CYANOTECH CORP, 10QSB, 1996-02-14

CYANOTECH CORP
10QSB, 1996-02-14
MEDICINAL CHEMICALS & BOTANICAL PRODUCTS

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<PAGE>

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

FORM 10-QSB

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

For Quarterly Period Ended December 31, 1995

Commission File Number 0-14602

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

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

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

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

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes XX No
------ ------

Number of common shares outstanding as of January 15, 1995:

Title of Class Shares Outstanding
-------------- ------------------
Common stock - $.005 par value stock 9,908,275

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

<PAGE>

CYANOTECH CORPORATION
FORM 10-QSB

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements Page
----

<S> <C>
Consolidated Balance Sheets
December 31, 1995 and March 31, 1995. . .....................................3

Consolidated Statements of Income
Three and nine month periods ended
December 31, 1995 and 1994...................................................4

Consolidated Statements of Cash Flows
Nine month periods ended
December 31, 1995 and 1994...................................................5

Notes to Consolidated Financial Statements........................................6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................10

PART II. OTHER INFORMATION

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

SIGNATURES . . ............................................................................16
</TABLE>

<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

<TABLE>
<CAPTION>
December 3 March 31,
1995 1995
(Unaudited) (Audited)
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 776 $ 496
Accounts receivable 1,291 648
Inventories (note 2) 275 375
Prepaid expenses 32 5
--------- ---------
Total current assets 2,374 1,524

Equipment and leasehold improvements, net (note 4) 7,204 4,635
Other assets 71 53
--------- ---------
Total assets $ 9,649 $ 6,212
--------- ---------
--------- ---------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 175 $ 7
Current maturities of capital lease obligations 123 58
Accounts payable 700 629
Other accrued liabilities (note 5) 372 230
--------- ---------
Total current liabilities 1,370 924

Long-term debt, excluding current maturities 550 -
Obligations under capital leases, excluding
current maturities 358 184
--------- ---------
Total liabilities 2,278 1,108

Stockholders' equity:
Preferred stock (note 6) 2 2
Common Stock - 9,807,575 shares outstanding on
December 31, 1995 and 9,051,325 shares issued
on March 31, 1995 49 45
Additional paid-in capital 12,720 12,216
Accumulated deficit (5,400) (7,129)
--------- ---------
7,371 5,134
Less - Treasury stock, 30,000 common shares at cost - (30)
--------- ---------
Total stockholders' equity 7,371 5,104
--------- ---------

Total liabilities and stockholders' equity $ 9,649 $ 6,212
--------- ---------
--------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

CYANOTECH CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
--------------------- ----------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $2,348 $948 $5,972 $2,921
COST OF PRODUCT SALES 1,051 540 2,784 1,582
-----------------------------------------------------
Gross Profit 1,297 408 3,188 1,339
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 85 39 243 93
General and administrative 340 167 862 504
Sales and marketing 130 75 302 208
-------- -------- -------- --------

Total operating expenses 555 281 1,407 805
-------- -------- -------- --------

Income from operations 742 127 1,781 534
-------- -------- -------- --------

OTHER INCOME (EXPENSE):
Interest income 9 4 19 12
Interest expense (32) (4) (63) (19)
Other income, net - 3 - 13
Proportionate share of
loss of joint venture - - - (37)
-------- -------- -------- --------

Total other income (expense) (23) 3 (44) (31)
-------- -------- -------- --------
Net income before income taxes 719 130 1,737 503
Provision for income taxes (8) - (8) -
-------- -------- -------- --------

NET INCOME $711 $130 $1,729 $503
-------- -------- -------- --------
-------- -------- -------- --------

NET INCOME PER COMMON SHARE $0.05 $0.01 $0.12 $0.04
-------- -------- -------- --------
-------- -------- -------- --------

Weighted average number of common
shares outstanding and
common stock equivalents (note 3) 14,581 14,036 14,452 13,907
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>

See accompanying notes to consolidated financial statements

<PAGE>

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

<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,729 $503
Adjustments to reconcile net income to net
cash provided by operating activities:
Proportionate share of loss of joint venture - 37
Depreciation and amortization 356 234
Net (increase) decrease in:
Accounts receivable (643) (5)
Inventories 100 (43)
Prepaid expenses and other assets (45) (40)
Net increase (decrease) in:
Accounts payable 71 (152)
Other accrued liabilities 142 45
--------- ---------

Net cash provided by operating activities 1,710 579
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (2,622) (982)
Investment in joint venture - (37)
--------- ---------

Net cash used in investing activities (2,622) (1,019)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 538 174
Proceeds from issuance of long-term debt 750 -
Principal payments on capital lease obligations (64) (38)
Principal payments on long-term debt (32) (10)
--------- ---------

Net cash provided by financing activities 1,192 126
--------- ---------

Net increase (decrease) in cash and cash equivalents 280 (314)
Cash and cash equivalents at beginning of period 496 866
--------- ---------

Cash and cash equivalents at end of period $776 $552
--------- ---------
--------- ---------

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of equipment under
capital lease obligation $303 $167
--------- ---------
--------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

CYANOTECH CORPORATION
FORM 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. These financial statements and notes should
be read in conjunction with the Company's financial statements contained in
the Company's previously filed report on Form 10-KSB for the year ended
March 31, 1995.

The Company consolidates enterprises in which it has a controlling
financial interest. The accompanying consolidated financial statements
include the accounts of Cyanotech Corporation and its wholly-owned
subsidiary, Nutrex, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation. While the financial
information furnished for the three and nine month periods ended December
31, 1995 is unaudited, the statements in this report reflect all material
items which, in the opinion of management, are necessary for a fair
presentation of the results of operations for the interim periods covered
and of the financial condition of the Company at the dates of the
consolidated balance sheets. The operating results for the interim period
presented are not necessarily indicative of the results that may be
expected for the year ending March 31, 1996.

2. INVENTORIES

Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market and consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
----------- -----------
<S> <C> <C>
Raw materials $ 67 $ 29
Work in process 105 105
Finished goods 33 171
Supplies 70 70
------- -------
$ 275 $ 375
------- -------
------- -------
</TABLE>

<PAGE>

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

3. NET INCOME PER COMMON SHARE INFORMATION

Net income per common share for the three and nine month periods ended
December 31, 1995 and 1994 is computed based on net income after preferred
stock dividend requirements and the weighted average number of common
shares outstanding during the period, adjusted to reflect the assumed
exercise of outstanding stock options and warrants and the conversion of
preferred stock to the extent these items had a dilutive effect on the
computation. Primary and fully diluted net income per common share herein
are the same.

4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
----------- ----------

<S> <C> <C>
Equipment $ 2,995 $ 2,622
Leasehold improvements 6,028 3,648
Furniture and fixtures 36 31
Equipment under capital lease 602 299
-------- --------
9,661 6,600
Less accumulated depreciation
and amortization (2,895) (2,539)
Construction in-progress 438 574
-------- --------
Equipment and leasehold improvements, net $ 7,204 $ 4,635
-------- --------
-------- --------
</TABLE>

<PAGE>

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

5. OTHER ACCRUED LIABILITIES

Other accrued liabilities as of December 31, 1995 and March 31, 1995
consist of the following (dollars in thousands):

December 31, March 31,
1995 1995
-------- -------
<S> <C> <C>
Accrued payroll and related benefits $ 269 $ 126
Accrued directors' fees 30 35
Deposits - 26
Other accrued expenses 73 43
------- -------
$ 372 $ 230
------- -------
------- -------
</TABLE>

6. PREFERRED STOCK

Preferred stock as of December 31, 1995 and March 31, 1995 consists of the
following (dollars in thousands, except per share amounts):

December 31, March 31,
1995 1995
----------- ---------

<S> <C> <C>
Perferred stock, authorized 5,000,000
shares; $.001 par value, issued
and outstanding:

Series A, 12% cumulative;
1,250,000 shares on December 31, and March 31,
1995; liquidation value $.40 per share
plus unpaid accumulated dividends $ 1 $ 1
Series B, 12% cumulative; nil shares on
December 31, 1995; 12,500 shares on
March 31, 1995; liquidation value
value $.40 per share plus unpaid
accumulated dividends - - *
Series C, 8% cumulative, convertible;
734,977 shares on December 31, and
March 31, 1995; liquidation value $5.00
per share plus unpaid accumulated dividends 1 1
------- -------

$ 2 $ 2
------- -------
------- -------

</TABLE>

* Amounts are less than $.5

<PAGE>

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

7. ACCOUNTING CHANGES

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 the adoption to have a
material effect on the Company's consolidated financial condition or
results of operations.

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.

<PAGE>

CYANOTECH CORPORATION

ITEM 2. 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.

Since 1993 the Company has been capacity constrained, with demand for its
SPIRULINA PACIFICA exceeding the Company's production capabilities. 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 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. 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.

The Company is currently producing SPIRULINA PACIFICA at full capacity.
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.

<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994

NET SALES

Net sales for the three months ended December 31, 1995 increased 148% to
$2,348,000 from the $948,000 reported for the three months ended December 31,
1994. The increase is attributable to increased prices, significantly higher
production and sales of bulk Spirulina powder and tablets and increased sales of
packaged consumer products, which carry a higher sales price than bulk Spirulina
Pacifica products. The increased production is a result of the Spirulina
production expansions that were completed in September 1995.

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
218% to $1,297,000 for the three months ended December 31, 1995 from $408,000 in
the comparable period of 1994 and increased 17% from $1,110,000 in the
immediately preceding quarter. The Company's gross margin was 55.2% for the
three months ended December 31, 1995 compared to 43.0% for the comparable period
of 1994. This increase is attributable to expanded production capacity and the
resulting increase in efficiency during the current quarter.

OPERATING EXPENSES

Operating expenses were $555,000 for the three months ended December 31,
1995, an increase of 97.5% from $281,000 in the comparable period of 1994, and
represented 23.6% of net sales compared to 29.6% of net sales for the three
months ended December 31, 1994. The improvement as a percentage of net sales is
attributable to expanded production capacity and the resulting increase in
efficiency during the current quarter.

RESEARCH AND DEVELOPMENT. Expenditures for research and development
increased to $85,000, or 3.6% of net sales, for the three months ended December
31, 1995, from $39,000, or 4.1% of net sales, from the comparable period of
1994. The increase from the prior year is primarily the result of the research
work being done on beta carotene products for the joint venture partnership with
Hauser Chemical Research, Inc. ("Hauser") and on the astaxanthin product.
Research and development costs are expected to increase further during fiscal
1996 and through fiscal 1997 as the Company continues work on the development of
astaxanthin, a genetically engineered mosquitocide, and other microalgae
products.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $340,000, or 14.5% of net sales, for the three months ended December 31,
1995, from $167,000, or 17.6% of net sales, from the comparable period of 1994.
This increase was due to the payment of associate

<PAGE>

incentive bonuses indexed to the Company's profitability during the three months
ended December 31, 1995, and higher insurance costs.

SALES AND MARKETING. Sales and marketing expenses increased to $130,000,
or 5.5% of net sales, for the three months ended December 31, 1995, from
$75,000, or 7.9% of net sales, for the comparable period of 1994. Sales and
marketing expenses for the third quarter ended December 31, 1995 increased 73%
primarily due to expenses related to the increasing domestic and international
marketing efforts and higher payroll related expenditures.

The Company recorded $581,000 more net income for the third quarter of
fiscal 1996 than for the comparable period of fiscal 1995. The increased net
income in the three month period was primarily due to higher Spirulina
production and sales and the resulting increase in gross profit margin.

NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994

NET SALES

Net sales for the nine months ended December 31, 1995 increased 104% to
$5,972,000 from the $2,921,000 reported for the nine months ended December 31,
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 customer 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.

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 December 31, 1995 compared to 45.8% for the comparable period
of 1994. This 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 1994, 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 is
attributable to increased sales for the nine months ended December 31, 1995.

<PAGE>

RESEARCH AND DEVELOPMENT. Expenditures for research and development
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 comparable period of
1994. The increase from the prior period was primarily the result of the
research work being done on natural beta carotene products for the joint venture
partnership with Hauser and on astaxanthin. Research and development costs are
expected to increase further during fiscal 1996 and through fiscal 1997 as the
Company continues work on the development of astaxanthin product and the
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, from 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 Aquasearch, 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 liability of $7,500 in the nine months ended December 31, 1995
represents alternative minimum tax 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, net tax
operating loss and tax 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.

<PAGE>

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 stock warrants
and 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 ponds and equipment to
increase Spirulina production capacity. Largely as a result of the increase 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 cash balances, together with cash expected to be provided by
operations, will be sufficient to fund its current and planned operations and
capital expenditures. The Company has current commitments for capital
expenditures totaling $1,120,500. As of the date of this report, the Company has
no available bank credit lines.

ACCOUNTING CHANGES

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 and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows derived from an asset
is less than the carrying amount of the asset, an impairment loss is recognized.
Measurement of that loss would be based on the fair value of the asset.
Generally, SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. The 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 of results of
operations.

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 Company has not yet determined if it
will adopt the fair value based method of accounting for stock-based
compensation for purposes of preparing its basic financial statements.

<PAGE>

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

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

3.1 Bylaws of the Registrant, as amended.

10.1 Sub-Lease Agreement between the Company and The Natural
Energy Laboratory of Hawaii Authority dated December 29,
1995.

10.2 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.

10.3 Term Loan Agreement dated July 11, 1995 between Satoshi
Sakurada and the Company.

10.4 Management Incentive Plan dated May 18, 1995. Confidential
portions of this exhibit have been omitted and filed
separately with the Commission.

27 Financial Data Schedule

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended
December 31, 1995.

<PAGE>

SIGNATURES

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

CYANOTECH CORPORATION (Registrant)

February 14, 1996 By: /s/ Gerald R. Cysewski
- ------------------- -----------------------------------------
(Date) Gerald R. Cysewski
Chairman of the Board,
President and Chief Executive Officer

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

<PAGE>

TABLE OF CONTENTS
OF THE BYLAWS OF
CYANOTECH CORPORATION

ARTICLE 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.01. NAME . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02. REGISTERED OFFICE AND RESIDENT AGENT . . . . . . . . 1
Section 1.03. OTHER OFFICES. . . . . . . . . . . . . . . . . . . . 1
Section 1.04. SEAL . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.05. FISCAL YEAR . . . . . . . . . . . . . . . . . . . . 1

ARTICLE 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.01. CONSIDERATION FOR SHARES . . . . . . . . . . . . . . 1
Section 2.02. PAYMENT FOR SHARES . . . . . . . . . . . . . . . . . 1
Section 2.03. CERTIFICATES REPRESENTING SHARES . . . . . . . . . . 2
Section 2.04. TRANSFER OF SHARES . . . . . . . . . . . . . . . . . 2
Section 2.05. REGULATIONS. . . . . . . . . . . . . . . . . . . . . 2

ARTICLE 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.01. PLACE OF STOCKHOLDERS' MEETINGS. . . . . . . . . . . 2
Section 3.02. ANNUAL STOCKHOLDERS' MEETING . . . . . . . . . . . . 2
Section 3.03. SPECIAL STOCKHOLDERS' MEETINGS . . . . . . . . . . . 3
Section 3.04. BUSINESS AT STOCKHOLDERS' MEETINGS . . . . . . . . . 3
Section 3.05. NOTICE OF STOCKHOLDERS' MEETINGS . . . . . . . . . . 4
Section 3.06. STOCKHOLDER QUORUM . . . . . . . . . . . . . . . . . 4
Section 3.07. ADJOURNED STOCKHOLDERS' MEETINGS . . . . . . . . . . 4
Section 3.08. ENTRY OF NOTICE. . . . . . . . . . . . . . . . . . . 5
Section 3.09. VOTING . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.10. CONSENT OF ABSENTEES . . . . . . . . . . . . . . . . 5
Section 3.11. STOCKHOLDER ACTION WITHOUT MEETING . . . . . . . . . 6
Section 3.12. PROXIES. . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.13. DEFINITION OF "STOCKHOLDER". . . . . . . . . . . . . 6

ARTICLE 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.01. NUMBER; TERM; ELECTION . . . . . . . . . . . . . . . 6
Section 4.02. NOMINATIONS. . . . . . . . . . . . . . . . . . . . . 6
Section 4.03. VACANCIES. . . . . . . . . . . . . . . . . . . . . . 8
Section 4.04. ANNUAL MEETING . . . . . . . . . . . . . . . . . . . 9
Section 4.05. REGULAR MEETINGS . . . . . . . . . . . . . . . . . . 9
Section 4.06. OTHER MEETINGS . . . . . . . . . . . . . . . . . . . 9
Section 4.07. NOTICE OF ADJOURNED MEETINGS . . . . . . . . . . . . 9
Section 4.08. ENTRY OF NOTICE. . . . . . . . . . . . . . . . . . . 10
Section 4.09. WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . 10

<PAGE>

Section 4.10. QUORUM . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.11. PARTICIPATION IN MEETINGS BY TELEPHONE . . . . . . . 10
Section 4.12. ADJOURNMENT. . . . . . . . . . . . . . . . . . . . . 10
Section 4.13. ACTION WITHOUT MEETING . . . . . . . . . . . . . . . 10
Section 4.14. FEES AND COMPENSATION. . . . . . . . . . . . . . . . 11
Section 4.15. LIMITATION OF LIABILITY. . . . . . . . . . . . . . . 11
Section 4.16. INDEMNIFICATION; ADVANCEMENT OF EXPENSES . . . . . . 11
Section 4.17. INDEMNIFICATION OF EMPLOYEES AND AGENTS. . . . . . . 11
Section 4.18. POWERS OF DIRECTORS. . . . . . . . . . . . . . . . . 12
Section 4.19. COMMITTEES . . . . . . . . . . . . . . . . . . . . . 12

ARTICLE 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.01. OFFICERS . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.02. ELECTION . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.03. SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . 12
Section 5.04. REMOVAL AND RESIGNATION. . . . . . . . . . . . . . . 13
Section 5.05. VACANCIES. . . . . . . . . . . . . . . . . . . . . . 13
Section 5.06. CHAIRMAN OF THE BOARD OF DIRECTORS . . . . . . . . . 13
Section 5.07. CHIEF EXECUTIVE OFFICER. . . . . . . . . . . . . . . 13
Section 5.08. PRESIDENT. . . . . . . . . . . . . . . . . . . . . . 13
Section 5.09. VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . 14
Section 5.10. SECRETARY. . . . . . . . . . . . . . . . . . . . . . 14
Section 5.11. ASSISTANT SECRETARIES. . . . . . . . . . . . . . . . 15
Section 5.12. CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . 15
Section 5.13. TREASURER. . . . . . . . . . . . . . . . . . . . . . 15
Section 5.14. ASSISTANT TREASURERS . . . . . . . . . . . . . . . . 15
Section 5.15. CORPORATE BANK ACCOUNTS. . . . . . . . . . . . . . . 15
Section 5.16. TRANSFERS OF AUTHORITY . . . . . . . . . . . . . . . 16

ARTICLE 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 6.01 RECORD DATE AND CLOSING STOCK BOOKS . . . . . . . . . 16
Section 6.02 CHECKS, DRAFTS, ETC. . . . . . . . . . . . . . . . . 16
Section 6.03 CONTRACTS, ETC., HOW EXECUTED . . . . . . . . . . . . 16
Section 6.04 LOST CERTIFICATES OF STOCK. . . . . . . . . . . . . . 17
Section 6.05 REPRESENTATION OF SHARES. . . . . . . . . . . . . . . 17
Section 6.06 INSPECTION OF BYLAWS. . . . . . . . . . . . . . . . . 17

ARTICLE 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 7.01 POWER OF STOCKHOLDERS . . . . . . . . . . . . . . . . 17
Section 7.02 POWER OF DIRECTORS. . . . . . . . . . . . . . . . . . 18

<PAGE>

BYLAWS
OF CYANOTECH CORPORATION

ARTICLE I
IDENTIFICATION

Section 1.01. NAME. The name of the Corporation is Cyanotech Corporation.

Section 1.02. REGISTERED OFFICE AND RESIDENT AGENT. The address of its
registered office in Nevada is One East First Street, Suite 1600, Reno, Nevada
89501. The name of the resident agent at such address is Corporation Trust
Company of Nevada.

Section 1.03. OTHER OFFICES. The principal executive office of the
Corporation shall be established by the Board of Directors and branch or
subordinate offices may be established by the Board of Directors.

Section 1.04. SEAL. The seal of the Corporation will be circular in form
and mounted upon a metal die, suitable for impressing the same upon paper. The
use of the seal is not necessary on any corporate document and its use or
nonuse shall not in any way affect the legality of the document.

Section 1.05. FISCAL YEAR. The fiscal year of the Corporation will be
determined by resolution of the Board of Directors.

ARTICLE 2
STOCK

Section 2.01. CONSIDERATION FOR SHARES. The shares of stock may be issued
for such consideration, expressed in dollars, as shall be fixed from time to
time by the Board of Directors. Treasury shares may be disposed of by the
Corporation for such consideration expressed in dollars as may be fixed from
time to time by the Board of Directors.

Section 2.02. PAYMENT FOR SHARES. The consideration for the issuance of
shares may be paid, in whole or in part, in the form of any tangible or
intangible property or benefit to the Corporation, including, but not limited
to, cash, promissory notes, services performed, contracts for services to be
performed or other securities of the Corporation. When the Corporation receives
the consideration for which the Board of Directors authorized the issuance of
shares, the shares issued therefor are fully paid and non-assessable. The
judgment of the Board of Directors as to the adequacy of the consideration
received for shares shall be conclusive in the absence of actual fraud in the

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transaction. The Corporation may place in escrow shares issued for a contract
for further services or benefits or a promissory note, or make any other
arrangement to restrict the transfer of the shares.

Section 2.03. CERTIFICATES REPRESENTING SHARES. Each holder of stock is
entitled to a certificate in such form as may be required by applicable law
signed by the Chairman of the Board of Directors, Chief Executive Officer, or
President (or a vice president), and the Secretary (or an assistant secretary),
certifying the number of shares owned by the stockholder in the Corporation.

In case any officer or officers who shall have signed, or whose facsimile
signature or signatures shall have been used on, any certificate or
certificates shall cease to be an officer or officers of the Corporation,
whether because of death, resignation or otherwise, before the certificate or
certificates shall have been delivered by the Corporation, the certificate or
certificates may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed the certificate or
certificates, or whose facsimile signature or signatures shall have been used
thereon, had not ceased to be an officer or officers of the Corporation.

Section 2.04. TRANSFER OF SHARES. Transfers of shares shall be made only
upon the stock transfer books of the Corporation kept in an office of the
Corporation or by transfer agents designated to transfer shares of the stock of
the Corporation.

Section 2.05. REGULATIONS. The issue, transfer, conversion and
registration of stock shall be governed by such other regulations as the Board
of Directors may establish.

ARTICLE 3
STOCKHOLDERS

Section 3.01. PLACE OF STOCKHOLDERS' MEETINGS. Meetings of the
stockholders of the Corporation shall be held at the principal executive office
of the Corporation, 73-4460 Queen Kaahumanu Highway, Suite 102, Kailua-Kona,
Hawaii 96740, or at such other place as may be designated by the Chairman of
the Board of Directors, the Chief Executive Officer or the Board of Directors.

Section 3.02. ANNUAL STOCKHOLDERS' MEETING. The annual meeting of the
stockholders shall be held on such date and at such time as the Board of
Directors shall fix for the purposes of electing directors and transacting such
other business as may be properly be brought before the meeting.

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Section 3.03. SPECIAL STOCKHOLDERS' MEETINGS. Subject to the Corporation's
Articles of Incorporation, special meetings of the stockholders may be called
by the Board of Directors, and shall be held on such date and at such time
as shall be fixed by resolution.

Section 3.04. BUSINESS AT STOCKHOLDERS' MEETINGS. Except as otherwise
provided by law (including but not limited to Rule 14a-8 of the Securities
Exchange Act of 1934, as amended, or any successor provision thereto) or in
these Bylaws, the business which shall be conducted at any meeting of the
stockholders shall (a) have been specified in the written notice of the
meeting (or any supplement thereto) given by the Corporation, (b) be brought
before the meeting at the direction of the Board of Directors or the
presiding officer of the meeting, or (c) have been specified in a written
notice given to the Secretary of the Corporation by or on behalf of any
stockholder who shall have been a stockholder of record on the record date
for such meeting and who shall continue to be entitled to vote thereat and
who is in continuing compliance with the requirements of Rule 14a-8 (the
"Stockholder's Notice"), in accordance with all of the following requirements:

(1) Each Stockholder's Notice must be delivered to, or mailed and
received at, the principal executive offices of the Corporation:

(a) in the case of an annual meeting that is called for a date
that is within thirty (30) days before or after the anniversary
date of the immediately preceding annual meeting of stockholders,
not less than one hundred twenty (120) calendar days in advance of
the date of the Corporation's proxy statement for the previous
year's annual stockholder's meeting nor more than one hundred fifty
(150) days prior to such anniversary date; and

(b) in the case of an annual meeting that is called for a date
that is not within thirty (30) days before or after the anniversary
date of the immediately preceding annual meeting, not later than
the close of business on the tenth (10th) day following the day on
which notice of the date of the meeting was mailed or public
disclosure of the date of the meeting was made, whichever occurs
first; and

(2) Each such Stockholder's Notice must set forth each of the
following:

(a) the name and address of the stockholder who intends to
bring the business before the meeting:

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(b) the general nature of the business which he or she seeks
to bring before the meeting; and

(c) a representation that the stockholder is a holder of
record of shares of stock entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to bring the
business specified in the notice before the meeting.

The presiding officer of the meeting may, in his or her sole discretion,
refuse to acknowledge any business proposed by a stockholder not made in
compliance with the foregoing procedure.

Section 3.05. NOTICE OF STOCKHOLDERS' MEETINGS. Written notice stating
the place, day and hour of a meeting of stockholders and the purpose for
which the meeting is called must be delivered not less than ten (10) days,
nor more than sixty (60) days before the date of the meeting, either
personally, or by mail, or by means of written communication, charges
prepaid, signed by the President (or any vice-president) or the Secretary (or
any assistant secretary) to each registered stockholder entitled to vote at
the meeting. If mailed, the notice shall be considered to be delivered when
deposited in the United States mail addressed to the stockholder at the
stockholder's address as it appears on the stock transfer books of the
Corporation. It is not required that the notice be published in any
newspaper. Waiver by a stockholder in writing of notice of a meeting is
equivalent to giving notice. Attendance by a stockholder, without objection
to the notice, whether in person or by proxy, at a meeting is a waiver of
notice of the meeting.

Section 3.06. STOCKHOLDER QUORUM. A majority of the shares entitled to
vote, represented in person or by proxy, is a quorum at a meeting of
stockholders, unless or except to the extent that the presence of a larger
number may be required by law. Where separate vote by a class or classes is
required, a majority of the shares of such class or classes present in person
or represented by proxy shall constitute a quorum entitled to take action
with respect to that vote on that matter. The stockholders present at a duly
organized meeting may continue to do business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.

Section 3.07. ADJOURNED STOCKHOLDERS' MEETINGS. Any meeting of
stockholders, whether annual or special, whether or not a quorum is present,
may be adjourned from time to time by the vote of a majority of the shares,
the holders of which are either present in person or represented by proxy,
but in the absence of a quorum no other business may be transacted at any
meeting of stockholders.

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When any meeting of stockholders, whether annual or special, is
adjourned for thirty (30) days or more, notice of the adjourned meeting
shall be given as in the case of an original meeting. As to any adjournment
of less than (30) days, it shall not be necessary to give any notice of the
time and place of the adjourned meeting or of the business to be transacted,
other than by announcement at the meeting at which the adjournment is taken.

Section 3.08. ENTRY OF NOTICE. An entry in the minutes of any meeting of
stockholders, whether annual or special, to the effect that notice has been
duly given shall be conclusive and incontrovertible evidence that due notice
of the meeting was given to all stockholders as required by law and these
Bylaws.

Section 3.09. VOTING. Except as otherwise provided by law, only persons
in whose names shares entitled to vote stand on the stock registry of the
Corporation (a) on the day prior to any meeting of stockholders, or (b) if a
record date for voting purposes is fixed as provided in Article 6, Section
6.01, of these Bylaws, then on that record date, shall be entitled to vote at
the meeting. Voting shall be by ballots, each of which shall state the
stockholder's name or proxy voting and such other information as may be
required under the procedure established for the meeting. The Corporation
may, and to the extent required by law shall, in advance of any meeting of
stockholders, appoint one or more inspectors to act at the meeting and make
written report thereof. Each vote taken by ballot shall be counted by an
inspector or inspectors appointed by the chairman of the meeting.

Except as otherwise provided by law or by an express provision of the
Articles of Incorporation, or by an express provision of any Directors'
Resolution for a series of Preferred Stock, each full share is entitled to
one vote and, when a quorum is present at the commencement of any meeting of
stockholders, the vote of the holders of a majority of the shares entitled to
vote present, in person or by proxy, shall decide any question brought before
the meeting of stockholders. Fractional shares shall not be entitled to any
voting rights whatsoever.

Section 3.10. CONSENT OF ABSENTEES. The transactions of any meeting of
stockholders, whether annual or special and however, called and noticed,
shall be as valid as though had at a meeting duly held after regular call and
notice if a quorum be present either in person or by proxy and if, either
before or after the meeting, each of the stockholders entitled to vote, not
present in person or by proxy, signs a written waiver of notice, or a consent
to the holding of the meeting, or an approval of the minutes thereof, all
such waivers, consents or approvals shall be filed with the Secretary or be
made a part of the minutes of the meeting.

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<PAGE>

Section 3.11. STOCKHOLDER ACTION WITHOUT MEETING. Except for actions taken
by the unanimous written consent of the stockholders, all action taken by the
stockholders, including but not limited to the election and removal of
directors, voting on stockholder issues, consents, approvals and
ratifications, must be taken at a duly called, noticed and held meeting of
the stockholders and no such action may be taken without a meeting.

Section 3.12. PROXIES. Every person entitled to vote or execute consents
shall have the right to do so either in person or by an agent or agents
authorized by a written proxy executed by the person or by the person's duly
authorized agent and filed with the Secretary of the Corporation; provided,
that no proxy shall be valid after the expiration of six (6) months from the
date of its execution unless the person executing it specified therein the
length of time for which the proxy is to continue in force, which in no event
shall exceed seven (7) years from the date of its execution.

Section 3.13. DEFINITION OF "STOCKHOLDER". As used in these Bylaws, the
term "stockholder," and any term of like import, shall include all persons
entitled to vote the shares held by a stockholder, unless the context in
which the term is used indicates that a different meaning is intended.

ARTICLE 4
BOARD OF DIRECTORS

Section 4.01. NUMBER; TERM; ELECTION. The number of directors shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exists any vacancy in a previously authorized
directorship at the time any such resolution is presented to the Board of
Directors for adoption) but the number shall be not less than three (3) nor
more than twenty-five (25).

The Board of Directors including directors who may be elected by the
holders of one or more classes or series of Preferred Stock shall be elected
at each annual meeting of stockholders.

If a vacancy occurs on the Board of Directors, including a vacancy created
by an increase in the number of directors, the vacancy shall be filled by the
Board of Directors. All directors shall continue in office until the election
and qualification of their respective successors in office. No decrease in
the number of directors shall have the effect of shortening the term of any
incumbent director.

Section 4.02. NOMINATIONS. Only persons who are nominated in accordance
with the following procedures shall be eligible for election as directors.
Nominations of

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<PAGE>

persons for election to the Board of Directors at the annual meeting, by or
at the direction of the Board of Directors, may be made by any Nominating
Committee or person appointed by the Board of Directors; nominations may also
be made by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures
set forth in this Section 4. Such nomination, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely
notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's nominating notice shall be delivered to or mailed and received
at the principal executive office of the Corporation addressed to the
attention of Secretary of the Corporation not less than thirty-five (35) days
prior to the meeting or the date the stockholders are first solicited for
their consents as the case may be; provided, however, that, in the case of an
annual meeting and in the event that less than fifty (50) days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received no
later than the earlier of (a) the close of business on the tenth (10th) day
following the day on which such notice of the date of the meeting was mailed
or such public disclosure was made, whichever first occurs, or (b) two (2)
days prior to the date of the meeting.

Such stockholder's nominating notice to the Secretary shall set forth

(1) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, each of the following:

(a) the name, age, business address and residence address of the
person;

(b) the principal occupation or employment of the person;

(d) a statement as to the person's citizenship; and

(e) any other information relating to the person that is required to
be disclosed in solicitations for proxies for election of directors
pursuant to Section 14 of the Securities Exchange Action of 1934, as
amended, and the rules and regulations promulgated thereunder; and

(2) as to the stockholder giving the notice, each of the following:

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<PAGE>

(a) the name and record address of the stockholder giving the notice;

(b) the name and record address of the stockholder; and

The Corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the Corporation to determine the
eligibility of such proposed nominee to serve as director of the Corporation.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth herein.

In connection with any annual meeting, the Chairman of the Board of
Directors or the Chief Executive Officer or such officer presiding at the
meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the foregoing procedure and
that the defective nomination shall be disregarded.

Section 4.03. VACANCIES. Any vacancy occurring in the Board of Directors
may be filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the Board of Directors was present, or
by a sole remaining director. A director elected to fill a vacancy shall be
elected for the unexpired term of the director's predecessor in office.

A vacancy or vacancies in the Board of Directors shall be deemed to exist
in case of the death, resignation or removal of any director, or if the
authorized number of directors be increased, or if the stockholders fail at
any annual or special meeting of stockholders at which any director or
directors are elected to elect the full authorized number of directors to
be voted for at that meeting, or if a vacancy is declared by the Board of
Directors for any reason permitted by law.

The stockholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the Board of Directors. If the Board of
Directors accepts the resignation of a director tendered to take effect at a
future time, the Board of Directors shall have power to elect a successor to
take office when the resignation is to become effective.

No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of the director's term of
office.

<PAGE>

Section 4.04. ANNUAL MEETING. Immediately after the annual meeting of
the stockholders, at the same place as the meeting of the stockholders or
such other place as may be provided in a notice thereof, the Board of
Directors shall meet each year for the purpose of organization, election of
officers, and consideration of any other business that may properly be
brought before the meeting. No notice of any kind to either old or new
members of the Board of Directors for this annual meeting shall be necessary
unless the meeting is to be held at a place other than the place of the meeting
of the stockholders, in which case notice of the place of the meeting shall be
given as provided in Section 4.06.

Section 4.05. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at the times and places within or without the State
of Nevada as may be designated from time to time by resolution of the Board
of Directors or by written consent of all members of the Board of Directors.
No notice of any kind to members of the Board of Directors for these regular
meetings shall be necessary unless the meeting is to be held at a place other
than the principal executive office of the Corporation, in which case notice
of the place of the meeting shall be given as provided in Section 4.06.

Section 4.06. OTHER MEETINGS. Other meetings of the Board of Directors
for any purpose or purposes may be held at any time upon call by the Chairman
of the Board of Directors, Chief Executive Officer, President or, if any of
the above listed officers is absent or unable or refuses to act, by any vice
president or by any two (2) directors. The other meetings may be held at any
place within or without the State of Nevada as may be designated from time to
time by resolution of the Board of Directors or by written consent of all
directors.

Written notice of the time and place of other meetings shall be delivered
personally to each director or sent to each director by mail or other form of
written communication, charges prepaid, addressed to the director at the
director's address as it is shown upon the records of the Corporation or, if
it is not so shown on the Corporation's records or is not readily
ascertainable, at the place in which the meetings of the directors are
regularly held. In case the notice is mailed or telegraphed, it shall be
deposited in the United States mail or delivered to the telegraph company in
the place in which the principal executive office of the Corporation is
located at least three (3) days prior to the time of the holding of the
meeting. In case the notice is delivered personally, it shall be so
delivered at least three (3) days prior to the time of the holding of the
meeting. The mailing, telegraphing or delivery as above provided shall
constitute due, legal and personal notice to the director.

Section 4.07. NOTICE OF ADJOURNED MEETINGS. Notice of the time and place
of holding an adjourned meeting need not be given to absent directors if the
time and place be fixed at the meeting adjourned.

<PAGE>

Section 4.08. ENTRY OF NOTICE. An entry in the minutes of any special
meeting of the Board of Directors to the effect that notice has been duly
given shall be conclusive and incontrovertible evidence that due notice of
the special meeting was given to all directors as required by law and by
these Bylaws.

Section 4.09. WAIVER OF NOTICE. The transactions of any meeting of the
Board of Directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice, if
a quorum be present, and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice or a consent to the
holding of the meeting or an approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.

Section 4.10. QUORUM. A majority of the authorized number of directors,
or, in the event that a flexible number of directors is authorized by the
Articles of Incorporation or these Bylaws, a majority of the exact authorized
number of directors, shall be necessary to constitute a quorum for the
transaction of business, except to adjourn as hereinafter provided. Every
act or decision done or made by a majority of the directors present at a
meeting duly held at which a quorum is present shall be regarded as the act
of the Board of Directors unless a greater number be required by the Articles
of Incorporation, these Bylaws or applicable law.

Section 4.11. PARTICIPATION IN MEETINGS BY TELEPHONE. Members of the
Board of Directors, or of any committee thereof, may participate in any
meeting of the Board of Directors or committee by means of telephone
conference or similar communications by which all persons participating in
the meeting can hear each other and such participation shall constitute
presence in person at such meeting.

Section 4.12. ADJOURNMENT. A quorum of the directors may adjourn any
directors' meeting to meet again at a stated day and hour; provided, however,
that in the absence of a quorum, a majority of the directors present at any
directors' meeting either regular or special, may adjourn from time to time
until the time fixed for the next regular meeting of the Board of Directors.

Section 4.13. ACTION WITHOUT MEETING. Any action required or permitted
to be taken by the Board of Directors under the Articles of Incorporation,
these Bylaws, or under applicable law, may be taken without a meeting if all
members of the Board of Directors shall individually or collectively consent,
in writing, before or after the action, to the action. Any action by written
consent shall have the same force and effect as a unanimous vote of all
directors. All written consents must be filed with the Secretary.

<PAGE>

Section 4.14. FEES AND COMPENSATION. By resolution of the Board of
Directors, a fixed fee, with or without expenses of attendance, may be
allowed to any director for the director's services and any director may
participate in a stock option plan. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity as an officer, agent, employee or otherwise, and receiving
compensation therefor.

Section 4.15. LIMITATION OF LIABILITY. To the fullest extent permitted
by Nevada law, as the same now exists or may hereafter be amended, a director
shall have no personal liability to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. Any amendment to
or repeal of this Section 4.15 shall not adversely affect any right or
protection of a director of the Corporation for or with respect to any acts
or omissions of such director occurring prior to such amendment or repeal.

Section 4.16. INDEMNIFICATION; ADVANCEMENT OF EXPENSES. The Corporation
shall indemnify the officers and directors of the Corporation to the fullest
extent permitted by Nevada law as the same exists or may hereafter by
amended. In the event that Nevada law is amended, after the adoption of these
Bylaws, to authorize corporate action further eliminated or limiting the
personal liability of an officer or director, then the liability of an
officer or director of the Corporation shall be eliminated or limited to the
fullest extent permitted by Nevada law, as so amended.

The Corporation shall pay the expenses incurred by an officer or
director in defending any civil, criminal, administrative, or investigative
action, suit or proceeding in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such officer or director to repay such amount if it should by ultimately
determined that he/she is not entitled to be indemnified by the Corporation
as authorized by Nevada law.

Any amendment to or repeal of any of the provisions in this Section 4.16
shall not adversely affect any right or protection of an officer or director
of the Corporation for or with respect to any act or omission of such
director occurring prior to such amendment or repeal.

Section 4.17. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
grant rights to indemnification and to the advancement of expenses to any
employee or agent of the Corporation to the fullest extent of the provisions
of Section 4.16 of these Bylaws.

<PAGE>

Section 4.18. POWERS OF DIRECTORS. The Board of Directors may, except as
otherwise provided or required by law, exercise all such powers and do all
such acts and things as may be exercised or done by the Corporation.

Section 4.19. COMMITTEES. The Board of Directors, by resolution passed
by a majority of the whole Board, may from time to time designate committees
of the Board of Directors, including, without limitation, Executive,
Nominating, Audit and Compensation Committees with such lawfully delegable
powers and duties as the Board of Directors may confer, to serve at the
pleasure of the Board of Directors and shall, for those committees and any
other provided herein, elect one or more directors to serve on such
committees. Except as otherwise provided in these Bylaws or by resolution of
the Board of Directors, each committee may fix its own rules of procedure and
shall hold its meetings as provided by such rules.

ARTICLE 5
OFFICERS

Section 5.01. OFFICERS. The officers of the Corporation shall be a
Chairman of the Board of Directors, Chief Executive Officer, President, Chief
Financial Officer, Treasurer and Secretary. The Corporation may also have, at
the discretion of the Board of Directors, one or more executive vice
presidents or vice presidents, one or more assistant treasurers, one or more
assistant secretaries, and such other officers as may be designated from time
to time by the Board of Directors. Any number of offices may be held by the
same person. Officers, other than the Chairman of the Board of Directors,
need not be directors.

Section 5.02. ELECTION. The officers of the Corporation, except those
officers as may be appointed in accordance with the provisions of Section
5.03 or Section 5.05 of this Article 5, shall be elected annually by the
Board of Directors, and each shall hold office until the officer shall resign
or shall be removed as set forth in Section 5.04 or otherwise be disqualified
to serve, or the officer's successor shall be elected and qualified; provided
that officers may be elected at any time by the Board of Directors, or, as
permitted by Section 5.03 of this Article 5, appointed by the Chairman of the
Board of Directors or the Chief Executive Officer, for the purpose of
initially filling an office or filling a newly created or vacant office.

Section 5.03. SUBORDINATE OFFICERS. The Board of Directors may appoint,
and may empower the Chairman of the Board of Directors or Chief Executive
Officer to appoint, such other officers as the business of the Corporation
may require, each of whom shall hold office for the term, have the authority
and perform the duties as are provided in these Bylaws or as the Board of
Directors may from time to time determine.

<PAGE>

Section 5.04. REMOVAL AND RESIGNATION. Any officer may, subject to any
contractual arrangements between the officer and the Corporation, be removed,
either with or without cause, by a majority vote of the outstanding stock or
by a majority of the Directors in office at the time, at any regular or
special meeting of the stockholders or the Board of Directors, or, unless
otherwise specified by the Board of Directors, by the Chairman of the Board
of Directors or any other officer upon whom a general or special power of
removal may be conferred by the Board of Directors.

Any officer may resign at any time by giving written notice to the
Secretary and, in the case of the Secretary, to the President. Any resignation
shall take effect at the earlier of fourteen (14) days after receipt of the
notice or upon acceptance thereof by the Board of Directors.

Section 5.05. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in
the manner prescribed in these Bylaws for regular appointments to that office.

Section 5.06. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board of Directors, if there be such officer, shall, if present, preside at
all meetings of the Board of Directors and exercise and perform such other
powers and duties as may be from time to time assigned to him or her by the
Board of Directors or prescribed by these Bylaws. If there is not a Chief
Executive Officer, the Chairman of the Board of Directors shall, in addition,
be the Chief Executive Officer of the Corporation and shall have the powers
and duties prescribed in Section 5.07 of Article 5 of these Bylaws.

Section 5.07. CHIEF EXECUTIVE OFFICER. Subject to the control of the
Board of Directors and the Chairman of the Board of Directors, the Chief
Executive Officer shall have the general supervision, direction and control
of the business and officers of the Corporation. In the absence of the
Chairman of the Board of Directors, or if there be none, the Chief Executive
Officer shall preside at all meetings of the Board of Directors and the
stockholders. Except as expressly stated otherwise in these Bylaws, the Chief
Executive Officer shall be ex officio a member of all standing committees of
the Board of Directors, including the Executive Committee, if any. The Chief
Executive Officer shall have all the powers and shall perform all of the
duties which are ordinarily inherent in the office of Chief Executive Officer
of a corporation, and he or she shall have such further powers and shall
perform such further duties as may as prescribed for him or her by the Board
of Directors.

Section 5.08. PRESIDENT. In the absence or disability of the Chief
Executive Officer, or if there be none, the President shall perform all of
the duties of the Chief Executive Officer, and when so acting shall have all
of the powers of and be subject to

13
<PAGE>

all of the restrictions upon the Chief Executive Officer. The President shall
have such other duties as from time to time may be prescribed for him or her
by the Board of Directors.

Section 5.09. VICE PRESIDENTS. In the absence or disability of the
President, the vice presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the vice president designated by the Board of
Directors, the President or the officer, if any, senior to the President,
shall perform all the duties of the President, and when so acting, shall have
all the powers of and be subject to all the restrictions upon the President.
The vice presidents shall have such other powers and perform such other
duties as may be prescribed for them respectively by the Board of Directors,
the President, the officer, if any, senior the President or these Bylaws.

Section 5.10. SECRETARY. The Secretary shall keep or cause to be kept,
at the registered office, the principal executive office or such other place
as the Board of Directors may order, a book of minutes of all meetings of
directors and stockhoders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice thereof
given, the names of those present at directors' meetings, the number of
shares present or represented at meetings of the stockholders, and the
proceedings thereof. The Secretary shall be responsible for authenticating
records of the Corporation.

The Secretary shall keep or cause to be kept, in any form permitted by
law, at the registered office, the principal executive office or at the
office of the Corporation's transfer agent, a stock register, or a duplicate
stock register, revised at least annually, showing the names of the
stockholders and their residence addresses and the number and classes of
shares held by each stockholder. If the share register or a duplicate share
register is located at a place other than the registered office of the
Corporation, the Secretary shall file a certificate with the resident agent
located at the registered office setting out the name of the custodian of the
stock ledger or a duplicate stock ledger, and the present and complete post
office address, including street and number, if any, where such stock ledger
or duplicate stock ledger is kept.

The Secretary shall give, or cause to be given, notice of all the
meetings of the stockholders and of the Board of Directors and written
consents in lieu thereof required by these Bylaws or by law to be given, and
shall keep the seal of the Corporation if safe custody, and shall have such
other powers and perform such other duties as may be prescribed by the Board
of Directors, the Chairman of the Board of Directors, the Chief Executive
Officer, the President or these Bylaws.

After fixing a record date for a meeting, the Secretary shall prepare an
alphabetical list of the names of all its stockholders who are entitled to
notice of a stockholders

<PAGE>

meeting, which is arranged by voting group and class, and shows the address
and number of shares held by each stockholder. The list must be available for
inspection by any stockholder, for any purpose germane to the meeting,
beginning ten (10) business days before the meeting and continue to be
available throughout the meeting at the place indicated in the meeting notice
in the city where the meeting will be held.

Section 5.11. ASSISTANT SECRETARIES. It shall be the duty of the
assistant secretaries to assist the Secretary in the performance of his or
her duties and generally to perform such other duties as may be delegated to
them by the Board of Directors, the Secretary or these Bylaws.

Section 5.12. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of account of the Corporation. He or she shall receive and
deposit all moneys and other valuable belonging to the Corporation in the
name and to the credit of the Corporation and shall disburse the same and
only in such manner as the Board of Directors or the appropriate officer of
the Corporation may from time to time determine, shall render to the Board of
Directors, the Chairman of the Board of Directors, and the Chief Executive
Officer whenever any of them may request it, an account of all his or her
transactions as Chief Financial Officer and of the financial condition of the
Corporation, and shall perform such further duties as the Board of Directors
or the Chairman of the Board of Directors may require.

Section 5.13. TREASURER. The Treasurer shall assist the Chief Financial
Officer in the performance of his or her duties and generally such other
duties as may be delegated to him or her by the Board of Directors, the Chief
Financial Officer or these Bylaws.

Section 5.14. ASSISTANT TREASURERS. It shall be the duty of the
assistant treasurers to assist the Treasurer in the performance of his or her
duties and generally to perform such other duties as may be delegated to them
by the Board of Directors, the Chief Financial Officer, the Treasurer or
these Bylaws.

Section 5.15. CORPORATE BANK ACCOUNTS. Bank accounts in the name of the
Corporation may be opened without the approval of the Board of Directors if
opened with the consent of both the Chief Executive Officer and the Chief
Financial Officer. The Chief Financial Officer shall inform the Board of
Directors of any bank account opened by the Chief Executive Officer and Chief
Financial Officer pursuant to the authority granted in this section at the
next meeting of the Board of Directors.

15
<PAGE>

Section 5.16. TRANSFERS OF AUTHORITY. In case of the absence of any
officer of the Corporation, or for any reason that the Board of Directors may
consider sufficient, the Board of Directors may transfer the powers or duties
of that officer to any other officer or to any director or employee of the
Corporation, provided a majority of the Board of Directors concurs.

ARTICLE 6
MISCELLANEOUS

Section 6.01. RECORD DATE AND CLOSING STOCK BOOKS. The Board of Directors
may fix a time in the future, as a record date for the determination of the
stockholders entitled to notice of and to vote at any meeting of
stockholders, or entitled to receive any dividend or distribution, or any
allotment of rights, or to exercise rights in respect to any change,
conversion or exchange of shares. The record date so fixed shall not be more
than sixty (60) days prior to the date of the meeting or event for the
purposes of which it is fixed. When a record date is so fixed, only
stockholders of record on that date shall be entitled to notice of and to
vote at the meeting, or to receive the dividend, distribution or allotment of
rights, or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the Corporation after the record
date. The Board of Directors may close the books of the Corporation against
transfers of shares during the whole or any part of any the sixty (60) day
period.

Section 6.02. CHECKS, DRAFTS, ETC. All checks, drafts bonds, bills of
exchange, or other orders for payment of money, notes, or other evidences of
indebtedness issued in the name of or payable to the Corporation shall be
signed or endorsed by such person or persons and in such manner as, from
time to time, shall be determined by resolution of the Board of Directors.

Section 6.03. CONTRACTS, ETC., HOW EXECUTED. The Board of Directors,
except as in these Bylaws otherwise provided, may authorize any officer or
officers, agent or agents, to enter into any contract or execute any
instrument or document in the name of and on behalf of the Corporation, and
the authority may be general or confined to specific instances. Unless
otherwise specifically determined by the Board of Directors or otherwise
required by law, formal contacts, promissory notes and other evidences of
indebtedness, deeds of trust, mortgages and corporate instruments or documents
requiring the corporate seal, and certificates for shares of stock owned by
the Corporation shall be executed, signed or endorsed by the Chairman of the
Board of Directors, Chief Executive Officer or the President (or any vice
president) and by the Secretary (or any assistant secretary) or the Treasurer
(or any assistant treasurer). The Board of Directors may, however, authorize
any one (1) of these officers to sign any of such instruments, for and on
behalf of the Corporation, without necessity of countersignature; may
designate officers

<PAGE>

or employees of the Corporation, other than those named above, who may, in
the name of the Corporation, sign such instruments; and may authorize the
use of facsimile signatures for any of such such persons. No officer, agent
or employee shall have any power or authority to bind the Corporation by any
contract or engagement or to pledge its credit to render it liable for any
purpose or to any amount except as specifically authorized in these Bylaws or
by the Board of Directors in accordance with these Bylaws.

Section 6.04. LOST CERTIFICATES OF STOCK. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost, destroyed, or stolen, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost or destroyed.
When authorizing the issue of a new certificate or certificates, the Board of
Directors may, in its discretion, and as a condition precedent to the
issuance thereof, require the owner of the lost or destroyed certificate or
certificates, or the stockholder's legal representative, to advertise the
same in any manner as it shall require or give the Corporation a bond in any
sum as it may direct as indemnity against any claim that may be made against
the Corporation with respect to the certificate alleged to have been lost or
destroyed, or both.

Section 6.05. REPRESENTATION OF SHARES. The Chairman of the Board of
Directors, Chief Executive Officer, the President (or any vice president) and
the Secretary (or any assistant secretary) of this Corporation are each
authorized to vote, represent and exercise on behalf of this Corporation all
rights incident to any and all shares of any other Corporation or
Corporations standing in the name of this Corporation. The authority herein
granted to these officers to vote or represent on behalf of this Corporation
any and all shares held by this Corporation in any other Corporation or
Corporations may be exercised either by these officers in person or by any
persons authorized so to do by proxy or power of attorney duly executed by
these officers.

Section 6.06. INSPECTION OF BYLAWS. The Corporation shall keep in its
registered office for the transaction of business the original or a copy of
the Bylaws as amended or otherwise altered to date, certified by the
Secretary, which shall be open to inspection by the stockholders at all
reasonable times during office hours.

ARTICLE 7
Amendments

Section 7.01. POWER OF STOCKHOLDERS. New Bylaws may be adopted or these
Bylaws may be amended or repealed by the vote or written assent of
stockholders entitled to exercise a majority of the voting power of the
Corporation, unless a greater number is required by law, by the Articles of
Incorporation or by these Bylaws.

<PAGE>

Section 7.02. POWER OF DIRECTORS. Subject to the right of stockholders as
provided in Section 7.01 of this Article 7 to adopt, amend or repeal Bylaws,
Bylaws may be adopted, amended, or repealed by the Board of Directors.

[space intentionally left blank]

<PAGE>

CERTIFICATE OF SECRETARY
OF
CYANOTECH CORPORATION

I, Ronald P. Scott hereby certify:

1. That I am duly elected Secretary of Cyanotech Corporation.

2. That the foregoing Bylaws, comprising eighteen (18) pages, excluding
this page, are the Bylaws of Cyanotech Corporation as duly adopted at a
meeting of the Board of Directors thereof duly held on the 9th day of
November, 1995.

IN WITNESS WHEREOF, I have subscribed my name this 9th day of November,
1995.

/s/ RONALD P. SCOTT
------------------------------------------------------
Ronald P. Scott, Secretary

<PAGE>
EXHIBIT 10.1

RECORDATION REQUESTED BY:
THE NATURAL ENERGY LABORATORY OF HAWAII AUTHORITY
Keahole Point
P.O. Box 1749
Kailua-Kona, Hawaii 96745

AFTER RECORDATION, RETURN TO:
THE NATURAL ENERGY LABORATORY OF HAWAII AUTHORITY
P.O. Box 1749
Kailua-Kona, Hawaii 96745

RETURN BY: MAIL [ ] PICKUP [ ]
STATE MESSENGER [ ]

_________________________________________________________________

STATE OF HAWAII

THE NATURAL ENERGY LABORATORY OF HAWAII AUTHORITY

SUBLEASE NO. K-4

between

THE NATURAL ENERGY LABORATORY OF HAWAII AUTHORITY

in relation with the State Department
of Business, Economic Development and
Tourism

and

CYANOTECH CORPORATION

a NEVADA CORPORATION

covering

77.068 acres of land at

<PAGE>

Ke-ahole Airport, Kona, Hawaii
TABLE OF CONTENTS

Page(s)
------

TERM OF SUBLEASE.......................................................... 1

RENTAL:

1. Rental fees..................................................... 2

2. Reopening of rental fees........................................ 4

3. Determination of rental fees.................................... 4

4. Business records................................................ 5

5. Additional rent................................................. 6

6. Security Deposit................................................ 7

RESERVATIONS:

7. Minerals and waters............................................. 7

8. Prehistoric and historic remains................................ 7

9. Ownership of fixed improvements................................. 7

AGREEMENTS & COVENANTS BETWEEN PARTIES:

10. Payment of rent.................................................. 7

11. Taxes, assessments, etc.......................................... 8

12. Seawater, brackish water and ground water........................ 8

13. Utilities........................................................ 8

14. Equipment and apparatus.......................................... 9

15. Construction within premises..................................... 9

16. Seawater systems and utility connections......................... 9

i
<PAGE>
17. Operations................................................. 9

18. Seawater discharges........................................ 10

19. Sublessee responsibility................................... 10

20. Covenant against discrimination............................ 10

21. Sanitation, etc............................................ 10

22. Waste and unlawful, improper or offensive
use of premises............................................ 10

23. Compliance with laws....................................... 11

24. Inspection of premises..................................... 11

25. Improvements............................................... 11

26. Repairs to improvements.................................... 11

27. Non-adverse effects........................................ 11

28. Non-obstruction reservations............................... 11

29. Liens...................................................... 12

30. Assignments................................................ 12

31. Subletting................................................. 13

32. Indemnity.................................................. 13

33. Cost of litigation......................................... 13

34. Liability insurance........................................ 13

35. Bond, performance.......................................... 14

36. Sublessor's liens.......................................... 14

37. Mortgage................................................... 14

38. Breach of termination...................................... 14

ii
<PAGE>

39. Right of holder of record of a
security interest.......................................... 16

40. Condemnation.................................................... 16

41. Right to enter.................................................. 17

42. Inspection by prospective bidders............................... 17

43. Acceptance of rent not a waiver................................. 17

44. Ingress and Egress.............................................. 18

45. Extension of time............................................... 18

46. Justification of sureties....................................... 18

47. Waiver, modification, reimposition of
bond and liability insurance provisions.................... 18

48. Suspension of operations........................................ 19

49. Quite enjoyment................................................. 19

50. Surrender....................................................... 19

51. Non-warranty.................................................... 19

52. Hazardous materials............................................. 19

53. Fire and extended coverage insurance............................ 20

54. Withdrawal...................................................... 21

55. Clearance....................................................... 21

56. Force majeure................................................... 21

57. Notices......................................................... 21

58. Bond, improvement............................................... 22

59. Headings........................................................ 22

iii
<PAGE>

60. Modification of sublease........................................ 22

61. Hawaii law...................................................... 22

62. Exhibits - incorporated in sublease............................. 22

63. Partial invalidity.............................................. 22

THIS SUBLEASE IS ALSO SUBJECT TO THE FOLLOWING SPECIAL
TERMS AND CONDITIONS:

64. Design standards................................................ 22

65. Administrative rules............................................ 22

66. Restoration of subleased land................................... 22

67. Sublease subject to master lease................................ 23

DEFINITIONS............................................................... 23

SIGNATURE PAGE............................................................ 24

ACKNOWLEDGEMENT PAGE...................................................... 25

EXHIBIT "A".............Project Proposal

EXHIBIT "B".............Site Survey Description

EXHIBIT "C".............Site Survey Map

EXHIBIT "D" ............FAA Regulations, Part 77

EXHIBIT "E" ............Assignment of Lease Evaluation Policy

EXHIBIT "F" ............Master Lease

ADDENDUM

CONSENT TO AGREEMENT OF GENERAL LEASE NO. S-4717

vi
<PAGE>
STATE OF HAWAII
THE NATURAL ENERGY LABORATORY OF HAWAII AUTHORITY

SUBLEASE NO. K-4

THIS INDENTURE OF Sublease, made this 29th day of _December_ 1995_, but
effective as of the signing of the attached Consent by the State Board of Land
and Natural Resources, by and between the NATURAL ENERGY LABORATORY OF HAWAII
AUTHORITY, a body corporate and a public instrumentality of the State of Hawaii
organized pursuant to Hawaii Revised Statutes, Chapter 227D, hereinafter
referred to as the "Sublessor", and whose business and post office address is
P.O. Box 1749, Kailua-Kona, Hawaii 96745, and CYANOTECH CORPORATION ,
-----------------------------------
a CORPORATION ,
----------------------
under the laws of
(INSERT "CORPORATION," "PARTNERSHIP," "JOINT VENTURE," "SOLE PROPRIETORSHIP," OR
OTHER LEGAL FORM OF THE TENANT)
the State of NEVADA , hereinafter referred to as
-----------------------------
"Sublessee", whose business and mailing address is P. O. BOX 4385, KAILUA-KONA,
HAWAII 96745.

WITNESSETH

WHEREAS, the Sublessee desires to sublease certain NELHA leased land near
Keahole airport, North Kona, Island of Hawaii, only for the purposes specified
in the Sublessee's project proposal attached hereto as Exhibit "A" and
incorporated by reference herein.

The Sublessor for and in consideration of the rent to be paid and of the
terms, covenants, and conditions herein contained, all on the part of the
Sublessee to be kept, observed, and performed, does hereby sublease unto the
Sublessee, and the Sublessee does hereby sublease from the Sublessor the
premises identified as:

Lease Parcel G being a portion of the Natural Energy Laboratory of Hawaii
---
Authority site at Kalaoa 1st - 4th and OOMA 1st District of North Kona,
Island, County and State of Hawaii more particularly described in Exhibit
"B" and as shown on the map marked Exhibit "C", hereto attached and made a
part hereof.
TO HAVE AND TO HOLD THE subleased premises unto the Sublessee for the term
of Thirty (30) years, commencing on the 1st day of January, 1996, up to and
including the 31st day of December, 2025, unless sooner terminated as
hereinafter provided, the Sublessor reserving and the Sublessee yielding and
paying to the Sublessor at the Office of the Natural Energy Laboratory of Hawaii
Authority, Kona, Hawaii, State of Hawaii, a monthly rental as provided herein,
payable in advance, without notice or demand, in twelve equal installments on
the first day of each and every month during said term and a percentage rental
as follows:

1. RENTAL FEES. In consideration of the property and services provided
by

1
<PAGE>

Sublessor, Sublessee agrees to pay to Sublessor a fixed rental fee in the
amount of $ 9,328.40 per month, payable in advance, without notice or
----------
demand, in equal installments on the first day of each and every month or two
percent (2%) of gross sales as indicated below (the "Percentage Rent")
whichever is greater, subject to the following:

(a) The "Percentage Rent" shall be paid to Sublessor by Sublessee only to
the extent such percentage rent is greater than the fixed monthly rental fee
provided above. The percentage rent shall be two percent (2%) of gross sales.
For purposes of this agreement "gross sales" shall be defined as all receipts,
income, and revenues derived from relating to, or connected with the operations
on the rental property, and received by Sublessee under this agreement provided
however the following shall be excluded from the computation of gross sales:
(i) costs for goods shipped to a foreign destination from the State of Hawaii;
(ii) import tariffs; (iii) brokerage commission for foreign sales; and (iv)
the State of Hawaii general excise tax. Within ninety (90) days of the end of
each sublease year during the rental term, Sublessee shall submit to Sublessor a
report showing its gross sales less the above exclusions. Sublessee shall pay
to Sublessor the Percentage Rent due thereby within thirty (30) days after the
submission of the report of gross sales.

(b) In recognition of the capital investment by Sublessee to the Premises
during the early years of the prior sublease and the prior facilities rental
agreement as well as the financial risks undertaken by Sublessee together with
other direct and indirect benefits which will accrue to the State of Hawaii,
Sublessee shall be entitled to an offset for the period noted below in a total
amount not to exceed $505,000. This offset is contained within the following
offset allowance schedule, which references the allowable offset during the past
four years under the prior sublease and facilities rental agreement as well as
the first two years under this sublease:

i. Year 1 (1/1/92-12/31/92) in the amount of percentage rent payable
annually in excess of $25,000.00;

ii. Year 2 (1/1/93-12/31/93) in the amount of percentage rent payable
annually in excess of $35,000.00;

iii. Year 3 (1/1/94-12/31/94) in the amount of percentage rent payable
annually in excess of $40,000.00;

iv. Year 4 (1/1/95-12/31/95) in the amount of percentage rent payable
annually in excess of $45,000.00;

v. Year 5 (1/1/96-12/31/96) in the amount of percentage rent payable
annually in excess of $65,000.00; and

vi. Year 6 (1/1/97-12/31/97) in the amount of percentage rent payable
annually in

2
<PAGE>

excess of $75,000.

However, capital expenditure shall have occurred in order for Sublessee to
claim the offset. For purposes of this offset provision, "capital expenditures"
shall mean all costs incurred by Sublessee in making site improvements,
including: grading, contouring, road construction, paving, fill materials,
landscaping, utility installation, sea water and deep well pipelines and pumps
installation, building or office structures, permanent ponds, and metal fences.
Capital expenditures shall be established by receipts and certified audit
conducted in accordance with generally accepted accounting standards, available
to Sublessor upon written request.

Sublessee agrees to pay any costs incurred by Sublessor that result from
the installation and use of Sublessee's seawater systems and utility systems.
These costs will be billed to the Sublessee in monthly invoices and shall be
payable within ten (10) days of receipt.

A penalty fee of 1% per month (12% per annum) will be charged on any unpaid
balances which are thirty (30) days past due. Payments may be made at the
laboratory or mailed to the Sublessor's office in Kailua-Kona. Checks should be
made payable to: NELHA/State of Hawaii.

(c) INTEREST RATE: The interest rate on any and all unpaid or delinquent
rentals shall be at one per cent (1%) per month, plus a service charge of FIFTY
AND NO/100 DOLLARS ($50.00) per month for each month of delinquency.

(d) "GROSS SALES" DEFINED. As used herein, the term "gross sales" means:

i. All income and revenue derived from, relating to, or connected
with the operations, sales, and services rendered under this sublease, whether
for cash or credit and whether paid or unpaid; provided, however, that the
following shall be excluded from the computation of gross sales:

A. Any and all retail sales taxes, excise taxes, or related direct taxes
upon the consumer and collected by the Sublessee on these sales.

B. Receipts from the sale or trade-in value of any furniture, fixtures,
or equipment used upon the premises and owned by the Sublessee.

C. The value of any merchandise, supplies or equipment exchanged or
transferred from or to the other locations of business of the
Sublessee where the exchanges or transfers are not made for the
purpose of avoiding a sale by the Sublessee which otherwise would be
made at or from the premises.

D. Receipts in the form of refunds from or the value of merchandise,
supplies, or

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equipment returned to shippers, suppliers, or manufacturers.

E. Receipts with respect to any sale where the subject of the sale, or
some part thereof, is returned by the purchaser and accepted by the
Sublessee, to the extent of any refund actually granted or adjustment
actually made, either in the form of cash or credit.

F. The amount of any cash or quantity discounts received from sellers,
suppliers, or manufacturers.

G. Receipts from the sales at cost of uniforms or clothing to Sublessee's
employees where the uniforms or clothing are required by the
Sublessee.

H. Shipping costs to a foreign destination from the State of Hawaii.

I. Brokerage commissions for foreign sales.

J. Import tariffs.

ii. The Sublessee shall not be credited with or allowed to have any
reduction in the amount of the gross sales, which results in any arrangements
for a rebate, kickback, or hidden credit given or allowed to any customer;
provided, however, that the Sublessee may allow customary discounts on sales of
commodities and products to its own employees or volume purchasers.

2. REOPENING OF MONTHLY RENTAL FEES: The minimum monthly rental fees and
the percentage rental reserved shall be reopened and redetermined as of the day
following the expiration of the Twentieth (20th) year of the sublease term.

3. DETERMINATION OF RENTAL FEES AND PERCENTAGE RENTAL UPON REOPENING OF
THE ANNUAL RENTAL: The rental fees for any ensuing period shall be the fair
market rental at the time of reopening. Except as provided herein, the
provisions in Hawaii Revised Statutes, Chapter 658, shall be followed. At least
six (6) months prior to the time of reopening, the fair market rental shall be
determined by an appraiser whose services shall be contracted for by Sublessor,
and the Sublessee shall be promptly notified by certified mail, return receipt
requested of the fair market rental as determined by Sublessor's appraiser;
provided, that should the Sublessee fail to notify Sublessor in writing within
thirty (30) days after receipt thereof that Sublessee disagrees with the fair
market rental as determined by Sublessor's appraiser and that Sublessee has
appointed its own appraiser to prepare an independent appraisal report, then the
fair market rental as determined by Sublessor's appraiser shall be deemed to
have been accepted by Sublessee and shall be the fair market rental as of the
date of the reopening. If Sublessee has notified Sublessor and appointed its
appraiser as stated hereinabove, Sublessee's appraiser shall complete its
appraisal and two appraisers shall then exchange their reports within forty-

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<PAGE>

five (45) days from the date of the Sublessee's appointment of the appraiser.

The two appraisers shall review each other's reports and make every effort
to resolve whatever differences they may have. However, should differences
still exist fourteen (14) days after the exchange, the two appraisers shall
within seven (7) days thereafter appoint a third appraiser who shall also
prepare an independent appraisal report based on the review of the two appraisal
reports prepared and any other data. Copies thereof shall be furnished to the
first two appraisers within forty-five (45) days of the appointment. Within
twenty (20) days after receiving the third appraisal report, all three shall
meet and determine the fair market rental in issue. The fair market rental as
determined by a majority of the appraisers shall be final and binding upon both
Sublessor and Sublessee, subject to vacation, modification or correction in
accordance with the provisions of Sections 658-8 and 658-9, Hawaii Revised
Statutes. Each party shall pay for its own appraiser and the cost of the
services of the third appraiser shall be borne equally by the Sublessor and the
Sublessee. All appraisal reports shall become part of the public record of the
Sublessor.

In the event the appraisers are unable to determine the fair market rental
before the reopening date, or by the foregoing prescribed time, whichever is
later, the Sublessee shall pay the fair market rental as determined and the
rental paid by Sublessee shall then be subject to retroactive adjustments as
appropriate to reflect the fair market rental determined as set forth
hereinabove. However, Sublessee or Sublessee's appraiser's failure to comply
with the procedures set forth above shall constitute a waiver of Sublessee's
right to contest the new rent, and the Sublessee shall pay the rent as
determined by Sublessor's appraiser without any retroactive adjustments.
Alternatively, Sublessor may treat this failure as a breach of this sublease and
terminate the sublease.

4. BUSINESS RECORDS. The Sublessee shall:

a. Prepare and keep for a period for at least one (1) year following the
termination of the sublease, all pertinent original sales records including
serially numbered sales slips and other sales records which would normally be
examined by an independent accountant pursuant to accepted auditing standards in
performing an audit of the Sublessee's sales and gross sales.

b. Submit to the Sublessor on or before the ninetieth (90th) day
following the end of each sublease year at the place fixed for the payment of
rent, a statement certified as correct by the Sublessee or by a person duly
authorized by the Sublessee to certify showing in accurate detail the amount of
gross sales during the preceding sublease year, duly verified by an independent
certified public accountant. These statements shall be in a form and style and
contain details and breakdowns as Sublessor may require.

Without prejudice to any remedies provided in this sublease for Sublessee's
default, if the Sublessee shall fail to promptly furnish any sublease period
report or certified public accountant's annual verification report, the
Sublessor may have the report prepared on

<PAGE>

Sublessee's behalf by an accountant to be selected by the Sublessor, at the
expense of the Sublessee. The Sublessee shall furnish to the accountant all
records requested for the purpose of preparing the reports, and the Sublessee
shall pay to the Sublessor all expense incurred by the Sublessor in securing
the reports. Furthermore, the Sublessor may make assessments upon the
Sublessee by recourse to those procedures selected by the Sublessor which
would produce a reasonable gross sales expectation upon which percentage
rentals may be computed.

In the event that records have not been prepared and kept in accordance
with the provisions set forth herein, the Sublessor shall, in addition to all
other payments required herein, be entitled to demand and receive an additional
payment of ten percent (10%) of the applicable minimum rental fees for the
sublease periods involved.

c. Grant unto the Sublessor at all reasonable times access to all books,
accounts, records, and reports including gross income tax reports, showing
sales, and other pertinent records including the following:

i. shipping costs to foreign destinations;
ii. import tariffs;
iii. Hawaii General Excise Tax;
iv. Hawaii Corporate, Partnership, or Individual Income Tax;
v. Federal Corporate, Partnership, or Individual Income Tax;
vi. records showing capital expenditures made until the full
offset against percentage rent has been achieved, if offset
is provided.

Sublessee shall at any reasonable time upon twenty-four (24) hours notice,
permit the Sublessor's accountant or a certified public accountant to complete
an audit of the Sublessee's entire business affairs and records relating to the
business conducted on the premises for the term of the sublease. The Sublessee
shall cooperate fully in making any inspection, examination, or audit. If the
audit by a certified public accountant or by Sublessor's accountant discloses
that rental has been underpaid by two percent (2%) or more for any period under
examination, the Sublessor shall, in addition to the remedies provided in
paragraph b. above, be entitled to reimbursement of the reasonable cost of the
audit in addition to the deficiency. If the audit by a certified public
accountant or by Sublessor's accountant shall disclose that rent has been
underpaid by five percent (5%) or more for the period under examination, the
Sublessor shall have the right to terminate this sublease.

5. ADDITIONAL RENT: All utility, office space, services and compound
charges shall be charged to and payable by Sublessee as additional rent.

6. SECURITY DEPOSIT. Upon execution of this Sublease, Sublessee shall
deposit with Sublessor the sum of $_0.00____________________ as security for the
faithful performance of all of these terms and conditions. The whole or a
portion of the deposit will be returned to the Sublessee upon termination of
this Sublease, but only after all of the terms and conditions

<PAGE>

of this Sublease have been observed and performed to the satisfaction of
Sublessor.

RESERVING UNTO THE STATE OF HAWAII AND SUBLESSOR THE FOLLOWING:

7. MINERALS AND WATERS. (a) All minerals as hereinafter defined, in,
on or under the premises and the right, on the State of Hawaii's or Sublessor's
own behalf or through persons authorized by it, to prospect for, mine and remove
such minerals and to occupy and use so much of the surface of the ground as may
be required for all purposes reasonably extending to the mining and removal of
such minerals by means whatsoever, including strip mining. "Minerals", as used
herein, shall mean any or all oil, gas, coal, phosphate, sodium, sulfur, iron,
titanium, gold, bauxite, silver, bauxite clay, diaspore, boehmite, laterite,
gibbsite, alumina, all ores of aluminum and, without limitation thereon, all
other mineral substances and ore deposits, whether solid, gaseous or liquid,
including all geothermal resources in, on, or under the land, fast or submerged;
provided, that "minerals" shall not include sand, gravel, rock or other material
suitable for use and used in general construction in furtherance of the
Sublessee's permitted activities on the premises and not for sale to others.
(b) All surface and ground waters appurtenant to the premises (but specifically
excluding seawater) and the right on the State of Hawaii's or Sublessor's own
behalf or through persons authorized by it, to capture, divert or impound the
same and to occupy and use so much of this right reserved; provided, however,
that as a condition precedent to the exercise by the State of Hawaii or
Sublessor of the rights reserved in this paragraph just compensation shall be
paid to the Sublessee for any of Sublessee's improvements taken.

8. PREHISTORIC AND HISTORIC REMAINS. All prehistoric and historic
remains found on said premises.

9. OWNERSHIP OF FIXED IMPROVEMENTS. The ownership of all improvements of
whatever kind or nature, including but not limited to fences and pipeline
system(s) located on the land prior to or on January 23, 1986, when the original
sublease was executed.

THE SUBLESSEE COVENANTS AND AGREES WITH THE SUBLESSOR AS FOLLOWS:

10. PAYMENT OF RENT. Sublessee shall pay said rent to the Sublessor
at the times, in the manner and form provided in this sublease and at the place
specified above, or at such other place as the Sublessor may from time to time
designate, in legal tender of the United States of America.

11. TAXES, ASSESSMENTS, ETC. Sublessee shall pay or cause to be paid,
when due, the amount of all taxes, rates, and assessments of every description
as to which the premises or any part, or any improvements, or the Sublessor or
Sublessee, are now or may be assessed or become liable by authority of law
during the term of this sublease; provided, however, that with respect to any
assessment made under any betterment or improvement law which may be

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<PAGE>

payable in installments, Sublessee shall be required to pay only such
installments, together with interest, which becomes due and payable during
said term.

12. SEAWATER, BRACKISH WATER, AND GROUNDWATER. If applicable, Sublessor
will use reasonable efforts to maintain seawater flow at the times and rates
required by Sublessee, but because of the unpredictable conditions and aging
equipment relating to the seawater delivery, Sublessor does not guarantee a
continuous delivery of seawater. Sublessor shall not be liable for any and all
claims, loss, costs, damages, or expenses arising out of Sublessor's inability
to provide seawater to Sublessee.

Sublessee acknowledges that Sublessor cannot warrant, guarantee, or
represent that the quality of its seawater, brackish water, and groundwater is
never subject to contamination. Sublessee further acknowledges that it assumes
all risk of loss for injury or property damage which may result from
contamination of seawater, brackish water, and groundwater. Sublessor shall not
be liable for any and all claims, loss, costs, damages, or expenses arising out
of the contamination of seawater, brackish water, and groundwater.

13. UTILITIES. Sublessee shall pay when due all charges, duties, and
rates of every description, including water, electricity, sewer, gas, refuse
collection, and any other charges, as to which the premises or any part, or any
improvements or the Sublessor of Sublessee may become liable for during the
term, whether assessed to or payable by the Sublessor or Sublessee.

Sublessor will use reasonable efforts to accommodate Sublessee's
requirements for utilities at the site. However, Sublessor shall not be
responsible for any inability to provide utilities to Sublessee. In the event
that the utilities furnished to Sublessee must be interrupted or diminished by
Sublessor on a scheduled basis, Sublessor will attempt to provide Sublessee with
adequate notice thereof. Sublessor shall not be liable for any and all claims,
loss, costs, damages, or expenses arising out of any interruption of utility
service to the Sublessee.

Sublessee recognizes that freshwater is in limited supply in the North
Kona-Kohala area and Sublessee agrees that it shall conserve freshwater whenever
possible.

Provision of freshwater will be on a non-guaranteed basis and is subject to the
provisions of the County Board of Water Supply.

Subject to Sublessor's prior approval, Sublessee may install its own
telephone equipment using existing utility conduits.

14. EQUIPMENT AND APPARATUS. Sublessee shall be solely responsible for
any equipment and apparatus provided and operated by the Sublessee. All of
Sublessee's equipment and apparatus that will be connected to the seawater
systems and the electrical systems at the facility shall be subject to
inspection by the Sublessor or its designated

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<PAGE>

representative prior to any connection. All of Sublessee's test equipment
and apparatus shall be made in accordance with applicable standards,
regulations, codes and sound engineering practice. Sublessor or its
designated representative may request inspection and certification by outside
experts and/or professional engineers.

15. CONSTRUCTION WITHIN PREMISES. The Sublessee shall not make or cause
to be made any additions, alterations, or improvements, or install or cause to
be installed any buildings, structures, electrical, or plumbing fixtures, except
upon the prior review and consent of Sublessor. All buildings, structures, and
landscaping shall express the island character and be of high quality, but shall
be natural in appearance emphasizing the outdoor environment. The Sublessee
shall provide sufficient landscaping to make the project site visually
attractive to local residents and island visitors. All allowed structures shall
comply with applicable County building codes and construction permits.

16. SEAWATER SYSTEMS AND UTILITY CONNECTIONS. It shall be the
responsibility of the Sublessee to make the necessary connections to the
existing seawater, freshwater, electrical, process air, and utility systems.
All connections and service lines shall be made in accordance with the
applicable rules, regulations, laws, and codes and shall be subject to
Sublessor's prior approval. Sublessee shall discuss with and obtain the
concurrence of the Sublessor or its designated representative as to the method
proposed for each connection and line, and the days and time that any proposed
connection might cause disruption to Sublessor's operations, utilities, or
services. Sublessor shall be permitted to inspect all connections before any
connections shall be made.

17. OPERATIONS. Sublessee shall conduct its activities on the premises
in accordance with all applicable Federal, State, and County statutes,
ordinances and regulations in addition to Sublessor's rules and regulations.
Sublessor will provide the Sublessee with a copy of its Facilities Use Manual
(FUM) which outlines the day to day operating rules, regulations, and expected
conduct on the premises. All discharges from the Sublessee's project shall be
in conformity with and comply with existing permits at the site and the
Sublessee shall obtain and be responsible for all required importation permits
and shall give a copy to Sublessor. Project sites shall be kept visually
attractive to local residents and to island visitors.

18. SEAWATER DISCHARGES. Sublessee shall minimize any adverse
environmental effects to the surrounding ocean waters and to the water returned
by Sublessee to the ocean. Sublessee shall permit Sublessor to monitor the
surrounding ocean waters and the water returned by Sublessee to the ocean.
Sublessee shall submit discharge water quality and quantity samples to Sublessor
for inspection, review, and testing upon request by Sublessor. Water discharged
by Sublessee into any disposal system shall meet the applicable water quality
criteria prescribed by the department of health in its rules relating to water
quality standards. Sublessee shall be responsible and bear all costs incurred
for re-treating its discharged water to meet these standards.

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<PAGE>

Sublessor may require Sublessee to monitor, record, and report the quality
of Sublessee's discharged water to Sublessor monthly. Sublessee shall allow
Sublessor to enter the premises at any time for the purpose of taking samples of
Sublessee's water discharge for independent water quality analysis. In the
event that Sublessee's water discharge fails to meet the department of health's
water quality standards, Sublessor shall have the authority to order the
Sublessee to cease all of its operations until the water discharge problem has
been corrected to the satisfaction of the Sublessor and/or the department of
health. Should the Sublessee fail to cease all of its operations when ordered
to do so by the Sublessor, Sublessee's actions shall amount to a breach of this
sublease, thereby entitling the Sublessor to terminate this sublease in
accordance with paragraph 38 herein. In any event, Sublessee shall be liable
for any and all property or environmental damage resulting from its water
discharge.

19. SUBLESSEE RESPONSIBILITY. All persons hired or used by Sublessee
shall be considered Sublessee's agents and employees and Sublessee shall be
responsible for all services performed by its agents and employees. Further,
Sublessee intentionally, voluntarily, and knowingly assumes the sole and entire
liability for any of its agents and employees, and to third persons for all
loss, cost, damage, or injury caused, either direct or indirectly, by
Sublessee's agents and employees in the course of their employment.

20. COVENANT AGAINST DISCRIMINATION. The use and enjoyment of the
premises shall not be in support of any policy which discriminates against
anyone based upon race, creed, sex, color, national origin, religion, marital
status, familial status, ancestry, physical handicap, disability, age, or HIV
(human immunodeficiency virus) infection .
21. SANITATION, ETC. Sublessee shall keep the premises and improvements
in a strictly clean, sanitary, and orderly condition.

22. WASTE AND UNLAWFUL, IMPROPER OR OFFENSIVE USE OF PREMISES. Sublessee
shall not commit, suffer, or permit to be committed any waste, nuisance, strip
or unlawful, improper or offensive use of the premises, or any part, nor,
without the prior written consent of the Sublessor, cut down, remove or destroy,
or suffer to be cut down, removed or destroyed, any trees now growing on the
premises.

23. COMPLIANCE WITH LAWS. Sublessee shall comply with all of the
requirements of all county, state, and federal authorities and observe all
county, state, and federal laws applicable to the premises, now in force or
which may be in force.

24. INSPECTION OF PREMISES. Sublessee shall permit the Sublessor and its
agents, at all reasonable times during the sublease term, to enter the premises
and examine the state of repair and condition of the premises.

25. IMPROVEMENTS. Sublessee shall not at any time during said term
construct, place, maintain, and install on the premises any building, structure
or improvement of any kind and description except with the prior written
approval of Sublessor and upon those

10
<PAGE>

conditions the Sublessor may impose, including any adjustment of rent, unless
otherwise provided in this sublease. The Sublessee shall own these
improvements until the expiration, surrender, or termination pursuant to a
breach of the sublease, at which time the ownership shall, at the option of
the Sublessor, remain and become the property of the Sublessor or shall be
removed by the Sublessee at the Sublessee's expense.

26. REPAIRS TO IMPROVEMENTS. Sublessee shall, at its own expense, keep,
repair and maintain all buildings and improvements now existing or hereafter
constructed or installed on the premises in good order, condition, and repair,
reasonable wear and tear excepted.

27. NON-ADVERSE EFFECTS. Any building, structure, or improvement erected
or constructed by the Sublessee on the premises, shall not in any way adversely
affect the safe and efficient operations of the Ke-ahole Airport and prior to
construction or erection shall be approved in writing by the Sublessor.

28. NON-OBSTRUCTION RESERVATIONS. The conveyance of this sublease shall
be subject to the following reservations:

a. There is hereby reserved to the Department of Transportation,
Airports Division, its successors, and assigns, for the use and benefit of the
public, a right of flight for the passage of aircraft in the airspace above the
surface of the premises herein conveyed. This public right of flight shall
include the right to cause any noise inherent in the landing, departing or
operation of any aircraft used for navigation or flight through the airspace or
on or about the Ke-ahole Airport.

b. The erection of structures or growth of natural objects that
would constitute an obstruction to air navigation is prohibited.

c. Any activity on the land or along the adjacent coast that would
interfere with or be a hazard to the flight of aircraft over the land or to and
from the Ke-ahole Airport or interfere with air navigation and communication
facilities serving said Airport is prohibited.

d. The height limitations above which no structure or growth shall
be permitted shall be in accordance with the Airport Zoning Regulations all as
shown on Exhibit "D".

e. The filing of notice of construction requirements in FAA Part 77
shall remain in effect.

29. LIENS. Sublessee shall not commit or suffer any act or neglect which
results in the premises, any improvement, or the leasehold estate of the
Sublessor becoming subject to any attachment, lien, charge, or encumbrance,
except as provided in this sublease, and shall indemnify, defend, and hold the
Sublessor harmless from and against all attachments, liens,

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<PAGE>

charges, and encumbrances and all resulting expenses and attorneys' fees.

30. ASSIGNMENTS. The Sublessee shall not transfer, assign, or permit any
other person to occupy or use the premises or any portion or transfer or assign
this sublease or any interest, either voluntarily or by operation of law, except
by way of devise, bequest, or intestate succession, and any transfer or
assignment made shall be null and void; provided that with the prior written
approvals of the Board of Land and Natural Resources and the Sublessor the
assignment and transfer of this sublease or any portion may be made if (1) in
the case of commercial, industrial, and other business uses, the Sublessee was
required to put in substantial building improvements; (2) the Sublessee becomes
mentally or physically disabled; (3) extreme economic hardship is demonstrated
to the satisfaction of the Board of Land and Natural Resources and the
Sublessor; or (4) it is to the corporate successor the Sublessee; provided,
further, that prior to the approval of any assignment of sublease, the Sublessor
shall have the right to review and approve the consideration paid the Assignee
and may condition consent to the assignment of the sublease on payment by the
Sublessee of a premium based on the amount by which the consideration for the
assignment, whether by cash, credit, or otherwise, exceeds the straight-line
depreciated cost of improvements and trade fixtures being transferred to the
Assignee pursuant to the Board of Land and Natural Resources' Assignment of
Lease Evaluation Policy, as it may be amended, a copy of which is attached
hereto as Exhibit "E." The premium on any subsequent assignments shall be based
on the difference in the selling and purchase price plus the straight-line
depreciated cost of any improvements constructed by the then Assignor, pursuant
to the above-mentioned Evaluation Policy.

With respect to state agricultural or aquaculture subleases, in the event
of foreclosure or sale, the above-described premium shall be assessed only after
the encumbrances of record and any other advances made by the holders of a
security interest are paid.

If the Sublessee is a partnership, joint venture or corporation, the sale
or transfer of 50% interest or more of ownership in one year or stocks by
dissolution, merger, or any other means shall be deemed an assignment for
purposes of this paragraph and subject to the rights of the Board of Land and
Natural Resources and the Sublessor to impose the foregoing premium.

31. SUBLETTING. The Sublessee shall not rent or sublet the whole or any
portion of the premises, without the prior written approvals of the Board of
Land and Natural Resources and the Sublessor; provided, however, that prior to
this approval, the Board of Land and Natural Resources and the Sublessor shall
have the right to review and approve the rent to be charged to the proposed
sublessee and that in the case where the Sublessee is required to pay rent based
on a percentage of its gross sales, the receipts of the proposed sublessee or
any subsequent sublessee shall be included as part of the Sublessee's gross
sales, and the Board of Land and Natural Resources and the Sublessor shall have
the right to revise the rent of the premises based upon the rental rate charged
to the proposed sublessee including the percentage rent, if applicable, and
provided, further, that the rent may not be revised downward.

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<PAGE>

32. INDEMNITY. The Sublessee shall indemnify, defend, and hold the State
and Sublessor harmless from and against any claim or demand for loss, liability,
or damage including claims for bodily injury, wrongful death, or property
damage, arising out of or resulting from: (1) any act or omission on the part
of Sublessee relating to Sublessee's or its employee's or agent's use,
occupancy, maintenance, or enjoyment of the premises; (2) any failure on the
part of the Sublessee to maintain the premises and sidewalks, roadways and
parking areas adjacent thereto in Sublessee's use and control, and including any
accident, fire, or nuisance, growing out of or caused by any failure on the part
of the Sublessee to maintain the premises in a safe condition; and (3) from and
against all actions, suits, damages, and claims by whomsoever brought or made by
reason of the Sublessee's non-observance or non-performance of any of the terms,
covenants, and conditions of this sublease or the rules, regulations,
ordinances, and laws of the federal, state, municipal or county governments.

33. COSTS OF LITIGATION. In case the Sublessor shall, without any fault
on its part, be made a party to any litigation commenced by or against the
Sublessee (other than condemnation proceedings), the Sublessee shall pay all
costs, including reasonable attorney's fees, and expenses incurred by or imposed
on the Sublessor; furthermore, the Sublessee shall pay all costs, including
reasonable attorney's fees and expenses which may be incurred by or paid by the
Sublessor in enforcing the covenants and agreements of this sublease, in
recovering possession of the premises or in the collection of delinquent rental,
taxes, and any and all other charges.

34. LIABILITY INSURANCE. The Sublessee shall procure and maintain, at its
cost and expense and acceptable to the Sublessor, in full force and effect
throughout the term of this sublease, commercial general liability insurance, in
an amount of at least $500,000.00 for each occurrence and $1,000,000.00
aggregate, with an insurance company or companies licensed to do business in the
State of Hawaii. The policy or policies of insurance shall name the State of
Hawaii and the Sublessor as additional insureds. The insurance shall cover the
entire premises, including buildings, improvements, and grounds and all roadways
or sidewalks on or adjacent to the premises in the use or control of the
Sublessee.

The Sublessee, prior to entry and use of the premises or within fifteen
(15) days from the effective date of this sublease, whichever is sooner, shall
furnish the Sublessor with a certificate(s) showing the policy(s) to be
initially in force, keep the certificate(s) on deposit during the entire
sublease term, and furnish a like certificate(s) upon each renewal of the
policy(s). This insurance shall not be cancelled, limited in scope of coverage,
or nonrenewed until after thirty (30) days written notice has been give to the
Sublessor.

The Sublessor shall retain the right at any time to review the coverage,
form, and amount of the insurance required by this sublease. If, in the opinion
of the Sublessor, the insurance provisions in this sublease do not provide
adequate protection for the Sublessor, the Sublessor may require Sublessee to
obtain insurance sufficient in coverage, form, and amount to provide adequate
protection. The Sublessor's requirements shall be reasonable but shall be

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<PAGE>

designed to assure protection for and against the kind and extent of the risks
which exist at the time a change in insurance is required. The Sublessor shall
notify Sublessee in writing of changes in the insurance requirements and
Sublessee shall deposit copies of acceptable insurance policy(s) or
certificate(s) thereof, with the Sublessor incorporating the changes within
thirty (30) days of receipt of the notice.

The procuring of the required policy(s) of insurance shall not be construed
to limit the Sublessee's liability under this sublease nor to release or relieve
the Sublessee of the indemnification provisions and requirements of this
sublease. Notwithstanding the policy(s) of insurance, sublessee shall be
obligated for the full and total amount of any damage, injury, or loss caused by
Sublessee's negligence or neglect connected with this sublease.

It is agreed that any insurance maintained by the Sublessor will apply in
excess of, and not contribute with, insurance provided by Sublessee's policy.

35. BOND, PERFORMANCE. The Sublessee shall, at its own cost and expense,
within thirty (30) days after the date of receipt of this sublease document,
procure and deposit with the sublessor and thereafter keep in full force and
effect during the term of this sublease a good and sufficient surety bond,
conditioned upon the full and faithful observance and performance by Sublessee
of all the terms, conditions, and covenants of this sublease, in an amount equal
to two times the annual and estimated additional rental then payable. This bond
shall provide that in case of a breach or default of any of the sublease terms,
covenants, conditions, and agreements, the full amount of the bond shall be paid
to the Sublessor as liquidated and ascertained damages and not as a penalty.

36. SUBLESSOR'S LIEN. Sublessor shall have a lien on all the buildings
and improvements placed on the premises by the Sublessee, on all property kept
or used on the premises, whether the same is exempt from execution or not and on
the rents of all improvements and buildings situated on the premises for all
such costs, attorney's fees, rent reserved, for all taxes and assessments paid
by the Sublessor on behalf of the Sublessee and for the payment of all money
provided in this sublease to be paid by the Sublessee, and such lien continue
until the amounts due are paid.

37. MORTGAGE. Except as provided in this sublease, Sublessee shall not
mortgage, hypothecate or pledge the premises or any portion, or any interest in
this sublease, without the prior written approval of Sublessor and the State of
Hawaii's Board of Land and Natural Resources and mortgage, hypothecation or
pledge without the approval shall be null and void.

That upon due application and with the written consent of the Sublessor and
the State of Hawaii Board of Land and Natural Resources, the Sublessee may
mortgage this sublease or any interest, or create a security interest in the
subleasehold of the premises. If the mortgage or security interest is to a
recognized lending institution in either the State of Hawaii or elsewhere in the
United States, consent may extend to foreclosure and sale of Sublessee's
interest

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<PAGE>

at the foreclosure to any purchaser, including the mortgagee, without regard
to whether or not the purchaser is qualified to sublease, own or otherwise
acquire and hold the land or any interest. The interest of the mortgagee or
holder shall be freely assignable. The term "holder" shall include an
insurer or guarantor of the obligation or condition of such mortgage,
including the Department of Housing and Urban Development through the Federal
Housing Administration, the Federal National Mortgage Association, the
Veterans Administration, the Small Business Administration, Farmers Home
Administration, or any other federal agency and their respective successors
and assigns or any lending institution authorized to do business in the State
of Hawaii or elsewhere in the United States; provided, that the consent to
mortgage to a non-governmental holder shall not confer any greater rights or
powers in the holder than those which would be required by any of the
aforementioned Federal agencies.

38. BREACH AND TERMINATION. Time is of the essence of this agreement and
if the Sublessee shall fail to pay the rent or any part thereof at the times and
in the manner provided within ten (10) calendar days after delivery by the
Sublessor of a written notice of the breach or default, or if the Sublessee
shall become bankrupt, or shall abandon the premises, or if this sublease and
the premises shall be attached or taken by operation of law, of if any
assignment be made of the Sublessee's property for the benefit of creditors, or
if the Sublessee uses the property for purposes other than as specified in
Exhibit "A," or if the Sublessee ceases all activities for a period of three (3)
months without the Sublessor's written consent for reasons other than force
majeure, or if sublessee shall fail to observe and perform any of the covenants,
terms and conditions contained in this sublease and on its part to be observed
and performed and this failure shall continue for a period of more than thirty
(30) days after delivery by the Sublessor of a written notice of the breach or
default, by personal service, registered mail, or certified mail to the
Sublessee at its last known address and to each mortgagee or holder of record
having a security interest in the premises, the Sublessor may, subject to the
provisions of Section 171-21, Hawaii Revised Statutes, at once re-enter the
premises or any part thereof, and upon or without this entry, at its option,
terminate this sublease without prejudice to any other remedy or right of action
for arrears of rent or for any preceding or other breach of contract; and in the
event of termination at the option of the Sublessor, all buildings and
improvements shall remain and become the property of the Sublessor or shall be
removed by Sublessee at the Sublessee's cost; furthermore, Sublessor shall
retain all rent paid in advance to be applied to any damages. This does not
prohibit the Sublessor from seeking further damages. Sublessor shall not be
deemed guilty of trespass or become liable for loss or damage which may be
occasioned thereby.

39. RIGHT OF HOLDER OF RECORD OF A SECURITY INTEREST. In the event the
Sublessor seeks to forfeit the privilege, interest, or estate created by this
sublease, each recorded holder of a security interest may, at its option, cure
or remedy the default or breach of rent payment within ten (10) days or any
other default or breach within sixty (60) days, from the date of receipt of the
Sublessor's notice, or within such additional period as the Sublessor may allow
for good cause, and add the cost thereof to the mortgage debt and the lien of
the mortgage. Upon failure of the holder to exercise its option, the Sublessor
may: (a) pay to the holder

15
<PAGE>

from any moneys at its disposal, the amount of the mortgage debt, together
with interest and penalties, and secure an assignment of the debt, including
interest and penalties, and all reasonable expenses incurred by the holder in
connection with the foreclosure and preservation of its security interest,
less appropriate credits, including income received from the privilege,
interest, or estate subsequent to the foreclosure; or (b) if the property
cannot be reasonably reassigned without loss to the Sublessor or State, then
terminate the outstanding privilege, interest, or estate without prejudice to
any other right or remedy for arrears of rent or for any preceding or other
breach or default and use its best efforts to redispose of the affected land
to a qualified and responsible person free and clear of the mortgage and the
debt secured; provided that a reasonable delay by the Sublessor in
instituting or prosecuting its rights or remedies shall not operate as a
waiver of these rights or to deprive it of a remedy when it may still
otherwise hope to resolve the problems created by the breach or default. The
proceeds of any redisposition shall be applied, first, to reimburse the
Sublessor for costs and expenses in connection with the redisposition; second
to discharge in full any unpaid purchase price or other indebtedness owing
the Sublessor in connection with the privilege, interest, or estate
terminated; third, to the mortgagee to the extent of the value received by
the State upon redisposition which exceeds the fair market sublease value of
the land as previously determined by the Sublessor's or State's appraiser;
and fourth, to the owner of the privilege, interest, or estate.

40. CONDEMNATION. If at any time, during the term of this sublease, any
portion of the premises should be condemned or required for public purposes by
the State, any county, or city and county, the rental shall be reduced in
proportion to the value of the portion of the premises condemned. The Sublessee
shall be entitled to receive from the condemning authority (a) the value of
growing crops or animals, if any, which it is not permitted to harvest and (b)
the proportionate value of the Sublessee's permanent improvements so taken in
the proportion that it bears to the unexpired term of the sublease; provided,
that the Sublessee may, in the alternative, remove and relocate its improvements
to the remainder of the lands occupied by the Sublessee. The Sublessee shall
not by reason of such condemnation be entitled to any claim against the
Sublessor for condemnation or indemnity for subleasehold interest and all
compensation payable or to be paid for or on account of said subleasehold
interest by reason of such condemnation shall be payable to and be the sole
property of the Sublessor. The foregoing rights of the Sublessee shall not be
exclusive of any other to which Sublessee may be entitled by law. Where the
portion so taken renders the remainder unsuitable for the use or uses for which
the land was subleased, the Sublessee shall have the option to surrender this
sublease and be discharged and relieved from any further liability; provided,
that Sublessee may remove the permanent improvements constructed, erected and
placed by it within any reasonable period as may be allowed by the Sublessor.

41. RIGHT TO ENTER. The State of Hawaii's Board of Land and Natural
Resources or Sublessor or the County, or their respective agents or
representatives upon reasonable notice shall have the right to enter and cross
any portion of the premises for the purpose of performing any public or official
duties; provided, however, in the exercise of such rights, the

<PAGE>

Sublessor, the State of Hawaii Board of Land and Natural Resources or the
County shall not interfere unreasonably with the Sublessee or Sublessee's use
and enjoyment of the premises. The Sublessor or its designated
representative specifically reserves the right to enter the premises or any
part thereof for purposes related to the State of Hawaii's operation and
maintenance of the Ke-ahole Airport, provided that such entry, operation, or
maintenance does not unreasonably interfere with or hinder the use,
occupancy, operation, and enjoyment of the premises by the Sublessee.

42. INSPECTION BY PROSPECTIVE BIDDERS. The Sublessor shall have the right
to authorize any person or persons to enter upon and inspect the premises at all
reasonable times following a published notice for its proposed disposition for
purposes of informing and appraising that person or persons of the condition of
the lands preparatory to the proposed disposition; provided, however, that any
entry and inspection shall be conducted during reasonable hours after notice to
enter is first given to the Sublessee, and shall, if the Sublessee so requires,
be made in the company of the Sublessee or designated agents of the Sublessee;
provided, further, that no authorization shall be given more than two years
before the expiration of the term of the sublease.

43. ACCEPTANCE OF RENT NOT A WAIVER. The acceptance of rent by the
Sublessor shall not be deemed a waiver of any breach by the Sublessee of any
term, covenant, or condition of this sublease, nor the Sublessor's right of re-
entry for breach of term, condition, or covenant, nor of the Sublessor's right
to declare and enforce a forfeiture for any breach of any term, covenant, or
condition, or to exercise any option conferred, in any one or more instances,
shall not be construed as a waiver or relinquishment of any term, covenant,
condition, or option.

44. INGRESS AND EGRESS. Sublessee shall possess the right, by the most
convenient route(s) as approved by the Sublessor, of ingress and egress from the
premises for utilities, roadway purposes and pipelines and related facilities
necessary for Sublessee's operations and maintenance, subject to any reasonable
safety requirements of the Sublessor. This right of ingress and egress shall
inure to the benefit of the Sublessee and its duly authorized agents,
representatives, contractors, employees, and invitees.

45. EXTENSION OF TIME. Notwithstanding any provision to the contrary
contained in this sublease, when applicable, Sublessor may for good cause shown,
allow additional time beyond the time or times specified in this sublease for
the Sublessee to comply, observe, and perform any of the sublease terms,
conditions, and covenants.

46. JUSTIFICATION OF SURETIES. Any bonds required by this sublease shall
be supported by the obligation of a corporate surety organized for the purpose
of being a surety and qualified to do business in the State of Hawaii, or not
less than two personal sureties, corporate or individual, for which
justifications shall be filed as provided in Section 78-20, Hawaii Revised
Statutes; provided, however, the Sublessee may furnish a bond in like amount,

17
<PAGE>

conditioned as aforesaid, executed by it alone as obligor, if, in lieu of any
surety or sureties, it shall also furnish and at all times thereafter keep and
maintain on deposit with the Sublessor security in certified checks,
certificates of deposit (payable on demand or after such period as the Sublessor
may stipulate), bonds, stocks or other negotiable securities pro endorsed, or
execute and deliver to the Sublessor a deed or deeds of trust of real property,
all of such character which is satisfactory to the Sublessor and valued in the
aggregate at not less than the principal amount of said bond. It is agreed that
the value of any securities which may be accepted and at any time thereafter
held by the Sublessor shall be determined by the Sublessor, and that the
Sublessee may, with the approval of the Sublessor, exchange other securities or
money for any of the deposited securities if in the judgment of the Sublessor
the substitute securities or money shall be at least equal in value to those
withdrawn. It is further agreed that substitution of securities or the
substitution of a deposit of security for the obligation of a surety or sureties
may be made by the Sublessee, but only upon the written consent of the Sublessor
and that until this consent is granted, which shall be discretionary with the
Sublessor, no surety shall be released or relieved from any obligation.

47. WAIVER, MODIFICATION, REIMPOSITION OF BOND AND LIABILITY INSURANCE
PROVISIONS. Upon substantial compliance by the Sublessee of the terms,
covenants, and conditions contained in this sublease on its part to be observed
or performed, the Sublessor at its discretion may in writing, waive or suspend
the performance bond and/or improvement bond requirements or may in writing,
modify the particular bond(s) or liability insurance requirements by reducing
its amount; provided, however, that the Sublessor reserves the right to
reactivate the bonds or reimpose the bond(s) and/or liability insurance in and
to their original tenor and form at any time throughout the term of this
sublease.

48. SUSPENSION OF OPERATIONS. In the event of any disaster or pollution,
or likelihood of either, having or capable of having a detrimental effect on
public health, safety, welfare, or the environment caused in any manner or
resulting from operations under this sublease, the Sublessee shall immediately
take corrective action, seek to mitigate any damage and promptly notify
Sublessor and the State of Hawaii Board of Land and Natural Resources.

49. QUIET ENJOYMENT. Sublessor hereby covenants and agrees with the
Sublessee that upon payment of the rent at the times and in the manner provided
and the observance and performance of the covenants, terms, and conditions on
the part of the Sublessee to be observed and performed, the Sublessee may have,
hold, possess and enjoy the premises for the term of the sublease, without
hindrance or interruption by the Sublessor or any other person or persons
lawfully claiming by, through or under it.

50. SURRENDER. The Sublessee shall, at the end of the term or other
sooner termination of this sublease, peaceably deliver unto the Sublessor
possession of the premises, together with all improvements existing or
constructed thereon or the Sublessee, at its expense, shall remove such
improvements, at the option of the Sublessor. Furthermore, upon the expiration,
voluntary surrender, termination, and/or revocation of this sublease, should the

18
<PAGE>

Sublessee fail to remove any and all of the Sublessee's personal property from
the premises, after notice thereof, the Sublessor may remove any and all
personal property from the premises and either deem the property abandoned and
dispose of the property or place the property in storage at the cost and expense
of the Sublessee, and the Sublessee does agree to pay all costs and expenses for
disposal, removal, or storage of the personal property. This provision shall
survive the termination of the sublease.

51. NON-WARRANTY. Sublessor does not warrant the conditions of the
premises, as the same is being subleased as is.

52. HAZARDOUS MATERIALS. Sublessee shall not cause or permit the
escape, disposal, or release of any hazardous materials, except as provided by
law. Sublessee shall not allow the storage or use of such materials in any
manner not sanctioned by law or by the highest standards prevailing in the
industry for the storage and use of such materials, nor allow to be brought onto
the premises any such materials except to use in the ordinary course of
Sublessee's business, and then only after written notice is given to Sublessor
of the identity of such materials and upon Sublessor's consent, which consent
may be withheld at Sublessor's sole and absolute discretion. Sublessor shall
have the sole and absolute discretion to permit such materials to be brought
onto and remain on the premises. Sublessee's failure to comply with Sublessor's
directions under this section shall constitute a breach of this sublease. If
any lender or governmental agency shall ever require testing to ascertain
whether or not there has been any release of hazardous materials by Sublessee,
then Sublessee shall be responsible for the reasonable costs thereof. In
addition, Sublessee shall execute affidavits, representations and the like from
time to time at Sublessor's request concerning Sublessee's best knowledge and
belief regarding the presence of hazardous materials on the premises placed or
released by Sublessee.

Sublessee agrees to indemnify, defend and hold Sublessor harmless, from any
damages and claims resulting from the release of hazardous materials on the
premises occurring while Sublessee is in possession, or elsewhere if caused by
Sublessee or persons acting under Sublessee. These covenants shall survive the
expiration or earlier termination of the sublease.

For the purpose of this sublease "hazardous material" shall mean any
pollutant, toxic substance, hazardous waste, hazardous material, hazardous
substance, or oil as defined in or pursuant to the Resource Conservation and
Recovery Act, as amended, the Comprehensive Environmental Response,
Compensation, and Liability Act as amended, the Federal Clean Water Act, or any
other federal, state, or local environmental law, regulation, ordinance, rule,
or by-law, whether existing as of the date hereof, previously enforced, or
subsequently enacted.

53. FIRE AND EXTENDED COVERAGE INSURANCE. The sublessee, at its cost and
expense, shall procure and maintain at all times during the term of this
sublease fire and extended coverage insurance with an insurance company(s)
licensed to do business in the State of

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<PAGE>

Hawaii, insuring all buildings and improvements erected on the land subleased
in the joint names of the Sublessor and the Sublessee, with the standard
mortgage clause for Mortgagee, if any, as their interest may appear, in an
amount equal to the replacement cost of the facilities and shall pay the
premiums at the time and place required under the policy.

In the event of total or partial loss, any proceeds derived from the
policy(s) shall be used by the Sublessee for rebuilding, repairing, or otherwise
reinstating the same buildings in a good and substantial manner according to the
plans and specifications approved in writing by the Sublessor; provided,
however, that with the approval of the Sublessor, the Sublessee may surrender
this sublease and pay the balance owing on any mortgage and the Sublessee shall
then receive that portion of the proceeds which the unexpired term of this
sublease at the time of the loss or damage bears to the whole of the term, the
Sublessor to be paid the balance of the proceeds.

All rights or claims of subrogation against the Sublessor or State of
Hawaii, their officers, employees, and agents are waived.

54. WITHDRAWAL. The Sublessor shall have the right to withdraw the
premises, or any portion, at any time during the term of this sublease upon
giving of reasonable notice and without compensation, except as provided in the
sublease, for public uses or purposes, for constructing new roads or extensions,
or changes in line or grade of existing roads, for rights of way and easements
of all kinds, and shall be subject to the right of the Sublessor to remove all
soil, rock or gravel as may be necessary for the construction of roads and
rights of way within or without the premises; provided, that upon the
withdrawal, or upon the taking which causes any portion of the land originally
subleased to become unusable for the specific use or uses for which it was
subleased, the rent shall be reduced in proportion to the value of the land
withdrawn or made unusable, and if any permanent improvement constructed upon
the land by the Sublessee is destroyed or made unusable in the process of the
withdrawal or taking, the proportionate value thereof shall be paid upon the
unexpired term of the sublease; provided, further that no withdrawal or taking
shall be had of those portions of the land which are then under production of
crops or aquatic species until the crops or aquatic species are harvested,
unless the Sublessor pays to the Sublessee the value of the crops or aquatic
species.

55. CLEARANCE. The premises are subleased in an "as is" condition and
Sublessee shall be responsible for obtaining all necessary federal, state and
county clearances. The Sublessor, however will use its best efforts to assist
the Sublessee in obtaining the necessary permits for Sublessee's operation.

56. FORCE MAJEURE. If the Sublessee is rendered unable wholly or in part
by force majeure to carry out its obligations under this sublease, Sublessee
shall give to Sublessor prompt written notice of the Force Majeure. Thereupon,
and if the circumstances relied upon by Sublessee constitute force majeure in
the good faith opinion of the Sublessor, any obligations of the Sublessee to
perform, so far as they are affected by the force majeure, shall

20
<PAGE>

be suspended during the continuance of the force majeure and the primary term
of any continuation period shall be extended for a period equal to the period
of suspended performance caused by the force majeure. Sublessee shall use
all possible diligence to resolve the settlement of strikes, lockouts or
other difficulties. In no event shall any extension affect the terms,
conditions, or covenants of this sublease.

57. NOTICES. Sublessor may give any notice or deliver any document
hereunder to Sublessee by mailing the same by registered or certified mail
addressed to Sublessee's address above or by delivering the same in person to
any officer of Sublessee. Sublessee may give any notice or deliver any document
hereunder to Sublessor by mailing the same by registered or certified mail
addressed to Sublessor's address above or by delivering the same to Sublessor in
person. For the purposes of this paragraph, either party may change its address
by written notice to the other. In case of any notice or document delivered by
certified or registered mail, the same shall be deemed delivered when deposited
in any United States post office, properly addressed as herein provided, with
postage fully prepaid.

58. BOND, IMPROVEMENT. The Sublessee shall, within thirty (30) days
after the date of receipt of this sublease document, procure and deposit with
the Sublessor a surety bond in the amount of_________________________________,
DOLLARS ($_____________), acceptable to the Sublessor, which bond shall name the
State and Sublessor as obligees, conditioned upon the faithful observance,
performance, and completion of the building requirement contained in this
sublease, the completion of the building and improvements on or before the
specified date of completion free from all liens and claims, and that the
Sublessee shall hold the State and Sublessor harmless from all liens, suits,
actions or damages arising out of, caused from or attributable to the work
performed pursuant to the building requirement.

59. HEADINGS. The article and paragraph headings are inserted only
for the convenience of the Sublessor and the Sublessee and are not intended to
construe the intent or meaning of any of the provisions thereof.

60. MODIFICATION OF SUBLEASE. Any modification, alteration, or
change in this sublease shall be made only by written agreement executed by the
parties.

61. HAWAII LAW. This sublease shall be construed, interpreted, and
governed by the laws of the State of Hawaii.

62. EXHIBITS - INCORPORATION IN SUBLEASE. All exhibits referred to are
attached to this sublease and hereby are deemed incorporated by reference.

63. PARTIAL INVALIDITY. If any term, provision, covenant, or condition of
this sublease should be held to be invalid, void, or unenforceable, the
remainder of this sublease shall continue in full force and effect and shall in
no way be affected, impaired, or invalidated

21
<PAGE>

thereby.

THIS SUBLEASE IS ALSO SUBJECT TO THE FOLLOWING SPECIAL TERMS AND CONDITIONS:

64. DESIGN STANDARDS. The Sublessee shall comply with the established
design standards of the Sublessor or the Board of Land and Natural Resources in
the preparing, design and construction of structures and other site
improvements.

65. ADMINISTRATIVE RULES. The Sublessee shall comply with all
administrative rules adopted by Sublessor pursuant to Chapter 91 and Chapter
227D, Hawaii Revised Statutes, relating to the Natural Energy Laboratory of
Hawaii Authority.

66. RESTORATION OF SUBLEASED LAND. Upon termination, surrender, or
expiration of this sublease, the Sublessor may require the Sublessee to restore
the lands covered herein to its original condition insofar as it is reasonable
to do so within ninety (90) calendar days thereof, except for such roads,
excavations, alterations or other improvements which may be designated for
retention by the Sublessor or a State agency having jurisdiction over said
lands. When determined by the Sublessor or such State agency, cleared sites and
roadways shall be replanted with grass, shrubs, or trees by the Sublessee.

67. SUBLEASE SUBJECT TO MASTER LEASE. This sublease is subject to the
terms and conditions of the master lease No. S-5157 between the Board of Land
and Natural Resources of the State of Hawaii and Sublessor, a copy of which is
attached hereto as Exhibit "F." Any conflicts between the provisions of this
sublease and the foregoing master lease shall be resolved in favor of the master
lease.

DEFINITIONS

68. The use of any gender shall include all genders, and if there is more
than one Sublessee, then all words used in the singular shall extend to and
include the plural.

69. As used herein, unless clearly repugnant to the context:

a. "County" means the County of Hawaii and any governmental agencies
or authorities thereof.

b. "Sublessee" means and includes the Sublessee, its officers,
employees, invitees, successors or permitted assigns.

c. "Holder of a record of a security interest" means any person who
is the

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<PAGE>

owner or possessor of a security interest in the land subleased and who has
filed with the Natural Energy Laboratory of Hawaii Authority and with the
Bureau of Conveyances of the State of Hawaii a copy of such interest.

d. "Premises" means the land and all buildings and improvements now
or hereinafter constructed and installed on the subleased land.

e. "Waste" includes, but is not limited to, (1) permitting the
premises or any portion thereof to become unduly eroded or failure to take
proper precautions or make reasonable effort to prevent or correct the erosion;
(2) permitting a substantial increase in noxious weeds in uncultivated portions
of the premises; and (3) failure to employ all of the usable portions of the
premises.

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed this _29th__ day of December, 1995.

NATURAL ENERGY LABORATORY OF HAWAII
OF HAWAII AUTHORITY

By__/s/ Robert Kihine_____________________________
Its Executive Director

_Cyanotech Corporation______ (Sublessee)

By_/s/ Gerald R. Cysewski__________
Its President

APPROVED AS TO FORM:

_____________________________
Deputy Attorney General

Dated:_______________________

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<PAGE>

STATE OF HAWAII )
) SS.
COUNTY OF HAWAII )

On this ______________________ day of _____________, 19____, before me
personally appeared __________________________________________________________,
to me known to be the person(s) described in and who executed the foregoing
instrument and acknowledgement to me that _____________________ executed the
same as _____________ free act and deed.

____________________________________
Notary Public, State of Hawaii

My commission expires:________________

STATE OF HAWAII )
) SS.
COUNTY OF )

On this ______ day of ______________, 19___, before me appeared
______________________________ and ________________________________, to me
personally known, who, being by me duly sworn, did say that they are the
______________________________ and ________________________________,
respectively of ___________________________________________________, a Hawaii
corporation, and that the seal affixed to the foregoing instrument is the
corporate seal of said corporation and that the said instrument was signed and
sealed in behalf of said corporation by authority of its Board of Directors, and
the said ______________________ and ______________________, acknowledged said
instrument to be the free act and deed of said corporation.

____________________________________
Notary Public, State of Hawaii

My commission expires:________________

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<PAGE>

ADDENDUM

Sublessor and Sublessee agree to waive paragraph 35 (Bond, Performance) and
paragraph 58 (Bond, Improvement), as provided for by paragraph 47 (Waiver,
modification, reimposition of bond and liability insurance provisions) in
attached sublease K-4, dated _December 29th_______, 1995.

SUBLESSOR:

NATURAL ENERGY LABORATORY OF HAWAII AUTHORITY

By __/s/ Robert Kihune____________________
Its Executive Director

SUBLESSEE:

CYANOTECH CORPORATION

By __/s/ Gerald R. Cysewski________________
Its President

<PAGE>

CONSENT TO AGREEMENT OF
GENERAL LEASE NO. S-4717

Consent is hereby given by the STATE OF HAWAII, by its Board of Land and
Natural Resources, Lessor under General Sublease No. S-4717 to the attached
Agreement dated _______________________, 1996, from the NATURAL ENERGY
LABORATORY OF HAWAII AUTHORITY, a body corporate and politic and an
instrumentality and agency of the State of Hawaii, as "Sublessor", to
CYANOTECH CORPORATION, as "Sublessee"; PROVIDED, that nothing contained
- ---------------------
herein shall change, modify, waive or amend the provisions, terms, conditions
and covenants or duties and obligations of the Lessee or Sublessee under
General Lease No. S-4717.

SUBJECT further to the following conditions:
1. The terms and conditions of the Agreement shall be reviewed and
examined effective ______________________ and, if warranted, the rent of the
premises under General Lease No. S-4717 shall be revised based on the rental
rate charged to the Sublessee.
2. The Sublessee is required to seek approval of the Department of
Transportation for all improvements to insure compatibility with airport
operations prior to submission to the Chairperson of the Board of Land and
Natural Resources for review and approval.
3. IT IS UNDERSTOOD that except as provided herein, should there be any
conflict between the terms of the General Lease No. S-4717 and the terms of the
sublease, the former shall control; and further, that except as provided herein,
this Consent shall not act or nor in any manner be construed as varying in any
respect the terms and conditions of the general lease; and also that no further
sublease or assignment of any interest of the premises or any portion thereof,
if permitted by Sublessor, shall be made without the prior written consent of
the Board of Land and Natural Resources.

IN WITNESS WHEREOF, the STATE OF HAWAII, by its Board of Land and Natural
Resources, has caused this seal of the Department of Land and Natural Resources
to be hereunto affixed and there presents to be duly executed this _____ day of
______________, 1996.
STATE OF HAWAII

By __________________________________
Chairman and Member
Board of Land and Natural
Resources

Approved by the Board
at its meeting held on

<PAGE>

_________________________.

And By __________________________________
Member
Board of Land and Natural
Resources

APPROVED AS TO FORM:

________________________
Deputy Attorney General

Date:____________________

<PAGE>

[LETTERHEAD CYANOTECH CORPORATION]

SUPPLY AND EXCLUSIVE MARKETING AGREEMENT

This agreement is made this 8th day of July, 1994 between Cyanotech
Corporation, (including its wholly owned subsidiary Nutrex, Inc.)
(Cyanotech), a Nevada corporation having its principle place of business at:
P.O. Box 4384, Kailua-Kona, Hawaii 96745, and Nutrition Gandalf (Gandalf)
having its principle place of business at 2110 Cabot, Montreal, Quebec,
Canada H4E1E4.

1) GRANTING OF EXCLUSIVE MARKETING RIGHTS Cyanotech hereby grants Gandalf
exclusive marketing rights for Products, as listed on Exhibit A, to
use its best efforts to sell the Products in the Area of Primary
Responsibility described in paragraph 2, on the terms and conditions set
forth in this Agreement. Cyanotech agrees not to knowingly sell directly or to
knowingly ship to any company or person inside the boarders of the
countries in the Area of Primary Responsibility.

2) AREAS OF PRIMARY RESPONSIBILITY

a) CYANOTECH BULK PRODUCTS. Area of Primary Responsibility (the Area) as
used herein for the sale of Cyanotech bulk products, as listed on Exhibit A,
means the countries of Canada and Austria. Gandalf agrees not to sell
directly to or ship to any company or person outside the borders of the
countries in the Area of Primary Responsibility without advance written
authorization from Cyanotech.

b) NUTREX PRODUCTS. Area of Primary Responsibility (the Area) as used
herein for the sale of Nutrex products, as listed on Exhibit A, means the
country of Canada. Gandalf agrees not to sell Nutrex products directly to any
company or person outside the borders of the country in the Area of Primary
Responsibility without advance written authorization from Cyanotech.

3) GUARANTEED SUPPLY OF PRODUCTS Cyanotech guarantees to sell to Gandalf its
Spirulina Products, as listed on Exhibit A, and will use its best efforts to
supply Gandalf at least the quantities as shown on Exhibit B.

4) GUARANTEED PURCHASE OF PRODUCTS Gandalf guarantees to purchase from
Cyanotech Spirulina Products, as listed on Exhibit A, and will use its best
efforts to purchase from Cyanotech at least the quantities as shown on
Exhibit B.

5) PRICES AND PAYMENT TERMS Selling prices of Cyanotech Products will be the
current published prices of Cyanotech. Current prices, FOB Kona Hawaii are
[*] per kg for bulk Spirulina Pacifica powder and [*] for bulk Spirulina
Pacifica 1000 mg tablets. [*] Cyanotech products which are sold by Gandalf
under the Nutrex name and/or trademark. [*]

[*CONFIDENTIAL TREATMENT REQUESTED*]

<PAGE>

2
[*]

6) ADDITIONAL TERMS

a) Gandalf will be responsible for and bear all costs for all sales
promotion of Nutrex products including printed material, radio and television
advertisements, and demonstrations.

7) CYANOTECH SPIRULINA ONLY SPIRULINA SOLD BY GANDALF For the duration of
this agreement, Gandalf agrees that only Spirulina Products manufactured by
Cyanotech shall be sold, and/or used in products which Gandalf sells in the
Area.

8) TRADEMARKS The trademark Spirulina Pacifica and all other present or
future trademarks of Cyanotech may be displayed and used by Gandalf in the
sale and promotion of the Products in a manner identical or similar to
Cyanotech's own practice. Such trademarks are and shall remain the sole
property of Cyanotech and any use thereof by Gandolf shall be limited to the
Cyanotech Products, or such other products as may be authorized by Cyanotech.
It is expressly agreed that Gandalf's use of Cyanotech trademarks is with and
on the consent of Cyanotech and that Gandalf shall acquire no rights in said
trademarks because of its use thereof.

9) GANDALF TO INDEMNIFY CYANOTECH Gandalf agrees to indemnify and save
harmless Cyanotech for all loss and damages (including attorney's fees), that
either or both may sustain or become liable for by reason of claims against
it or them resulting from unauthorized acts or statements of Gandalf or its
employees agents or representatives.

10) CYANOTECH TO INDEMNIFY GANDALF Cyanotech agrees to indemnify and save
harmless Gandalf for all loss and damages (including attorney's fees), that
either or both may sustain or become liable for by reason of claims against
it or them resulting from unauthorized acts or statements of Cyanotech or its
employees agents or representatives.

11) INSURANCE During the term of this Agreement, both Gandalf and Cyanotech,
each on their own accord, will maintain, at their own expense, product
liability insurance with a minimum liability of $1,000,000. Proof of such
insurance will be provided upon written request by the other party.

12) TERM AND TERMINATION This Agreement shall be in force and effective
beginning as of the date first above written and shall continue in force from
the date of this agreement unless terminated as provided below:

a) In the event of a default by Gandalf in any of the obligations which
it undertakes by entering into this Agreement and/or purchasing Products from
Cyanotech, Cyanotech shall have the right to terminate this Agreement thirty
(30) days after sending a notice in writing to Gandalf specifying the nature
of the default and Cyanotech's intention to terminate, unless

[*CONFIDENTIAL TREATMENT REQUESTED*]

<PAGE>
3

within said thirty (30) day period, Gandalf shall have cured the default to
Cyanotech's satisfaction.

b) This Agreement shall terminate one day prior to Gandalf becoming
insolvent, or bankrupt or Gandalf's business being placed in the hands of a
receiver or trustee for the benefit of creditors, whether by voluntary act of
Gandalf or otherwise.

c) Gandalf's exclusivity in a country of its Area of Primary
Responsibility will terminate if Gandalf does not purchase at least 80% of
the annual quantity of the Products for that country as specified in Exhibit
B. At the request written of Cyanotech, Gandalf will, within 10 days after
receiving such request, provide documentation to substantiate the quantity of
products shipped to each country.

d) This Agreement will terminate four (4) years after the date first
above written. At the end of the first year of this agreement, Cyanotech and
Gandalf agree to negotiate in good faith to extend or modify this agreement
upon its termination. In this manner both Cyanotech and Gandalf will have as
much as three years notice should there be any change to the supply and
exclusive marketing arrangement.

13) FAILURE TO ENFORCE PROVISIONS The failure to either party to enforce at
any time or for any period of time the provisions hereof shall not be
construed to be a waiver of such provisions or right of such party thereafter
to enforce such provisions.

14) FORCE MAJEURE Neither party hereto shall be responsible for failure or
delay in the performance of any of its obligations hereunder or under any
purchase contract(s) made between Cyanotech and Gandalf hereunder by reason
of force majeure, including, but not limited to, industrial disputes, riots,
mobs, fires, floods, wars, shortage of labor, power, fuel, raw materials, or
transportation, laws, regulations, orders or administrative guidelines of any
government or its agencies or any other circumstances beyond the control of
such party.

15) GANDALF NOT AGENT OR LEGAL REPRESENTATIVE OF CYANOTECH This Agreement
does not constitute Gandalf the agent or legal representative of Cyanotech
for any purpose whatsoever. Gandalf is not granted any right or authority to
assume or to create any obligation or responsibility, express or implied, on
behalf of or in the name of Cyanotech or to bind it in any manner or thing
whatsoever.

16) LIABILITY Should either Cyanotech or Gandalf breach any of the terms of
this agreement, the damaged party has the right to collect unspecified
damages from the offending party and the offending party has the liability to
pay such unspecified damages which resulted from the breach of terms.

17) ENTIRE AGREEMENT This instrument cancels and supersedes any and all
previous agreements, arrangements, or understandings between the parties, and
contains the entire agreement between the parties respecting the subject
matter hereof, and any representations, promises or conditions not
incorporated herein shall not be binding upon Cyanotech until signed on its
behalf by an officer of Cyanotech nor shall any modification, renewal,
termination or waiver of any of the provisions herein contained, or any
future representation, promise, warranty of condition in connection with the
subject matter hereof be binding upon Cyanotech unless made in writing and
signed on its behalf by one of its officers.

18) ARBITRATION All disputes, controversies, differences, or claims arising
out of this

[*CONFIDENTIAL TREATMENT REQUESTED*]

<PAGE>

Agreement, or the breach thereof, are to be finally settled by final and
binding arbitration in the state of California in accordance with the rules
of the American Arbitration Association then existing. The losing party is to
bear the cost of its and the prevailing party's reasonable attorney's and
expert witness fees. Gandalf and Cyanotech agree that no party is to request
and the arbitrator is to have no authority to award punitive or exemplary
damages to the prevailing party against the other party.

19) APPLICABLE LAW This agreement shall be construed in accordance with the
laws in the state of California.

20) NOTICES Any payment, notice or other communication required or permitted
to be made or given by either party hereto pursuant to this Agreement shall
be sufficiently made or given on the date of mailing if sent to such party by
registered or certified air mail, postage prepaid, addressed to it at its
address set forth above, or to such other address as it shall designate by
written notice given to the other party at said address.

21) AGREEMENT NOT ASSIGNABLE This Agreement constitutes a personal contract
between Cyanotech and Gandalf and Gandalf shall not transfer or assign any
part thereof without Cyanotech's written consent.

22) SEVERABILITY In the event that any part of this Agreement between
Cyanotech and Gandalf shall be found to be illegal, or a violation of public
policy, or for any reason unenforceable in law. Such finding shall in no
event invalidate any other part of this Agreement.

The signed officers of Cyanotech and Gandalf have the personal obligation to
make their respective Board of Directors, any new management and any new
owners aware of this agreement. Any new management or owners of either
Cyanotech and Gandalf will have the responsibility to abide by this agreement.

IN WITNESS WHEREOF the parties hereto have executed this Agreement in
duplicate as of the day and year first above written.

Cyanotech Corporation Nutrition Gandalf
_____________________ _________________

By /s/ Gerald R. Cysewski By /s/ Charles Goulet

Its President & CEO Its Directeur Finances et Secretaire

[*CONFIDENTIAL TREATMENT REQUESTED*]

<PAGE>

EXHIBIT A

CYANOTECH BULK PRODUCTS

1) Spirulina Pacifica -TM- bulk powder

2) Spirulina Pacifica bulk Crystal Flakes -TM-

3) Spirulina Pacifica -TM- bulk 1,000 mg tablets

4) Spirulina Pacifica -TM- bulk 500 mg tablets

NUTREX PRODUCTS

1) Spirulina Pacifica -TM- powder

2) Spirulina Pacifica -TM- tablets

3) Hawaiian Energizer powder

4) Hawaiian Energizer tablets

5) Papaya Pacifica -TM- tablets

6) Spirulina Pacifica Crystal Flake -TM-

[*CONFIDENTIAL TREATMENT REQUESTED*]

<PAGE>

EXHIBIT B

Gandalf Purchases of CYANOTECH BULK PRODUCTS Required to Maintain Area
Exclusivity and Agreement Renewal for Cyanotech Bulk Products. (Numbers in
1,000 Kilograms)

[*CONFIDENTIAL TREATMENT REQUESTED*]

<PAGE>
EXHIBIT 10.3

TERM LOAN AGREEMENT

TERM LOAN AGREEMENT ("Agreement"), dated JULY 11, 1995, between CYANOTECH
-------------
CORPORATION , whose business address is 73-4460 Queen Kaahumanu Highway, #102,
Kailua-Kona, HI 96740 (the "Borrower") and SATOSHI SAKURADA whose business
address is c/o Venture Emporium Ltd., 10635 Santa Monica Blvd., Suite 160, Los
Angeles, CA 90025 (the "Lender") agree as follows:

I. TERM LOAN AND SUPPLY OBLIGATIONS

1.01 LOAN. Subject to the satisfaction of the conditions stated in
Article II and the other terms and conditions of this Agreement, the Lender
shall make a term loan (the "Loan") to the Borrower in the principal amount of
Five Hundred Thousand U.S. Dollars ($500,000.00). Unless otherwise directed in
writing by the Borrower, all proceeds of the Loan shall be transmitted by wire
transfer on or before June 30, 1995 (the "Closing Date") to the Borrower's
Deposit Account No. 67-067347, maintained with First Hawaiian Bank, Kona Branch,
Kailua-Kona, Hawaii (Wire Transfer No. 121-301-015). The Borrower shall pay
interest at the specified rate and repay the principal of the Loan in accordance
with the following terms:

(a) Subject to the provisions of subparagraph (b) of this Section 1.01,
Borrower shall make principal payments of $25,000.00 on the first day
of each calendar quarter, or as soon thereafter as the LIBOR rate
referred to in subparagraph (b) has been determined, beginning
October 1, 1995 in freely transferrable U.S. dollars at
, together with the interest on the unpaid principal amount
to the date of each such payment at the rate provided in subparagraph
(b) of this Section 1.01;

(b) Borrower shall pay interest on a 360 day basis at the rate of the one-
year London Interbank Offered Rate ("LIBOR") plus 2%, adjusted
quarterly, as reported in

1
<PAGE>

the Wall Street Journal on the last U.S. business day of the previous
quarter.

(c) With simultaneous fax notice to Borrower, principal and interest
payments may, at the option of the Lender, be paid when due and
payable by credits against amounts then due to Borrower on shipments
of product by Borrower to Lender, provided that such credits taken by
Lender may not exceed amounts then due and payable hereunder by
Borrower to Lender.

(d)(i) Borrower may at its option prepay, without premium, the following
principal amounts: up to an additional $50,000.00 principal
amount each calendar quarter without notice to Lender, and more
than such amount but not exceeding $150,000.00 per calendar
quarter with 90 days written notice to Lender; subject however to
the prepayment limitation of $300,000.00 principal amount per
twelve month period.

(ii) Borrower may at its option prepay principal amounts exceeding
those permitted by subparagraph (d)(i) by payment of a premium of
5% of such excess principal prepayment.

1.02 PURPOSE. The proceeds of the Loan shall be used exclusively to fund a
portion of the total cost of construction of six 500,000 liter algae culture
ponds at Borrower's facilities in Kailua-Kona, Hawaii.

1.03 SECURITY. The Loan shall initially be secured by the personal assets
of Gerald R. Cysewski. No later than 120 days after the Closing Date, the Loan
shall be secured by liens on or security interests in the following Collateral,
which liens or security interest shall be of first priority unless otherwise
agreed by the Lender; six 500,000 liter algae culture ponds located at
Borrower's facilities in Kailua-Kona, Hawaii, as more fully described in Exhibit
A hereto. At such time, the security interest in the personal assets of Gerald
R. Cysewski shall be released. Borrower shall duly file and otherwise perfect a
lien under UCC-1 for the Collateral.

2
<PAGE>

1.04 BORROWER'S OBLIGATIONS. The Borrower's obligations to pay, observe
and perform all indebtedness, liabilities, covenants and other obligations on
the part of the Borrower to be paid, observed and performed under this
Agreement, are herein collectively called the "Obligations."

1.05 SUPPLY OBLIGATIONS. Borrower or its subsidiary, Nutrex, Inc., shall
supply Cyanotech Asia with a minimum of 35,000 kg. of Spirulina
powder, flakes, tablets or other products per year, as requested from
time to time by Lender on Borrower's standard selling terms and
conditions in effect at the time the order is received by Borrower,
beginning 30 days after completion of the six 500,000 liter algae
culture ponds. This annual supply obligation of 35,000 kg. will
thereafter continue for five years from the date of this Agreement.

II. CONDITIONS PRECEDENT

The obligation of the Lender to make the Loan is subject to the
satisfaction of all of the following conditions on or before the Closing Date.

2.01. DOCUMENTS REQUIRED FOR THE CLOSING. The Lender shall have received
evidence of the Borrower's compliance, in respect of its properties, with the
provisions stated below in Section 4.05.

2.02 CERTAIN OTHER EVENTS. On the Closing Date:

(a) No event shall have occurred and be continuing that (1) constitutes an
Event of Default, as that term is defined in Section 6.01, or (2) with
the giving of notice or passage of time, or both, would constitute
such an Event of Default;

(b) No material adverse change shall have occurred in the financial
condition of the Borrower since the date of its most recent financial
statements filed with the United States Securities and Exchange
Commission; and

3
<PAGE>

(c) No material adverse change shall have occurred in the physical
condition of the Borrower's assets since the date of this Agreement.

III. REPRESENTATIONS AND WARRANTIES

3.01 To induce the Lender to make the Loan, the Borrower represents and
warrants to the Lender as follows:

(a) ORGANIZATION. The Borrower is duly organized, validly existing and in
good standing under the laws of Hawaii, and has the lawful power to
own its properties and to engage in the business it conducts;

(b) NO BREACH. The execution and performance of this Agreement will
not immediately, or with the passage of time or the giving of notice,
or both:

(1) Violate any law or result in a default under any contract,
agreement, or instrument to which the Borrower is a party or by
which the Borrower or its property is bound; or

(2) Result in the creation or imposition of any security interest in,
or lien or encumbrance on, any of the assets of the Borrower,
except in favor of the Lender;

(c) AUTHORIZATION. The Borrower has the power and authority to incur and
perform the Obligations, and the Borrower has taken all corporate
action necessary to authorize the execution and delivery of this
Agreement and its incurring of the Obligations;

(d) VALIDITY. This Agreement is valid, binding, and enforceable in
accordance with its terms;

(e) FINANCIAL STATEMENTS. All financial statements heretofore given by
the Borrower to the Lender, including any schedules and notes
pertaining thereto, were prepared in accordance with generally
accepted accounting principles consistently applied, and fully and
fairly present the financial condition of the Borrower at the dates
thereof and the results of operations for the periods covered thereby,
and as of

4
<PAGE>

the date of this Agreement there have been no material
adverse changes in the financial condition or business of the Borrower
from the date of the most recent financial statements given to the
Lender;

(f) TAXES. Except as otherwise permitted by this Agreement, the
Borrower has filed all tax returns it was required by law to have
filed prior to the date of this Agreement, has paid or caused to be
paid all taxes, assessments and other governmental charges that were
due and payable prior to the date of this Agreement, and has made
adequate provision for the payment of such taxes, assessments or other
charges accruing but not yet payable, and the Borrower has no
knowledge of any deficiency or additional assessment in a materially
important amount in connection with any taxes, assessments or charges
not provided for on its books;

(g) COMPLIANCE WITH LAW. Except to the extent that the failure to
comply would not materially interfere with the conduct of the business
of the Borrower, the Borrower has complied with all applicable laws in
respect of: (1) restrictions, specifications or other requirements
pertaining to products that the Borrower sells or to the services it
performs; (2) the conduct of its business; and (3) the use,
maintenance, and operation of its properties;

(h) STATEMENTS AND OMISSIONS. No representation or warranty by the
Borrower contained in this Agreement or in any certificate or other
document furnished by the Borrower pursuant to this Agreement contains
any untrue statement of material fact or omits to state a material
fact necessary to make such representation or warranty not misleading
in light of circumstances under which it was made; and

3.02 SURVIVAL. All representations and warranties stated above in Section
3.01 shall survive until all the Obligations shall have been satisfied in full.

IV. AFFIRMATIVE COVENANTS

5
<PAGE>

For so long as any of the Obligations remains outstanding, the Borrower
shall, unless otherwise permitted by the Lender in writing:

4.01 PAYMENTS. Punctually pay when due all sums which may be due hereunder.

4.02 FINANCIAL REPORTING. All financial statements and reports of
Borrower required to be filed by it with the Securities and Exchange Commission
shall be furnished by Borrower to the Lender no later than ten days after the
date of mailing to the Securities and Exchange Commission.

4.03 EXISTENCE. Borrower shall maintain its legal existence as a
corporation and timely file all necessary and appropriate documents and exhibits
and pay all appropriate fees and charges in connection therewith.

4.04 OBSERVANCE OF LAWS. Borrower shall conduct its business activities in
an orderly, efficient and regular manner and comply with all requirements of all
applicable state, federal and local laws, rules and regulations.

4.05 INSURANCE. Maintain and keep in force insurance of the types and
in such amounts as are reasonably satisfactory to the Lender, and in no event
less than amounts customarily carried in lines of business similar to
Borrower's, including but not limited to, fire, public liability, property
damage and workers' compensation insurance, and provide the Lender on request
with a schedule or schedules or certificates of insurance from time to time
setting forth all insurance then in effect, together with copies of all such
policies.

The Collateral shall be covered by fire insurance with extended coverage
and other hazard insurance policies reasonably acceptable to the Lender, and
such policies shall contain endorsements naming the Lender as loss payee and
shall require 30 days' prior written notice to the Lender of any cancellation or
material change in coverage.

All insurance required by this Agreement shall be through valid and
enforceable insurance policies issued by companies authorized to do business in
the State of Hawaii. This Agreement constitutes written notice to the Borrower
from the Lender that the Lender may not make the granting of the Loan contingent
on

6
<PAGE>

the procuring of insurance from any insurance company designated by the
Lender.

4.06 FACILITIES. Keep all of Borrower's property and business premises
in a good state of repair and condition and make all necessary repairs, renewals
and replacements thereto from time to time so that such property and business
premises shall be fully and efficiently preserved and maintained, and keep the
Collateral free and clear of all liens, charges or encumbrances except those
provided for herein.

4.07 TAXES AND OTHER LIABILITIES. Pay and discharge when due all of
Borrower's indebtedness, obligations, assessments and taxes, except such as the
Borrower may in good faith contest or as to which a bona fide dispute may exist,
provided that if requested by Lender the Borrower gives evidence satisfactory to
the Lender regarding the Borrower's ability to pay the disputed items if
determined to be justly due.

4.08 NOTICE TO LENDER. Promptly give notice to the Lender of (a) the
occurrence of any Event of Default, (b) any change in the name or organizational
structure of the Borrower, (c) any uninsured loss through fire, theft, liability
or property damage exceeding $100,000, (d) any change in the Borrower's
principal place of business, and (e) any change in the location of any
Collateral securing the Loan.

V. NEGATIVE COVENANTS

For so long as any of the Obligations remains outstanding, the
Borrower will not, unless otherwise permitted by the Lender in writing:

5.01 USE OF FUNDS. Use any of the proceeds of the Loan for any
purpose except as set forth in Section 1.02 of this Agreement.

5.02 BUSINESS. Materially change the character of the Borrower's
current business, or engage in any type of business other than the Borrower's
current business.

VI. EVENTS OF DEFAULT; LENDER'S RIGHT UPON DEFAULT

6.01 EVENTS OF DEFAULT. The following events constitute an event of
default ("Event of Default") hereunder:

7
<PAGE>

(a) Borrower shall fail to make any payment of principal or interest
when due and payable and such default shall be continuing for ten (10) business
days after the due date;

(b) Borrower shall commence a voluntary case under the U.S.
Bankruptcy Code ("Code") or an involuntary case is commenced against Borrower
under the Code or any other applicable bankruptcy, insolvency or similar law;
and

6.02 LENDER'S REMEDIES ON DEFAULT. If any Event of Default shall occur
and be continuing after ten (10) business days written notice to Borrower, the
Lender shall have, in addition to any rights it may have under this Agreement,
and any and all other rights and remedies, legal or equitable, available to the
Lender under Hawaii law. Lender may exercise any of its right under Hawaii
Revised Statutes Chapter 490 (Uniform Commercial Code).

VII. MISCELLANEOUS

7.01 FURTHER ASSURANCE. From time to time within five days after the
Lender's demand, the Borrower will execute and deliver such additional documents
and provide such additional information as may be reasonably requested by the
Lender to carry out the intent of this Agreement.

7.02 ENFORCEMENT AND WAIVER BY THE LENDER. The Lender shall have the
right at all times to enforce the provisions of this Agreement, as it may be
amended from time to time, in strict accordance with its terms, notwithstanding
any conduct on the part of the Lender in refraining from so doing at any time or
times. The failure of the Lender at any time or times to enforce its rights
under such provisions, strictly in accordance with the same, shall not be
construed as a waiver of any provision of this Agreement. All rights and
remedies of the Lender are cumulative and concurrent and the exercise of one
right or remedy shall not be deemed a waiver or release of any other right or
remedy.

7.03 NOTICES. Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed delivered if delivered in
person or if sent by certified mail, postage prepaid, return receipt request, or
by FAX, at the

8
<PAGE>

addresses noted above, unless such address is changed by written
notice hereunder to the other party.

7.04 APPLICABLE LAW. The substantive laws of the State of Hawaii shall
govern the construction of this Agreement and the rights and remedies of the
parties hereto.

7.05 BINDING EFFECT. This Agreement shall inure to the benefit of, and
shall be binding on, the parties hereto and their respective successors and
permitted assigns.

7.06 MERGER. This Agreement constitutes the full and complete agreement
between the Lender and the Borrower with respect to the Loan, and all prior oral
and written agreements, commitments and undertakings shall be deemed to have
been merged into this Agreement into this Agreement and such prior oral and
written agreements, commitments and undertakings shall be deemed to have been
merged into this Agreement and such prior oral and written agreements,
commitments and undertakings shall have no further force or effect except to the
extent expressly incorporated herein.

7.07 AMENDMENTS; CONSENTS. No amendment, modification, supplement,
termination, or waiver of any provision of this Agreement is effective unless in
writing signed by the party against whom enforcement is sought.

7.08 ASSIGNMENTS. The Borrower shall have no right to assign any of its
rights or obligations without the prior written consent of the Lender.

7.09 SEVERABILITY. If any provision of any of this Agreement shall be held
invalid under any applicable law, such invalidity shall not affect any other
provision hereof that can be given effect without the invalid provision, and, to
this end, the provisions hereof are severable.

7.10 TIME IS OF THE ESSENCE. Time is of the essence under and in respect
of this Agreement.

The Borrower and the Lender have duly executed this Agreement as of the
date first above written.

CYANOTECH CORPORATION

<PAGE>

By: /s/ Gerald R. Cysewski
------------------------
Its President
Borrower

By: /s/ Satoshi Sakurada
-----------------------
Its
Lender

<PAGE>
EXHIBIT 10.4

CYANOTECH CORPORATION
MANAGEMENT INCENTIVE PLAN "MIP"

SECTION 1. PURPOSE. The purpose of the Management Incentive Plan ("MIP") is to
provide officers and key management personnel of Cyanotech Corporation and
subsidiaries ("the Company") financial incentives to manage the resources of the
Company in a way that maximizes the interests of stockholders and employees.

SECTION 2. ADMINISTRATION. The MIP shall be administered by the Compensation
and Stock Option Committee of the Board of Directors (the "Committee"). Although
the Committee can establish and approve the performance criteria for any MIP
year, no payments will be made to any MIP participant without the approval of a
majority of the Board of Directors. No member of the Committee may participate
in the MIP.

SECTION 3. ELIGIBILITY. All officers of the Company are eligible to
participate in the MIP, subject to approval by the Compensation and Stock Option
Committee. The specific MIP targets for an individual member of management are
for the specific named individual only and may not be transferred to another
individual.

SECTION 4. PLAN TERM. The Plan year is concurrent with the Company's fiscal
year. MIP targets will be set during the first fiscal quarter of each year and
be based on the approved financial plan for that year.

SECTION 5. MIP DISTRIBUTIONS. Achievement of MIP results is calculated from
the audited financial statements or, where appropriate, company prepared
financial management reports. Distributions under the MIP will be made no later
than ninety days after the audited financial statements are filed with the
Securities and Exchange Commission on Form 10-KSB. At the option of the MIP
participant, up to 100% of the MIP distribution for any year may be deferred to
future years. Any amounts that are deferred will accrue interest at the prime
rate charged by First Hawaiian Bank, compounded monthly.

<PAGE>

May 18, 1995 Cyanotech Corporation

EXHIBIT A
Management Incentive Plan "MIP"
Proposal to the Compensation Committee

I. Current Base Salaries (as of May 1995) Proposed Base Salary
effective June 1, 1995
Gerry Cysewski $90,000 $95,000
Kelly Moorhead $55,000* $65,000
Ron Scott $82,000 $85,000
Glenn Jensen $60,000 $65,000
Shane Rohan $50,000 $50,000**

* Plus 1% of Nutrex sales
** Shane Rohan salary was increased April 1, 1995

II. Proposed Incentives (Base business excluding BetaPharm JV)

Additional
Cash
Gerry Cysewski ; President and CEO Compensation
- ---------------------------------- ------------

Annual Pretax Profit < 17% of Revenue $ 0
> 17% and < 20% of revenue $ 10,000
> 20% and < 23% of revenue $ 15,000
> 23% of revenue $ 20,000

Corporate Development (commercial funding arranged)
Astaxanthin $ 5,000
Beta Carotene $ 5,000

Investor Relations

[*]

Kelly Moorhead ; President, Nutrex and V.P. Sales and Marketing
- ---------------------------------------------------------------

Annual Pretax Profit < 17% of Revenue $ 0
> 17% and < 20% of revenue $ 5,000
> 20% and < 23% of revenue $ 10,000
> 23% of revenue $ 15,000

% TOTAL SALES
Total Sales < $6.5 million 0
$6.5 to $7.5 million 0.2%
$7.5 to $8.5 million 0.3%
> $8.5 million >0.3%

[*CONFIDENTIAL TREATMENT REQUESTED*]

<PAGE>

RON SCOTT ; V.P. FINANCE & ADMINISTRATION
- -----------------------------------------

Annual Pretax Profit < 17% of Revenue $ 0
> 17% and < 20% of revenue $ 5,000
> 20% and < 23% of revenue $ 10,000
> 23% of revenue $ 15,000

Accounts Receivable Collections
> 55 Average Days Sales Outstanding $ 0
50 to 55 Average DSO $ 2,500
45 to 49 Average DSO $ 5,000
40 to 44 Average DSO $ 7,500

Investor Relations

[*]

Corporate Development (commercial funding arranged)
Astaxanthin $ 5,000
Beta Carotene $ 5,000

GLENN JENSEN ; V.P. OPERATIONS
- ------------------------------

Annual Pretax Profit < 17% of Revenue $ 0
> 17% and < 20% of revenue $ 5,000
> 20% and < 23% of revenue $ 10,000
> 23% of revenue $ 15,000

Annual Production Incentive

[*]

Per Kilo Cost Reduction

[*]

ROBERT SHANE ROHAN ; PRODUCTION MANAGER
- ---------------------------------------

Annual Pretax Profit < 17% of Revenue $ 0
> 17% and < 20% of revenue $ 4,000
> 20% and < 23% of revenue $ 8,000
> 23% of revenue $ 12,000

[*CONFIDENTIAL TREATMENT REQUESTED*]

<PAGE>

Annual Production Incentive
$ 4,000
[*] $ 6,000
$ 8,000
$10,000

Per Kilo Cost Reduction
$ 4,000
[*] $ 6,000
$ 8,000

Notes

1. No payout to anyone under the plan if annual product sales are less than
$6,500,000

Cash
--------
2. Maximum MIP payout Gerry Cysewski $ 37,500
(excluding base salary) Kelly Moorhead $ 40,500
Ron Scott $ 40,000
Glenn Jensen $ 37,500
Shane Rohan $ 30,000

[*CONFIDENTIAL TREATMENT REQUESTED*]

<PAGE>
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</TABLE>