CYANOTECH CORPORATION

PREFERRED STOCK CONVERSION AND REGISTRATION RIGHTS AGREEMENT


         THIS PREFERRED STOCK CONVERSION AND REGISTRATION RIGHTS AGREEMENT (this
"Agreement")  is  made  as of  February  20,  1996,  by  and  between  Cyanotech
Corporation,  a Nevada  corporation  (the  "Company"),  and Firemen's  Insurance
Company of  Newark,  New  Jersey,  a New Jersey  insurance  company  ("Firemen's
Insurance").  National-Ben  Franklin Co. of Illinois,  and Illinois  corporation
("National-Ben"),  has executed this Agreement for purposes of Article IV hereof
only.

         WHEREAS,  Firemen's  Insurance  holds  1,250,000  shares (the "Series A
Shares") of the Company's 12% Cumulative,  Convertible Preferred Shares - Series
A, par vale $.001 per share,  constituting  all the shares of such series of the
Company currently issued and outstanding;

         WHEREAS,  Firemen's Insurance purchased the Series A Shares pursuant to
the Venture  Capital Unit Purchase  Agreement dated as of April 18, 1985 between
The Continental  Corporation (the successor in interest to Firemen's  Insurance)
and the Company (the "Series A Agreement");

         WHEREAS,  Firemen's  Insurance  holds  595,031  shares  (the  "Series C
Shares") of the Company's 8% Cumulative,  Convertible  Preferred Shares - Series
C, par value $.001 per share;

         WHEREAS, the 1,250,000  outstanding Series A Shares were convertible by
their terms into 250,000 shares of the Company's  common stock,  par value $.005
per share (all shares of the  Company's  common stock  referred to herein as the
"Common Stock"), until February 28, 1995;

         WHEREAS,  the Company is contemplating an underwritten public offering
of its Common Stock (the "Contemplated  Public Offering"),  registered under the
Securities Act of 1933, as amended (the "Securities  Act"),  which  Contemplated
Public Offering is expected to occur in late March or early April 1996;

         WHEREAS,  the  underwriters  of the  Contemplated  Public Offering have
advised the Company that for marketing reasons, among other factors, the success
of the Contemplated Public Offering is partially dependent, among other factors,
upon agreement of Firemen's Insurance to convert the outstanding Series A Shares
into Common Stock of the Company;

         WHEREAS, Firemen's Insurance will benefit from the success of the 
Contemplated Public Offering;

         WHEREAS,  Firemen's  Insurance  desires  to  convert,  and the  Company
desires  Firemen's  Insurance  to  convert,  the Series A Shares  into shares of
Common Stock, on the terms and subject to the terms set forth herein; and

         WHEREAS,  to further induce Firemen's Insurance to convert the Series A
Shares  and the  Series C  Shares,  the  Company  has  agreed  to grant  certain
"piggy-back"  registration  rights to  Firemen's  Insurance  with respect to its
resale of the shares of Common  Stock  issuable  on  conversion  of the Series A
Shares and the Series C Shares.
<PAGE>
         NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:


                                   ARTICLE I
                         Conversion of Series A Shares
                         -----------------------------

                  1.1  Conversion  of Series A Shares.  Subject to the terms and
                       ------------------------------
conditions of this  Agreement,  Firemen's  Insurance  shall convert the Series A
Shares into 250,000 shares of Common Stock  (subject to  appropriate  adjustment
for stock splits, stock dividends,  combinations,  other  recapitalizations  and
similar  events) which  conversion  ratio has been determined in accordance with
the  independent  valuation  attached  hereto as Exhibit A and the Company shall
issue to Firemen's  Insurance  250,000 shares of Common Stock in respect thereof
(subject  to  appropriate   adjustment  for  stock  splits,   stock   dividends,
combinations, other recapitalizations and similar events). The aggregate 250,000
shares of  Common  Stock to be issued to  Firemen's  Insurance  shall  herein be
referred to as the "Common Shares."

                  1.2 Termination of Rights Under Other  Agreements.  All rights
                      ---------------------------------------------
of Firemen's Insurance to cause the Company to register the resale of any of the
Company's  securities existing prior to the date hereof under the Securities Act
or any state  securities laws shall terminate as of the date hereof.  All rights
of Firemen's Insurance under the Series A Agreement,  and any other agreement to
which the Company and  Firemen's  Insurance is a party  relating to the Series A
Shares and the Common Stock issuable upon conversion  thereof shall terminate as
of the date hereof.  All rights of Firemen's  Insurance incident to ownership of
Series A Shares,  including,  without limitation,  the ability of the holders of
the Series A Shares to elect one director of the Company,  shall terminate as of
the Closing (as defined below).

                  1.3  Closing.  The  conversion  of the Series A Shares and the
                       -------
issuance of the Common  Shares in respect  thereof shall take place at such time
and place as the closing of the  Contemplated  Public  Offering  (which time and
place are  designated as the  "Closing").  At the Closing,  Firemen's  Insurance
shall deliver to the Company the  certificates  representing the Series A Shares
and the Company shall deliver to Firemen's Insurance  certificates  representing
the Common  Shares as set forth in Section  1.1  hereof.  This  Agreement  shall
terminate in its entirety and be of no further force and effect,  and any rights
terminated  pursuant to Section 1.2 shall be reinstated, if the Closing does not
occur by  September  30,  1996,  or such later date as all parties  hereto shall
agree.


                                   ARTICLE II
             Representations and Warranties of Firemen's Insurance
             -----------------------------------------------------

               Firemen's Insurance hereby represents and warrants to the 
company that:

                  2.1 Title to  Stock.  Firemen's  Insurance  has good and valid
                      ---------------
title to the  Series A Shares  held by it,  free and clear of any lien,  pledge,
security  interest,  or other  encumbrance  with full right and power to convert
such shares as set forth herein.

                  2.2  Authorization.  This  Agreement  constitutes  a valid and
                       -------------
legally binding obligation, enforceable in accordance with its terms, subject to
bankruptcy  and  other  laws of  general  application  affecting  the  right and
remedies  of  creditors,  and  rules  of  law  governing  specific  performance,
injunctive relief, or other equitable remedies.
<PAGE>

                  2.3 Restricted  Securities.  Firemen's  Insurance  understands
                      ----------------------
that the Common Shares are  characterized as "restricted  securities" under the
federal  securities  laws  inasmuch  as they were  initially  acquired  from the
Company in a  transaction  not  involving a public  offering and that under such
laws  and  applicable  regulations,   such  securities  may  be  resold  without
registration under the Securities Act, only in certain limited circumstances. In
this  connection,  Firemen's  Insurance  represents  that  it is  familiar  with
Securities and Exchange  Commission  ("SEC") Rule 144 as presently in effect and
it understands the resale limitations imposed thereby and by the Securities Act.
Firemen's  Insurance  understands  that it may be deemed an  "affiliate"  of the
Company as that term is defined in Rule 144.

                  2.4 Disclosure of Information.  Firemen's  Insurance  believes
                      -------------------------
that  it has  received  all  the  information  that  it  consider  necessary  or
appropriate for deciding whether to enter into the transactions  contemplated by
this Agreement and to acquire the Common Shares.  Firemen's Insurance has had an
opportunity to ask questions and receive answers from the Company  regarding the
terms  and  conditions  of the  Common  Shares.  The  Company  has not  made any
representations  to Firemen's  Insurance  regarding  the Company,  its business,
prospects, financial condition, or any other matter.

                  2.5 Legends. It is understood that the certificates evidencing
                      -------
the Common Shares,  when reissued in the name of Firemen's  Insurance,  may bear
the following legend, or a legend substantially similar to such legend:

                  "These   securities  have  not  been   registered   under  the
Securities  Act of 1933,  as  amended.  They may not be sold,  offered for sale,
pledge or hypothecated in the absence of a registration statement in effect with
respect to the securities  under such Act or an opinion of counsel  satisfactory
to the Company that such registration is not required or unless sold pursuant to
Rule 144 of such Act."


                                  ARTICLE III
                              Registration Rights
                              -------------------

                  The Company covenants and agrees as follows:

                  3.1      Definitions.  For purposes of this Article III:
                           -----------

                  (a) The  term  "register,"  "registered,"  and  "registration"
refer  to a  registration  effected  by  preparing  and  filing  a  registration
statement or similar  document in  compliance  with the  Securities  Act and the
declaration  or ordering of  effectiveness  of such  registration  statement  or
document;

                  (b) The term  "Registrable  Securities"  means (1) the  Common
Shares issued to Firemen's Insurance pursuant to this Agreement,  (2) the shares
of Common Stock of the Company  issuable or issued upon conversion of the Series
C Shares,  and (3) any Common Stock of the Company  issued as (or issuable  upon
the  conversion or exercise of any warrant,  right,  or other  security which is
issued as) a dividend or other  distribution with respect to, or in exchange for
or in replacement of, such Common Shares or such Common Stock,  excluding in all
cases, however, any Registrable  Securities sold by a person in a transaction in
which his/her rights under this Article III are not assigned;
<PAGE>

                  (c) The  number  of  shares of  "Registrable  Securities  then
outstanding"  shall be  determined  by the  number of  shares  of  Common  Stock
outstanding  which  are,  and the  number of shares  of  Common  Stock  issuable
pursuant to then exercisable or convertible  securities  which are,  Registrable
Securities;

                  (d) The term  "Holder"  means any person  owning or having the
right to acquire  Registrable  Securities or any assignee  thereof in accordance
with Section 3.10 hereof; and

                  (e) The term "Form  S-3" means such form under the  Securities
Act as in effect on the date hereof or any  comparable  or successor  form under
the Securities Act  subsequently  adopted by the SEC which permits  inclusion or
incorporation  of substantial  information by reference to other documents filed
by the Company with the SEC.

                  3.2 Company Registration. If (but without any obligation to do
                      --------------------
so under  this  Agreement),  at any time after the  closing of the  Contemplated
Public  Offering,  the Company  proposes  to register  any of its stock or other
securities  under the Securities Act in connection  with the public  offering of
such  securities  solely for cash (other than a registration  relating solely to
the  sale  of  securities  to  participants  in  a  Company  stock  plan,  or  a
registration  on  any  form  which  does  not  include  substantially  the  same
information  as would be required to be  included  in a  registration  statement
covering the sale of the  Registrable  Securities),  the Company shall,  at such
time,  give each Holder  written  notice of such  registration  at least 20 days
prior to the proposed date to file any registration statement.  Upon the written
request of each  Holder  given  within  twenty  (20) days after  mailing of such
notice by the Company in accordance with Section 4.5, the Company shall, subject
to the  provisions of Section 3.6,  cause to be registered  under the Securities
Act all of the Registrable  Securities that each such Holder has requested to be
registered.

                  3.3 Obligations of the Company.  Whenever  required under this
                      --------------------------
Article  III to effect  the  registration  of any  Registrable  Securities,  the
Company shall, as expeditiously as reasonably possible:

                  (a)  Prepare  and file with the SEC a  registration  statement
with respect to such Registrable  Securities and use its reasonable best efforts
to cause such registration statement to become effective and to remain effective
for a  period  of not  less  than  90 days or such  shorter  period  which  will
terminate when all Registrable Securities covered by such registration statement
have been sold.

                  (b)  Prepare  and  file  with  the  SEC  such  amendments  and
supplements to such registration statement and the prospectus used in connection
with  such  registration  statement  as may be  necessary  to  comply  with  the
provisions of the Securities Act and other  applicable laws and regulations with
respect  to the  disposition  of all  securities  covered  by such  registration
statement.

                  (c)  Furnish  to the  Holders  such  numbers  of  copies  of a
prospectus,   including  a  preliminary  prospectus  including  all  supplements
thereto,  in conformity  with the  requirements  of the Securities Act, and such
other  documents  as they may  reasonable  request  in order to  facilitate  the
disposition of Registrable Securities owned by them.
<PAGE>

                  (d) Use its  reasonable  best  efforts to register and qualify
the  securities  covered  by  such  registration   statement  under  such  other
securities  or blue  sky  laws of such  jurisdictions  as  shall  be  reasonably
requested by the  Holders,  provided  that the Company  shall not be required in
connection  therewith or as a condition  thereto to quality to do business or to
file  a  general   consent  to  service  of  process  in  any  such   states  or
jurisdictions.

                  (e) Use its  reasonable  best efforts to list for quotation on
the National  Association  of  Securities  Dealers  Automated  Quotation  System
("Nasdaq")  (or such other  national  exchange or national  quotation  system on
which the Company's Common Stock is then listed) such Registrable Securities.

                  (f) In the event of any underwritten  public  offering,  enter
into and perform its obligations under an underwriting  agreement,  in usual and
customary  form,  with the managing  underwriter of such  offering.  Each Holder
participating  in such  underwriting  shall  also  enter  into and  perform  its
obligations under such an agreement. In addition, all shares registered shall be
distributed  substantially  in accordance  with the plan of  distribution as set
forth in the registration statement.

                  (g) Notify each Holder of  Registrable  Securities  covered by
such  registration  statement at any time when a prospectus  relating thereto is
required to be delivered  under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration  statement, as
then in effect,  includes any untrue  statement  of a material  fact or omits to
state a material  fact  required to be stated  therein or  necessary to make the
statements  therein  not  misleading  in the  light  of the  circumstances  then
existing  and notice of any stop order  issued or  threatened  by the SEC and to
take all reasonable actions to prevent the entry of such stop order or to remove
it if it is entered.

                  (h) If any Registrable Securities are offered for sale, on the
date that the Registrable Securities are delivered to the underwriters,  if any,
and if such Registrable Securities are not being sold through underwriters, then
on the date the  registration  statement  becomes  effective,  the Company shall
furnish  the  Holder  with  (A) a signed  opinion,  dated as of the date of such
delivery, of the legal counsel of the Company addressed to the underwriters,  if
any, and if such Registrable Securities are not being sold through underwriters,
then to the  Holder  covering  such  matters  as are  customarily  addressed  in
opinions rendered to underwriters on such transactions,  and (B) a letter, dated
as of the date of such delivery of the Company  independent  public  accountants
addressed to the underwriters,  and if such Registrable Securities are not being
sold through underwriters, then to the Holder and, if such accountants refuse to
deliver such letter to the Holder, then to the Company (x) stating that they are
independent  certified public  accountants  within the meaning of the Securities
Act and that, in the opinion of such accountants,  the financial  statements and
other financial data of the Company  included in the  registration  statement or
the prospectus, or any amendment or supplement thereto, comply as to form in all
material respects with the applicable accounting  requirements of the Securities
Act, and (y) covering such other financial matters (including  information as to
the period ending not more then five (5) business days prior to the date of such
letter)  with  respect to the  registration  in respect of which such  letter is
being given as the Holder may  reasonably  request and as would be  customary in
such a transaction.

                  3.4 Furnish information.  It shall be a condition precedent to
                      -------------------
the  obligations of the Company to take any action  pursuant to this Article III
with  respect to the  Registrable  Securities  of any  selling  Holder that such
Holder  shall  furnish to the Company such  information  regarding  itself,  the
Registrable  Securities  held by it, and the intended  method of  disposition of
such  securities  as  shall  be  required  by law or  otherwise  to  effect  the
registration of such Holder's Registrable Securities.
<PAGE>

                  3.5 Expenses of Company  Registration.  The Company shall bear
                      ---------------------------------
and pay all expenses  incurred in connection with any  registration,  filing, of
qualification  of  Registrable  Securities  with  respect  to the  registrations
pursuant to Section 3.2 for each Holder (which right may be assigned as provided
in Section 3.10),  including (without limitation) all registration,  filing, and
qualification fees, printer's and accounting fees relating thereto, and fees and
disbursements   of  counsel  for  the  Company,   but  excluding  the  fees  and
disbursements of legal counsel for the selling Holders if separate legal counsel
is employed and underwriting  discounts and commissions  relating to Registrable
Securities.

                  3.6 (a)  Underwriting  Requirements.  In  connection  with any
                           --------------------------
offering involving an underwriting of shares of the Company's capital stock, the
Company  shall not be required  under Section 3.2 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon  between the Company and the  underwriters  selected by it (or by
other  persons  entitled to select the  underwriters),  and then  subject to the
terms set forth  below only in such  quantity  as will not in the opinion of the
underwriters jeopardize the success of the offering by the Company. If the total
amount  of   securities,   including   Registrable   Securities,   requested  by
stockholders  to be included in such  offering  exceeds the amount of securities
sold  other  than  by the  Company  that  the  underwriters  reasonably  believe
compatible with the success of the offering,  then the Company shall be required
to  include  in the  offering  only that  number of such  securities,  including
Registrable  Securities,  which the underwriters believe will not jeopardize the
success of the offering (the  securities so included to be apportioned  pro-rata
among the  selling  stockholders  according  to the total  amount of  securities
entitled to be included  therein  owned by each selling  stockholder  or in such
other proportions as shall mutually be agreed to by such selling  stockholders),
provided,   however,  that  the  amount  of  Registrable  Securities  and  other
securities  excluded  from the  offering  may not be  reduced to less than forty
percent (40%) of such  offering;  and further  provided,  however that Firemen's
Insurance  will be entitled to include in each public  offering,  if it shall so
elect,  no fewer than  507,000  shares of  Registrable  Securities  (subject  to
appropriate  adjustment for stock splits, stock dividends,  combinations,  other
recapitalizations  and similar events). For purposes of the parenthetical in the
preceding sentence concerning  apportionment,  for any selling stockholder which
is a Holder of Registrable Securities and which is a partnership or corporation,
the partners,  retired partners and stockholders of such Holder,  or the estates
and family members of any such partners and retired  partners and any trusts for
the  benefit  of any of the  foregoing  persons  shall be  deemed to be a single
"selling  stockholder," and any pro-rata reduction with respect to such "selling
stockholder"  shall be based  upon  the  aggregate  amount  of  shares  carrying
registration  rights  owned by all  entities  and  individuals  included in such
"selling stockholder," as defined in this sentence.

                  (b)  Withdrawal  Rights.  Each Holder  shall be  permitted  to
                       ------------------
withdraw up to 507,000  shares  (subject  to  appropriate  adjustment  for stock
splits,  stock  dividends,  combinations,  other  recapitalizations  and similar
events) of such Holder's  Registrable  Securities  included in a registration at
any time prior to the effective date of such registration.  In addition,  to the
extent the number of Registrable  Securities being sold by the Holder is greater
than 507,000 shares (subject to appropriate  adjustment for stock splits,  stock
dividends,  combinations, other recapitalizations and similar events) the Holder
can  withdraw  any such  portion  above  507,000  shares if, on the date of such
withdrawal, the last reported sale price of the Company's Common Stock on Nasdaq
(or such other  national  exchange  or  national  quotation  system on which the
Company's Common Stock is then listed) was less than 85% of the proposed maximum
offering price per share listed on the "Calculation of Registration Fee" section
on the  cover  of the  registration  statement  filed  with the  respect  to the
Registrable Securities.
<PAGE>
                  3.7 Delay of  Registration.  No Holder shall have any right to
                      ----------------------
obtain  or  seek  an  injunction  restraining  or  otherwise  delaying  any such
registration as the result of any  controversy  that might arise with respect to
the interpretation or implementation of this Article III. This Section 3.7 shall
not affect any  remedies at law  available to the Holder for breaches of Section
3.6(a)( by the Company.

                  3.8 Indemnification and Contribution.  In the event any 
                      --------------------------------
Registrable  Securities are included in a registration statement under this 
Article III:
                  (a) To the extent permitted by law, the company will indemnify
and hold harmless each Holder,  any  underwriter  (as defined in the  Securities
Act) for such  Holder and each  person,  if any,  who  controls  such  Holder or
underwriter within the meaning of the Securities Act or the Securities  Exchange
Act of 1934, as amended (the "1934 Act"), against any losses,  claims,  damages,
or  liabilities  (joint or several) to which they may become  subject  under the
Securities  Act or the 1934 Act or other  federal or state law,  insofar as such
losses,  claims,  damages,  or liabilities (or actions in respect thereof) arise
out  of or  are  based  upon  any of the  following  statements,  omissions,  or
violations  (collectively  a "Violation"):  (i) any untrue  statement or alleged
untrue  statement of a material fact contained in such  registration  statement,
including any preliminary  prospectus or final prospectus  contained  therein or
any amendments or supplements thereto,  (ii) the omission or alleged omission to
state therein a material fact required to be state therein, or necessary to make
the  statements  therein  not  misleading,  or (iii  any  violation  or  alleged
violation  by the  Company  of the  Securities  Act,  the 1934  Act,  any  state
securities law or any rule or regulation promulgated under the Securities Act or
the 1934 Act or any state  securities law; and the Company will pay to each such
Holder,  underwriter,  or controlling  person,  as incurred,  any legal or other
expenses  reasonably  incurred  by  them in  connection  with  investigating  or
defending any such loss, claim, damage, liability, or action; provided, however,
                                                              --------  -------
that the indemnity agreement contained in this subsection 3.8(a) shall not apply
to amounts paid in settlement of any such loss,  claim,  damage,  liability,  or
action if such settlement is effected  without the consent of the Company (which
consent shall not be unreasonably withheld),  nor shall the Company be liable in
any such case for any such  loss,  claim,  damage,  liability,  or action to the
extent  that it  arises  out of or is based  upon a  Violation  which  occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection  with such  registration by any such Holder,  underwriter,  or
controlling person.

                  (b) To the extent  permitted by law, each selling  Holder will
indemnify  and hold  harmless the Company,  each of its  directors,  each of its
officers who has signed the  registration  statement,  each person,  if any, who
controls the Company within the meaning of the Securities Act, any  underwriter,
any other Holder  selling  securities  in such  registration  statement  and any
controlling person of any such underwriter or other Holder,  against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become  subject  under the  Securities  Act or the 1934 Act or other
federal or state law, insofar as such losses,  claims,  damages,  or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such  Violation  occurs in
reliance  upon and in  conformity  with  written  information  furnished by such
Holder  expressly for use in connection  with such  registration;  and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person  intended to be indemnified  pursuant to this subsection  3.8(b),  in
connection  with  investigating  or  defending  any such  loss,  claim,  damage,
liability, or action; provided,  however, that the indemnity agreement contained
                      --------   -------
in this  subsection  3.8(b) shall not apply to amounts paid in settlement of any
such loss, claim,  damage,  liability,  or action if such settlement is effected
without the  consent of the  Holder,  which  consent  shall not be  unreasonably
withheld.
<PAGE>
                  (c) Promptly after receipt by an indemnified  party under this
Section  3.8  of  notice  of  the  commencement  of any  action  (including  any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying  party under this Section 3.8, deliver to
the  indemnifying  party a written  notice of the  commencement  thereof and the
indemnifying  party shall have the right to  participate  in, and, to the extent
the indemnifying  party so desires,  jointly with any other  indemnifying  party
similarly  noticed,   to  assume  the  defense  thereof  with  counsel  mutually
satisfactory  to the  parties;  provided,  however,  that an  indemnified  party
                                --------   -------
(together with all other  indemnified  parties which may be represented  without
conflict by one counsel) shall have the right to retain separate counsel in each
jurisdiction where separate  representation would be appropriate in the judgment
of the  indemnified  party,  with  the  fees  and  expenses  to be  paid  by the
indemnifying  party, if  representation of such indemnified party by the counsel
retained  by the  indemnifying  party  would be  inappropriate  due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such  proceeding.  The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action,  if  prejudicial  to its ability to defend such  action,  shall
relieve such indemnifying party to the extent of such prejudice of any liability
to the indemnified  party under this Section 3.8, but the omission so to deliver
written  notice to the  indemnifying  party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 3.8.

                  (d) No indemnifying party, in the defense of any claim arising
out of a Violation  shall,  except with the consent of each  indemnified  party,
consent to entry of any  judgment  or enter into any  settlement  which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such  indemnified  party of a release  from all  liability in respect to such
claim or  litigation  and, in the event the terms of such judgment or settlement
include  any term other  than the  payment  by the  indemnifying  party of money
damages,  the  indemnifying  party  shall not so  consent  or enter  into such a
settlement  without the  consent of each  indemnified  party  (which will not be
unreasonably withheld) whether or not the terms thereof include such a release.

                  (e) Contribution. If for any reason the indemnity provided for
                      ------------
in this Section 3.8 is unavailable to, or is  insufficient to hold harmless,  an
indemnified  party,  then the indemnifying  party shall contribute to the amount
paid or payable by the  indemnified  party as a result of such  losses,  claims,
damages,  liabilities  or expenses (i) in such  proportion as is  appropriate to
reflect the relative benefits received by the indemnifying party on the one hand
and the indemnified  party on the other,  or (ii) if the allocation  provided by
clause (i) above is not permitted by applicable law, or provides a lesser sum to
the indemnified party than the amount hereinafter calculated, in such proportion
as is  appropriate  to reflect not only the  relative  benefits  received by the
indemnifying  party on the one hand and the  indemnified  party on the other but
also the relative fault of the indemnifying  party and the indemnified  party as
well as any other relevant equitable considerations.  The relative fault of such
indemnifying party and indemnified parities shall be determined by reference to,
among other  things,  whether any action in  question,  including  any untrue or
alleged untrue  statement of a material fact or omission or alleged  omission to
state a material fact, has been made by, or relates to information  supplied by,
such  indemnifying  party or  indemnified  parties;  and the  parties'  relative
intent,  knowledge,  access to information and opportunity to correct or prevent
such  action.  The amount  paid or payable by a party as a result of the losses,
claims,  damages,  liabilities and expenses referred to above shall be deemed to
include,  subject to the limitations  set forth in Section 3.8(d),  any legal or
other fees or expenses  reasonably incurred by such party in connection with any
investigation or proceeding.
<PAGE>
                  The  parties  hereto  agree  that it  would  not be  just  and
equitable if  contribution  pursuant to this Section  3.8(e) were  determined by
pro-rata  allocation  or by any other method of  allocation  which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent  misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to  contribution  from
any person or entity who was not guilty of such fraudulent misrepresentation.

                  (f) The  obligations  of the Company  and  Holders  under this
Section  3.8  shall  survive  the  completion  of any  offering  of  Registrable
Securities in a registration statement under this Article III, and otherwise.

                  3.9 Reports Under Securities Exchange Act of 1934. With a view
                      ---------------------------------------------
to making  available to the Holders the benefits of Rule 144  promulgated  under
the  Securities  Act and any other rule or regulation of the SEC that may at any
time permit a Holder to sell  securities  of the  Company to the public  without
registration  or pursuant to a registration  on Form S-3, the Company agrees and
covenants to:
                  (a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144;

                  (b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act;

                  (c) furnish to any  Holder,  so long as the  Holder  owns any
Registrable  Securities,  forthwith upon request (i) a written  statement by the
Company that it has complied  with the reporting  requirements  of SEC Rule 144,
the Securities Act and the 1934 Act, or that it qualifies as a registrant  whose
securities  may be  resold  pursuant  to  Form  S-3  (at any  time  after  it so
qualifies),  (ii) a copy of the most recent  annual or  quarterly  report of the
Company and such other  reports and  documents  so filed by the Company with the
SEC or any  securities  exchange,  and (ii)  such  other  information  as may be
reasonably requested in availing any Holder of any rule or regulation of the SEC
which  permits  the  selling  of any such  securities  without  registration  or
pursuant to such form; and

                  (d) provide  the Holder with prompt notice of any failure by 
the Company to comply with the requirements of Rule 144.

                  3.10  Assignment of Registration  Rights.  The rights to cause
                        ----------------------------------
the Company to register Registrable  Securities pursuant to this Article III may
be assigned (but only with all related  obligations) by a Holder to a transferee
or assignee of such securities who, after such assignment or transfer, holds (i)
at  least  1%  of  the  Registrable  Securities  then  outstanding  (subject  to
appropriate  adjustment for stock splits, stock dividends,  combinations,  other
recapitalizations  and similar events), or (ii) all of the shares or Registrable
Securities  initially issued to such Holder,  provided that, within a reasonable
time after such  transfer,  the Company is furnished  with written notice of the
name and address of such  transferee or assignee and the securities with respect
to which such  registration  rights are being assigned;  and provided,  further,
that such  assignment  shall be effective  only if  immediately  following  such
transfer  the  further  disposition  of such  securities  by the  transferee  or
assignee is restricted  under the Securities  Act and/or not otherwise  eligible
for sale under Rule 144(k) of the Securities Act or similar  exemption.  For the
purpose of determining the number of shares of Registrable  Securities held by a
transferee  or  assignee,  the  holdings  of  transferees  and  assignees  of  a
partnership who are partners or retired partner of such  partnership  (including
spouses and  ancestors,  lineal  descendants,  and siblings of such  partners or
spouses  who  acquire  Registrable   Securities  by  gift,  will,  or  intestate
succession) shall be aggregated together and with the partnership; provided that
all assignees and transferees who would not qualify  individually for assignment
of registration rights shall have a single  attorney-in-fact  for the purpose of
exercising  any  rights,  receiving  notices,  or taking any  action  under this
Article III.
<PAGE>

                  3.11 Amendment of Registration  Rights.  Any provision of this
                       ---------------------------------
Article III may be amended  and the  observance  thereof  may be waived  (either
generally   or  in  a   particular   instance   and  either   retroactively   or
prospectively),  only with the written consent of the Company and the Holders of
a majority of the  Registrable  Securities  then  outstanding.  Any amendment or
waiver  effected in accordance  with this  paragraph  shall be binding upon each
Holder of any Registrable Securities then outstanding,  each future holder of al
such Registrable Securities and the Company.

                  3.12     Termination  of  Registration  Rights.  No Holder 
                           ------------------------------------- 
shall be entitled to exercise  any right provided for in this Article III after
February 3, 2005.


                                   ARTICLE IV
                                 Miscellaneous
                                 -------------

                  4.1 Market  Stand-Off.  Firemen's  Insurance and  National-Ben
                      -----------------
hereby  covenant that they will not,  except for the  conversion of the Series A
Shares contemplated by this Agreement,  without the prior written consent of Van
Kasper & Company (or such other investment bank that serves as the lead managing
underwriter  in the  company's  Contemplated  Public  Offering,  which person is
referred  to  herein  as the  "Lead  Managing  Underwriter"),  offer,  sell,  or
otherwise dispose of, directly or indirectly, any shares of the Company's Common
Stock, or any securities convertible into or exercisable or exchangeable for, or
any rights to purchase or acquire, Common Stock owned by it (otherwise than as a
bona fide gift or gifts,  provided the donee or donees  thereof agree in writing
to be bound by the terms of this  Section  4.1) for the period  beginning on the
date hereof and ending on the date one  hundred and twenty  (120) days after the
date of the closing of the  Contemplated  Public  Offering.  If requested by the
Lead Managing  Underwriter,  Firemen's  Insurance and National-Ben each agree to
execute an agreement  similar to that set forth in this Section 4.1 addressed to
the Lead  Managing  Underwriter.  The  Company  shall be  expressly  entitled to
enforce  the  provisions  of this  Section  4.1 on behalf  of the Lead  Managing
Underwriter.  This Section 4.1 shall be effective  only upon the  execution of a
similar provision by American Cyanamid Company.

                  4.2 Survival of Warranties.  The warranties,  representations,
                      ----------------------
and covenants of Firemen's Insurance,  National-Ben and the Company contained in
or made pursuant to this  Agreement  shall survive the execution and delivery of
this  Agreement  and shall in no way be  affected  by any  investigation  of the
subject  matter  thereof  made by or on behalf  of  Firemen's  Insurance  or the
Company.
<PAGE>

                  4.3  Successors  and  Assigns.  Except as  otherwise  provided
                       ------------------------
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding  upon the  respective  successors  and  assigns  of the  parties.
Nothing in this  Agreement,  express or implied,  is intended to confer upon any
party other than the parties hereto or their  respective  successors and assigns
any rights,  remedies,  obligations,  or liabilities  under or by reason of this
Agreement, except as expressly provided in this Agreement.

                  4.4  Expenses.  Except as  otherwise  provided  in Article III
                       --------
hereof,  irrespective  of whether the Closing is effected,  each party shall pay
its  own  costs  and  expenses  that  such  party  incurs  with  respect  to the
negotiation, execution, delivery, and performance of this Agreement.

                  4.5 Notices. Unless otherwise provided, any notice required or
                      -------
permitted  under this  Agreement  shall be given in writing  and shall be deemed
effectively  given upon  personal  delivery to the party to be notified or three
days  after  deposit  with the United  States  Post  Office,  by  registered  or
certified mail, postage prepaid and addressed to the party to be notified at the
address  indicated for such party on the signature page hereof,  or by facsimile
confirmed by such certified or registered  mail or at such other address as such
party  may  designate  by ten (10)  days'  advance  written  notice to the other
parties.

                  4.6 Governing  Law. This  Agreement  shall be governed by and
                      --------------
construed  under the laws of the State of Nevada.

                  4.7 Titles and Subtitle. The titles and subtitles used in this
                      -------------------
Agreement  are  used  for  convenience  only  and  are not to be  considered  in
construing or interpreting this Agreement.

                  4.8 Entire  Agreement  Amendments  and Waivers.  This writing,
                      ------------------------------------------
together with any exhibits  annexed hereto,  constitutes the entire Agreement of
the parties with respect to the subject  matter  hereof and shall  supersede all
prior  understandings  and  writings  with  respect  thereto.  Any  term of this
Agreement may be amended and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of all the parties hereto.

                  4.9  Counterparts.  This  Agreement  may be executed in two or
                       ------------
more counterparts,  each of which shall be deemed an original,  but all of which
together shall constitute one and the same instrument.

                  4.10 Severability. If one or more provisions of this Agreement
                       ------------
are held to be  unenforceable  under  applicable  law, such  provision  shall be
excluded  from  this  Agreement  and  the  balance  of the  Agreement  shall  be
interpreted  as if such  provision  were so excluded and shall be enforceable in
accordance with its terms.


<PAGE>



         IN WITNESS WHEREOF,  the parties have executed this Agreement as of the
date first above written.


                         Cyanotech Corporation


                         By:  S/GERALD R CYSEWSKI
                              _________________________________
                         Name: GERALD R. CYSEWSKI
                         Title: PRESIDENT AND CEO


                         Address: 73-4460 Queen Kaahumanu Hwy.,
                                  Suite 102
                                  Kailua-Kona, HI 96740


                         Firemen's Insurance Company of Newark, New Jersey


                         By:  S/ RICHARD W. DUBBERKE
                              _________________________________
                         Name:  RICHARD W. DUBBERKE
                         Title: VICE PRESIDENT


                         Address: CNA Plaza
                                  Chicago, IL 60685


                         For  purposes of Article IV
only:


                         National-Ben Franklin Co. of Illinois


                         By:  S/RICHARD W. DUBBERKE
                              _________________________________
                         Name: RICHARD W. DUBBERKE
                         Title: VICE PRESIDENT


                         Address: CNA Plaza
                                  Chicago, IL 60685