CYANOTECH CORP, SB-2, 1996-02-15

CYANOTECH CORP
SB-2, 1996-02-15
MEDICINAL CHEMICALS & BOTANICAL PRODUCTS

Previous: DEFINED ASSET FUNDS MUNICIPAL INVT TR FD NEW YORK SER 97, 24F-2NT, 1996-02-15

Next: DEFINED ASSET FUNDS MUNICIPAL INVT TR FD INSURED SERIES 41, 24F-2NT, 1996-02-15

<PAGE>
As filed with the Securities and Exchange Commission on February 15, 1996

Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CYANOTECH CORPORATION
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
NEVADA 2833 91-1206026
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

73-4460 QUEEN KAAHUMANU HWY., SUITE 102
KAILUA-KONA, HI 96740
(808) 326-1353
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)

GERALD R. CYSEWSKI, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CYANOTECH CORPORATION
73-4460 QUEEN KAAHUMANU HWY., SUITE 102
KAILUA-KONA, HI 96740
(808) 326-1353

(Name and address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------

COPIES TO:

<TABLE>
<S> <C>
BRADFORD J. SHAFER, ESQ. AUGUST J. MORETTI, ESQ.
THOMAS J. LIMA, ESQ. RICHARD FRIEDMAN, ESQ.
TAMARA L. THOMPSON, ESQ. ALI N. GHIASSI, ESQ.
BROBECK, PHLEGER & HARRISON LLP HELLER EHRMAN WHITE & MCAULIFFE
ONE MARKET, SPEAR STREET TOWER 525 UNIVERSITY AVENUE
SAN FRANCISCO, CA 94105 PALO ALTO, CA 94301
(415) 442-0900 (415) 324-7000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C> <C> <C>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
Common Stock, par value $.005 per
share.............................. 1,725,000 $7.00 $12,075,000 $4,164
</TABLE>

(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended, based upon the
average of the high and low prices of Cyanotech Corporation Common Stock as
reported on The Nasdaq SmallCap Market on February 13, 1996.
--------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CYANOTECH CORPORATION
CROSS-REFERENCE SHEET

SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS ON FORM SB-2

<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM SB-2 REGISTRATION LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................. Outside Front Cover Page; Front of Registration
Statement
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages; Available
Information
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors; Inside Front Cover
Page
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Legal Proceedings.................................... Not Applicable
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Principal Stockholders
12. Description of Securities............................ Prospectus Summary; Capitalization; Description of
Capital Stock
13. Interest of Named Experts and Counsel................ Not Applicable
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
15. Organization Within Last Five Years.................. Not Applicable
16. Description of Business.............................. Prospectus Summary; Risk Factors; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business
17. Management's Discussion and Analysis or Plan of
Operation........................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property.............................. Business
19. Certain Relationships and Related
Transactions........................................ Certain Transactions; Principal Stockholders
20. Market for Common Equity and Related Stockholder
Matters............................................. Outside Front Cover Page; Prospectus Summary; Price
Range of Common Stock and Dividend Policy;
Description of Capital Stock; Shares Eligible for
Future Sale
21. Executive Compensation............................... Management
22. Financial Statements................................. Consolidated Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................. Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 15, 1996

1,500,000 SHARES

[COMPANY LOGO]
CYANOTECH CORPORATION

COMMON STOCK

All 1,500,000 shares of Common Stock offered hereby are being sold by
Cyanotech Corporation ("Cyanotech" or the "Company"). The Company's Common Stock
is currently traded on The Nasdaq SmallCap Market under the symbol "CYAN."
Application has been made to have the Common Stock approved for quotation on the
Nasdaq National Market under the same symbol. On February 14, 1996, the last
reported sale price of the Common Stock on The Nasdaq SmallCap Market was $6.75
per share. See "Price Range of Common Stock and Dividend Policy."
------------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- ---------------------------------------------------------------------------------------------------------------
Per Share........................ $ $ $
- -------------------------------------------------------------------------------------------
Total (3)........................ $ $ $
</TABLE>

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

(1) Does not include a non-accountable expense allowance payable by the Company
to the Representative of the Underwriters. See "Underwriting" for
indemnification arrangements with the several Underwriters.

(2) Before deducting expenses payable by the Company estimated at $465,000,
including the Representative's non-accountable expense allowance.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 225,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , Underwriting Discount will total
$ and the Proceeds to Company will total $ . See
"Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Van Kasper & Company, San Francisco, California on or about
, 1996.

Van Kasper & Company

, 1996
<PAGE>
CYANOTECH DEVELOPS AND COMMERCIALIZES NATURAL
PRODUCTS FROM MICROALGAE, A LARGELY UNEXPLORED AND UNEXPLOITED
RENEWABLE NATURAL RESOURCE

SPIRULINA is a naturally occurring multi-cellular microscopic plant that
grows extremely fast, producing a new crop approximately every week. The Company
has developed and produces a unique strain of this microalgae, SPIRULINA
PACIFICA, which is a vegetable-based, highly absorbable source of natural beta
carotene, mixed carotenoids and other phytonutrients, B vitamins, gamma
linolenic acid, protein and essential amino acids. SPIRULINA PACIFICA is sold
world-wide to the health and natural foods market.

[Photograph of Spirulina cells]

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 Company is
currently conducting pilot production work and feeding trials on natural
astaxanthin derived from the Haematococcuss microalgae, and is discussing a
strategic alliance with a major aquaculture feed formulator.

[Photograph of haematococcuss cells containing astaxanthin]

MOSQUITOCIDE PRODUCTS are currently under development by Cyanotech. The
toxin gene from Bacillus Thuringinsis var, israelensis (Bti) has been
genetically engineered into Synechococcus, a blue green algae which is a food
for mosquito larvae. The Company believes that when applied to a
mosquito-infested body of water, the algae could act as an effective and
environmentally safe means of control. Development of a commercial production
system for this product is scheduled to start by mid-1996.

[Photograph of Syneochoccus cells]

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>
Cyanotech has developed and implemented proprietary production and
harvesting technologies, systems and processes permitting year-round production
of SPIRULINA PACIFICA.

1. GROWING PONDS

SPIRULINA PACIFICA is cultured in shallow, open ponds adjacent to the
Pacific Ocean. Paddlewheels agitate the water, permitting even exposure of the
algae to the sun. A combination of fresh water and nutrient-rich deep ocean
water, drawn from a depth of 2,000 feet, is used to fill the ponds.

[Photograph of Spirulina growing ponds]

2. SEPARATION SCREENS

SPIRULINA PACIFICA is pumped from the culture ponds through underground
pipes to a process building where it is screened for particulate matter and then
separated by stainless steel screens from the culture medium. In this system,
100% of the growing media is continuously recycled to culture ponds to become
the nutrient base for the next crop.

[Photograph of stainless steel screens used in processing the Company's
Spirulina products]

3. VACUUM WASHING SYSTEM

Prior to drying, SPIRULINA PACIFICA is washed three times with fresh water
and vacuum filtered.

[Photograph of vacuum washing system used in processing the Company's
Spirulina products.]

4. OCEAN CHILL DRYING (U.S. PATENT 15,276,977)

Cyanotech has developed and patented a drying system for powder microalgae
products called OCEAN CHILL DRYING. The drying process takes approximately three
seconds and results in a dark green powder with a consistency similar to flour.

[Drawing depicting the Company's Ocean Chill Drying process]

5. FINISHED PRODUCT

Bulk SPIRULINA PACIFICA powder, tablets and flakes are packaged in foil
laminate heat-sealed bags with an oxygen absorbing pack sealed in each bag. This
packaging ensures product freshness and extends the shelf life of bulk SPIRULINA
PACIFICA.

[Photograph of finished powder packaging]

6. COLD COMPRESSION TABLETING

SPIRULINA PACIFICA tablets are produced by Cyanotech by blending SPIRULINA
PACIFICA powder with a minimum amount of excipients and tableting in a cold
compression tablet making machine.

[Photograph of cold compression tablet-making machine]

7. QUALITY ASSURANCE TESTING

A sample from each lot of SPIRULINA PACIFICA is subjected to quality
assurance testing including bulk density, moisture, particulate matter, color
and taste and subjected to a prescribed set of microbiological tests for food
products.

[Photograph of Quality Assurance Testing Process]
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE
NOTED AND UNLESS THE CONTEXT INDICATES OTHERWISE, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION
AND (II) CONVERSION OF THE COMPANY'S 1,250,000 SHARES OF SERIES A PREFERRED
STOCK INTO 250,000 SHARES OF COMMON STOCK, EFFECTIVE AS OF THE CLOSING OF THIS
OFFERING. SEE "UNDERWRITING."

THE COMPANY

Cyanotech develops and commercializes natural products from microalgae. The
Company is currently producing microalgae products for the nutritional
supplement and immunological diagnostics markets and is also developing
microalgae-based products for the aquaculture feed/pigments, biopesticide and
food coloring markets. 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 nutrients. Microalgae
represent a largely unexplored and unexploited renewable natural resource, which
grow much faster than land-based plants. Under favorable growing conditions,
certain microalgae produce a new crop every week. Cyanotech has 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. The Company's
technologies, systems, processes and favorable growing location permit
year-round harvesting of its microalgal products in a cost-effective manner. The
Company believes that these accomplishments have not been equaled by any other
company, university or research institute.

Cyanotech's principal revenues are derived from sales of microalgae-based
"Spirulina" products for the vitamin and supplement market, which for the United
States alone is estimated at $3.7 billion. SPIRULINA PACIFICA is a unique strain
of Spirulina developed by Cyanotech which provides a vegetable-based, highly
absorbable source of natural beta carotene, mixed carotenoids and other
phytonutrients, B vitamins, gamma linolenic acid ("GLA"), protein and essential
amino acids. The Company believes its Hawaiian SPIRULINA PACIFICA has achieved
high brand identity among both wholesale and retail customers, and that the
Company's products have better taste, more consistent color and greater
concentrations of natural beta carotene than competing Spirulina products. Since
1993, the Company has been capacity-constrained, with demand for its bulk
SPIRULINA PACIFICA products exceeding the Company's production capabilities. The
Company has tripled its Spirulina production capacity since 1993 and continues
to increase capacity. Cyanotech currently markets its products in the United
States and twelve other countries through a combination of retail, wholesale,
and private label channels, and plans to market new products either directly or
through strategic alliances where appropriate.

Cyanotech maintains an environmentally responsible philosophy in the
development and production of its products, using natural production methods and
resources which employ extensive recycling of raw materials and nutrients. The
Company believes that these recycling methods result in substantially lower
operating costs. The Company's production system operates without the use of
pesticides and herbicides, and does not create erosion, fertilizer runoff or
water pollution. The Company believes that it is the only producer of microalgae
to receive organic certification.

The Company is incorporated in Nevada. Its principal executive offices are
located at 73-4460 Queen Kaahumanu Hwy., Suite 102, Kailua-Kona, Hawaii 96740,
and its telephone number is (808) 326-1353. Unless otherwise indicated, all
references in this Prospectus to the "Company" and "Cyanotech" refer to
Cyanotech Corporation, a Nevada corporation, and its wholly-owned subsidiary,
Nutrex, Inc.

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

SPIRULINA PACIFICA-TM-, OCEAN-CHILL DRYING-TM-, HAWAIIAN ENERGIZER-TM- and
NUTREX-TM- are trademarks of the Company. SPIRULINA PACIFICA is a registered
trademark of the Company in Japan. The SPIRULINA PACIFICA logo is a registered
trademark of the Company in the United States. This Prospectus also includes
trademarks of entities other than the Company.

3
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,500,000 shares
Common Stock to be outstanding after the
offering.................................... 15,232,460 shares (1)
Use of proceeds.............................. Construction of additional Spirulina culture
ponds, a natural astaxanthin production
facility and culture ponds, a
laboratory/warehouse and a cogeneration
facility, and for working capital and general
corporate purposes
Nasdaq symbol................................ CYAN
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- --------------------
1994 1995 1994 1995
--------- --------- --------- ---------
CONSOLIDATED STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C>
Net sales............................................... $ 2,697 $ 4,150 $ 2,921 $ 5,972
Gross profit............................................ 1,202 1,875 1,339 3,188
Income from operations.................................. 220 718 534 1,781
Net income.............................................. 204 769 503 1,729
Net income per common share............................. $ 0.02 $ 0.05 $ 0.04 $ 0.12
Weighted average number of common shares and common
share equivalents...................................... 13,330 13,589 13,907 14,452
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------
DECEMBER
JUNE 30, SEPTEMBER 30, 31,
1995 1995 1995
----------- ------------- -----------
Net sales.................................................. $ 1,568 $ 2,056 $ 2,348
<S> <C> <C> <C>
Gross profit............................................... 778 1,113 1,297
Income from operations..................................... 418 621 742
Net income................................................. 413 605 711
Net income per common share................................ 0.03 0.04 0.05
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------
AS
ACTUAL ADJUSTED (2)
--------- -------------
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C>
Working capital........................................................ $ 1,004 $ 9,930
Equipment and leasehold improvements, net.............................. 7,204 7,204
Total assets........................................................... 9,649 18,575
Stockholders' equity................................................... 7,371 16,297
</TABLE>

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

(1) Includes 3,674,885 shares of Common Stock which are issuable upon conversion
of the Company's Series C Preferred Stock. Excludes as of December 31, 1995
(i) 997,000 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants, (ii) 400,000 shares of Common Stock reserved for
issuance under the Company's 1995 Stock Option Plan, of which options to
purchase 101,000 shares are outstanding, (iii) 213,475 shares of Common
Stock reserved for issuance pursuant to the exercise of outstanding options
under the Company's 1985 Incentive Stock Option Plan, (iv) 89,000 shares of
Common Stock reserved for issuance under the Company's 1994 Non-Employee
Directors Stock Option and Stock Grant Plan, of which options to purchase
9,000 shares of Common Stock are outstanding, and (v) 102,000 shares of
Common Stock issuable upon exercise of other non-qualified options to
purchase Common Stock. See "Capitalization," "Management -- Stock Option
Plan," "Certain Transactions" and "Description of Capital Stock."

(2) Adjusted to give effect to the sale of 1,500,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price per share
of $6.75, the last reported sale price of the Common Stock on The Nasdaq
SmallCap Market on February 14, 1996, and the application of the estimated
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."

4
<PAGE>
RISK FACTORS

THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON
STOCK OFFERED HEREBY.

PRODUCT CONCENTRATION

Since 1992 substantially all of the Company's net sales have been
attributable to its SPIRULINA PACIFICA products. Sales of SPIRULINA PACIFICA
products accounted for approximately 94%, 97% and 97% of the Company's net sales
in the years ended March 31, 1994 and 1995 and the nine months ended December
31, 1995, respectively. The Company believes that SPIRULINA PACIFICA products
will continue to constitute a substantial portion of net sales. The Company
plans to increase production of Spirulina products substantially in 1996 by
using a portion of the net proceeds from this offering to construct more
Spirulina ponds and related Spirulina processing facilities. There can be no
assurance that the market for Spirulina products in general, or the Company's
SPIRULINA PACIFICA products in particular, will support the increased output
anticipated from the Company's planned expansion. Any decrease in the overall
level of sales of, or the prices for, the Company's 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 the Company's business, financial condition and results of
operations. The Company's Spirulina products are rich in natural beta carotene.
Two large scale studies released in January 1996 on synthetic beta carotene
indicated that certain health benefits previously associated with beta carotene
generally do not exist in synthetic beta carotene. Although synthetic beta
carotene has different properties from natural beta carotene, consumers'
perception of beta carotene generally may be adversely affected by this and
other studies. If consumer perceptions of the negative effects of synthetic beta
carotene are extended to the Company's products which contain natural beta
carotene, the Company's business, financial condition and results of operation
could be materially adversely affected. See "Management's Discussions and
Analysis of Financial Condition and Results of Operations."

CUSTOMER CONCENTRATION AND RISKS ASSOCIATED WITH CHANGES IN PRODUCT MIX

Approximately 32.3% and 49.5% of the Company's net sales in the year ended
March 31, 1995 and the nine months ended December 31, 1995, respectively, were
derived from sales to the Company's top three customers during those periods.
The Company's largest customer, a Hong Kong-based natural products marketing and
distribution company, accounted for approximately 3.0% and 31.1% of Cyanotech's
net sales in the year ended March 31, 1995 and the nine months ended December
31, 1995, respectively. The Hong Kong-based company is a multilevel marketing
organization which purchases the Company's packaged consumer products and sells
them under a private label. The Company understands that the government of
China, where the Hong Kong-based company distributes the vast majority of the
products it purchases from the Company, is considering regulating multilevel
marketing organizations. Any such regulation could result in reduced orders for
the Company's products being placed by the Hong Kong-based company, which could
in turn have a material adverse effect on the Company's business, financial
condition and results of operations. The Company anticipates that sales to its
largest customer will continue to represent a significant portion of its total
net sales in the three months ending March 31, 1996 and in the year ending March
31, 1997, although there can be no assurance in this regard. The Company's
second largest customer, a Canadian Spirulina marketing and distribution
company, accounted for approximately 16.8% and 10.9% of Cyanotech's net sales in
the year ended March 31, 1995 and the nine months ended December 31, 1995,
respectively. The Company's third largest customer, a Dutch-based Spirulina
marketing and distribution company, accounted for approximately 12.5% and 7.5%
of Cyanotech's net sales in the year ended March 31, 1995 and the nine months
ended December 31, 1995, respectively. The loss of, or significant adverse
change in, the relationship between the Company and its largest customer or any
other major customer would have a material adverse effect on the Company's
business, financial condition and results of operations. The loss of, or
reduction in orders from, any significant customer, losses arising from customer
disputes regarding shipments, fees, product condition or related matters, or the
Company's inability to collect accounts receivable from any major customer could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Customers."

5
<PAGE>
A majority of the Company's net sales are derived from the Company's bulk
SPIRULINA PACIFICA products, which have lower associated gross profit (measured
in dollars) but higher associated gross margin (measured as a percentage of net
sales) than the Company's packaged consumer products. Accordingly, an increase
in the percentage of net sales attributable to bulk products would increase the
Company's gross margin. Conversely, an increase in the percentage of the
Company's net sales attributable to the Company's packaged consumer products
would decrease its gross margin but likely increase gross profit. The Company
expects that its product mix will vary from period to period, and a decrease in
orders from a customer such as the Company's largest current customer which
purchases only packaged consumer products could require the Company to
reallocate greater portions of its production capacity to its bulk SPIRULINA
PACIFICA products. In such event, the Company expects that its gross margin
would be favorably impacted but that its earnings would be adversely affected.

RISKS ASSOCIATED WITH EXPANSION INTO ADDITIONAL MARKETS AND PRODUCT DEVELOPMENT

Other than its Spirulina and phycobiliprotein products, the Company
currently has no products available for commercial sale. The Company believes
that its future success is substantially dependent on the expansion of the
worldwide Spirulina market and the Company's ability to successfully develop and
commercialize new products and penetrate new markets. For example, the Company
is currently conducting pilot production work on natural astaxanthin, a red
pigment principally used in the aquaculture industry to impart pink color to the
flesh of pen-raised fish and shrimp. Natural astaxanthin is a new product for
the Company and many production issues must be resolved prior to commercial
production. The Company's future product plans also include a genetically
engineered mosquitocide and natural food colorings. There can be no assurance
that the Company can successfully develop these or any other additional
products, that any such products will be capable of being produced in commercial
quantities at reasonable cost, or that any such products will achieve market
acceptance. The Company has little experience marketing its products directly
and is generally dependent on the marketing skills and efforts of third parties.
There can be no assurances as to whether the marketing efforts of such third
parties will be successful or whether such third parties will eventually compete
with the Company or assist the Company's competitors. Many other companies have
significantly greater marketing and product development experience and resources
to devote to marketing and product development than the Company. The Company has
entered into, and expects to enter into additional, selected strategic alliances
with third parties for product development and marketing. There can be no
assurances regarding the performance of such third parties, or the overall
success, if any, of such strategic alliances. The inability of the Company to
successfully develop or commercialize these or any additional products would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Products Under Development."

CONCENTRATION OF PRODUCTION CAPACITY; RELIANCE ON CLIMATE CONDITIONS

All of the Company's production capacity is located at its Kailua-Kona,
Hawaii facility, on property leased from the State of Hawaii and which is
situated on a 200-year-old lava flow adjacent to a dormant volcano. The Company
maintains minimal finished goods inventory. In the event that production at or
transportation from such facility were interrupted by fire, volcanic eruption,
earthquake, tidal wave, hurricane, or other natural disaster, work stoppage,
termination or suspension of the Company's facility lease by the State of Hawaii
for public use or similar purposes, other regulatory actions or any other cause,
the Company would be unable to continue to produce its products at such
facility. Such an interruption would materially and adversely affect the
Company's business, financial condition and results of operations. See "Business
- -- Manufacturing" and "-- Properties."

Due to the importance of sunlight and a consistent warm temperature for
microalgae growth, the Company's production is significantly affected by weather
patterns and seasonal weather changes. For example, the Company estimates that
its ponds are up to approximately 20% less productive between the months of
November and February due to fewer daylight hours and lower temperatures than
during other months of the year. Any unseasonably cool or cloudy weather would
adversely impact the Company's production and could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results."

6
<PAGE>
DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon the continued
service of Gerald R. Cysewski, its President and Chief Executive Officer, and
other members of the Company's executive management and the loss of any of such
key executives could have a material adverse effect on the Company's business,
financial condition or results of operations. Furthermore, the Company's future
performance depends on its ability to identify, recruit and retain key
management personnel. The competition for such personnel is intense, and there
can be no assurance the Company will be successful in such efforts. The Company
is also dependent on its ability to continue to attract, retain and motivate
production, distribution, sales and other personnel, of which there can be no
assurance. The failure to attract and retain such personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management."

RISKS ASSOCIATED WITH MANAGING EXPANDING OPERATIONS

Since 1992 the Company has experienced substantial growth in its revenues
and operations, and has undergone substantial changes in its business that have
placed significant demands on the Company's management, working capital and
financial and management control systems. The Company's current expansion plans
also may place a significant strain on the Company's management, working capital
and financial and management control systems. Failure to upgrade the Company's
operating, management and financial control systems or difficulties encountered
during such upgrades could adversely affect the Company's business, financial
condition and results of operations. Although the Company believes that its
systems and controls are adequate to address its current needs, there can be no
assurance that such systems will be adequate to address future expansion of the
Company's business. The Company's results of operations will be adversely
affected if revenues do not increase sufficiently to compensate for the increase
in operating expenses resulting from any expansion and there can be no assurance
that any expansion will be profitable or that it will not adversely affect the
Company's results of operations. In addition, the success of any future
expansion plans will depend in part upon the Company's ability to continue to
improve and expand its management and financial control systems, to attract,
retain and motivate key personnel, and to raise additional required capital.
There can be no assurance that the Company will be successful in these regards.

COMPETITION

The Company's 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 the Company, and many
of whom offer a greater variety of products. The Company believes that its
direct competition in the Spirulina market currently is from Dainippon Ink and
Chemical's Earthrise Farms facility in California. To a lesser extent, the
Company competes with numerous smaller farms in China, India, Thailand, Brazil
and South Africa. The Company's packaged consumer products marketed under its
Nutrex brand also compete with products marketed by health food manufacturing
customers of the Company who purchase bulk Spirulina from the Company and
package it for retail sales. A large Spirulina production facility located in
Mexico, which has been closed since 1993, may reopen. Should this facility
resume production in substantial quantities, the Company will encounter
increased competition.

7
<PAGE>
PACIFICA products have typically been sold at prices higher than other Spirulina
products. There can be no assurance that the Company will not experience
competitive pressure, particularly with respect to pricing, that could adversely
affect its business, financial condition and results of operations.

The products being developed by Cyanotech will compete with both synthetic
and natural products on the basis of price and quality. The Company's future
competitors may include major chemical and specialized biotechnology companies,
many of which have financial, technical and marketing resources significantly
greater than those of Cyanotech. Cyanotech believes that its proprietary
technology combined with the metabolic diversity and high productivity of
microalgae will allow the Company to compete in large market areas against large
companies, although there can be no assurance in this regard.

The Company's natural astaxanthin product, if successfully developed, will
compete directly against synthetic astaxanthin produced and marketed worldwide
by Hoffman LaRoche. The Company believes that there are no other significant
producers of astaxanthin. Although the Company is unaware of any studies
indicating that natural astaxanthin has any benefits not otherwise provided by
synthetic astaxanthin, it believes there is consumer demand for a natural
astaxanthin product. See "Business -- Competition."

DEPENDENCE ON PROPRIETARY TECHNOLOGY

Although the Company regards its proprietary technology, trade secrets,
trademarks and similar intellectual property as critical to its success and
relies on a combination of trade secret, contract, patent, copyright and
trademark law to establish and protect its rights in its products and
technology, there can be no assurance that the Company will be able to protect
its 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 one United States
patent issued to it. Litigation in the United States or abroad may be necessary
to enforce the Company's patent or other intellectual property rights, to
protect the Company's 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 the Company's business,
results of operations and financial condition. Additionally, although currently
there are no pending claims or lawsuits that have been brought against the
Company, if any such claims are asserted against the Company, the Company 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 the Company, if at all.

While the disclosure and use of Cyanotech's know-how and trade secrets are
generally controlled under agreements with the parties involved, there can be no
assurance that all confidentiality agreements will be honored, that others will
not independently develop equivalent technology, that disputes will not arise
concerning the ownership of intellectual property, or that dissemination of the
Company's trade secrets will not occur. The Company anticipates that it may in
the future apply for additional patents on certain aspects of its technology. No
assurance can be given that its patent applications will issue as patents or
that any patent now or to be issued will provide the Company with preferred
positions with respect to the covered technology. Additionally, there can be no
assurance that any patent issued to the Company will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
adequate protection to the Company's products. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's products or, if patents are issued to the Company, design around
the patents issued to the Company. See "Business -- Patents, Licenses and
Trademarks."

VOLATILITY OF STOCK PRICE

The Company's stock price has been, and is likely to continue to be, highly
volatile. The market price of the Common Stock has fluctuated substantially in
recent periods, rising from $1 1/8 on March 24, 1995, to a high of $14 7/8 at
November 27, 1995, to $6.75 at February 14, 1996. Future announcements
concerning the Company or its competitors, quarterly variations in operating
results, introduction of new products or changes in product pricing policies by
the Company or its competitors, changes in market demand for Spirulina,
acquisition or loss of significant customers, weather patterns and other acts of
nature that may affect or be perceived to affect the Company's production
capability, or changes in earnings estimates by

8
<PAGE>
analysts, among other factors, could cause the market price of the Common Stock
to fluctuate substantially. In addition, stock markets have experienced extreme
price and volume volatility in recent years. This volatility has had a
substantial effect on the market prices of securities of many smaller public
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of the Common Stock. There can be no assurance that the market
price of the Common Stock will not decline below the public offering price. See
"Price Range of Common Stock and Dividend Policy."

RISK OF PRODUCT LIABILITY

Use of the Company's products and potential products in human consumption
may expose the Company to liability claims from the use of such products,
although the Company has not been subject to any such claims to date. Although
the Company conducts regular quality assurance tests, there can be no assurance
that the Company's products will not suffer contamination at the Company's
facilities or in the distribution channel, which could in turn cause injury to
consumers. Although the Company does not have any reason to believe that natural
beta carotene increases health risks, one large scale study released in January
1996 indicated that among smokers and persons who worked with asbestos, users of
synthetic beta carotene suffered a higher incidence of death from lung cancer
and heart disease. The Company maintains product liability insurance in limited
amounts for products involving human consumption. However, there can be no
assurance that the Company's insurance will be adequate or will remain available
to cover any liabilities arising from use of the Company's current or future
products. A contamination problem, product liability claim or recall of products
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Product Liability and
Legal Proceedings."

RISKS ASSOCIATED WITH INTERNATIONAL SALES

In the years ended March 31, 1994 and 1995 and the nine months ended
December 31, 1995, international sales accounted for approximately 32%, 42% and
56%, respectively, of the Company's net sales. The Company expects that
international sales will continue to represent a significant portion of its
revenue. The Company's 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 the Company's international sales are currently
denominated in United States dollars, fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to
customers in the affected country, leading to a reduction in sales in that
country. Additionally, the Company's largest customer resells the Company's
products principally in mainland China, and thus the Company is exposed to
political, legal, economic and other risks and uncertainties associated with
doing business in China. See "-- Customer Concentration and Risks Associated
with Changes in Product Mix," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Marketing and Sales" and
"-- Distribution."

HISTORY OF LOSSES; FLUCTUATIONS IN OPERATING RESULTS

The Company was formed in 1983 and did not become profitable on an annual
basis until fiscal 1992. As of December 31, 1995, the Company's accumulated
deficit was $5.4 million. There can be no assurance that the Company will be
consistently profitable on either a quarterly or an annual basis. The Company
has experienced quarterly fluctuations in operating results and anticipates that
these fluctuations may continue in future periods. Future operating results may
fluctuate as a result of new product introductions, weather patterns, the mix
between sales of bulk products and packaged consumer products, start-up costs
associated with new facilities, expansion into new markets, sales promotions,
competition, increased energy costs, the announcement or introduction of new
products by the Company's competitors, changes in the Company's customer mix,
and overall trends in the market for Spirulina products. While a significant
portion of the Company's expense levels are relatively fixed, and the timing of
increases in expense levels is based in large part on the Company's forecasts of
future sales, if net sales are below expectations in any given period, the
adverse impact on results of operations may be magnified by the Company's
inability to adjust spending quickly enough to compensate for the sales
shortfall. The Company may also choose to reduce prices or

9
<PAGE>
increase spending in response to market conditions, which may have a material
adverse effect on the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quarterly Results."

POTENTIAL DIFFICULTY IN OBTAINING FDA AND OTHER GOVERNMENT APPROVALS

The Company'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 other countries, including the
Food and Drug Administration (the "FDA") pursuant to the Federal Food, Drug and
Cosmetic Act. Each line of products that is or may be marketed by the Company,
its licensees or its collaborators can present unique regulatory problems and
risks, depending on the product type, uses and method of manufacture. The FDA
regulates, to varying degrees and in different ways, dietary supplements,
nutritional products and diagnostic and pharmaceutical products, including their
manufacture, labeling, marketing and advertising. Generally, prescription
pharmaceuticals and certain types of diagnostic products are regulated more
rigorously than foods, such as dietary supplements. The Company 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. The Company works with foreign distributors in its 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 or other such regulatory
bodies, with possible retroactive effect, will not have a material adverse
effect on the Company's business, financial condition and results of operations.

The Company's Spirulina manufacturing processes and the Company's contract
bottlers are required to adhere to current Good Manufacturing Practices ("cGMP")
as prescribed by the FDA. The Company believes that it is currently in
compliance with all applicable cGMP regulations. Such regulations specify
component and product testing standards, quality assurance requirements, and
records and other documentation controls. Compliance with relevant cGMP
requirements can be onerous and time consuming, and there can be no assurance
that the Company can continue to meet relevant FDA manufacturing requirements
for existing products or meet such requirements for any future products. Ongoing
compliance with cGMP and other applicable regulatory requirements are monitored
through periodic inspections by state and federal agencies, including the FDA
and the Hawaii Department of Health and comparable agencies in other countries.
A determination that the Company is in violation of cGMP and other regulations
could lead to the imposition of civil penalties, including fines, product
recalls or product seizures, and potentially criminal sanctions.

Cyanotech's current food supplement and immunological diagnostic products do
not require clearance of the FDA. However, the Company's manufacturing process
is regulated under cGMP and is inspected periodically by the Hawaii State
Department of Health and the FDA. The Company's processing facility is also
inspected annually for organic certification by Quality Assurance International
and for Kosher certification by the Kosher Overseers Association.

Cyanotech's proposed astaxanthin product will need FDA clearance in the
United States. The Company believes that obtaining such clearance could be a
lengthy process. The Company believes that no regulatory approval is required
for use of astaxanthin in major markets outside the United States. The Company's
proposed genetically engineered mosquitocide will require clearance of the
Environmental Protection Agency with respect to efficacy and toxicity for use in
the United States. The Company's potential natural food coloring products may
require FDA clearance. There can be no assurance that any of the Company's
potential products will satisfy applicable regulatory requirements. See
"Business -- Government Regulation."

CONTROL BY OFFICERS AND DIRECTORS

The Company's officers and directors and their affiliates will, in the
aggregate, control approximately 39.8% of the voting power of the capital stock
of the Company upon completion of this offering. As a result, in certain
circumstances, these stockholders acting together may be able to determine
matters requiring

10
<PAGE>
approval of the stockholders of the Company, including the election of the
Company's directors, or they may delay, defer or prevent a change in control of
the Company. In addition, Eva R. Reichl, a director of the Company, has the
contractual right to nominate one person for election as a director. See
"Certain Transactions," "Principal Stockholders" and "Description of Capital
Stock."

EFFECT OF ANTI-TAKEOVER PROVISIONS

The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock, 734,977 of which are currently outstanding and
designated as Series C Preferred Stock, and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of
Preferred Stock. The consent of holders of a majority of the outstanding shares
of Series C Preferred Stock is required to change the powers, preferences or
rights of such shares, sell all or substantially all of the Company's assets or
merge the Company. Such rights could have the effect of delaying, deferring or
preventing a change in control of the Company. While the Company has no present
intention to issue additional shares of Preferred Stock, such issuance, while
providing desirable flexibility in connection with the possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of the Company and entrenching existing
management. In addition, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Company is also subject to the anti-takeover provisions of Sections
78.411 through 78.444 of the Nevada Revised Statutes, which restrict certain
"combinations" with "interested stockholders" unless certain conditions are met.
By delaying and deterring unsolicited takeover attempts, these provisions could
adversely affect prevailing market prices for the Company's Common Stock. See
"Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of shares of Common Stock in the public market
following the offering could have an adverse impact on the market price of the
Common Stock. After the closing of this offering, 7,209,212 shares of Common
Stock, including the 1,500,000 shares offered hereby, will be freely tradable
without restriction under the Securities Act. Of the 13,732,460 shares of Common
Stock held by the existing stockholders (assuming conversion of the Company's
Series C Preferred Stock), 7,460,748 shares are subject to lock-up agreements
with the Underwriters. The directors, executive officers and stockholders of the
Company who hold such shares have agreed, subject to certain limited exceptions,
not to offer, sell or otherwise dispose of, directly or indirectly, any shares
of Common Stock, or any securities convertible into or exercisable for, or any
rights to purchase or acquire, Common Stock owned by them for the 120-day period
after the closing of this offering without the prior written consent of Van
Kasper & Company. After the expiration of the lock-up period, the shares subject
to such lock-up agreements will become eligible for sale subject, with respect
to approximately 6,611,018 of those shares, to the provisions of Rule 144. The
Company has reserved 400,000 shares of Common Stock for issuance under the 1995
Stock Option Plan, options to purchase 101,000 shares of which have been
granted. The Company also has outstanding options to purchase 213,475 shares,
which options were granted under the 1985 Incentive Stock Option Plan. In
addition, the Company has options outstanding to purchase 9,000 shares under the
1994 Non-Employee Directors Stock Option and Stock Grant Plan and other
non-qualified options outstanding to purchase 102,000 shares of Common Stock.
The Company has filed registration statements under the Securities Act covering
an aggregate of 800,000 shares of Common Stock issuable under the Company's 1995
Stock Option Plan and 1985 Incentive Stock Option Plan. Shares issued upon the
exercise of stock options or previously issued on exercise, generally will be
available for sale in the open market subject to Rule 144 volume limitations
applicable to affiliates and the lock-up agreements with Van Kasper & Company
described above. No predictions can be made as to the effect, if any, that
market sales of Common Stock or the availability of Common Stock for sale will
have on the market price prevailing from time to time. Sale of a substantial
number of shares of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. See "Shares
Eligible for Future Sale."

11
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company are estimated to be approximately $8.9 million at an
assumed offering price of $6.75 per share, the last reported sale price of the
Common Stock on The Nasdaq SmallCap Market on February 14, 1996. Since 1993, the
Company has been capacity-constrained, with demand for its bulk SPIRULINA
PACIFICA products exceeding the Company's production capabilities. Accordingly,
the Company has not been able to accept any major new customers since March
1995. The Company intends to use approximately $4 million of the net proceeds of
the offering to construct additional culture ponds and related processing
facilities in order to increase the production of SPIRULINA PACIFICA products.
The balance of the net proceeds are expected to be used as follows: (i)
construction of a facility and culture ponds for the production of natural
astaxanthin, (ii) construction of a laboratory/warehouse, and (iii) construction
of a cogeneration facility. The remainder of the net proceeds will be used for
working capital and general corporate purposes.

Pending such uses, the Company intends to invest the net proceeds from this
offering in short-term interest-bearing securities, including government
obligations and money market instruments.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The following table sets forth the high and low bid quotation per share of
the Company's Common Stock on The Nasdaq SmallCap Market for the periods
indicated. Quotations from The Nasdaq SmallCap Market are from the Nasdaq
Monthly Statistical Summary Report, and reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions. Application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Year ended March 31, 1994
First Quarter......................................................... 1 7/8 1 3/16
Second Quarter........................................................ 1 3/8 1 1/8
Third Quarter......................................................... 1 9/16 1
Fourth Quarter........................................................ 1 1/2 1
Year ended March 31, 1995
First Quarter......................................................... 1 1/8 13/16
Second Quarter........................................................ 1 5/8 15/16
Third Quarter......................................................... 1 1/2 1 1/4
Fourth Quarter........................................................ 1 3/8 1 1/16
Year ending March 31, 1996
First Quarter......................................................... 1 3/8 1 1/16
Second Quarter........................................................ 3 3/8 1 1/8
Third Quarter......................................................... 14 7/8 5 1/8
Fourth Quarter (through February 14, 1996)............................ 11 3/8 6 3/8
</TABLE>

As of December 31, 1995, there were approximately 1,445 holders of record of
the Company's Common Stock. On February 14, 1996, the last reported sale price
of the Common Stock on The Nasdaq SmallCap Market was $6.75 per share.

The Company has never declared or paid cash dividends on its Common Stock.
Holders of Series C Preferred Stock are entitled to cumulative annual dividends
at the rate of $.40 per share if and when declared by the Board of Directors.
The Company may not pay dividends on the Common Stock until it has paid
accumulated dividends on the Series C Preferred Stock. Cumulative dividends in
arrears on the Series C Preferred Stock as of December 31, 1995 amounted to $1.9
million ($2.563 per share). The Company currently intends to retain all of its
earnings for use in its business and does not anticipate paying any cash
dividends on its Series C Preferred Stock or Common Stock in the foreseeable
future. See "Description of Capital Stock."

12
<PAGE>
CAPITALIZATION

The following table sets forth (i) the capitalization of the Company as of
December 31, 1995, (ii) the pro forma capitalization of the Company as of
December 31, 1995, assuming full conversion of all outstanding shares of Series
A Preferred Stock into shares of Common Stock, and (iii) the pro forma
capitalization of the Company as of December 31, 1995, as adjusted to reflect
the sale by the Company of 1,500,000 shares of Common Stock pursuant to this
offering and the receipt and application by the Company of the estimated net
proceeds therefrom, assuming a public offering price of $6.75 per share (the
last reported sale price of the Common Stock on The Nasdaq SmallCap Market on
February 14, 1996) and after deducting the estimated underwriting discount and
estimated offering expenses. The capitalization information set forth in the
table below is qualified by the more detailed consolidated financial statements
and notes thereto included elsewhere in this Prospectus and should be read in
conjunction with such consolidated financial statements and notes.

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Long-term liabilities, net of current portion.................................. $ 908 $ 908 $ 908
--------- ----------- -----------
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares authorized
Series A, 12% cumulative; 1,250,000 shares issued and outstanding, actual; no
shares issued and outstanding, pro forma and pro forma as adjusted;
liquidation value $0.40 per share plus unpaid accumulated dividends......... 1 -- --
Series C, 8% cumulative, convertible; 734,977 shares issued and outstanding,
actual, pro forma and pro forma as adjusted; liquidation value $5.00 per
share plus unpaid accumulated dividends..................................... 1 1 1
Common Stock, $0.005 par value, 18,000,000 shares authorized; 9,807,575 shares
issued and outstanding, actual; 10,057,575 shares issued and outstanding, pro
forma; 11,557,575 shares issued and outstanding, pro forma as adjusted (1).... 49 50 58
Additional paid-in capital..................................................... 12,720 12,720 21,638
Accumulated deficit............................................................ (5,400) (5,400) (5,400)
--------- ----------- -----------
Total stockholders' equity................................................... 7,371 7,371 16,297
--------- ----------- -----------
Total capitalization....................................................... $ 8,279 $ 8,279 $ 17,205
--------- ----------- -----------
--------- ----------- -----------
</TABLE>

(1) Excludes 3,674,885 shares of Common Stock which are issuable upon conversion
of the Company's Series C Preferred Stock. Also excludes as of December 31,
1995 (i) 997,000 shares of Common Stock reserved for issuance upon exercise
of outstanding warrants, (ii) 400,000 shares of Common Stock reserved for
issuance under the Company's 1995 Stock Option Plan, of which options to
purchase 101,000 shares are outstanding, (iii) 213,475 shares of Common
Stock reserved for issuance pursuant to the exercise of outstanding options
under the Company's 1985 Incentive Stock Option Plan, (iv) 89,000 shares of
Common Stock reserved for issuance under the Company's 1994 Non-Employee
Directors Stock Option and Stock Grant Plan, of which options to purchase
9,000 shares of Common Stock are outstanding, and (v) 102,000 shares of
Common Stock issuable upon exercise of other non-qualified options to
purchase Common Stock. See "Management -- Stock Option Plan," "Certain
Transactions" and "Description of Capital Stock."

13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth for the periods indicated selected
consolidated financial data for the Company. The consolidated statement of
income data for the years ended March 31, 1994 and 1995 and the consolidated
balance sheet data at March 31, 1994 and 1995 have been derived from the
Company's consolidated financial statements, which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The following
selected consolidated financial and operating data are qualified by the more
detailed consolidated financial statements of the Company and the notes thereto
included elsewhere in this Prospectus and should be read in conjunction with
such consolidated financial statements and notes and the discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The consolidated statement of
income data for the nine-month periods ended December 31, 1994 and 1995 and the
consolidated balance sheet data at December 31, 1995 are derived from unaudited
consolidated financial statements which, in the opinion of management, have been
prepared on the same basis as the audited consolidated financial statements and
contain all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position and results of operations for
such periods. The results of operations for the nine months ended December 31,
1995 are not necessarily indicative of results to be expected for the full year.

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- --------------------
1994 1995 1994 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA
Net sales............................................................. $ 2,697 $ 4,150 $ 2,921 $ 5,972
Cost of sales....................................................... 1,495 2,275 1,582 2,784
--------- --------- --------- ---------
Gross profit.......................................................... 1,202 1,875 1,339 3,188
--------- --------- --------- ---------
Operating expenses:
Research and development............................................ 59 171 93 243
General and administrative.......................................... 604 685 504 862
Sales and marketing................................................. 319 301 208 302
--------- --------- --------- ---------
Total operating expenses.......................................... 982 1,157 805 1,407
--------- --------- --------- ---------
Income from operations............................................ 220 718 534 1,781
--------- --------- --------- ---------
Other income (expense):
Interest income..................................................... 13 17 12 19
Interest expense.................................................... (16) (27) (19) (63)
Other income, net................................................... 22 98 13 --
Proportionate share of loss of joint venture........................ (35) (37) (37) --
--------- --------- --------- ---------
Total other income (expense)...................................... (16) 51 (31) (44)
--------- --------- --------- ---------
Net income before income taxes.................................... 204 769 503 1,737
Provision for income taxes........................................ -- -- -- 8
--------- --------- --------- ---------
Net income........................................................ $ 204 $ 769 $ 503 $ 1,729
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share....................................... $ 0.02 $ 0.05 $ 0.04 $ 0.12
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common shares and common share
equivalents.......................................................... 13,330 13,589 13,907 14,452
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- -------------
<S> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................................................. $ 870 $ 600 $ 1,004
Equipment and leasehold improvements, net....................................... 3,365 4,635 7,204
Total assets.................................................................... 5,132 6,212 9,649
Stockholders' equity............................................................ 4,160 5,104 7,371
</TABLE>

14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Substantially all of the Company's resources are currently dedicated to the
production of SPIRULINA PACIFICA, a nutritional microalgae. The Company sells
SPIRULINA PACIFICA to health food manufacturers, health food distributors and
retail consumers on a worldwide basis. Through the application of its Integrated
Culture Biology Management ("ICBM") technology, the Company maintains continuous
algae cultures and produces a new crop from each of its 45 algal culture ponds
(aggregating approximately 28 acres) approximately every week on average. For
the year ended March 31, 1994, with an average of 17 culture ponds in operation
(aggregating approximately 10 acres), the Company had net sales of $2,697,000
and net income of $204,000. For the year ended March 31, 1995, with an average
of 25 culture ponds in operation (aggregating approximately 15 acres), the
Company had net sales of $4,150,000 and net income of $769,000.

Since 1993 the Company has been capacity-constrained, with demand for its
bulk SPIRULINA PACIFICA products exceeding the Company's production
capabilities. Historically, a majority of the Company's net sales have been
derived from the Company's bulk SPIRULINA PACIFICA products, which have lower
associated gross profit (measured in dollars) but higher associated gross margin
(measured as a percentage of net sales) than the Company's packaged consumer
products. Accordingly, an increase in the percentage of net sales attributable
to bulk SPIRULINA PACIFICA products would increase the Company's gross margin.
Conversely, an increase in the percentage of the Company's net sales
attributable to the Company's packaged consumer products would decrease its
gross margin but likely increase gross profit. The Company expects that its
product mix will vary from period to period, and a decrease in orders from a
customer such as the Company's largest current customer which purchases only
packaged consumer products could require the Company to reallocate greater
portions of its production capacity to its bulk SPIRULINA PACIFICA products. In
such event, the Company expects that its gross margin would be favorably
impacted but that its earnings would be adversely affected. See "Risk Factors --
Product Concentration and Product Mix."

The Company is currently producing SPIRULINA PACIFICA at full capacity and,
with a portion of the net proceeds of this offering, is planning to
significantly increase the rate of production by late 1996. There can be no
assurance that the favorable supply/demand characteristics of the market for
SPIRULINA PACIFICA will continue. In order to meet the increasing demand for the
Company's Spirulina products, the Company completed construction of six
additional 36,000 square foot algal culture ponds during December 1995, bringing
the total number of ponds to 45. The Company is currently constructing six
additional such ponds and installing the associated equipment. This work is
expected to be completed by late February 1996 and full production attained by
early March 1996. The Company intends to undertake a substantial pond expansion
project that is currently scheduled to be completed in late 1996 with a portion
of the net proceeds from this offering.

Using a portion of the net proceeds of this offering, the Company plans to
begin construction of a natural astaxanthin production facility in mid-1996.

15
<PAGE>
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31,
-------------------- --------------------
1994 1995 1994 1995
--------- --------- --------- ---------
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
<S> <C> <C> <C> <C>
Cost of sales....................................... 55.4 54.8 54.2 46.6
--------- --------- --------- ---------
Gross profit.......................................... 44.6 45.2 45.8 53.4
--------- --------- --------- ---------
Operating expenses:
Research and development............................ 2.2 4.1 3.2 4.1
General and administrative.......................... 22.4 16.5 17.2 14.4
Sales and marketing................................. 11.8 7.3 7.1 5.1
--------- --------- --------- ---------
Total operating expenses.......................... 36.4 27.9 27.5 23.6
--------- --------- --------- ---------
Income from operations............................ 8.2 17.3 18.3 29.8
--------- --------- --------- ---------
Other income (expense):
Interest income..................................... 0.4 0.4 0.4 0.3
Interest expense.................................... (0.5) (0.7) (0.6) (1.0)
Other income, net................................... 0.8 2.4 0.4 --
Proportionate share of loss of joint venture........ (1.3) (0.9) (1.3) --
--------- --------- --------- ---------
Total other income (expense)...................... (0.6) 1.2 (1.1) (0.7)
--------- --------- --------- ---------
Net income before income taxes.................... 7.6 18.5 17.2 29.1
Income taxes...................................... -- -- -- (0.1)
--------- --------- --------- ---------
Net income........................................ 7.6% 18.5% 17.2% 29.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994

NET SALES

Net sales for the nine months ended December 31, 1995 increased 104.5% to
$5,972,000 from $2,921,000 for the comparable period in 1994. The increase is
attributable to increased prices, increased sales of bulk Spirulina powder and
tablets and increased sales of packaged consumer products. The increased
production is a result of the Spirulina production expansions that were
completed in October 1994 and May 1995. Due to the Company's capacity
constraints, it has not been able to accept any major new customers since March
1995. However, approximately $1,982,000 of the period to period increase
resulted from increased sales to the Company's largest customer, a Hong
Kong-based natural products marketing and distribution company which purchases
packaged consumer products for private label resale. See "Risk Factors --
Customer Concentration and Risks Associated with Changes in Product Mix."

International sales represented 56% and 39% of total net sales for the nine
months ended December 31, 1995 and 1994, respectively. The increase is
attributable principally to the Company's increasing emphasis on developing
international markets and higher sales of packaged consumer products into Asian
retail markets.

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. The Company's gross profit increased
138.1% to $3,188,000 for the nine months ended December 31, 1995 from $1,339,000
in the comparable period of 1994. The Company's gross margin was 53.4% for the
nine months ended

16
<PAGE>
December 31, 1995 compared to 45.8% for the comparable period of 1994. The
increase in gross margin was primarily attributable to higher prices and higher
production levels resulting in the absorption of fixed manufacturing overhead
costs over a significantly increased sales volume during the period.

OPERATING EXPENSES

Operating expenses were $1,407,000 for the nine months ended December 31,
1995, an increase of 74.8% from $805,000 in the comparable period of the prior
year, and represented 23.6% of net sales compared to 27.5% of net sales for the
nine months ended December 31, 1994. The improvement as a percentage of net
sales was due to increased sales for the nine months ended December 31, 1995.

RESEARCH AND DEVELOPMENT. Research and development expense increased to
$243,000, or 4.1% of net sales, for the nine months ended December 31, 1995,
from $93,000 or 3.2% of net sales, for the nine months ended December 31, 1994.
The increase from the prior period was primarily the result of the research work
done on natural beta carotene products for the joint venture partnership with
Hauser Chemical Research, Inc. ("Hauser") and on natural astaxanthin. Research
and development costs are expected to increase further during the remainder of
the year ending March 31, 1996, and increase substantially during future years
as the Company continues work on the development of natural astaxanthin,
genetically engineered mosquitocide and other algae products.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $862,000, or 14.4% of net sales, for the nine months ended December 31, 1995,
from $504,000, or 17.2% of net sales, for the comparable period of the prior
year. This increase in absolute dollars was due to the payment of associate
incentive bonuses indexed to the Company's profitability during the nine months
ended December 31, 1995, higher insurance costs and compensation expense
associated with grants of Common Stock to non-employee directors.

SALES AND MARKETING. Sales and marketing expenses increased to $302,000 or
5.1% of net sales, for the nine months ended December 31, 1995, from $208,000,
or 7.1% of net sales, for the comparable period of the prior year. The increase
was primarily due to higher payroll and travel expenditures. The Company
anticipates that sales and marketing expenses will increase during the remainder
of the year ending March 31, 1996 and in future years as the Company increases
its marketing efforts both domestically and internationally.

PROPORTIONATE SHARE OF LOSS FROM JOINT VENTURE

Proportionate share of loss from joint venture represents the Company's 50%
ownership interest in a joint venture with Acquasearch, Inc. for the development
of astaxanthin. The loss in the nine months ended December 31, 1994 represents
services and facilities and equipment use that was contributed to the joint
venture by the Company. The joint venture was terminated in November 1994 by
mutual consent and the Company has no further obligation under the joint venture
arrangement.

INCOME TAXES

The tax provision of $7,500 for the nine months ended December 31, 1995
represents estimated alternative minimum taxes payable. The Company made no
provision for income taxes for the nine months ended December 31, 1994 due to
the utilization of tax net operating loss carry forwards. As of March 31, 1995,
tax net operating loss and tax credit carryforwards amounted to $6.8 million and
$140,000, respectively. Subject to certain limitations and differences between
federal and state tax laws, the Company expects to apply these carryforwards to
taxable income and/or income taxes in the year ending March 31, 1996 and in
future years until such carryforwards are fully utilized or expire unutilized.

17
<PAGE>
YEARS ENDED MARCH 31, 1995 AND 1994

NET SALES

Net sales for the year ended March 31, 1995 were $4,150,000, a 54% increase
over net sales of $2,697,000 for the year ended March 31, 1994. The increase in
net sales during the year ended March 31, 1995 was due primarily to price
increases and significantly higher production and sales of bulk Spirulina powder
and tablets. The increased production was the result of Spirulina production
expansions that were completed in March and October of 1994.

International sales represented 42% and 32% of total net sales for the years
ended March 31, 1995 and 1994, respectively. This increase reflects the
Company's increasing emphasis on developing international markets.

GROSS PROFIT

Gross profit increased 56.0% to $1,875,000 for the year ended March 31, 1995
from $1,202,000 for the year ended March 31, 1994. The slight increase in gross
margin to 45.2% for the year ended March 31, 1995 from 44.6% for the year ended
March 31, 1994 was due primarily to higher prices and higher production levels.

OPERATING EXPENSES

Operating expenses were $1,157,000 for the year ended March 31, 1995, an
increase of 17.8% from $982,000 in the prior year. These expenses represented
27.9% and 36.4% of net sales for the years ended March 31, 1995 and 1994,
respectively.

RESEARCH AND DEVELOPMENT. Expenditures for research and development during
the year ended March 31, 1995 increased by 189.8% to $171,000 from the limited
activity of the prior year primarily as a result of the research work being done
for the joint venture partnership with Hauser.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
13.4% to $685,000 during the year ended March 31, 1995 primarily due to higher
insurance and payroll expenditures.

SALES AND MARKETING. Sales and marketing expenses decreased 5.6% to
$301,000 during the year ended March 31, 1995 from 1994 due to lower advertising
and promotion expenditures associated with the Nutrex product line.

Inflation during the years ended March 31, 1994 and 1995 and the nine months
ended December 31, 1995 did not have a material impact on the Company's
operations.

QUARTERLY RESULTS

The following table sets forth certain unaudited quarterly financial data
for the four quarters in the year ended March 31, 1995 and the first three
quarters in the year ending March 31, 1996. In the opinion of the Company's
management, this unaudited information has been prepared on the same basis as
the audited consolidated financial statements contained herein and includes all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the information set forth therein. The operating results for any quarter
are not necessarily indicative of results for any future period.

18
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1994 1994 1995 1995 1995
----------- --------------- --------------- ----------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales.......................... $ 930 $ 1,043 $ 948 $ 1,229 $ 1,568 $ 2,056
Cost of sales.................... 516 525 539 695 790 943
----- ------ ----- ----------- ----------- ------
Gross profit..................... 414 518 409 534 778 1,113
----- ------ ----- ----------- ----------- ------
Operating expenses:
Research and development......... 24 30 39 78 69 89
General and administrative....... 156 181 168 180 206 315
Sales and marketing.............. 65 69 75 92 85 87
----- ------ ----- ----------- ----------- ------
Total operating expenses....... 245 280 282 350 360 491
----- ------ ----- ----------- ----------- ------
Income from operations......... 169 238 127 184 418 621
----- ------ ----- ----------- ----------- ------
Other income (expense):
Interest income.................. 4 4 4 5 6 4
Interest expense................. (8) (7) (4) (8) (10) (21)
Other income, net................ 9 1 3 85 (1) 1
Proportionate share of loss of
joint venture................... (13) (24) -- -- -- --
----- ------ ----- ----------- ----------- ------
Total other income (expense)... (8) (26) 3 82 (5) (16)
----- ------ ----- ----------- ----------- ------
Net income before income
taxes......................... 161 212 130 266 413 605
Provision for income taxes..... -- -- -- -- -- --
----- ------ ----- ----------- ----------- ------
Net income..................... $ 161 $ 212 $ 130 $ 266 $ 413 $ 605
----- ------ ----- ----------- ----------- ------
----- ------ ----- ----------- ----------- ------

DECEMBER 31,
1995
-------------

<S> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales.......................... $ 2,348
Cost of sales.................... 1,051
------
Gross profit..................... 1,297
------
Operating expenses:
Research and development......... 85
General and administrative....... 341
Sales and marketing.............. 130
------
Total operating expenses....... 556
------
Income from operations......... 742
------
Other income (expense):
Interest income.................. 9
Interest expense................. (32)
Other income, net................ --
Proportionate share of loss of
joint venture................... --
------
Total other income (expense)... (23)
------
Net income before income
taxes......................... 719
Provision for income taxes..... 8
------
Net income..................... $ 711
------
------
</TABLE>

The following table sets forth certain consolidated statement of income data
as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1994 1994 1995 1995 1995
----------- --------------- --------------- ----------- ----------- ---------------
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
<S> <C> <C> <C> <C> <C> <C>
Cost of sales................ 55.5 50.3 56.9 56.6 50.4 45.9
----- ----- ----- ----- ----- -----
Gross profit................. 44.5 49.7 43.1 43.4 49.6 54.1
----- ----- ----- ----- ----- -----
Operating expenses:
Research and development..... 2.5 2.9 4.1 6.3 4.4 4.4
General and administrative... 16.8 17.4 17.7 14.6 13.1 15.3
Sales and marketing.......... 7.0 6.6 7.9 7.5 5.4 4.2
----- ----- ----- ----- ----- -----
Total operating expenses... 26.3 26.9 29.7 28.4 22.9 23.9
----- ----- ----- ----- ----- -----
Income from operations..... 18.2 22.8 13.4 15.0 26.7 30.2
----- ----- ----- ----- ----- -----
Other income (expense):
Interest income.............. 0.4 0.4 0.4 0.4 0.4 0.3
Interest expense............. (0.9) (0.7) (0.4) (0.6) (0.6) (1.0)
Other income, net............ 1.0 0.1 0.3 6.9 (0.1) --
Proportionate share of loss
of joint venture............ (1.4) (2.3) -- -- -- --
----- ----- ----- ----- ----- -----
Total other income
(expense)................. (0.9) (2.5) 0.3 6.6 (0.4) (0.8)
----- ----- ----- ----- ----- -----
Net income before income
taxes..................... 17.3 20.3 13.7 21.6 26.3 29.4
Provision for income
taxes..................... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Net income................. 17.3% 20.3% 13.7% 21.6% 26.3% 29.4%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----

DECEMBER 31,
1995
---------------
Net sales...................... 100.0%
<S> <C>
Cost of sales................ 44.7
-----
Gross profit................. 55.3
-----
Operating expenses:
Research and development..... 3.6
General and administrative... 14.5
Sales and marketing.......... 5.6
-----
Total operating expenses... 23.7
-----
Income from operations..... 31.6
-----
Other income (expense):
Interest income.............. 0.4
Interest expense............. (1.4)
Other income, net............ --
Proportionate share of loss
of joint venture............ --
-----
Total other income
(expense)................. (1.0)
-----
Net income before income
taxes..................... 30.6
Provision for income
taxes..................... 0.3
-----
Net income................. 30.3%
-----
-----
</TABLE>

19
<PAGE>
Although the Company has been profitable in each of the last seven quarters,
there can be no assurance that such profitability will continue or that levels
of net sales, income from operations and net income will not vary significantly
among quarterly periods. The Company has experienced quarterly fluctuations in
operating results and anticipates that these fluctuations may continue in future
periods. Due to the importance of sunlight and temperature for microalgae
growth, the Company's production is significantly affected by weather patterns
and seasonal weather changes. The Company estimates that its ponds are up to
approximately 20% less productive between the months of November and February
due to less sunlight and lower temperatures. The decline in net sales in the
quarter ended December 31, 1994 from the quarter ended September 30, 1994
resulted from this seasonality combined with the fact that there was no increase
in the number of producing ponds between those two periods. Future operating
results may fluctuate as a result of new product introductions, weather
patterns, the mix between sales of bulk products and packaged consumer products,
start-up costs associated with new facilities, expansion into new markets, sales
promotions, competition, increased energy costs, the announcement or
introduction of new products by the Company's competitors, changes in the
Company's customer mix, and overall trends in the market for Spirulina products.
See "Risk Factors -- History of Losses; Fluctuations in Operating Results."

LIQUIDITY AND CAPITAL RESOURCES

In recent periods, the Company has met its operating and capital
requirements from cash flow from operating activities, additional borrowings and
proceeds from the exercise of warrants and stock options. The Company's cash and
cash equivalent balance increased by $280,000 during the nine months ended
December 31, 1995. The increase was primarily due to increased profit levels,
borrowings from two customers and proceeds from the exercise of warrants and
stock options. Major uses of cash during the nine months ended December 31, 1995
included $643,000 in additional accounts receivable to support the higher sales
level and $2,622,000 in additional investment in culture ponds and equipment to
increase Spirulina production capacity. Largely as a result of the increases in
cash and accounts receivable, working capital increased $404,000 during the nine
months ended December 31, 1995. The Company presently estimates that its
existing capital resources, the net proceeds from this offering and interest
thereon, together with its facility and equipment financing and expected cash
flow from operations, will be sufficient to fund its current and planned
operations and capital expenditures. The Company currently has no bank credit
lines.

As of December 31, 1995, the Company had construction commitments totalling
$1,120,000, which the Company intends to fund from cash reserves and cash flow
from operations. In addition, the Company intends to use approximately $7.5
million of the net proceeds from this offering for the construction of (i)
additional culture ponds and related processing facilities, (ii) a facility and
culture ponds for the production of natural astaxanthin, (iii) a
laboratory/warehouse, and (iv) a cogeneration facility. See "Use of Proceeds."

NEW ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized. Measurement of
that loss would be based on the fair value of the asset. Generally, SFAS No. 121
requires that long-lived assets and certain intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
provisions of SFAS No. 121 must be adopted by the Company no later than April 1,
1996. The Company has not determined when it will adopt the provisions of SFAS
No. 121 but does not expect adoption to have a material effect on the Company's
consolidated financial statements.

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a new,
fair value based method of measuring stock-based compensation, but does not
require an entity to adopt the new method for preparing its basic financial
statements. For entities not adopting the new method for preparing basic
financial statements, SFAS No. 123 requires disclosure in the footnotes of pro
forma net earnings and earnings per share information as if the fair value based
method had been adopted. Adoption of SFAS No. 123 is required no later than the
Company's year ending March 31, 1997. The disclosure requirements of SFAS No.
123 are effective for financial statements for fiscal years beginning after
December 31, 1995. The Company will comply with the disclosure requirements of
SFAS No. 123 in its financial statements for its year ending March 31, 1997.

20
<PAGE>
BUSINESS

OVERVIEW

Cyanotech develops and commercializes natural products from microalgae. The
Company is currently producing microalgae products for the nutritional
supplement and immunological diagnostics markets and is also developing
microalgae-based products for the aquaculture feed/pigments, biopesticide and
food coloring markets. 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 nutrients. Microalgae
represent a largely unexplored and unexploited renewable natural resource, which
grow much faster than land-based plants. Under favorable growing conditions,
certain microalgae produce a new crop every week. Cyanotech has 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. The Company
believes its technologies, systems, processes and favorable growing location
permit year-round harvesting of its microalgal products in a cost effective
manner. The Company believes that these accomplishments have not been equaled by
any other company, university or research institute.

Cyanotech's principal revenues are derived from sales of microalgae-based
"Spirulina" products for the vitamin and supplement market, which for the United
States alone is estimated at $3.7 billion. SPIRULINA PACIFICA is a unique strain
of Spirulina developed by Cyanotech which provides a vegetable-based, highly
absorbable source of natural beta carotene, mixed carotenoids and other
phytonutrients, B vitamins, gamma linolenic acid ("GLA"), protein and essential
amino acids. The Company believes its Hawaiian SPIRULINA PACIFICA has achieved
high brand identity among both wholesale and retail customers, and that the
Company's products have better taste, more consistent color and greater
concentrations of natural beta carotene than competing Spirulina products. Since
1993, the Company has been capacity-constrained, with demand for its bulk
SPIRULINA PACIFICA products exceeding the Company's production capabilities. The
Company has tripled its Spirulina production capacity since 1993 and continues
to increase capacity. Cyanotech currently markets its products in the United
States on twelve other countries through a combination of retail, wholesale, and
private label channels, and plans to market new products either directly or
through strategic alliances where appropriate.

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 grow extremely fast, making it possible to harvest a new
crop every week utilizing optimal culture and processing technologies. The raw
materials required for microalgae growth are abundant and include sunlight,
carbon dioxide and agricultural fertilizers.

Research on potential uses of microalgae began in the early 1900s and
intensified after World War II. One of the first comprehensive reviews on
applications of microalgae and methods to grow microalgae was in ALGAL CULTURE
FROM LABORATORY TO PILOT PLANT, published by the Carnegie Institute in 1953.
Most early work centered on microalgae as a food and this theme was carried into
recent work by NASA, which continues to examine microalgae as a source of food
as well as a means to remove carbon dioxide and generate oxygen in outer space.
Current industry and university research is directed at identifying unique
compounds produced by microalgae for the fine chemical and pharmaceutical
markets.

Over 30,000 species of microalgae are known to exist and represent a largely
unexplored and unexploited renewable natural resource. Microalgae has the
following properties that make the commercial

21
<PAGE>
production attractive: (1) microalgae grow much faster than land grown plants;
(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) cellular uniformity also 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; and (5) microalgae contain natural pigments and are a
potential source of medical products.

Commercial applications for these microscopic plants include nutritional
products, diagnostic products, aquaculture feed/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. These include forms of Spirulina, Chlorella, lake grown blue green
algae and natural beta carotene from DUNALIELLA SALINA. These microalgae food
supplements contain, in varying degrees, highly absorbable sources of
phytonutrients including mixed carotenoids, B vitamins, GLA, protein and
essential amino acids. Published scientific animal studies suggest that
increased levels of some of these natural compounds in the diet may reduce the
risk of heart disease, reduce the risk of many types of cancer, and strengthen
the immune system. The Company believes that demand for these microalgae
products has increased as the benefits of plant-based nutrients, commonly known
as "green superfoods," are beginning to receive promotion in retail markets
outside the health food community.

While many unique compounds have been identified in microalgae, the
efficient and cost effective commercial production of microalgae is elusive.
Many microalgae culture systems have been designed and tested and failed over
the last 20 years. Because microalgae produced for food supplements is typically
cultivated and harvested outdoors, production is affected significantly 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 as quickly, resulting in longer harvesting
cycles, decreased pond utilization and increased cost. Furthermore, microalgal
growth requires a 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 restarted, a process that further
decreases pond utilization and increases production costs.

Microalgae producers also face relatively high harvesting and processing
costs, particularly with respect to the energy costs required to dry the
microalgae prior to packaging and the labor required throughout the harvesting
and processing cycles. Once harvested, microalgal cells contain from 85% to 95%
water. The high water content is due to internal water in the cells that cannot
be removed by mechanical means. The Company estimates that the cost of
conventional heat-based microalgae drying processes represents approximately 30%
of total production cost. Most drying systems also damage or destroy oxygen
sensitive nutrients in the finished microalgae products.

THE CYANOTECH SOLUTION

Cyanotech has 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 ("ICBM"). Through the application of this technology,
Cyanotech's ponds are in production year-round without any significant loss in
productivity due to contamination. The Company believes that such an
accomplishment remains unique to Cyanotech. Certain aspects of the ICBM
technology are also applicable to producing other microalgae products which the
Company currently has under development. The Company believes that its ICBM
technology combined with the climate conditions at its production facility in
Hawaii make it a cost-effective producer of premium Spirulina products.

In addition to the advantages of its ICBM technology, Cyanotech has
developed a patented system for the recovery of carbon dioxide from its 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, the

22
<PAGE>
Company is able to divert the recovered carbon dioxide back to the algae
cultures to nourish the growing algae. The Company believes that this process
provides it with a significant cost advantage over other microalgae producers
who must purchase carbon dioxide. OCEAN-CHILL DRYING also dries microalgal
products in a low oxygen environment which protects oxygen sensitive nutrients.
In addition, Cyanotech has developed an automated Spirulina processing system,
which enables a single operator to harvest and produce dried Spirulina powder.

Another major advantage for the Company is the location of its production
facility at the Hawaii Ocean Science and Technology ("HOST") Park at Keahole
Point, Hawaii. The Company believes that the combination of consistent warm
temperature, abundant sunlight, and low rainfall at this facility makes this a
favorable location for economically cultivating microalgae on a large scale. The
Company believes that in contrast to its facility, other microalgae production
facilities located in areas lacking these characteristics stop producing
microalgae for up to four months a year because of unfavorable climate or
weather conditions.

At the HOST Park, the Company has access to cold, clean, deep sea water that
is pumped up 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, Cyanotech's facility has access to a complete
industrial infrastructure and is located 30 miles from a deep water port and
adjacent to an airport. The Company believes that the combination of its ICBM
technology, favorable growing location, year-round production capability,
OCEAN-CHILL DRYING process and automated processing system can be successfully
applied to the large-scale cultivation of other species of microalgae that may
be identified for commercial applications. The Company is currently conducting
pilot production work on natural astaxanthin, a red pigment used primarily in
the aquaculture industry to impart pink color to the flesh of pen-raised fish
and shrimp. Among the Company's other microalgae products under development are
a genetically engineered mosquitocide and natural food colorings.

CYANOTECH'S STRATEGY

The Company's objective is to be the leading developer and producer of
microalgal products in its existing and future markets. The Company seeks to
achieve this objective through the following strategies:

- INCREASE THE COMPANY'S SPIRULINA MARKET SHARE. The Company intends to
increase its world market share for Spirulina by expanding channels of
distribution, expanding geographically and locating new potential markets
for Spirulina. The Company plans to expand domestic sales and marketing
efforts for its Nutrex products and private label packaged products, and
to explore mass marketing opportunities for Spirulina based products. The
Company's products are sold in twelve foreign countries and the Company is
investigating ways to expand the global presence of its products,
including through the addition of foreign distributors. The Company is
investigating potential additonal uses for Spirulina. To this end, the
Company intends to fund limited clinical trials on the effects of
Spirulina on arthritis and the immune system, and to fund studies for the
use of Spirulina as a premium animal feed.

- PROMOTE BRAND UNIQUENESS AND PACKAGED PRODUCTS. Cyanotech is the only
Hawaiian producer of Spirulina and has developed a unique strain of
Spirulina marketed as "SPIRULINA PACIFICA." Manufacturers who market
Cyanotech's brand generally identify and promote Hawaiian Spirulina as a
superior product. The private label customers also promote the brand
uniqueness of Hawaiian Spirulina, which the Company believes provides
competitive differentiation in the market place. The Company plans to
increase marketing emphasis on packaged products, which generally have
higher associated gross profit per pound than bulk products. The Company
believes that it is the only producer of microalgae to receive organic
certification.

- INCREASE BREADTH OF PRODUCT OFFERINGS. The Company is developing and plans
to develop other products from microalgae, utilizing, in part, its current
production technologies. These products include aquaculture feed/pigments
and biopesticides. The Company is currently conducting pilot production

23
<PAGE>
work on natural astaxanthin, a red pigment used primarily in the
aquaculture industry to impart pink color to the flesh of pen-raised fish
and shrimp. Among the Company's other products under development are a
genetically engineered mosquitocide and natural food colorings.

- ESTABLISH STRATEGIC ALLIANCES. The Company intends to market new and
existing products through strategic alliances where appropriate. The
Company believes that these alliances will allow it to focus on its core
business as a microalgal producer and to gain access to broader markets.
For example, the Company is currently discussing strategic alliances for
its proposed natural astaxanthin product with a major aquaculture feed
formulator.

- CONTINUE IMPROVEMENT UPON PRODUCTION METHODOLOGIES. Cyanotech intends to
continue to improve upon its ICBM proprietary production system and
OCEAN-CHILL DRYING system and apply certain of those technologies in the
development of additional microalgae-based products for the aquaculture
feed/pigments, biopesticide and food coloring markets, nutrition, as well
as other potential commercial uses.

- PROMOTE ENVIRONMENTAL RESPONSIBILITY. Cyanotech has a strong commitment to
the environment. The Company's production system recovers carbon dioxide
from its drying system exhaust gas, recycles 100% of the growing media,
operates without the use of pesticides or herbicides, and does not create
erosion, fertilizer runoff or water pollution. The Company believes that
these recycling methods result in substantially lower operating costs.

TECHNOLOGY

Cyanotech has developed the following proprietary technology for the
efficient, stable and cost-effective production of microalgal products:

- INTEGRATED CULTURE BIOLOGY MANAGEMENT. Most notable among the Company's
technology is the proprietary ICBM microalgae production method which
integrates culture pond chemistry and harvesting and processing methods
designed to maintain optimal microalgae growing conditions. The Company
believes that ICBM has eliminated many of the stability and contamination
problems frequently encountered in the large scale production of
microalgae. Currently, the Company's Spirulina microalgae is produced
using ICBM in a system in which 100% of the growing media is continuously
recycled to culture ponds to become the nutrient base for the next crop.
Culture ponds generally are harvested approximately once each week.
Spirulina production with ICBM has proven to be an extremely stable
operating environment, permitting the Company to grow and harvest
Spirulina year-round without any significant problems of contamination by
unwanted algae and associated loss of productivity. The Company believes
that such an accomplishment has not been equaled by any other company,
university or research institute.

- OCEAN-CHILL DRYING. Cyanotech has also developed and patented a drying
system for powder microalgal products. Called OCEAN-CHILL DRYING, this
unique system utilizes cold sea water brought from a depth of 2,000 feet
in a closed-cycle modified spray-drying system that cools and removes
moisture from the air exiting the dryer. This dryer air is then recycled,
permitting the Company to control and reduce oxygen levels within the
dryer. This minimizes product oxidation and increases carbon dioxide
levels to concentrations that make recovery feasible. The recovered carbon
dioxide is then fed to the algae culture ponds as a nutrient source. This
system substantially eliminates carbon dioxide exhaust emissions, provides
a higher quality product, and significantly reduces production costs by
recovering carbon dioxide that would otherwise have to be purchased.

24
<PAGE>
PRODUCTS AND PRODUCT CANDIDATES

The following table summarizes the market applications and current status of
the Company's current products and products under development.

MARKET APPLICATION STATUS
<S> <C> <C>
CURRENT PRODUCTS:
SPIRULINA PACIFICA Powder Health and nutrition Domestic and international
wholesale and retail sales
SPIRULINA PACIFICA Tablets Health and nutrition Domestic and international
wholesale and retail sales
SPIRULINA PACIFICA Flakes Health and nutrition Domestic retail sales
HAWAIIAN ENERGIZER Sports Health and nutrition Domestic retail sales
Drink Powder
HAWAIIAN ENERGIZER Tablets Health and nutrition Domestic retail sales
Phycobiliproteins Immunological
diagnostics Domestic and international sales
PRODUCTS UNDER DEVELOPMENT:
Natural Astaxanthin Aquaculture pigment Pilot production in process
Genetically Engineered Pesticide Production system development work
Mosquitocide expected to start mid-1996
Natural Food Colorings Food manufacturers Pilot production in process
</TABLE>

PRODUCTS

SPIRULINA

Cyanotech's principal product is a nutritional microalgae marketed as
SPIRULINA PACIFICA, a unique strain of Spirulina developed by Cyanotech and sold
worldwide to the health and natural foods market. SPIRULINA PACIFICA is a
vegetable microalgae that is a highly absorbable source of natural beta
carotene, mixed carotenoids and other phytonutrients, B vitamins, GLA, protein
and essential amino acids. The Company believes SPIRULINA PACIFICA has greater
concentrations of natural beta carotene, better taste and more consistent color
than competing Spirulina products. The Company believes that it is the only
Spirulina producer to have its products and processes certified organic.

Spirulina is a naturally occurring microscopic plant which grows wild
throughout the world in alkaline environments such as soda lakes. It has been
used for thousands of years as a food. Today, Spirulina is used by the health
conscious consumer for a variety of immediate and long term effects. Based on
customer testimonials, the Company believes that the primary immediate benefits
Spirulina provides are increased energy and, in people who have arthritis or
injuries, decreased joint pain. Spirulina is a good source of natural
phytonutrients, including carotenoids and phycocyanin, among others. Published
scientific animal studies suggest that increased levels of some of these natural
compounds in the diet may reduce the risk of heart disease, reduce the risk of
many types of cancer, and strengthen the immune system.

The Company produces SPIRULINA PACIFICA in three forms: powder, flake and
tablets. Powder is used as an ingredient in health food drinks while flakes are
used as a seasoning on salads and pasta. Tablets are consumed daily as a food
supplement. The retail price of the Company's Spirulina consumer packaged
products is approximately for a one-month supply.

The Company also produces and markets 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.

25
<PAGE>
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.

The Company produces a line of four phycobiliprotein products with various
spectral properties. R-phycoerythrin (RPE) is a red pigment used primarily in
flow cytometry. Allo-phycocyanin (APC) is a blue pigment also used in flow
cytometry, but typically in combination with RPE to form a fluorescent tandem
phycobiliprotein conjugate which improves sensitivity. Cross-linked
allo-phycocyanin (XL-APC) is a stabilized form of APC which can be used in very
diluted solution without problems of degradation. C-phycocyanin (CPC) is also a
blue pigment and, although not used extensively in cytometry, has potential
applications in food and cosmetics coloring. The Company's phycobiliproteins
currently range in price from $5,000 to $33,000 per gram. Sales of
phycobiliproteins accounted for less than 3% of the Company's net sales for the
nine months ended December 31, 1995. The Company anticipates that sales of
phycobiliproteins will not be material in future periods.

PRODUCTS UNDER DEVELOPMENT

Cyanotech's expertise is in the development of efficient, stable and
cost-effective production systems for microalgal products. The Company does not
conduct basic scientific research to identify new microalgal products or develop
new microalgal products through genetic engineering. Rather, the Company
investigates specific microalgae identified in scientific literature for
potentially marketable products. When necessary, the Company will license
specific organisms and/or basic science technology for pilot-studies.

Three products are under active development by Cyanotech: natural
astaxanthin, genetically engineered mosquitocide and natural food colorings.

NATURAL ASTAXANTHIN

Astaxanthin is a red pigment used primarily in the aquaculture industry to
impart pink color to the flesh of pen-raised fish and shrimp. For example,
without astaxanthin in their diet, the flesh of pen-raised salmon is white and
has a limited market. Studies suggest that astaxanthin may improve the general
health of fish. The astaxanthin market currently is dominated by Hoffman
LaRoche, which produces synthetic astaxanthin from petrochemicals. The Company
believes that Hoffman LaRoche currently sells synthetic astaxanthin to the
aquaculture industry at $1,140 per pure pound.

The Company is currently discussing a strategic alliance for its natural
astaxanthin with a major aquaculture feed formulator. The Company has also been
working with this feed formulator to schedule feeding tests at a major salmon
production facility. Presently, feeding schedules call for Cyanotech to deliver
limited amounts of natural astaxanthin product beginning in March 1996.

Using a portion of the net proceeds of this offering, the Company plans to
begin construction of a natural astaxanthin production facility by mid-1996.
Natural astaxanthin is a new product for the Company and many production issues
must be resolved prior to commercial production. There can be no assurance that
the Company will resolve production issues or that the Company will successfully
complete its pilot production scale studies of natural astaxanthin. See "Risk
Factors -- Risks Associated with Expansion into Additional Markets and Product
Development."

GENETICALLY ENGINEERED MOSQUITOCIDE

A genetically engineered mosquitocide was developed at the University of
Memphis by a team under the direction of Professor Edward Stevens, Jr., who
successfully cloned the toxin gene from BACILLUS THURINGINSIS VAR, ISRAELENSIS
(Bti) into the blue-green algae SYNECHOCOCCUS. The bacterial toxin of Bti is
very specific to mosquitoes and black flies, while the blue-green algae is a
food for mosquito larvae. The Company believes that when applied to a
mosquito-infested body of water, the algae could act as an effective and
environmentally safe means of control.

26
<PAGE>
In June 1995, Cyanotech signed an exclusive worldwide license agreement with
the University of Memphis to manufacture and sell the genetically engineered
mosquitocide. Work to develop a commercial production system is scheduled to
start by mid-1996. In addition to being a nuisance, mosquitoes are carriers for
viral encephalitis in the United States, and major carriers for a number of
diseases throughout the world including malaria, yellow fever, dengue fever and
filariasis. The Company is currently investigating the possible application of
this technology to other biopesticides.

NATURAL FOOD COLORINGS

Natural beta carotene, a fat soluble pigment found in many plants, can be
used as a yellow/orange coloring agent for margarine, cake mixes, soft drinks
and other products. The Company believes that there are no other natural
yellow/orange food colorings available today.

In August 1994, Cyanotech and Hauser formed a joint venture partnership,
BetaPharm International, to develop, produce and sell products derived from
DUNALIELLA SALINA (natural beta carotene). Pilot scale studies are underway to
determine the economic and technical feasibility of producing certain products
derived from natural beta carotene. If the results of the project warrant and
market conditions dictate, the joint venture will proceed to obtain funding to
commercialize the product. The parties must agree on all commercialization
funding decisions. If commercialization (i.e., obtaining production plant
funding) cannot be reached by December 31, 1996, the joint venture will dissolve
and licenses granted by the parties under the joint venture will terminate.

OTHER POTENTIAL PRODUCTS

Many potential commercial substances have been identified in microalgae
including amino acids, vitamins, fatty acids, pigments, enzymes, anti-bacterial
agents and anti-viral agents. Cyanotech believes that it has, and is further
developing, technology which will allow the Company to produce a variety of
products from microalgae. Of particular interest to the Company is the
production of natural colorants for use in foods and cosmetics and an expanded
line of biopesticides through genetic manipulation of microalgae. Cyanotech
believes that a large market may exist for these products, and that while
government approval for such products may be required, Cyanotech believes
approval may be obtained in a shorter time period and with less expense than for
pharmaceutical products. The Company believes that as new potential products are
either identified in microalgae or genetically engineered into microalgae, it
will be in a unique position to employ its proprietary and commercially proven
technology for the cost effective production of these potential products.

MANUFACTURING

SPIRULINA

Cyanotech began culturing SPIRULINA PACIFICA in 1985 at its present facility
at the HOST Park. SPIRULINA PACIFICA is cultured in shallow, open ponds adjacent
to the Pacific Ocean. Paddlewheels agitate the water, permitting even exposure
of the algae to the sun. A combination of fresh water and nutrient-rich deep
ocean water, drawn from a depth of 2,000 feet, is used to fill the Spirulina
ponds. Ninety-six trace elements are supplied by deep ocean water. The other
major components required for growing Spirulina are food-grade baking soda
(sodium bicarbonate) and carbon dioxide.

SPIRULINA PACIFICA is pumped from the culture ponds through underground
pipes to a process building where it is screened for particulate matter and then
separated by stainless steel screens from the culture medium. It is then washed
three times with fresh water and vacuum filtered. SPIRULINA PACIFICA intended
for use in powder and tablets is dried by a patented OCEAN-CHILL DRYING process.
The Company uses deep ocean water in its OCEAN-CHILL DRYING process. The Company
obtains the cold water from the HOST Park at a cost substantially less than the
cost of generating the same cooling effect by refrigeration. The drying process
takes approximately three seconds and results in a dark green powder with a
consistency similar to flour. SPIRULINA PACIFICA prepared in flake form is dried
in a more conventional proprietary process. Bulk SPIRULINA PACIFICA powder,
tablets and flakes are packaged in foil laminate heat-sealed bags with an oxygen
absorbing pack sealed in each bag. This packaging ensures product freshness and
extends the shelf life of bulk SPIRULINA PACIFICA.

27
<PAGE>
Carbon dioxide is recovered as a result of the OCEAN-CHILL DRYING process
and fed back to the culture ponds as a nutrient. By use of ICBM, all culture
media from the harvest are recycled to culture ponds and additional nutrients
are added to support the next growth phase. Active culture remaining in the
ponds after harvest serves to inoculate the next batch. The algae reproduces
rapidly, and, on average, approximately one week is required before the culture
pond is again harvested. Spirulina production with ICBM has proved to be an
extremely stable operating environment, permitting the Company to grow and
harvest Spirulina without any significant problems of contamination by unwanted
algae and associated loss of productivity. The Company believes that its
Spirulina competitors continue to experience problems of culture contamination
by unwanted algae, requiring that culture ponds be emptied, cleaned and
restarted. The Company is presently pursuing certification under the
international quality management system ISO 9000.

Spirulina powder is difficult to tablet and most tablet manufacturers
overcome this difficulty by either adding high amounts (from 10% to 30%) of
excipients to "glue" the tablet together or by using a heat granulation process
that destroys nutrients. SPIRULINA PACIFICA tablets are produced by the Company
by blending SPIRULINA PACIFICA powder with a minimum amount of excipients
(maximum of 2%) and tableting in a cold press compression tablet-making machine.
SPIRULINA PACIFICA flakes are produced by blending SPIRULINA PACIFICA powder
with food-grade lecithin and drying this in a proprietary drying system. The
Company's packaged consumer products are bottled and labeled by two
subcontractors in California, both of which are certified cGMP manufacturers and
undergo regular governmental inspections.

A sample from each lot of SPIRULINA PACIFICA is subjected to quality
assurance testing. Quality assurance testing includes bulk density, moisture,
particulate matter, color and taste. In addition, each lot of SPIRULINA PACIFICA
is subjected to a prescribed set of microbiological tests for food products,
including total aerobic bacteria, coliform bacteria and E. coli. SPIRULINA
PACIFICA powder is certified free of pesticides and herbicides, and certified
Kosher.

Since 1993 Cyanotech tripled its production capacity of Spirulina to its
present annual production capacity of 350 metric tons per year. In June 1995,
the Company more than doubled its drying capacity.

NATURAL ASTAXANTHIN

Cyanotech is conducting pilot production work to develop a commercial
production system for natural astaxanthin. HAEMATOCOCCUS, the microalgae which
produces astaxanthin, grows in neutral conditions and is susceptible to
contamination by unwanted algae. Cyanotech is developing a proprietary system
which it believes will solve this problem. The Company employs a closed culture
system during the initial stage of algal growth, after which it is transferred
to open ponds for astaxanthin production. An additional advantage of the
Company's pilot system is the ability to control the temperature of algal
cultures by the use of cold seawater. The Company believes that the application
of certain aspects of its ICBM technology to its two stage culture system, in
combination with its unique site location, will permit it to compete
successfully with synthetic astaxanthin on the basis of both price and quality.

28
<PAGE>
MARKETING AND SALES

The Company believes that its present bulk customers could consume a
significant portion of the increased production of Spirulina from the facilities
expansion funded by a portion of the net proceeds of this offering. However, it
is the Company's strategy to first emphasize sales of higher priced packaged
consumer products through its own Nutrex brand and private label customers,
since sales of packaged consumer products carry higher associated gross profit
than sales of bulk products. Cyanotech intends to form strategic alliances with
established mass market sales and distribution companies to sell Spirulina
products into mass markets. The Company also intends to take certain efforts
targeted at expanding the bulk market for Spirulina and to continue to
differentiate its products based on quality, taste and color consistency.

- PRODUCT IDENTITY AND BRAND UNIQUENESS. Cyanotech is the only Hawaiian
producer of Spirulina and has developed a unique strain of Spirulina
marketed as "SPIRULINA PACIFICA." Manufacturers who market Cyanotech's
brand generally identify and promote Hawaiian Spirulina as a superior
product. The private label customers also promote the brand uniqueness of
Hawaiian Spirulina, which the Company believes provides competitive
differentiation in the market place. The Company plans to increase
marketing emphasis on packaged products, which generally have higher
associated gross profit per pound than bulk products.

- EXPAND SALES OF CONSUMER PACKAGED PRODUCTS.

PRIVATE LABEL CONSUMER PACKAGED PRODUCTS. The Company has achieved
significant sales of private label products in certain Pacific Rim
countries. Cyanotech plans to capitalize upon its unique Hawaiian brand to
increase the number of both domestic and international private label
customers.

NUTREX BRAND PRODUCTS. The Company believes that a substantial opportunity
exists to increase domestic sales of its Nutrex brand products. Nutrex
packaged consumer products and certain of the Company's private label
products currently are the only organic certified microalgal products,
which the Company believes is important to health and natural food
consumers. The Company is launching a new label and an intensified retail
marketing program. The initial thrust of this program will be to focus
resources on high volume, large natural food store chains such as Whole
Foods, Mrs. Gooches, Alfalfas, Wild Oats, Bread and Circus, and Puget
Consumers Cooperatives. The Company intends to hire domestic sales
personnel and increase spending on Nutrex marketing activities.

- DEVELOP STRATEGIC ALLIANCES. The Company is seeking strategic alliances
with sales and distribution companies that have proven track records in
mass market sales and distribution outside the health food industry. The
objective is to generate sales of consumer packaged products in chain drug
stores and discount stores. Cyanotech anticipates coordinating this
program with media advertising.

- EXPAND BULK SALES. The Company intends to focus marketing efforts on its
existing bulk customers in order to increase bulk sales. Cyanotech
develops product literature and marketing materials for bulk customers,
sponsors cooperative advertising, participates in trade shows and provides
speakers for product forums and press interviews. The Company plans to
sponsor feed studies on the benefits of incorporating SPIRULINA PACIFICA
in feed formulations for poultry, pets and fish in an effort to expand the
bulk market for Spirulina products.

- DIFFERENTIATE PRODUCTS ON QUALITY ADVANTAGES. Cyanotech believes it has
established a quality advantage for its SPIRULINA PACIFICA in the health
food and nutrition industry. The Company plans on maintaining its premium
status through (i) continued education of customers about the Company's
product quality and (ii) consistent improvement of product quality through
improved processing and handling of finished goods.

DISTRIBUTION

The majority of Cyanotech's 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, the
Company sells directly to manufacturers and health food formulators. Packaged
consumer products sell in the domestic market through an established health food
distribution network and

29
<PAGE>
via mail order. Orders for packaged consumer products are taken at the store
level by one of 34 regional broker representatives and shipped through one of 22
distributors. In the foreign markets the Company has appointed exclusive sales
distributors for both bulk Spirulina and packaged consumer products. The Company
now has exclusive sales distributors for the following regions: (i) Japan,
Korea, Taiwan and Singapore; (ii) Canada; (iii) the Benelux Countries; (iv)
Australia; (v) Hong Kong and China; and (vi) France.

CUSTOMERS

Cyanotech markets and sells its Spirulina products to health food
manufacturers, private label customers, retail distributors, natural products
distributors and direct to certain natural food stores. The Company's customers
range in size from large enterprises with over $500 million in annual sales to
small neighborhood retail stores. Several of the Company's major customers are
businesses that were established exclusively to market and sell Spirulina
products. The Company cooperates closely with these customers to develop product
labeling and advertising designed to educate the consumer about the health
benefits of using a "green superfood" such as Spirulina and, more specifically,
SPIRULINA PACIFICA products. Net sales to the Company's three largest customers
increased from approximately 32.3% of net sales in the year ended March 31, 1995
to approximately 49.5% of net sales in the nine months ended December 31, 1995.
Since 1993 the Company has been capacity-constrained, with demand for its bulk
SPIRULINA PACIFICA products exceeding the Company's production capabilities. The
Company has not been able to accept any major new customers since March 1995.

HEALTH FOOD MANUFACTURERS. Health food manufacturers use the Company's
products as the key ingredient in Spirulina products, or as an ingredient in
health food formulations, which they manufacture for sale. 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. In some instances, these
customers produce products under private-labeling arrangements with third
parties. Many of the products produced by these customers are often marketed and
sold in direct competition with the Nutrex line of retail consumer products.
However, the Company differentiates its products from those of its bulk
customers by reserving the certified organic line of products for sale
exclusively under the Nutrex label and certain private labels.

PRIVATE LABEL CUSTOMERS. The Company currently provides private label
retail consumer products to two international customers. Using Spirulina tablets
produced by the Company, the products are packaged by one of the Company's two
bottling subcontractors in Southern California, using product labels supplied by
the customer. Products for these customers are manufactured only upon receipt of
an order; finished product inventories are not maintained by the Company.

RETAIL DISTRIBUTORS. According to WHOLE FOODS RETAILER magazine, in the
domestic health and natural food industry, retail distributors account for
approximately 57% of all products sold to health and natural food retailers.
Retail distributors act as product wholesalers to independent and chain
retailers. The majority of domestic Nutrex sales in the nine months ended
December 31, 1995 were to 22 distributors. Pricing and promotional strategies
with respect to retail distributors are coordinated by the Company's master
broker, an independent consultant retained by the Company on a month-to-month
basis.

NATURAL PRODUCTS DISTRIBUTORS. In the nine months ended December 31, 1995,
the Company sold to three U.S. 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 FOOD STORES. Less than 5% of the Company's sales in the nine months
ended December 31, 1995, were direct sales to independent or chain natural food
retail stores. The Company believes that most natural food retail stores prefer
to purchase products from retail distributors.

30
<PAGE>
COMPETITION

SPIRULINA

The Company's 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 the Company, and many
of whom offer a greater variety of products. The Company believes that its
direct competition in the Spirulina market currently is from Dainippon Ink and
Chemical's Earthrise Farms facility in California and numerous smaller farms in
China, India, Thailand, Brazil and South Africa, but that the Company is the
only producer of certified organic microalgal consumer products. The Company's
packaged consumer products marketed under its Nutrex brand also compete with
products marketed by health food manufacturing customers of the Company who
purchase bulk Spirulina from the Company and package it for retail sales. A
large Spirulina production facility in Mexico, which has been closed since 1993,
may reopen. Should this facility resume production in substantial quantities,
the Company would encounter increased competition.

In addition to other Spirulina based products, SPIRULINA PACIFICA competes
in certain markets with other "green superfoods," such as Chlorella (a green
microalgae with sales primarily in Japan), APHAMIZOMENON (a blue-green algae
harvested from an eutrophic lake in Oregon with sales primarily through
multilevel marketing) and cereal grasses such as barley, wheat and kamut. In
addition, major food and beverage companies may become more active in the
nutritional products business, either directly or through the acquisition of
smaller companies. A decision by another company to focus on the Company's
existing markets or target markets or a substantial increase in the overall
supply of Spirulina could have a material adverse effect on the Company's
business, financial condition and results of operations. While the Company
believes that it competes favorably on factors such as quality, brand name
recognition and loyalty, the Company's SPIRULINA PACIFICA products have
typically been sold at prices higher than most other Spirulina products. There
can be no assurance that the Company will not experience competitive pressure,
particularly with respect to pricing, that could adversely affect its business,
financial condition and results of operations. See "Risk Factors -- Competition"
and "-- Customer Concentration and Risks Associated with Changes in Product
Mix."

PHYCOBILIPROTEINS

There are four major competitors which 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. In addition, one large potential user of
phycobiliproteins, Coulter, Inc., manufactures phycobiliproteins for its
internal use. 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 the Company's 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.

PRODUCTS UNDER DEVELOPMENT

31
<PAGE>
Cyanotech's proposed mosquitocide product may, if successfully developed,
compete with chemical pesticides as well as other biopesticides. Three companies
currently manufacture a mosquito biopesticide based on the bacterial Bti toxin:
Abbot Laboratories, Novo and Sandoz. There can be no assurance that Cyanotech's
proposed product, if successfully developed, can or would compete favorably with
the other Bti products currently available.

The Company's natural food coloring, if successfully developed, will compete
directly with synthetic food colorings as well as natural food colorings
produced by other companies.

GOVERNMENT REGULATION

The Company's Spirulina manufacturing processes and the Company's contract
bottlers are required to adhere to current Good Manufacturing Practices ("cGMP")
as prescribed by the FDA. The Company believes that it is currently in
compliance with all applicable cGMP regulations. Such regulations specify
component and product testing standards, quality assurance requirements, and
records and other documentation controls. Compliance with relevant cGMP
requirements can be onerous and time consuming, and there can be no assurance
that the Company can continue to meet relevant FDA manufacturing requirements
for existing products or meet such requirements for any future products. Ongoing
compliance with 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. A
determination that the Company is in violation of cGMP and other regulations
could lead to the imposition of civil penalties, including fines, product
recalls or product seizures, and potentially criminal sanctions.

As either a food supplement or vitro diagnostic, Cyanotech's current
products do not require clearance by the FDA. However, the Company's Spirulina
manufacturing process is regulated under cGMP and is inspected periodically by
the Hawaii State Department of Health and the FDA. The Company's processing
facility is also inspected annually for organic certification by Quality
Assurance International and for Kosher certification by the Kosher Overseers
Association.

Cyanotech's proposed astaxanthin product will need FDA clearance in the
United States. The Company believes that obtaining such clearance could be a
lengthy process. The Company believes that no regulatory approval is required
for use of astaxanthin in major markets outside the United States. The Company's
proposed genetically engineered mosquitocide will require the approval of the
Environmental Protection Agency with respect to efficacy and toxicity for use in
the United States. The Company's potential natural food coloring products may
require FDA clearance. There can be no assurance that any of the Company's
potential products will satisfy applicable regulatory requirements. See "Risk
Factors -- Potential Difficulty in Obtaining FDA and Other Government
Approvals."

32
<PAGE>
PATENTS, LICENSES AND TRADEMARKS

Although the Company regards its proprietary technology, trade secrets,
trademarks and similar intellectual property as critical to its success and
relies on a combination of trade secret, contract, patent, copyright and
trademark law to establish and protect its rights in its products and
technology, there can be no assurance that the Company will be able to protect
its 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 one United States
patent issued to it. Litigation in the United States or abroad may be necessary
to enforce the Company's patent or other intellectual property rights, to
protect the Company's 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 the Company's business,
results of operations and financial condition. Additionally, although currently
there are no pending claims or lawsuits that have been brought against the
Company, if any such claims are asserted against the Company, the Company 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 the Company, if at all.

ASSOCIATES

The Company employed 53 associates as of December 31, 1995, of which 49 are
full-time. Approximately 20 associates are involved in the harvesting and
production process, five 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. The Company has not
experienced difficulty in attracting personnel. None of the Company's associates
are represented by a labor union.

Effective April 1, 1995, the Company implemented a profit sharing plan for
all associates not covered under a separate management incentive plan. Under the
profit sharing plan, 5% of pre-tax profits are allocated based on gross wages to
non-management associates on a quarterly basis. Fifty percent of each
associate's profit sharing bonus is distributed in cash on an after-tax basis,
the remainder is deposited in each associate's 401(k) account on a pre-tax basis
with a six year vesting schedule, based on years of service with the Company.

PROPERTIES

The Company is located in Kailua-Kona, Hawaii, at the HOST Park. The
facility in Kailua-Kona consists of approximately 77 leased acres containing
production ponds, a processing facility, a laboratory, administrative offices
and additional space for production ponds. 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. Cyanotech is in negotiations to obtain an
option to lease an additional 160 acres at the HOST Park. The Company believes
that there is sufficient available land at the HOST Park to meet its currently
planned needs. The Company has no production facilities or offices outside the
State of Hawaii.

33
<PAGE>
PRODUCT LIABILITY AND LEGAL PROCEEDINGS

Cyanotech is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the normal course of its business. These actions could include
product liability, employee-related issues and disputes with vendors or
customers. Due to the nature of the Company's products, the Company may be
subject to product liability claims involving personal injuries allegedly
related to the Company's products. The Company carries 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. Nevertheless, any future claims are
subject to the uncertainties related to litigation and the ultimate outcome of
any such proceedings or claims cannot be predicted. There can be no assurance
that the Company's insurance is adequate or will remain available to cover any
such claims. In addition, the Company may experience product recalls, although
no such recalls have been required to date. See "Risk Factors -- Risk of Product
Liability."

34
<PAGE>
MANAGEMENT

DIRECTORS AND OFFICERS

The directors and executive officers of Cyanotech and their respective ages
and positions with Cyanotech are set forth in the following table.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
Gerald R. Cysewski, Ph.D. ................ 46 Chairman of the Board, President and Chief
Executive Officer
<S> <C> <C>
Ronald P. Scott........................... 41 Executive Vice President - Finance and
Administration, Secretary, Treasurer and
Director
Glenn Jensen.............................. 37 Vice President - Operations
Kelly J. Moorhead......................... 40 Vice President - Sales and Marketing and
President, Nutrex, Inc.
Julian C. Baker........................... 29 Director
Eva R. Reichl............................. 77 Director
John T. Ushijima.......................... 71 Director
Paul C. Yuen, Ph.D. ...................... 67 Director
</TABLE>

DR. CYSEWSKI co-founded the Company in 1983 and has served as a director of
the Company and as its Scientific Director since that time. Since March 1990,
Dr. Cysewski has served as President and Chief Executive Officer of the Company
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 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. SCOTT was appointed to the Board of Directors of the Company (the
"Board") 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 University, San Jose, and an M.B.A. degree from the University
of Santa Clara.

MR. JENSEN has served as Vice President - Operations since May 1993. He
joined the Company 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
President of Nutrex, Inc. since December 1991. From August 1987 to December
1991, he served as Vice President - Production. Mr. Moorhead joined the Company
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.

35
<PAGE>
MR. BAKER has served as a director of the Company since November 1995. Mr.
Baker is a portfolio manager for Laurence A. Tisch and Preston R. Tisch and for
members of their family. Prior to his employment by the Tisch family, Mr. Baker
was a member of The Clipper Group and its predecessors, CS First Boston Merchant
Bank and First Boston Venture Capital. Mr. Baker is a graduate of Harvard
University. Laurence A. Tisch and Preston R. Tisch are Co-Chairmen and Co-Chief
Executive Officers of Loews Corporation and own approximately 32% of the
outstanding shares of that corporation. Loews Corporation owns approximately 84%
of the outstanding shares of CNA Financial Corporation. CNA Financial
Corporation, through a wholly-owned subsidiary, is a significant stockholder of
Cyanotech. See "Principal Stockholders."

MS. REICHL has served as a director of the Company since August 1993. She is
a private investor who has been involved in a variety of real estate and
fruit-growing operations in the states of Florida and Washington during the past
ten years.

MR. USHIJIMA has served as a director of the Company since 1984. He has been
a Partner in the law firm of Ushijima & Ushijima, Hilo, Hawaii, for over ten
years. Mr. Ushijima is also a former Hawaii State Senator and currently serves
as a member of the Board of Regents for the University of Hawaii.

DR. YUEN has served as a director of the Company since August 1993. Dr. Yuen
currently serves as Dean, College of Engineering, for the University of Hawaii
at Manoa. From July 1992 to March 1993, Dr. Yuen was Acting President of the
University of Hawaii. From 1989 to 1992, Dr. Yuen was Interim Senior Vice
President for Academic Affairs, University of Hawaii at Manoa. Dr. Yuen holds
M.S. and Ph.D. degrees in Electrical Engineering from the Illinois Institute of
Technology.

The Company's directors are elected at the annual stockholders' meeting and
serve until their respective successors are elected or until death, resignation
or removal. Officers are appointed by, and serve at the discretion of, the
Board. There are no family relationships among any directors or executive
officers of the Company.

BOARD COMMITTEES

The Board has an Audit Committee and a Compensation and Stock Option
Committee. The Board does not have a standing nominating committee. The present
Audit Committee consists of Dr. Yuen, Mr. Ushijima and Ms. Reichl. The present
Compensation and Stock Option Committee consists of Dr. Yuen, Mr. Ushijima and
Ms. Reichl.

DIRECTOR COMPENSATION

Each non-employee director is entitled to receive $500 per Board meeting
attended and is reimbursed for all out-of-pocket costs incurred in connection
with attendance at such meetings. In addition, each non-employee director (other
than Mr. Baker) has received, pursuant to the Company's 1994 Non-Employee
Directors Stock Option and Stock Grant Plan (the "Non-Employee Directors Plan"),
options to purchase 3,000 shares of the Company's Common Stock. At the 1996
Annual Meeting of Stockholders, Mr. Baker and any other new non-employee
director (in each case if continuing as a director) who has not received such a
grant will receive a 10-year option to purchase 3,000 shares. Each non-employee
director who has received such an option grant, at each subsequent annual
meeting of stockholders, received or will receive under the Non-Employee
Directors Plan an automatic grant of 2,000 shares of fully paid and
non-assessable shares of Common Stock that are non-transferable for six months
following the date of such grant. During the fiscal year ended March 31, 1995,
each of the director nominees other than Mr. Cysewski was granted under the
Non-Employee Directors Plan options to purchase 3,000 shares of Common Stock
expiring in 2004 at $1.0625 per share, representing the fair market value of the
shares on the date of grant.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company believes that its status as a Nevada corporation as well as
certain provisions of its Restated Articles of Incorporation and Bylaws will be
useful to attract and retain qualified persons as directors and officers. The
Company's Restated Articles of Incorporation limit the liability of directors to
the fullest extent permitted by Nevada law. This provision is intended to allow
the Company's directors the benefit of Nevada Corporation Law which provides
that directors of Nevada corporations may be relieved of

36
<PAGE>
monetary liabilities for breach of their fiduciary duties as directors, except
under certain circumstances, including (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law, or (ii) the payment
of unlawful distributions. The Company's Bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent provided by Nevada
law.

The Company has obtained officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters arising
under the Securities Act.

There is no pending litigation or proceeding involving a director, officer,
associate or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director, officer, associate or other agent.

EXECUTIVE COMPENSATION

SUMMARY OF CASH AND OTHER COMPENSATION

The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the years ended March 31, 1995 (fiscal
1995), March 31, 1994 (fiscal 1994) and December 31, 1992 (fiscal 1992),
respectively, to the Company's Chief Executive Officer (the "Named Executive
Officer"). No executive officer earned over $100,000. No executive officer who
would have otherwise been includable in this table on the basis of salary and
bonus earned for fiscal 1995 has resigned or terminated employment.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------
-------------------- SECURITIES
SALARY BONUS UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($) OPTIONS/SARS(#)
- ------------------------------------------------- ----------- --------- --------- -------------------
Gerald R. Cysewski 1995 $ 86,809 $ 10,000 11,000
<S> <C> <C> <C> <C>
Chairman of the Board, 1994(1) 71,941 -- 11,000
President and Chief Executive Officer 1992 69,000 -- --
</TABLE>

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

(1) The Company changed its fiscal year end from December 31 to March 31,
effective March 31, 1994.

STOCK OPTION GRANTS TO NAMED EXECUTIVE OFFICER

The following table contains information concerning the grant of stock
options made by the Company during the year ended March 31, 1995 to the Named
Executive Officer.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/ SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE
SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
- ----------------------------------------------------------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Gerald R. Cysewski (1)..................................... 11,000 11.1% $0.9375 6/30/99
</TABLE>

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

(1) The options become exercisable in four equal and cumulative annual
installments over the optionee's period of service with the Company,
beginning one year after the June 30, 1994 grant date.

OPTION EXERCISES AND HOLDINGS

The following table provides information with respect to the Named Executive
Officer and certain other officers concerning the exercise of options during the
year ended March 31, 1995 and unexercised options held as of March 31, 1995. No
stock appreciation rights were exercised during the year ended March 31, 1995 or
outstanding as of March 31, 1995.

37
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/ SARS
NUMBER OF OPTIONS/SARS AT MARCH 31,
SHARES VALUE 1995 AT MARCH 31, 1995 ($)
ACQUIRED ON REALIZED -------------------------- --------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald R. Cysewski (1)....................... 0 0 5,500 16,500 0 $ 2,750
Ronald P. Scott (1).......................... 0 0 23,000 24,000 7,184 7,434
Glenn Jensen (1)............................. 0 0 28,000 24,000 8,434 7,434
Kelly J. Moorhead (1)........................ 0 0 34,000 25,000 10,308 8,058
</TABLE>

- ------------------------
(1) Since March 31, 1995, the Company has granted to Dr. Cysewski and Messrs.
Jensen, Moorhead and Scott, options to purchase 14,500, 12,000 and 13,000
shares of Common Stock, respectively. The options become exercisable in four
equal and cumulative annual installments over the optionee's period of
service with the Company, beginning one year after the August 10, 1995 grant
date.

STOCK OPTION PLAN

The Board adopted, and the stockholders approved, the 1995 Stock Option Plan
(the "Plan") in August 1995. The Plan is the successor plan to the Company's
1985 Incentive Stock Option Plan (the "Prior Plan"). The Plan contains a
discretionary grant program (the "Discretionary Grant Program"), under which
associates and consultants may be granted options to purchase shares of the
Company's Common Stock, and a discounted option grant program (the "Discounted
Grant Program"), under which associates may elect to have a portion of their
base salary reduced each year in return for options to purchase shares of Common
Stock at a discount from current fair market value. Options granted under the
Discretionary Grant Program may be either incentive stock options ("ISOs")
designed to meet the requirements of Section 422 of the Internal Revenue Code or
non-qualified options ("NQOs") which are not intended to satisfy such
requirements. All grants under the Discounted Grant Program are NQOs.

The Discretionary Grant Program and the Discounted Grant Program are
administered by a committee (the "Committee") of two or more non-employee Board
members appointed by the Board, presently the Compensation and Stock Option
Committee. Under the Plan, 400,000 shares of the Company's Common Stock are
reserved for issuance over the ten-year term of the Plan. Associates of the
Company or its subsidiaries (including officers) and consultants are eligible to
participate in the Plan. As of December 31, 1995, approximately 35 associates
were eligible to participate in the Plan.

The Committee may authorize loans or installment payments in order to assist
optionees in financing the exercise of outstanding options under the
Discretionary Grant Program or Discounted Grant Program on terms to be
determined by the Committee. Any such financing may be subject to forgiveness in
whole or in part, at the discretion of the Committee, over the optionee's period
of service with the Company. As of December 31, 1995, no loans or installment
payments had been authorized.

There are currently outstanding options to purchase 101,000 and 213,475
shares of Common Stock under the Plan and the Prior Plan, respectively, with a
weighted average exercise price per share of $2.32.

401(K) PLAN

The Company sponsors a 401(k) Plan (the "401(k) Plan") under which eligible
associates may contribute, on a pre-tax basis, up to 15% of the associate's
total annual income from the Company, subject to certain Internal Revenue Code
limitations. Associates may contribute 50% of their profit-sharing bonus to the
401(k) Plan. All contributions are allocated to the associate's individual
account and are subject to a six-year vesting schedule based on years of service
with the Company. All full-time associates who have attained age 18 are eligible
to participate in the 401(k) Plan. See "Business -- Associates."

38
<PAGE>
CERTAIN TRANSACTIONS

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

STOCKHOLDERS AGREEMENT. In connection with the purchase by Eva R. Reichl in
1993 of 1,800,000 shares of the Company's Common Stock, certain holders of
Common Stock, including Gerald R. Cysewski (the "Holders"), the Company and Ms.
Reichl entered into a Stockholders Agreement dated as of May 17, 1993 (the
"Stockholders Agreement"). Under the Stockholders Agreement, the parties agreed
that without approval of a majority of the Holders' and Ms. Reichl's shares, the
Company would not propose, and the Holders and Ms. Reichl would not vote for,
any resolution, Bylaw change or other proposal that would increase the Company's
Board of Directors to more than six members. In addition, the Company is
obligated under the Stockholders Agreement to notify Ms. Reichl of any Board
elections so that she may nominate one person for election as a director. At any
Board election, the Holders and Ms. Reichl have agreed to vote their shares to
elect such nominee. The Stockholders Agreement terminates when Ms. Reichl sells,
transfers or disposes of any of the 1,800,000 shares acquired, other than by
will, the laws of descent, or to any entity controlled by Ms. Reichl.

OTHER TRANSACTIONS

SHARE CONVERSION AGREEMENT. In February 1996, the Company entered into a
Preferred Stock Conversion and Registration Rights Agreement with Firemen's
Insurance Company of Newark, NJ (an indirect wholly-owned subsidiary of CNA
Financial Corporation) ("Firemen's Insurance"), a principal stockholder of the
Company (the "Conversion Agreement"), for the conversion of the Company's Series
A Preferred Stock into Common Stock effective upon the closing of this offering.
Firemen's Insurance holds 1,250,000 shares of the Company's Series A Preferred
Stock (the "Series A Shares"), constituting all the Series A Shares currently
issued and outstanding, which shares were convertible into 250,000 shares of
Common Stock until February 28, 1995. Pursuant to the Conversion Agreement,
Firemen's Insurance has agreed to convert the Series A Shares into 250,000
shares of Common Stock, which conversion ratio was determined in accordance with
an independent valuation. Firemen's Insurance has agreed, subject to certain
limited exceptions, not to offer, sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock, or any securities convertible into or
exercisable for, or any rights to purchase or acquire, Common Stock owned by
them through the date 120 days after the date of the closing of this offering.
In addition, the Company has granted to Firemen's Insurance certain "piggy-back"
registration rights with respect to the shares of Common Stock issuable upon
conversion of the Series A Shares and the shares of Common Stock issuable upon
conversion of the Company's Series C Preferred Stock held by Firemen's
Insurance. See "Shares Eligible for Future Sale -- Registration Rights."

39
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1995 and as adjusted
to reflect the sale of shares of Common Stock offered hereby by (i) each person
who is known to the Company to own beneficially more than 5% of the outstanding
shares of the Common Stock of the Company, (ii) the Named Executive Officer,
(iii) each director and (iv) all directors and executive officers as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING(1)
SHARES ------------------------
NAME AND ADDRESS BENEFICIALLY BEFORE AFTER
OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Gerald R. Cysewski, Ph.D. (2)............................................ 473,308(3) 3.4% 3.1%
Ronald P. Scott (2)...................................................... 34,750(4) * *
Julian C. Baker (2)...................................................... --(5) -- --
Eva R. Reichl (2)........................................................ 1,805,000 13.1 11.8
John T. Ushijima (2)..................................................... 283,600(6) 2.1 1.9
Paul C. Yuen (2)......................................................... 13,100(7) * *
B. Michael Pisani........................................................ 855,573(8) 6.0 5.4
44 Lake Road
Short Hills, NJ 07078
CNA Financial Corporation................................................ 3,408,641(9) 24.8 22.4
CNA Plaza
Chicago, IL 60685
American Cyanamid Company................................................ 699,730(10) 5.1 4.6
(a wholly-owned subsidiary of American Home
Products Corporation)
One Cyanamid Plaza
Wayne, NJ 07470
All directors and executive officers as a group (8 persons)(5)(11)....... 2,670,658 19.3 17.4
</TABLE>

- --------------------------
* Less than 1.0%.

(1) Reflects the pro forma capitalization of the Company at December 31, 1995,
assuming for all percentages presented full conversion of all outstanding
shares of Series A Preferred Stock and Series C Preferred Stock into shares
of Common Stock (13,732,460 issued and outstanding before the offering;
15,232,460 issued and outstanding after the offering). See "Capitalization."
For each person, also assumes as outstanding options and warrants
exercisable by such person within 60 days of December 31, 1995.

(2) Address is c/o Cyanotech Corporation, 73-4460 Queen Kaahumanu Hwy., Suite
102, Kailua-Kona, HI 96740.

(3) Includes options exercisable within 60 days of December 31, 1995 for 11,000
shares of Common Stock.

(4) Includes options exercisable within 60 days of December 31, 1995 for 22,250
shares of Common Stock.

(5) Does not include 250,000 shares held by Firemen's Insurance Company of
Newark, NJ ("Firemen's Insurance"), 183,486 shares held by National-Ben
Franklin Company of Illinois ("National-Ben Franklin") and 2,975,155 shares
of Common Stock issuable upon conversion of 595,031 shares of Series C
Preferred Stock held by Firemen's Insurance. Mr. Baker is the director
nominee (relating to the Series A Preferred Stock which is being converted
to Common Stock as of the closing of this offering) of CNA Financial
Corporation, the parent company of Firemen's Insurance and National-Ben
Franklin, and disclaims beneficial ownership of such shares.

(6) Includes options exercisable within 60 days of December 31, 1995 for 3,000
shares of Common Stock.

(7) Includes options exercisable within 60 days of December 31, 1995 for 3,000
shares of Common Stock.

(8) Includes warrants exercisable within 60 days of December 31, 1995 for
561,816 shares of Common Stock.

(9) Represents 250,000 shares held by Firemen's Insurance, 183,486 shares held
by National-Ben Franklin and 2,975,155 shares of Common Stock issuable upon
conversion of 595,031 shares of Series C Preferred Stock held by Firemen's
Insurance. National-Ben Franklin and Firemen's Insurance are indirect
wholly-owned subsidiaries of CNA Financial Corporation. Firemen's Insurance
holds approximately 81.0% of the Series C Preferred Stock.

(10) Represents 699,730 shares of Common Stock issuable upon conversion of
139,946 shares of Series C Preferred Stock. American Cyanamid Company holds
approximately 19.0% of the Series C Preferred Stock.

(11) Includes 85,250 shares issuable under options and warrants to purchase
shares of Common Stock exercisable within 60 days of December 31, 1995 to:
Gerald R. Cysewski (11,000 shares); Ronald P. Scott (22,250); John T.
Ushijima (3,000 shares); Paul C. Yuen (3,000 shares); and 46,000 shares
issuable to other executive officers.

40
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 18,000,000 shares of
Common Stock, $0.005 par value per share, of which 9,807,575 shares of Common
Stock were issued and outstanding as of December 31, 1995 (10,057,575 shares
issued and outstanding, assuming full conversion of the Series A Preferred Stock
effective on the closing of this offering), and 5,000,000 shares of Preferred
Stock, $0.001 par value per share, 734,977 shares of which are designated as
Series C Preferred Stock, and are currently issued and outstanding.

COMMON STOCK

Subject to the rights of holders of Preferred Stock, the holders of
outstanding shares of Common Stock are entitled to share ratably in dividends
declared out of assets legally available therefor at such time and in such
amounts as the Board of Directors may from time to time lawfully determine. Each
holder of Common Stock is entitled to one vote for each share held. Cumulative
voting in elections of directors and all other matters brought before
stockholders meetings, whether they be annual or special, is not permitted. The
Common Stock is not entitled to conversion or preemptive rights and is not
subject to redemption or assessment. Subject to the rights of holders of any
outstanding Preferred Stock, upon liquidation, dissolution or winding up of the
Company, any assets legally available for distribution to stockholders as such
are to be distributed ratably among the holders of the Common Stock at that time
outstanding. The Common Stock presently outstanding is, and the Common Stock
issued in this offering will be, fully paid and nonassessable.

PREFERRED STOCK

Preferred Stock may be issued in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company's Restated Articles of Incorporation, as the Board determines. The
rights, preferences, limitations and restrictions of different series of
Preferred Stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and other matters. The Board may authorize the issuance of
Preferred Stock which ranks senior to the Common Stock with respect to the
payment of dividends and the distribution of assets on liquidation. In addition,
the Board is authorized to fix the limitations and restrictions, if any, upon
the payment of dividends on Common Stock to be effective while any shares of
Preferred Stock are outstanding. The Board, without stockholder approval, can
issue Preferred Stock with voting and conversion rights which could adversely
affect the voting power of the holders of Common Stock. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company.

The Company's 8% Cumulative, Convertible Preferred Shares -- Series C (the
"Series C Shares") are convertible at the option of the holders thereof into
Common Stock at the rate of five shares of Common Stock for one share of
Preferred Stock through February 23, 2000, after which date the conversion
feature is no longer applicable. Holders of 21,030 Series C Shares elected to
convert such shares into 105,150 shares of Common Stock during the year ended
March 31, 1995. Series C Shares have voting rights equal to the number of shares
of Common Stock into which they are convertible and have a preference in
liquidation over all other series of preferred stock of five dollars per share
plus any accumulated but unpaid dividends. Holders of Series C Shares are
entitled to cumulative annual dividends at the rate of $.40 per share if and
when declared by the Board; cumulative dividends in arrears as of December 31,
1995 amounted to $1.9 million ($2.563 per share). Upon conversion of Series C
Shares, cumulative dividends in arrears on converted shares are no longer
payable. Each share of Series C Preferred Stock entitles holders to voting power
equal to the voting power of the number of shares of Common Stock into which the
shares of Series C Preferred Stock may be converted. Holders of Series C
Preferred Stock are entitled to vote on all matters on which holders of shares
of Common Stock are entitled to vote. The consent of holders of a majority of
the outstanding Series C Shares is required to change the powers, preferences or
rights of the Series C Shares, sell all or substantially all of the Company's
assets or merge the Company. The Series C Shares were originally issued with a
redemption feature. Terms of the Series C Shares were modified in February 1991
to eliminate the redemption feature.

The Company has no present intention to issue any additional shares of
Preferred Stock.

41
<PAGE>
WARRANTS

As of December 31, 1995, the Company had warrants outstanding to acquire
997,000 shares of the Company's Common Stock. The warrants were issued in
consideration for loans to the Company, in consideration for and in recognition
of services performed, and to certain individuals who guaranteed notes payable
by the Company. Warrants granted for loans, services and guarantees were granted
with exercise prices not lower than the fair market value of the Company's
Common Stock on the date of grant. These outstanding warrants are exercisable at
prices ranging from $.40 to $1.00 per share, with a weighted average price per
share of $.458, and expire on various dates from 1996 to 1999.

NEVADA ANTI-TAKEOVER LAWS AND CERTAIN CHARTER PROVISIONS

Nevada's "Combination with Interested Stockholders Statute," Nevada Revised
Statutes 78.411-78.444, which applies to Nevada corporations having at least 200
stockholders, prohibits an "interested stockholder" from entering into a
"combination" with the corporation, unless certain conditions are met. A
"combination" includes (a) any merger with an "interested stockholder," or any
other corporation which is or after the merger would be, an affiliate or
associate of the interested stockholder, (b) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets, in one transaction or
a series of transactions, to an "interested stockholder," having (i) an
aggregate market value equal to 5% or more of the aggregate market value of the
corporation's assets, (ii) an aggregate market value equal to 5% or more of the
aggregate market value of all outstanding shares of the corporation, or (iii)
representing 10% or more of the earning power or net income of the corporation,
(c) any issuance or transfer of shares of the corporation or its subsidiaries,
to the "interested stockholder," having an aggregate market value equal to 5% or
more of the aggregate market value of all the outstanding shares of the
corporation, (d) the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by the "interested stockholder," (e)
certain transactions which would have the effect of in increasing the
proportionate share of outstanding shares of the corporation owned by the
"interested stockholder," or (f) the receipt of benefits, except proportionately
as a stockholder, of any loans, advances or other financial benefits by an
"interested stockholder." An "interested stockholder" is a person who (i)
directly or indirectly owns 10% or more of the voting power of the outstanding
voting shares of the corporation or (ii) an affiliate or associate of the
corporation which at any time within three years before the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the voting power
of the then outstanding shares of the corporation.

A corporation to which the statute applies may not engage in a "combination"
within three years after the interested stockholder acquired its shares, unless
the combination or the interested stockholder's acquisition of shares was
approved by the board of directors before the interested stockholder acquired
the shares. If this approval was not obtained, then after the three-year period
expires, the combination may be consummated if all the requirements in the
Articles of Incorporation are met and either (a) (i) the board of directors of
the corporation approves, prior to such person becoming an "interested
stockholder," the combination or the purchase of shares by the "interested
stockholder" or (ii) the combination is approved by the affirmative vote of
holders of a majority of voting power not beneficially owned by the "interested
stockholder" at a meeting called no earlier than three years after the date the
"interested stockholder" became such or (b) the aggregate amount of cash and the
market value of consideration other than cash to be received by holders of
common shares and holders of any other class or series of shares meets the
minimum requirements set forth in Sections 78.411 through 78.443, inclusive, and
prior to the consummation of the combination, except in limited circumstances,
the "interested stockholder" will not have become the beneficial owner of
additional voting shares of the corporation.

Nevada's "Control Share Acquisition Statute," Nevada Revised Statute
Section78.378-78.379, prohibits an acquiror, under certain circumstances, from
voting shares of a target corporation's stock after crossing certain threshold
ownership percentages, unless the acquiror obtains the approval of the target
corporation's stockholders. The Control Share Acquisition Statute only applies
to Nevada corporations with at least 200 stockholders, including at least 100
record stockholders who are Nevada residents, and which do business directly or
indirectly in Nevada. The Company does not intend to "do business" in Nevada
within the meaning of the Control Share Acquisition Statute. Therefore, it is
unlikely that the Control Share Acquisition Statute will apply to the Company.
The statute specifies three thresholds: at least one-fifth but less than
one-third, at least one-third but less than a majority, and a majority or more,
of all the outstanding voting power. Once an acquiror crosses one of the above
thresholds, shares which it acquired in the transaction

42
<PAGE>
taking it over the threshold or within ninety days become "Control Shares" which
are deprived of the right to vote until a majority of the disinterested
stockholders restore that right. A special stockholders' meeting may be called
at the request of the acquiror to consider the voting rights of the acquiror's
shares no more than 50 days (unless the acquiror agrees to a later date) after
the delivery by the acquiror to the corporation of an information statement
which sets forth the range of voting power that the acquiror has acquired or
proposes to acquire and certain other information concerning the acquiror and
the proposed control share acquisition. If no such request for a stockholders'
meeting is made, consideration of the voting rights of the acquiror's shares
must be taken at the next special or annual stockholders' meeting. If the
stockholders fail to restore voting rights to the acquiror or if the acquiror
fails to timely deliver an information statement to the corporation, then the
corporation may, if so provided in its articles of incorporation or bylaws, call
certain of the acquiror's shares for redemption. The Company's Restated Articles
of Incorporation and Bylaws do not currently permit it to call an acquiror's
shares for redemption under these circumstances. The Control Share Acquisition
Statute also provides that the stockholders who do not vote in favor of
restoring voting rights to the Control Shares may demand payment for the "fair
value" of their shares (which is generally equal to the highest price paid in
the transaction subjecting the stockholder to the statute).

The provisions described above, together with the ability of the Board of
Directors to issue Preferred Stock as described under "Preferred Stock," may
have the effect of delaying or deterring a change in the control or management
of the Company. See "Risk Factors -- Effect of Anti-Takeover Provisions."

LISTING

The Company's Common Stock is currently listed on The Nasdaq SmallCap Market
under the symbol "CYAN." Application has been made to have the Common Stock
approved for quotation on the Nasdaq National Market under the same symbol.

TRANSFER AGENT AND REGISTRAR

First Interstate Bank of Washington, N.A. is the registrar and transfer
agent of the Company's Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

GENERAL

After the closing of the offering, 7,209,212 shares of Common Stock,
including the 1,500,000 shares offered hereby, will be freely tradable without
restriction under the Securities Act, except for any shares purchased or held by
affiliates of the Company, which will be subject to certain resale limitations
of Rule 144 promulgated under the Securities Act. Of the 13,732,460 shares of
Common Stock held by the existing stockholders (assuming conversion of the
Company's Series C Preferred Stock), 7,460,748 shares are subject to lock-up
agreements with the Underwriters. The directors, executive officers and
stockholders of the Company who hold such shares have agreed, subject to certain
limited exceptions, not to offer, sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock, or any securities convertible into or
exercisable for, or any rights to purchase or acquire, Common Stock owned by
them for the 120-day period after the closing of this offering without the prior
written consent of Van Kasper & Company. Van Kasper & Company may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements. No predictions can be made as to
the effect, if any, that market sales of Common Stock or the availability of
Common Stock for sale will have on the market price prevailing from time to
time. Sale of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. See "Risk Factors -- Shares Eligible for Future Sale."

After the expiration of the lock-up period, the shares subject to such
lock-up agreements will become eligible for sale subject, with respect to
approximately 6,611,018 of those shares, to the provisions of Rule 144. In
general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who, together with any previous holder who is not an
affiliate of the Company, has beneficially owned restricted shares of at least
two years, including persons who may be deemed "affiliates" of the Company, will
be entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is

43
<PAGE>
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are also subject to certain other requirements relating to manner of sale,
notice and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the three months immediately
preceding the sale, and who, together with any previous holder who is not an
affiliate of the Company, has beneficially owned restricted shares for at least
three years, would be entitled to sell such shares under Rule 144(k) without
regard to the limitations described above.

The Company has reserved 400,000 shares of Common Stock for issuance under
the 1995 Stock Option Plan, options to purchase 101,000 shares of which have
been granted. The Company also has outstanding options to purchase 213,475
shares, which options were granted under the 1985 Incentive Stock Option Plan.
In addition, the Company has options outstanding to purchase 9,000 shares under
the 1994 Non-Employee Directors Stock Option and Stock Grant Plan and other
non-qualified options outstanding to purchase 102,000 shares of Common Stock.
The Company has filed registration statements under the Securities Act covering
an aggregate of 800,000 shares of Common Stock under the Company's 1995 Stock
Option Plan and 1985 Incentive Stock Option Plan. Shares issued upon the
exercise of stock options or previously issued on exercise, generally will be
available for sale in the open market subject to Rule 144 volume limitations
applicable to affiliates and the lock-up agreements with Van Kasper & Company
described above.

REGISTRATION RIGHTS

In connection with a Joint Venture Agreement consummated August 31, 1994,
between Hauser Chemical Research, Inc. ("Hauser") and the Company, Hauser
purchased 96,969 shares of the Company's Common Stock and the Company granted
certain demand and "piggy-back" registration rights to Hauser covering the
96,969 shares of Common Stock pursuant to a Registration Rights Agreement dated
as of August 31, 1994. Under the agreement, Hauser may, subject to certain
limitations, require the Company to register shares of such Common Stock under
the Securities Act to enable it to sell such shares to the public. In addition,
whenever the Company proposes to register any of its securities under the
Securities Act (other than registrations in connection with stock option plans
and certain other registrations), Hauser may require the Company, subject to
certain limitations, to include all or any portion of such shares of Common
Stock in the registration. The Company generally is required to bear all costs
incurred in connection with the "piggy-back" registrations other than
underwriting discounts and commissions payable with respect to the Common Stock
and fees of counsel to the holders of the Common Stock, and Hauser is generally
required to bear all costs incurred in connection with the demand registrations.
Hauser has agreed, subject to certain limited exceptions, not to offer, sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exercisable for, or any rights to purchase or
acquire, Common Stock owned by them through the date 120 days after the date of
the closing of this offering.

The Company has granted to Firemen's Insurance and American Cyanamid certain
"piggy-back" registration rights with respect to the shares of Common Stock
issuable upon conversion of the Series A Shares and the Series C Shares,
amounting to 4,108,371 shares of Common Stock on a fully-diluted basis. Whenever
the Company proposes to register any of its securities under the Securities Act
in connection with the public offering of such securities solely for cash (other
than registrations in connection with stock option plans and certain other
registrations), Firemen's Insurance and American Cyanamid may require the
Company, subject to certain limitations, to include all or any portion of the
Common Stock acquired pursuant to the conversion of Series A Shares and Series C
Shares in such registration. The Company generally is required to bear all costs
incurred in connection with such registrations other than underwriting discounts
and commissions payable with respect to the Common Stock and fees of counsel to
the holders of the Common Stock. In connection with and in consideration of the
granting of such registration rights, Firemen's Insurance and American Cyanamid
have agreed, subject to certain limited exceptions, not to offer, sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exercisable for, or any rights to purchase or
acquire, Common Stock owned by them through the date 120 days after the date of
the closing of this offering. See "Certain Transactions -- Other Transactions."

44
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representative, Van Kasper & Company
(the "Representative"), have severally agreed to purchase from the Company the
number of shares of Common Stock set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------------- ----------
<S> <C>
Van Kasper & Company.........................................................

----------
Total........................................................................ 1,500,000
----------
----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, and that the underwriters will
purchase all shares of Common Stock offered hereby if any of such shares are
purchased.

The Underwriters propose to offer the Common Stock directly to the public at
the offering price set forth on the cover page of this Prospectus and to certain
selected dealers at this price less a concession not in excess of $ per
share. The Underwriters may allow and such dealers may reallow a concession not
in excess of $ per share to certain other dealers.

The Company has granted an option to the Underwriters, exercisable by the
Representative within 30 days after the date of this Prospectus, to purchase up
to 225,000 additional shares of Common Stock at the initial offering price, less
underwriting discounts and commissions. The Representative may exercise the
over-allotment option solely for the purpose of covering over-allotments, if
any, incurred in the sale of the shares of Common Stock offered hereby. To the
extent that the over-allotment option is exercised, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage of the
additional shares as the number of shares to be purchased and offered by that
Underwriter in the above table bears to the total.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Representative
has informed the Company that the Underwriters do not intend to confirm sales to
accounts over which they exercise discretionary authority.

Certain stockholders, representing in the aggregate 7,460,748 shares of
Common Stock (assuming conversion of the Company's Series C Preferred Stock) and
the holders of options to purchase 85,250 shares of Common Stock have agreed
pursuant to such lock-up agreements, subject to certain limited exceptions, not
to offer, sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock, or any securities convertible into or exercisable for, or any
rights to purchase or acquire, Common Stock owned by them for the 120-day period
after the closing of this offering without the prior written consent of the
Representative. The Representative may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. In addition, the Company has agreed that for a period of 120
days after the date of this Prospectus, it will not, without the prior written
consent of the Representative, issue, offer, sell, grant options to purchase or
otherwise dispose of any equity securities or securities convertible into or
exchangeable for equity securities except for (i) shares of Common Stock offered
hereby, (ii) shares of Common Stock issued pursuant to the exercise of
outstanding options and warrants, (iii) shares of Common Stock issued pursuant
to the conversion of Preferred Stock and (iv) options granted to its

45
<PAGE>
associates, officers, directors and consultants so long as none of such options
become exercisable during said 120-day period. Sales of such shares in the
future could adversely affect the market price of the Common Stock. See "Shares
Eligible for Future Sale."

The Company has agreed to pay the Representative a non-accountable expense
allowance of 1.0% of the total proceeds of the offering.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Woodburn and Wedge, Reno,
Nevada. Certain legal matters in connection with this offering will be passed
upon for the Company by Brobeck, Phleger & Harrison LLP, San Francisco,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Heller Ehrman White & McAuliffe, Palo Alto,
California.

EXPERTS

The consolidated financial statements of Cyanotech Corporation and its
subsidiary as of March 31, 1995 and March 31, 1994, and for each of the years in
the two-year period ended March 31, 1995, have been included herein and in the
Registration Statement in reliance on the report of KPMG Peat Marwick LLP,
independent certified public accountants, and upon the authority of said firm as
experts in accounting and auditing.

AVAILABLE INFORMATION

Cyanotech is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
Company has filed a registration statement on Form SB-2 (herein, together with
all amendments and exhibits referred to as the "Registration Statement") with
the Commission under the Securities Act of 1933, as amended (the "Securities
Act"). This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information, exhibits and schedules set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement, exhibits and schedules thereto. Statements contained in
this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete and, in each instance, if such contract
or document is filed as an exhibit to the Registration Statement, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, and each such statement being qualified in all respects
by such reference to such exhibit. Copies of such materials may be inspected,
without charge, at the offices of the Commission, or obtained at prescribed
rates from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center
(13th Floor), New York, New York 10019. The Company's Common Stock is quoted on
The Nasdaq SmallCap Market. Reports, proxy statements and other information
concerning the Company may also be inspected at the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.

46
<PAGE>
CYANOTECH CORPORATION
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets at March 31, 1994 and 1995 and at December 31, 1995 (unaudited)................ F-3
Consolidated Statements of Income for the Years Ended March 31, 1994 and 1995 and for the Nine Months Ended
December 31, 1994 and 1995 (unaudited).................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1994 and 1995 and the Nine
Months Ended December 31, 1995 (unaudited)................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994 and 1995 and for the Nine Months
Ended December 31, 1994 and 1995 (unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Cyanotech Corporation:

We have audited the accompanying consolidated balance sheets of Cyanotech
Corporation and subsidiary as of March 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cyanotech
Corporation and subsidiary as of March 31, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

KPMG Peat Marwick LLP

Honolulu, Hawaii
May 3, 1995

F-2
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1994 AND 1995 AND DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS (NOTE 4)
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 866 $ 496 $ 776
Accounts receivable........................................................... 462 648 1,291
Inventories (note 2).......................................................... 398 375 275
Prepaid expenses.............................................................. 7 5 32
--------- --------- ------
Total current assets........................................................ 1,733 1,524 2,374
Equipment and leasehold improvements, net (note 3).............................. 3,365 4,635 7,204
Other assets.................................................................... 34 53 71
--------- --------- ------
Total assets................................................................ $ 5,132 $ 6,212 $ 9,649
--------- --------- ------
--------- --------- ------

LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt (note 4)................................. $ 13 $ 7 $ 175
Current maturities of capital lease obligations (note 5)...................... 26 58 123
Accounts payable.............................................................. 566 629 700
Accrued expenses and other (note 7)........................................... 258 230 372
--------- --------- ------
Total current liabilities................................................... 863 924 1,370
Long-term debt, excluding current maturities (note 4)........................... 7 -- 550
Obligations under capital lease, excluding current maturities (note 5).......... 102 184 358
--------- --------- ------
TOTAL LIABILITIES........................................................... 972 1,108 2,278
--------- --------- ------
STOCKHOLDERS' EQUITY:
Preferred stock (note 8)...................................................... 2 2 2
Common stock of $.005 par value; authorized 18,000,000 shares; outstanding
8,736,506 shares at March 31, 1994, 9,051,325 shares at March 31, 1995 and
9,807,575 shares at December 31, 1995........................................ 44 45 49
Additional paid-in capital.................................................... 12,042 12,216 12,720
Accumulated deficit........................................................... (7,898) (7,129) (5,400)
--------- --------- ------
4,190 5,134 7,371
Less -- treasury stock, 30,000 common shares at cost.......................... 30 30 --
--------- --------- ------
Total stockholders' equity.................................................. 4,160 5,104 7,371
--------- --------- ------
Commitments and contingencies (notes 5, 8 and 12)
Total liabilities and stockholders' equity.................................. $ 5,132 $ 6,212 $ 9,649
--------- --------- ------
--------- --------- ------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1994 AND 1995 AND
NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER-SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- ------------------------
1994 1995 1994 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
NET SALES (note 10)............................................... $ 2,697 $ 4,150 $ 2,921 $ 5,972
COST OF SALES..................................................... 1,495 2,275 1,582 2,784
--------- --------- ----------- -----------
GROSS PROFIT.................................................. 1,202 1,875 1,339 3,188
--------- --------- ----------- -----------
OPERATING EXPENSES:
Research and development........................................ 59 171 93 243
General and administrative...................................... 604 685 504 862
Sales and marketing............................................. 319 301 208 302
--------- --------- ----------- -----------
Total operating expenses...................................... 982 1,157 805 1,407
--------- --------- ----------- -----------
Income from operations........................................ 220 718 534 1,781
--------- --------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income................................................. 13 17 12 19
Interest expense................................................ (16) (27) (19) (63)
Other income, net............................................... 22 98 13 --
Proportionate share of loss of joint venture (note 6)........... (35) (37) (37) --
--------- --------- ----------- -----------
Total other income (expense).................................. (16) 51 (31) (44)
--------- --------- ----------- -----------
Net income before income taxes................................ 204 769 503 1,737
Provision for income taxes........................................ -- -- -- (8)
--------- --------- ----------- -----------
NET INCOME........................................................ $ 204 $ 769 $ 503 $ 1,729
--------- --------- ----------- -----------
--------- --------- ----------- -----------
NET INCOME PER COMMON SHARE....................................... $ 0.02 $ 0.05 $ 0.04 $ 0.12
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Weighted average number of common shares and common share
equivalents...................................................... 13,330 13,589 13,907 14,452
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1994 AND 1995
AND NINE MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK
(NOTE 8) COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN ACCUMULATED TREASURY
SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT STOCK
--------- --------- --------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1993......... 2,118,507 $ 2 6,260,197 $ 31 $ 9,665 $ (8,102) $ (30)
Common stock issued for cash, net
of costs of $24................... -- -- 2,350,000 12 2,314 -- --
Exercise of warrants for cash...... -- -- 83,000 1 37 -- --
Exercise of stock options for
cash.............................. -- -- 3,300 -- 2 -- --
Common stock issued in satisfaction
of debt........................... -- -- 40,000 -- 24 -- --
Other.............................. -- -- 9 -- -- -- --
Net income......................... -- -- -- -- -- 204 --
--------- --------- --------- --------- ----------- ------------- -----
BALANCES AT MARCH 31, 1994......... 2,118,507 2 8,736,506 44 12,042 (7,898) (30)
Common stock issued for cash, net
of costs of $6.................... -- -- 146,969 1 144 -- --
Exercise of warrants for cash...... -- -- 38,400 -- 24 -- --
Exercise of stock options for
cash.............................. -- -- 4,300 -- 3 -- --
Conversion of 21,030 shares of
Series C preferred stock to
105,150 shares of common stock.... (21,030) -- 105,150 -- -- -- --
Conversion of 100,000 shares of
Series E preferred stock to 20,000
shares of common stock............ (100,000) -- 20,000 -- -- -- --
Issuance of common stock warrants
for services...................... -- -- -- -- 3 -- --
Net income......................... -- -- -- -- -- 769 --
--------- --------- --------- --------- ----------- ------------- -----
BALANCES AT MARCH 31, 1995......... 1,997,477 2 9,051,325 45 12,216 (7,129) (30)
Exercise of warrants for cash...... -- -- 695,200 4 420 -- --
Exercise of stock options for
cash.............................. 80,550 74
Issuance of stock grants to non-
employee directors................ -- -- 8,000 -- 40 -- --
Exchange of 12,500 shares of Series
B preferred stock for 2,500 shares
of common stock................... (12,500) -- 2,500 -- -- -- --
Retire 30,000 shares of treasury
stock............................. -- -- (30,000) -- (30) -- 30
Net income......................... -- -- -- -- -- 1,729 --
--------- --------- --------- --------- ----------- ------------- -----
BALANCES AT DECEMBER 31, 1995
(unaudited)....................... 1,984,977 $ 2 9,807,575 $ 49 $ 12,720 $ (5,400) $ --
--------- --------- --------- --------- ----------- ------------- -----
--------- --------- --------- --------- ----------- ------------- -----

TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCES AT MARCH 31, 1993......... $ 1,566
Common stock issued for cash, net
of costs of $24................... 2,326
Exercise of warrants for cash...... 38
Exercise of stock options for
cash.............................. 2
Common stock issued in satisfaction
of debt........................... 24
Other.............................. --
Net income......................... 204
------
BALANCES AT MARCH 31, 1994......... 4,160
Common stock issued for cash, net
of costs of $6.................... 145
Exercise of warrants for cash...... 24
Exercise of stock options for
cash.............................. 3
Conversion of 21,030 shares of
Series C preferred stock to
105,150 shares of common stock.... --
Conversion of 100,000 shares of
Series E preferred stock to 20,000
shares of common stock............ --
Issuance of common stock warrants
for services...................... 3
Net income......................... 769
------
BALANCES AT MARCH 31, 1995......... 5,104
Exercise of warrants for cash...... 424
Exercise of stock options for
cash.............................. 74
Issuance of stock grants to non-
employee directors................ 40
Exchange of 12,500 shares of Series
B preferred stock for 2,500 shares
of common stock................... --
Retire 30,000 shares of treasury
stock............................. --
Net income......................... 1,729
------
BALANCES AT DECEMBER 31, 1995
(unaudited)....................... $ 7,371
------
------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1994 AND 1995
AND NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- ------------------------
1994 1995 1994 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 204 $ 769 $ 503 $ 1,729
Adjustments to reconcile net income to net cash provided by
operating activities:
Proportionate share of loss of joint venture.................. 35 37 37 --
Depreciation and amortization................................. 253 338 234 356
Net (increase) decrease in:
Accounts receivable......................................... (77) (186) (5) (643)
Inventories................................................. (159) 23 (43) 100
Prepaid expenses and other assets........................... 33 (17) (40) (45)
Net increase (decrease) in:
Accounts payable............................................ 283 63 (152) 71
Accrued expenses and other.................................. 63 (28) 45 142
--------- --------- ----------- -----------
Net cash provided by operating activities................. 635 999 579 1,710
--------- --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements.............. (1,770) (1,442) (982) (2,622)
Investment in joint venture..................................... (35) (37) (37) --
--------- --------- ----------- -----------
Net cash used in investing activities..................... (1,805) (1,479) (1,019) (2,622)
--------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock...................... 2,366 175 174 538
Proceeds from issuance of long-term debt........................ -- -- -- 750
Principal payments on capital lease obligations................. (10) (52) (38) (64)
Principal payments on long-term debt............................ (532) (13) (10) (32)
--------- --------- ----------- -----------
Net cash provided by financing activities................. 1,824 110 126 1,192
--------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents...... 654 (370) (314) 280
Cash and cash equivalents at beginning of period.................. 212 866 866 496
--------- --------- ----------- -----------
Cash and cash equivalents at end of period........................ $ 866 $ 496 $ 552 $ 776
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........................ $ 18 $ 26 $ 20 $ 25
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Non-cash investing and financing activities:
Equipment leased under capital lease obligation............... $ 133 $ 166 $ 167 $ 303
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Common stock issued in satisfaction of debt................... $ 24 $ -- $ -- $ --
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995
(INFORMATION AS OF DECEMBER 31, 1995 AND
NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995 IS UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(1) SUMMARY OF ACCOUNTING POLICIES

(a) Description of Business

Cyanotech Corporation is engaged in the identification and wholesale
commercialization of high-value chemicals, nutritional additives and related
products derived from blue-green (cyanobacteria) and other algae. Cyanotech
Corporation is dependent, to an extent, upon the health food and medical
diagnostic industry sectors.

(b) Principles of Consolidation

The Company consolidates enterprises in which it has a controlling financial
interest. The accompanying consolidated financial statements include the
accounts of Cyanotech Corporation and its wholly-owned subsidiary, Nutrex, Inc.
All significant intercompany balances and transactions have been eliminated in
consolidation.

For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt investments purchased with original maturities
of three months or less to be cash equivalents.

(d) Inventories

Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market.

(e) 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 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 following estimated useful lives:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
---------------
<S> <C>
Equipment.................................................................... 3 to 10 years
Leasehold improvements....................................................... lease term
Furniture and fixtures....................................................... 7 years
Equipment under capital lease................................................ lease term
</TABLE>

Amortization of equipment under capital lease is included in depreciation
and amortization expense in the accompanying consolidated financial statements.

(f) Investments in Joint Ventures

Investments in joint ventures and other investments for which the Company
has the ability to exercise significant influence over the operating and
financing policies of the enterprise are accounted for under the equity method.

(g) Net Income Per Common Share

Net income per common share is computed based on net income after preferred
stock dividend requirements and the weighted average number of common shares
outstanding during the year, adjusted to

F-7
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
reflect the assumed exercise of outstanding stock options and warrants and the
conversion of preferred stock to the extent such items have a dilutive effect on
the computation. Fully diluted net income per common share is not materially
different from primary net income per common share.

(h) Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.

(i) Accounting Changes -- Future Implementation

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

The provisions of SFAS No. 121 must be adopted by the Company no later than
April 1, 1996. The Company has not determined when it will adopt the provisions
of SFAS No. 121 but does not expect adoption to have a material effect on the
Company's consolidated financial condition or results of operations.

(2) INVENTORIES
Inventories consists of the following as of March 31, 1994 and 1995 and
December 31, 1995:

<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- ---------------
<S> <C> <C> <C>
Raw materials................................................... $ 15 $ 29 $ 67
Work in process................................................. 105 105 105
Finished goods.................................................. 192 171 33
Supplies........................................................ 86 70 70
--------- --------- -----
$ 398 $ 375 $ 275
--------- --------- -----
--------- --------- -----
</TABLE>

F-8
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements consists of the following as of March
31, 1994 and 1995 and December 31, 1995:

<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- ------------
<S> <C> <C> <C>
Equipment................................................. $ 2,221 $ 2,622 $ 2,995
Leasehold improvements.................................... 2,638 3,648 6,028
Furniture and fixtures.................................... 28 31 36
Equipment under capital lease (note 5).................... 133 299 602
--------- --------- ------------
5,020 6,600 9,661
Less accumulated depreciation and amortization............ (2,201) (2,539) (2,895)
Construction in-progress.................................. 546 574 438
--------- --------- ------------
Equipment and leasehold improvements, net............. $ 3,365 $ 4,635 $ 7,204
--------- --------- ------------
--------- --------- ------------
</TABLE>

(4) LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 1994 and 1995 and
December 31, 1995:

<TABLE>
<CAPTION>
MARCH 31,
------------ DECEMBER 31,
1994 1995 1995
----- ----- ------------
<S> <C> <C> <C>
Note payable at 5% to the State of Hawaii, Department of Agriculture, in annual installments of $14,
including interest; final payment due September 1995............................................... $ 20 $ 7 $--
Notes payable at the London Interbank Offered Rate (LIBOR) plus 2%, adjusted quarterly; principal
payments of $37.5 due quarterly.................................................................... -- -- 725
Less current maturities of long-term debt........................................................... (13) (7) (175)
----- ----- -----
Long-term debt, excluding current maturities.................................................... $ 7 $-- $ 550
----- ----- -----
----- ----- -----
</TABLE>

Note payable to the State of Hawaii, Department of Agriculture was secured
by substantially all of the Company's assets.

On April 1, 1995, the Company executed a $250 note, payable in principal
installments of $12.5 each quarter, plus interest, with principal and interest
payments satisfied by delivering to the lender an equivalent market value amount
of salable product or cash (at the lender's option). The note payable bears
interest at the London Interbank Offered Rate (LIBOR) plus 2%, adjusted
quarterly, and is secured by certain assets of the Company.

On July 11, 1995, the Company executed a $500 note payable in principal
installments of $25 each quarter, plus interest, with principal and interest
payments satisfied by delivering to the lender an equivalent market value amount
of salable product or cash (at the lender's option). The note payable bears
interest at LIBOR plus 2%, adjusted quarterly, and is secured by certain assets
of the Company. The quarterly principal payment due October 1, 1995 was paid in
January 1996.

(5) LEASES
The Company leases certain of its equipment and a building under capital
leases expiring between 1998 and 2000 and leases facilities, equipment and land
under operating leases expiring between 1996 and 2013. At March 31, 1995, the
net book value of equipment under the capital leases amounted to $266.

F-9
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of March 31, 1995 are
as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------- -----------
<S> <C> <C>
Year ended March 31:
1996.............................................................. $ 75 $ 87
1997.............................................................. 75 77
1998.............................................................. 68 74
1999.............................................................. 58 72
2000.............................................................. 3 72
Thereafter, through 2013.......................................... -- 941
----- -----------
279 $ 1,323
-----------
-----------
Less amount representing interest at 8.1%........................... 37
-----
Present value of minimum capital lease obligations.............. 242
Less current maturities of capital lease obligations................ 58
-----
Obligations under capital lease, excluding current maturities... $ 184
-----
-----
</TABLE>

Total rent expense under operating leases amounted to $49 and $48 for the
years ended March 31, 1994 and 1995, respectively, and $33 and $71 for the nine
months ended December 31, 1994 and 1995, respectively.

As of March 31, 1995, the Company has received a commitment for an equipment
leasing credit facility totalling $350.

(6) INVESTMENT IN JOINT VENTURES
In March 1993, the Company formed a joint venture corporation, OceanColor,
Inc., with an unrelated entity, Aquasearch, Inc., to develop commercial systems
for producing a natural red pigment from micro-
algae, called astaxanthin, for use as a natural feed ingredient by the
aquaculture industry. On November 18, 1994, the joint venture agreement was
terminated by mutual consent. Under the terms of the joint venture agreement,
the Company owned a 50% interest in OceanColor, Inc., and was committed to
contribute, subject to certain conditions, services and facilities and equipment
use and technology valued at $423. As of the termination date, $63 of services
and facilities and equipment use had been contributed and the Company has no
further obligation under the joint venture arrangement. The joint venture's
financial statements are not significant to the Company's consolidated financial
statements. The Company plans to continue, on its own, development of commercial
systems for the production of astaxanthin.

On August 31, 1994, the Company formed a joint venture partnership with
Hauser Chemical Research, Inc. (Hauser) to develop, produce, and market natural
beta carotene. Under the terms of the partnership agreement, Hauser has a 60%
interest and the Company has a 40% interest in the joint venture. Development
work was expected to be completed in 1995 with the total cost to the Company for
its share of development costs not expected to exceed $300 (as of March 31, 1995
and December 31, 1995, approximately $125 and $174, respectively, had been
incurred). Funding for the construction of the commercial production facility
would be arranged by the joint venture partnership.

F-10
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) ACCRUED EXPENSES AND OTHER
Accrued expenses and other consists of the following as of March 31, 1994
and 1995 and December 31, 1995:

<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- ---------------
<S> <C> <C> <C>
Accrued payroll and related benefits............................ $ 64 $ 126 $ 269
Accrued directors' fees......................................... 40 35 30
Deposits........................................................ 58 26 --
Other accrued liabilities....................................... 96 43 73
--------- --------- -----
$ 258 $ 230 $ 372
--------- --------- -----
--------- --------- -----
</TABLE>

(8) PREFERRED STOCK
Series A and B preferred stock are nonvoting (except for the right of Series
A preferred stockholders to elect one director, as described below) and were
convertible into common stock at the rate of five shares of preferred stock for
one share of common stock through February 28, 1995 for Series A preferred stock
and February 28, 1993 for Series B preferred stock. Holders of Series A
preferred stock are entitled to 12% cumulative annual dividends at the rate of
$.048 per share; cumulative dividends in arrears as of March 31, 1995 and
December 31, 1995 amount to $595 ($.476 per share) and $640 ($.512 per share),
respectively, for Series A. Series A preferred stockholders have a prior claim
in liquidation of $.40 per share plus all declared but unpaid dividends. On
December 27, 1995, the Company exchanged 2,500 shares of restricted common stock
for the remaining 12,500 shares of Series B perferred stock.

Series A preferred stockholders also have certain preemptive rights,
anti-dilution privileges and the right to elect one member of the board of
directors. The consent of Series A preferred stockholders is also required to
alter their present rights, issue additional shares of preferred stock, sell the
Company, or sell or assign the Company's proprietary technical information.

Series C convertible 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. Holders of 21,030 shares of Series C preferred stock elected to
convert such shares into 105,150 shares of common stock during the year ended
March 31, 1995. 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 March 31, 1995 and December 31, 1995
amount to $1,663 ($2.263 per share) and $1,884 ($2.563 per share), respectively.
Upon conversion of Series C preferred stock, cumulative dividends in arrears on
converted shares are no longer payable. The amount of cumulative dividends
foregone due to conversion during the year ended March 31, 1995 and the nine
months ended December 31, 1995 amounted to $36 and nil, respectively. The
consent of Series C preferred stockholders is required to change their present
rights or sell all or substantially all of the Company's assets.

The Series C convertible preferred stock was originally issued with a
redemption feature. Terms of the Series C preferred stock were modified in
February 1991 to eliminate such redemption feature.

Series E convertible preferred stock was convertible at the holder's option
into common stock at the rate of five shares of preferred stock for one share of
common or for such number of common shares as have a market value of $.75,
through September 26, 1994. Series E convertible preferred stock was converted
by the holder into 20,000 shares of common stock on September 21, 1994. Upon
conversion of Series E preferred stock, cumulative dividends in arrears on
converted shares were no longer payable. The amount of cumulative dividends
foregone due to conversion during the year ended March 31, 1995 was $38.

F-11
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) PREFERRED STOCK (CONTINUED)
Preferred stock as of March 31, 1994 and 1995 and December 31, 1995, consist
of the following:

<TABLE>
<CAPTION>
MARCH 31,
---------- DECEMBER 31,
1994 1995 1995
---- ---- ------------
<S> <C> <C> <C>
Preferred stock, authorized 5,000,000 shares;
$.001 par value, issued and outstanding:
Series A, 12% cumulative; 1,250,000 shares;
liquidation value $.40 per share plus
unpaid accumulated dividends........................ $ 1 $ 1 $ 1
Series B, 12% cumulative, 12,500 shares on
March 31, 1994 and 1995; nil shares on
December 31, 1995; liquidation value $.40 per share
plus unpaid accumulated dividends................... * * --
Series C, 8% cumulative, convertible; 756,007 shares
as of March 31, 1994 and 734,977 shares as of March
31, 1995 and December 31, 1995: liquidation value
$5.00 per share plus unpaid accumulated dividends... 1 1 1
Series E, 12% cumulative, convertible; converted to
common shares in September 1994..................... * -- --
---- ---- -----
$ 2 $ 2 $ 2
---- ---- -----
---- ---- -----
</TABLE>

- ------------------------
*Amount is less than $.5

(9) STOCK OPTIONS AND WARRANTS

STOCK OPTIONS

At the Annual Meeting held on August 9, 1995, the stockholders of the
Company approved the Company's 1995 Stock Option Plan (Plan), reserving a total
of 400,000 shares of common stock for issuance under the Plan. The Plan provides
for the issuance of both incentive and nonqualified stock options. Options are
to be granted at or above the fair market value of the Company's common stock at
the date of grant and generally become exercisable over a five-year period.

The Company also has a Non-Employee Director Stock Option and Stock Grant
Plan, which was approved by stockholders in 1994. Under the Plan, non-employee
directors are granted a ten-year option to purchase 3,000 shares of the
Company's common stock at its fair market value on the date of grant. In
addition, on the date of each Annual Meeting of Stockholders in each year that
this plan is in effect, each non-employee director continuing in office will be
automatically granted, without payment, 2,000 shares of common stock that is
non-transferable for six months following the date of grant. Grants of 8,000
shares of common stock were made under this plan in August 1995.

In 1985, the Company adopted an Incentive Stock Option Plan (qualified stock
option plan) and authorized 200,000 shares of common stock to be set aside for
grants to officers and key employees of the Company. In 1993, the stockholders
approved an amendment to the Incentive Stock Option Plan which increased the
number of shares reserved for issuance under this plan from 200,000 to 400,000.
Options are granted with exercise prices not lower than the fair market value of
the Company's common stock at the date of grant. Options generally become
excercisable in four equal annual installments, commencing one year from the
date of grant and expire, if not exercised, five years from the date of grant,
unless stipulated

F-12
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) STOCK OPTIONS AND WARRANTS (CONTINUED)
otherwise by the Compensation and Stock Option Committee of the board of
directors. The Incentive Stock Option Plan terminated on March 18, 1995. Options
granted prior to the plan termination date are not affected.

The Company has also issued nonqualified stock options to nonemployees and
directors in exchange for services provided to the Company. Nonqualified stock
options are granted with exercise prices not lower than the fair market value of
the Company's common stock on the date of grant, are immediately exercisable and
expire two to ten years from the date of grant.

A summary of transactions relating to options during the years ended March
31, 1994 and 1995, and nine months ended December 31, 1995 is set forth below:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------
QUALIFIED NONQUALIFIED
SHARES UNDER ---------------------------- ----------------------------
OPTION NUMBERS OF NUMBER OF
AVAILABLE SHARES UNDER PRICE PER SHARES UNDER PRICE PER
FOR GRANT OPTION SHARE OPTION SHARE
------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1993............. 47,400 152,600 $ .56 to .94 18,000 $ .50 to 5.25
Additional shares reserved............. 200,000 -- -- -- --
Options granted........................ (82,000) 82,000 1.50 -- --
Options exercised...................... -- (3,300) .56 to .94 -- --
Options cancelled...................... 10,300 (10,300) .56 to 1.50 (16,000) 3.30 to 5.25
------------ ------------ -------------- ------------ --------------
Balances at March 31, 1994............. 175,700 221,000 .56 to 1.50 2,000 .50
Options granted........................ (98,900) 98,900 .94 115,000 1.06 to 2.00
Options exercised...................... -- (4,300) .56 to .94 -- --
Options canceled....................... 20,900 (20,900) .56 to 1.50 (3,000) 1.06
------------ ------------ -------------- ------------ --------------
Balances at March 31, 1995............. 97,700 294,700 .56 to 1.50 114,000 .50 to 2.00
Additional shares reserved............. 400,000 -- -- -- --
Options granted........................ (101,000) 101,000 5.13 -- --
Options exercised...................... (77,550) .56 to 1.50 (3,000) 1.06
Options cancelled...................... 3,675 (3,675) .56 to 1.50 -- --
Expiration of 1985 Plan................ (101,375) -- -- -- --
------------ ------------ -------------- ------------ --------------
Balances at December 31, 1995.......... 299,000 314,475 $ .56 to 5.13 111,000 $ .50 to 2.00
------------ ------------ -------------- ------------ --------------
------------ ------------ -------------- ------------ --------------
</TABLE>

At March 31, 1995 and December 31, 1995, options to purchase 408,700 and
425,475 shares of common stock, respectively, were exercisable at average prices
of $1.23 and $2.21 per share, respectively.

WARRANTS

The Company has warrants outstanding to acquire 1,653,800 and 997,000 shares
of the Company's common stock as of March 31, 1995 and December 31, 1995,
respectively. The warrants were issued in consideration for loans to the
Company, in consideration for and in recognition of services performed and to
certain individuals who guaranteed notes payable by the Company. Warrants
granted for loans, services and guarantees were granted with exercise prices not
lower than the fair market value of the Company's common stock on the date of
grant. The warrants are exercisable at prices ranging from $.40 to $1.00 per
share and expire on various dates from 1996 to 1999.

F-13
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(10) MAJOR CUSTOMERS AND EXPORT SALES
Sales to major customers for the years ended March 31, 1994 and 1995, and
the nine months ended December 31, 1994 and 1995, are summarized as follows
(percent of product sales):

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED DECEMBER 31,
------------------------ ----------------------------------
1994 1995 1994 1995
----- ----- ---------------- ----------------
<S> <C> <C> <C> <C>
Customer A.......................................... *% *% *% 31%
Customer B.......................................... 16% 17% 13% 11%
Customer C.......................................... *% 13% 12% *%
Customer D.......................................... 10% *% *% *%
-- -- -- --
26% 30% 25% 42%
-- -- -- --
-- -- -- --
</TABLE>

- ------------------------
*Less than 10% of product sales.

Product sales revenue by geographic area for the years ended March 31, 1994
and 1995, and the nine months ended December 31, 1994 and 1995, are summarized
as follows:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
-------------------- ------------------------
1994 1995 1994 1995
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
United States................................... $ 1,828 $ 2,412 $ 1,781 $ 2,620
Canada.......................................... 497 696 378 654
Europe.......................................... 202 621 424 558
Asia/Pacific.................................... 170 421 338 2,150
--------- --------- ----------- -----------
$ 2,697 $ 4,150 $ 2,921 $ 5,972
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>

(11) INCOME TAXES
The provision for income taxes for the years ended March 31, 1994 and 1995
and nine months ended December 31, 1994 is nil due to the utilization of net
operating losses. The provision for income taxes for the nine months ended
December 31, 1995 represents estimated alternative minimum taxes payable.

The tax effects of temporary differences related to various assets and
liabilities that give rise to deferred tax assets and deferred tax liabilities
as of March 31, 1994 and 1995, are as follows:

<TABLE>
<CAPTION>
MARCH 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 2,949 $ 2,585
Tax credit carryforwards............................................... 149 141
Other.................................................................. 62 72
--------- ---------
3,160 2,798
Less valuation allowance................................................. (3,051) (2,751)
--------- ---------
Net deferred tax assets.............................................. $ 109 $ 47
--------- ---------
--------- ---------
Deferred tax liability -- equipment and leasehold improvements........... $ 109 $ 47
--------- ---------
--------- ---------
</TABLE>

The valuation allowance for deferred tax assets as of March 31, 1994 and
1995 was $3,051 and $2,751, respectively. The valuation allowance decreased by
$71 and $300 during the years ended March 31, 1994 and 1995, respectively.

F-14
<PAGE>
CYANOTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) INCOME TAXES (CONTINUED)
At March 31, 1995, the Company has tax net operating tax loss carryforwards
available to offset future federal and state taxable income and tax credit
carryforwards available to offset future federal income taxes as follows:

<TABLE>
<CAPTION>
INVESTMENT RESEARCH AND
NET OPERATING TAX EXPERIMENTATION
LOSSES CREDITS TAX CREDITS
------------- ---------- ---------------
<S> <C> <C> <C>
Expires March 31,
1998...................................................... $-- -- 3
1999...................................................... -- -- 14
2000...................................................... -- 14 15
2001...................................................... 852 -- 22
2002...................................................... 1,800 -- 15
2003...................................................... 1,405 52
2004...................................................... 1,825 -- 5
2005...................................................... 155 -- --
2006...................................................... 763 -- --
2007...................................................... 1 -- --
2008...................................................... -- -- --
2009...................................................... 1 -- --
------ --- ---
$6,802 14 126
------ --- ---
------ --- ---
</TABLE>

Investment tax credits will be recorded as a reduction of the provision for
federal income taxes in the year realized.

(12) COMMITMENTS AND CONTINGENCIES
At March 31, 1995 and December 31, 1995, the Company has commitments for
capital expenditures totaling $506 and $1,120, respectively.

The Company is involved in various claims arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.

F-15

<PAGE>

[Aerial photograph of Cyanotech's production facility located
at the Hawaii Ocean Science and Technology Park on the Kona coast of
Hawaii.]

Cyanotech's production facility located at the Hawaii Ocean Science and
Technology Park on the Kona coast of Hawaii

[Photograph of selected bottles containing the Company's Spirulina
products.]

<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
Use of Proceeds................................ 12
Price Range of Common Stock and Dividend
Policy........................................ 12
Capitalization................................. 13
Selected Consolidated Financial Data........... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
Business....................................... 21
Management..................................... 35
Certain Transactions........................... 39
Principal Stockholders......................... 40
Description of Capital Stock................... 41
Shares Eligible for Future Sale................ 43
Underwriting................................... 45
Legal Matters.................................. 46
Experts........................................ 46
Available Information.......................... 46
Index to Consolidated Financial Statements..... F-1
</TABLE>

1,500,000 SHARES

[COMPANY LOGO]
CYANOTECH CORPORATION

COMMON STOCK

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

PROSPECTUS

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

Van Kasper & Company

, 1996

- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Nevada Private Corporation Law ("NPCL") provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, to (x) any action or suit by or in the right
of the corporation against expenses, including amounts paid in settlement and
attorneys' fees, actually and reasonably incurred, in connection with the
defense or settlement believed to be in, or not opposed to, the best interests
of the corporation, except that indemnification may not be made for any claim,
issue or matter as to which such a person has been adjudged by a court of
competent jurisdiction to be liable to the corporation or for amounts paid in
settlement to the corporation and (y) any other action or suit or proceeding
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement, actually and reasonably incurred, if he or she acted in good
faith and in a manner which he or she reasonably believed to be in, or not
opposed to, reasonable cause to believe his or her conduct was unlawful: To the
extent that a director, officer, employee or agent has been "successful on the
merits or otherwise" the corporation must indemnify such person. The articles of
incorporation or bylaws may provide that the expenses of officers and directors
incurred in defending any such action must be paid as incurred and in advance of
the final disposition of such action. The NPCL also permits the Registrant to
purchase and maintain insurance on behalf of the Registrant's directors and
officers against any liability arising out of their status as such, whether or
not Registrant would have the power to indemnify him against such liability.
These provisions may be sufficiently broad to indemnify such persons for
liabilities arising under the Securities Act.

The Company's Bylaws provide that the Company shall, to the fullest extent
permitted by applicable law, indemnify any director or officer of the Company in
connection with certain actions, suits or proceedings, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred. The Company is also required to pay any
expenses incurred by a director or officer in defending such an action, in
advance of the final disposition of such action. The Company's Bylaws further
provide that, by resolution of the Board of Directors, such benefits may be
extended to employees, agents or other representatives of the Company.

The NPCL provides that a corporation's articles of incorporation may contain
a provision which eliminates or limits the personal liability of a director or
officer to the corporation or its stockholders for damages for breach of
fiduciary duty as a director or officer, provided that such a provision must not
eliminate or limit the liability of a director or officer for: (a) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law; or (b) the payment of illegal distributions. The Company's Restated
Articles of Incorporation include a provision eliminating the personal liability
of directors for breach of fiduciary duty except that such provision will not
eliminate or limit any liability which may not be so eliminated or limited under
applicable law.

Reference is made to Section 7 of the Underwriting Agreement contained in
Exhibit 1.1 hereto, indemnifying the Company's officers and directors against
certain liabilities.

II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Common Stock being registered. All
amounts are estimates except the registration fee, the NASD fee and the Nasdaq
National Market fee.

<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
Registration fee.............................................................. $ 4,164
NASD fee...................................................................... 1,708
Nasdaq National Market fee.................................................... 17,500
Non-accountable expense allowance............................................. 116,438
Printing and engraving........................................................ 75,000
Legal fees and expenses....................................................... 175,000
Accounting fees and expenses.................................................. 35,000
Director and officer insurance................................................ 22,000
Blue sky fees and expenses.................................................... 10,000
Transfer agent fees........................................................... 5,000
Miscellaneous................................................................. 3,190
----------
Total....................................................................... $ 465,000
----------
----------
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

Since January 1993, the Registrant has issued and sold the following
unregistered securities in reliance on the exemption provided by Section 4(2) of
the Securities Act:

(a) Pursuant to a Subscription Agreement dated as of May 15, 1993, the
Company sold 1,800,000 shares of its Common Stock to Ms. Eva Reichl at $1.00 per
share for an aggregate purchase price of $1,800,000, 560,000 of which were
purchased on May 15, 1993, 640,000 of which were purchased on June 14, 1993, and
600,000 of which were purchased on August 30, 1993.

(b) Since August 10, 1994, the Company has granted non-qualified options to
purchase an aggregate of 15,000 shares of its Common Stock to certain directors
pursuant to its 1994 Non-Employee Directors Stock Option and Stock Grant Plan at
a weighted average exercise price of $1.125.

(c) On August 31, 1994, the Company sold to Hauser Chemical Research, Inc.
96,969 shares of the Company's Common Stock for an aggregate purchase price of
$100,000 cash.

(d) On September 19, 1994, the Company granted to a customer options to
purchase 100,000 shares of Common Stock at an exercise price of $2.00 per share.

(e) On September 30, 1994, the Company issued a warrant to purchase 25,000
shares of Common Stock at an exercise price of $1.00 per share to Canterbury
Associates in exchange for certain services to be rendered pursuant to an
agreement between the Company and Canterbury Associates dated January 26, 1994.
The agreement was terminated on January 5, 1995.

(f) On August 9, 1995, the Company granted 8,000 shares of fully paid and
non-assessable Common Stock to certain of its non-employee directors pursuant to
its 1994 Non-Employee Directors Stock Option and Stock Grant Plan.

(g) On October 18, 1995, the Company issued 3,000 shares of the Company's
Common Stock to Ms. Eva Reichl pursuant to the exercise of options under the
1994 Non-Employee Directors Stock Option and Stock Grant Plan at an exercise
price of $1.0625 per share.

(h) On December 4, 1995, the Company issued 38,400 shares of the Company's
Common Stock to Mr. James Austin pursuant to the exercise of a warrant at an
exercise price of $0.625 per share.

(i) On December 8, 1995, the Company issued 120,000 and 96,000 shares of the
Company's Common Stock to Mr. John Ushijima pursuant to the exercise of a
warrant at exercise prices of $0.40 and $0.50, respectively, per share.

II-2
<PAGE>
ITEM 27. EXHIBITS.

II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.14 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.)
<S> <C>
10.15 Sub-Lease Agreement between the Company and the 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.)
10.16+ Preferred Stock Conversion and Registration Rights Agreement by and between the Company and Firemen's
Insurance Company of Newark, N.J., dated as of February , 1996.
10.17+ Registration Rights Agreement by and between the Company and American Cynamid Company dated as of
February , 1996.
10.18 Management Incentive Plan dated May 18, 1995. Confidential portions of this exhibit have been omitted
and filed separately with the Commission. (Incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995.)
11.1* Statement re: Computation of Earnings Per Share.
21.1* Subsidiaries of the Company.
23.1* Consent of KPMG Peat Marwick LLP (see page II-6).
23.2* Consent of Woodburn and Wedge (included in Exhibit 5.1).
24.1* Power of Attorney (included on page II-5).
</TABLE>

- ------------------------
* Filed herewith.
+ To be filed by amendment.

ITEM 28. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the NPCL, the Restated Articles of Incorporation or the
Bylaws of Registrant, Underwriting Agreement, or otherwise, the Registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kailua-Kona, State of
Hawaii on this 14th day of February 1996.

CYANOTECH CORPORATION

By /s/ GERALD R. CYSEWSKI, PH.D.

------------------------------------
Gerald R. Cysewski, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, Gerald R. Cysewski, Ph.D.
and Ronald P. Scott and each one of them, his or her attorneys-in-fact, each
with the power of substitution, for him or her in any and all capacities, to
sign any and all amendments to this Registration Statement (including
post-effective amendments), or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitutes, may do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1993, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------- --------------------

<C> <S> <C>
/s/ GERALD R. CYSEWSKI, PH.D. Chairman of the Board, President February 14, 1996
------------------------------------------- and Chief Executive Officer
Gerald R. Cysewski, Ph.D.

/s/ RONALD P. SCOTT Executive Vice President -- Finance February 14, 1996
------------------------------------------- and Administration, Chief
Ronald P. Scott Financial Officer, Secretary,
Treasurer and Director

/s/ JULIAN C. BAKER Director February 14, 1996
-------------------------------------------
Julian C. Baker

/s/ EVA R. REICHL Director February 14, 1996
-------------------------------------------
Eva R. Reichl

/s/ JOHN T. USHIJIMA Director February 14, 1996
-------------------------------------------
John T. Ushijima

/s/ PAUL C. YUEN, PH.D. Director February 14, 1996
-------------------------------------------
Paul C. Yuen, Ph.D.
</TABLE>

II-5
<PAGE>
CONSENT OF INDEPENDENT AUDITORS

KPMG Peat Marwick LLP

<TABLE>
<S> <C> <C>
P.O. Box 4150 Telephone 808 531 7286 Telefax 808 541 9321
Honolulu, HI 96812-4150 Telex 7238615
</TABLE>

Board of Directors
Cyanotech Corporation:

We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the registration statement.

KPMG Peat Marwick LLP
Honolulu, Hawaii
February 14, 1996

II-6
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1991). ............................................
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). .............................
4.1* Specimen Common Stock Certificate. .....................................................................
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). ....................
5.1* Opinion of Woodburn and Wedge. .........................................................................
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.) ............................................................................................
10.4 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.)......................
10.5 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.)...............
10.6 Supply and Exclusive Marketing Agreement between the Company and Nutrition Gandalf dated July 8, 1994.
Confidential portions of this exhibit have been omitted and filed separately with the Commission.
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1995.)......................................................................
10.7 Joint Venture Agreement dated as of August 31, 1994 between Hauser Chemical Research, Inc. and the
Company. Confidential portions of this exhibit have been omitted and filed separately with the
Commission. (Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1994.).............................................................
10.8 Letter and Registration Rights Agreement dated August 31, 1994 between Hauser Chemical Research, Inc.
and the Company. (Incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1994.)......................................................
10.9 Facilities Rental Agreement dated November 1, 1994 between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.15.) (Incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995.)......................
10.10 Facilities Rental Agreement dated December 2, 1994 between the Company and Natural Energy Laboratory of
Hawaii Authority. (Superseded by Exhibit 10.15.) (Incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995.)......................
10.11 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.).....................................................................
10.12 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.).....................................................................
10.13 Term Loan Agreement dated July 11, 1995 between Kenny Corporation and the Company. (Incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10- QSB for the quarter ended
December 31, 1995.)....................................................................................
10.14 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.)..............................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.15 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.)..............................................................
<S> <C>
10.16+ Preferred Stock Conversion and Registration Rights Agreement by and between the Company and Firemen's
Insurance Company of Newark, N.J., dated as of February , 1996. .....................................
10.17+ Registration Rights Agreement by and between the Company and American Cynamid Company dated as of
February , 1996. ....................................................................................
10.18 Management Incentive Plan dated May 18, 1995. Confidential portions of this exhibit have been omitted
and filed separately with the Commission. (Incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995.)..............................
11.1* Statement re: Computation of Earnings Per Share. .......................................................
21.1* Subsidiaries of the Company. ...........................................................................
23.1* Consent of KPMG Peat Marwick LLP (see page II-6). ......................................................
23.2* Consent of Woodburn and Wedge (included in Exhibit 5.1). ...............................................
24.1* Power of Attorney (included on page II-5). .............................................................
</TABLE>

- ------------------------
* Filed herewith.
+ To be filed by amendment.

<PAGE>
CYANOTECH CORPORATION

INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
NUMBER SHARES

COMMON STOCK COMMON STOCK

SEE REVERSE FOR
CERTAIN DEFINITIONS

THIS CERTIFIES THAT CUSIP 232437 20 2

SPECIMEN

IS THE REGISTERED HOLDER OF

FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.005 PAR VALUE, OF
____________________ _______________________
__________________________CYANOTECH CORPORATION___________________________
____________________ _______________________

transferable on the books of the Corporation by the holder hereof, in
person or by duly authorized attorney-in-fact upon surrender of this
certificate, together with written assignment thereof in proper form, the
form of assignment on the reverse of this certificate being acceptable.
This certificate is not valid until countersigned by the Transfer Agent
and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.

Dated:

/s/ Ronald P. Scott /s/ Gerald R. Cysewski
SECRETARY [CYANOTECH CORPORATION] PRESIDENT
[ SEAL ]

COUNTERSIGNED AND REGISTERED:
FIRST INTERSTATE BANK OF WASHINGTON, N.A.
TRANSFER AGENT
AND REGISTRAR,
BY

AUTHORIZED SIGNATURE

<PAGE>

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM--as tenants in common UNIF GIFT MIN ACT-- Custodian
TEN ENT--as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right under Uniform Gift
of survivorship and not as to Minors
tenants in common Act
(State)

Additional abbreviations may also be used though not in the above list.

For Value Received, __________hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------

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

________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises:

Dated:_______________________

Sign here______________________________________________

______________________________________________
Signature Guaranteed

______________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR WITHOUT ABBREVIATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER

<PAGE>
EXHIBIT 5.1
WOODBURN AND WEDGE
One East First Street
Suite 1600
Post Office Box 2311
Reno, NV 89505

February 15, 1996

Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Kailua-Kona, Hawaii 96740

Re: Registration Statement Form SB-2, 1,725,000

Ladies and Gentlemen:

We have acted as special Nevada counsel to Cyanotech Corporation, a Nevada
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, of 1,725,000 shares of the Company's Common
Stock, $0.005 par value per share (the "Shares").

In connection with this opinion, we have examined the following documents:

A. Restated Articles of Incorporation of the Company, as amended to date, on
file with the Nevada Secretary of State;

B. Bylaws of the Company, as amended to date;

C. Resolutions adopted by the Board of Directors of the Company pertaining
to the Shares; and

D. The Registration Statement on Form SB-2, dated February 15, 1996, as
filed by the Company with the Securities and Exchange Commission covering
the Shares (the "Registration Statement"), including the
Prospectus/Information Statement (the "Prospectus") constituting a part
of such Registration Statement.

In addition, we have examined such other documents as we have deemed
necessary or appropriate as a basis for the opinions hereinafter expressed.

As to certain questions of fact, we have relied, without further
investigation, upon certificates of governmental authorities and of officers of
the Company. Additionally, we have assumed that the signatures on all documents
examined by us are genuine, that all documents submitted to us as originals are
authentic and that all documents submitted to us as copies or as facsimiles of
copies or originals, conform with the originals, which assumptions we have not
independently verified.

Based upon the foregoing and the examination of such legal authorities as we
have deemed relevant, and subject to the qualifications and further assumptions
set forth below, we are of the opinion that the Shares to which the Registration
Statement and Prospectus relate are duly authorized and, when issued and sold as
described in the Registration Statement and Prospectus, will be validly issued,
fully paid and non-assessable.

The foregoing opinion is limited to the matters expressly set forth herein
and no opinion may be implied or inferred beyond the matters expressly stated.
We disclaim any obligation to update this letter for events occurring after the
date of this letter, or as a result of knowledge acquired by us after that date,
including changes in any of the statutory or decisional law after the date of
this letter. We are members of the bar of the State of Nevada. We express no
opinion as to the effect and application of any United States federal law, rule
or regulation or any securities or blue sky laws of any state, including the
State of Nevada. We are not opining on, and assume no responsibility as to, the
applicability to or the effect on any of the matters covered herein of the laws
of any other jurisdiction, other than the laws of Nevada as presently in effect.
<PAGE>
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our name in the Prospectus
constituting a part of such Registration Statement under the heading "Legal
Matters."

Very truly yours,

WOODBURN AND WEDGE

By: /s/ KIRK S. SCHUMACHER

-----------------------------------
Kirk S. Schumacher

<PAGE>
EXHIBIT 11.1
CYANOTECH CORPORATION
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED MARCH 31, 1994 AND 1995 AND NINE MONTHS ENDED
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- --------------------
1994 1995 1994 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income available for common stockholders:
Net income............................................................... $ 204 $ 769 $ 503 $ 1,729
Preferred stock dividends................................................ -- (61) -- (45)
--------- --------- --------- ---------
Net income available for common stockholders............................. $ 204 $ 708 $ 503 $ 1,684
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common shares and common share equivalents:
Common stock............................................................. 8,284 8,894 8,854 9,514
Convertible preferred stock.............................................. 3,925 3,675 3,925 3,675
Common stock options and warrants........................................ 1,121 1,020 1,128 1,263
--------- --------- --------- ---------
13,330 13,589 13,907 14,452
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share................................................ $ 0.02 $ 0.05 $ 0.04 $ 0.12
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY

Nutrex, Inc., a Hawaii corporation