four miles from the HOST Park. The HOST Park facility
consists of approximately 183 leased acres. Approximately 90 acres have been
fully developed and contain production ponds, a processing facility, a
laboratory, and administrative offices. All products are produced at this
facility. The property is leased from the State of Hawaii under a 30-year
commercial lease expiring in 2025. During 1997, we reached a preliminary
agreement with the State of Hawaii to lease an additional 93 acres for 30 years
at the HOST Park, which increased the total acreage under lease to 183 acres. We
plan to use this new property to construct a larger NatuRose production facility
and additional culture ponds that would use the PhytoMax PCS technology. We
believe that there is sufficient available land at the HOST Park to meet our
currently planned future needs. Our Nutrex, Inc. subsidiary maintains a sales
office in Kailua-Kona, Hawaii.

Item 3. Legal Proceedings

Cyanotech is not currently subject to any material pending legal
proceedings.

We maintain product liability insurance in limited amounts for products
involving human consumption. In the opinion of management, broader product
liability insurance coverage is prohibitively expensive at this time.

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

No matters were submitted to a vote of the stockholders during the
fourth quarter of fiscal 1998.

Part II

Item 5. Market for Common Equity and Related Stockholder Matters

The information required by this Item is incorporated by reference to
the Section labeled "Market for Common Equity and Related Stockholder Matters"
appearing in the Company's 1998 Annual Report to Stockholders.

Item 6. Selected Financial Data

The information required by this Item is incorporated by reference to
the Section labeled "Selected Financial Data" appearing in the Company's 1998
Annual Report to Stockholders.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The information required by this Item is incorporated by reference to
the Section labeled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing in the Company's 1998 Annual Report to
Stockholders.

Item 8. Financial Statements and Supplementary Data

The consolidated balance sheets of the Company and subsidiaries as of
March 31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 1998, together with the related notes and the report of
KPMG Peat Marwick LLP, independent certified public accountants, all contained
in the Company's 1998 Annual Report to Stockholders are incorporated herein by
reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

Part III

Item 10. Directors and Executive Officers; Compliance with Section 16(a) of the
Exchange Act

(a) Identification of Directors

The information required by this Item is incorporated by reference from the
Sections captioned "Proposal One: Election of Directors," "Certain
Transactions," " Security Ownership of Certain Beneficial Owners and Management"
and "Compliance with Section 16(a) of the Exchange Act" contained in Cyanotech's
definitive 1998 Proxy Statement.

(b) Identification of Executive Officers

The executive officers of Cyanotech and their ages and positions as of March 31,
1998 are as follows:

Name Age Position
---- --- --------

Gerald R. Cysewski, Ph.D. ................ 49 Chairman of the Board, President and Chief
Executive Officer
Glenn D. Jensen........................... 39 Vice President - Operations
Kelly J. Moorhead......................... 42 Vice President - Sales and Marketing
President - Nutrex, Inc.
Ronald P. Scott........................... 43 Executive Vice President - Finance and
Administration, Secretary, Treasurer

Dr. Cysewski co-founded Cyanotech in 1983 and has served as a director since
that time. Since March 1990, Dr. Cysewski has served as President and Chief
Executive Officer of Cyanotech and in October 1990 was also appointed to the
position of Chairman of the Board. From 1988 to November 1990, he served as Vice
Chairman and from 1983 to June, 1996 he served as Scientific Director of the
Company. From 1980 to 1982, Dr. Cysewski was group leader of microalgae research
and development at Battelle Northwest, a major contract research and development
firm. From 1976 to 1980, Dr. Cysewski was an assistant professor in the
Department of Chemical and Nuclear Engineering at the University of California,
Santa Barbara, where he received a two-year grant from the National Science
Foundation to develop a culture system for blue-green algae. Dr. Cysewski
received his doctorate in Chemical Engineering from the University of California
at Berkeley.

Mr. Jensen has served as Vice President - Operations since May 1993. He joined
Cyanotech in 1984 as Process Manager and was promoted to Production Manager in
1991, in which position he served until his promotion to Vice President -
Operations. Prior to joining Cyanotech, Mr. Jensen worked for three years as a
plant engineer at a Spirulina production facility, Cal-Alga, near Fresno,
California, which ceased to do business in 1983. Mr. Jensen holds a B.S. degree
in Health Science from California State University, Fresno.

Mr. Moorhead has served as Vice President - Sales and Marketing and of the
Company and President of Nutrex, Inc. since October 1997. From August 1996 to
October 1997 he served as Vice President - International Sales. From December
1991 to August 1996 he served as Vice President - Sales and Marketing and
President of Nutrex, Inc. From August 1987 to December 1991, he served as Vice
President - Production of the Company. Mr. Moorhead joined Cyanotech as
Production Biologist in December 1984. Prior to joining Cyanotech, Mr. Moorhead
worked at the Oceanic Institute in Honolulu, Hawaii where he conducted research
on production of Spirulina from agricultural wastes. Mr. Moorhead holds a B.S.
degree in Aquatic Biology from the University of California, Santa Barbara.

Mr. Scott was appointed to the Board of Directors of the Company in November
1995, has served as Executive Vice President - Finance and Administration since
August 1995, and has served as Secretary and Treasurer since November 1990 and
June 1990, respectively. From December 1990 until August 1995 Mr. Scott served
as Vice President - Finance and Administration. From September 1990 to December
1990, Mr. Scott served as Controller. From 1989 to 1990, he was Assistant
Controller for PRIAM Corporation, a manufacturer of Winchester disk drives. From
1980 to 1989, he served in various accounting management positions with Measurex
Corporation, a manufacturer of industrial process control systems. Mr. Scott
holds a B.S. degree in Finance and Management from California State University,
San Jose, and an M.B.A. degree from the University of Santa Clara.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference from the
section captioned "Executive Compensation and Other Information," "Director
Remuneration" and "Stockholder Return Performance Graph" contained in
Cyanotech's definitive 1998 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in Cyanotech's definitive 1998 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

Not applicable.

Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) (1). The following Consolidated Financial Statements of Cyanotech
Corporation and its subsidiaries are incorporated herein by reference pursuant
to Item 8:
Page in 1998
Annual Report
To Stockholders
Independent Auditors' Report.................................... 24
Consolidated Balance Sheets as of March 31, 1998 and 1997....... 9
Consolidated Statements of Operations for each of the years
in the three-year period ended March 31, 1998................... 10
Consolidated Statements of Stockholders' Equity for
each of the years in the three-year period ended March 31, 1998.. 11
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended March 31, 1998.................... 12
Notes to Consolidated Financial Statements....................... 13 to 23

(a) (2). The following financial statement schedules are included in this report
on the pages indicated below:

Schedule of Valuation and Qualifying Accounts.................... Page 16
Independent Auditors' Report..................................... Page 17

Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the consolidated financial statements or notes thereto, which financial
statements are incorporated herein by reference.

(a) (3). Index to exhibits

Exhibit Number Document Description

3.1 Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1996, file no. 0-14602.)
3.2 Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995, file no. 0-14602.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form SB-2 filed on February 28, 1996,
file no. 333-00951.)
4.2 Terms of the Series C Preferred Stock as Revised 1991. (Incorporated by reference
to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, file no. 0-14602.)
10.1 1985 Incentive Stock Option Plan dated March 18, 1985, as amended. (Incorporated
by reference to Exhibit 4(d) to the Company's Registration Statement on Form S-8
filed on December 3, 1992, file no. 33-55310.)
10.2 Stockholders Agreement dated as of May 17, 1993. (Incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1994, file no. 0-14602.)
10.3 1994 Non-Employee Directors Stock Option and Stock Grant Plan. (Incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1994, file no. 0-14602.)
10.4 Term Loan Agreement dated April 1, 1995 between Spirulina International B.V. and
the Company. (Incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1995, file no. 0-14602.)
10.5 License Agreement by and between The University of Memphis and the Company dated
June 19, 1995. (Incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995, file no.
0-14602.)
10.6 Term Loan Agreement dated July 11, 1995 between the Company and Satoshi Sakurada.
(Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602)
10.7 1995 Stock Option Plan for Cyanotech Corporation dated August 9, 1995, as
amended. (Incorporated by reference to Exhibit 4(c) to the Company's Registration
Statement on Form S-8 filed on October 27, 1995, file no. 33-63789.)
10.8 Sub-Lease Agreement between the Company and Natural Energy Laboratory of Hawaii
Authority dated December 29, 1995. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1995, file no. 0-14602.)
10.9 Preferred Stock Conversion and Registration Rights Agreement by and between
the Company and Firemen's Insurance Company of Newark, New Jersey, dated as
of February 20, 1996.(Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form SB-2 as filed on February 28, 1996, file no.
333-00951.)

10.10 Registration Rights Agreement by and between the Company and American Cynamid
Company dated as of February 20, 1996. (Incorporated by reference to Exhibit
10.17 to the Company's Registration Statement on Form SB-2 as filed on February
28, 1996, file no 333-00951.)
10.11 Credit Agreement between the Company and First Hawaiian Bank, dated February 27,
1997. (Incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997, file no. 0-14602.)
10.12 Promissory Note between the Company and First Hawaiian Bank, dated February 27,
1997. (Incorporated by reference to Exhibit 10.15 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997, file no. 0-14602)
10.13 Security Agreement between the Company and First Hawaiian Bank, dated February
27, 1997. (Incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997, file no. 0-14602)
10.14 License agreement by and between The Scripps Research Institute and the Company
dated April 14, 1998.
10.15 Workout/Suspension Agreement between the Company and Kiewit Pacific Co. dated
March 30, 1998.
10.16 Security Agreement between the Company and Kiewit Pacific Co. dated January 1,
1998.
11.1 Statement re: Computation of Earnings per Share
13 1998 Annual Report to Stockholders (portions only)
21.1 Subsidiaries of the Company.
23.1 Accountants' Consent
27 Financial Data Schedule.

- ---------------------

(b) Reports on Form 8-K

The Registrant did not file any reports on Form 8-K during the fourth quarter of
the 1998 fiscal year.

No Annual Report to Stockholders or proxy material has been sent to Stockholders
as of this date. Such report and proxy material will be furnished to
Stockholders after the filing of this Form and copies of such materials will be
furnished to the Commission when they are sent to Stockholders.

Schedule II
Cyanotech Corporation and Subsidiaries
Valuation and Qualifying Accounts (in thousands)
Years Ended March 31, 1998, 1997 and 1996

Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of year Expenses Accounts Deductions Year

Allowance for Doubtful Receivables
1998 $ -- 10 -- -- $ 10
1997 $ -- -- -- -- $ --
1996 $ -- -- -- -- $ --
`

INDEPENDENT AUDITORS' REPORT ON SCHEDULE

The Board of Directors
Cyanotech Corporation:

Under date of April 27, 1998, we reported on the consolidated balance sheets of
Cyanotech Corporation and subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1998, as
contained in the 1998 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year ended March 31, 1998. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule as listed in the accompanying
index. The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

/s/KPMG Peat Marwick LLP
Honolulu, Hawaii
April 27, 1998
17

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
June, 1998.

CYANOTECH CORPORATION

By:/s/Gerald R. Cysewski, Ph.D
----------------------------
Gerald R. Cysewski, Ph.D
Chairman of the Board,
President and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/Gerald R. Cysewski, Ph.D Chairman of the Board, President and June 23, 1998
- -------------------------- Chief Executive Officer (Principal
Gerald R. Cysewski, Ph.D Executive Officer)

/s/Ronald P. Scott Executive Vice President - Finance and June 23, 1998
- -------------------------- Administration, Secretary and Treasurer
Ronald P. Scott (Principal Financial and Accounting
Officer)

Director -------------
- --------------------------
Julian C. Baker

Director -------------
- --------------------------
Eva R. Reichl

/s/John T. Ushijima Director June 23, 1998
- --------------------------
John T. Ushijima

/s/Paul C. Yuen Director June 23, 1998
- --------------------------
Paul C. Yuen