SECURITY AGREEMENT

     THIS SECURITY  AGREEMENT (the "Security  Agreement") made as of the 1st day
of January, 1998, by CYANOTECH CORPORATION, a Nevada Corporation,  whose address
is 73-4460 Queen Kaahumanu Highway, #102, Kailua-Kona, Hawaii 96740, hereinafter
referred to as the "Debtor", in favor and for the benefit of KIEWIT PACIFIC CO.,
a Delaware  corporation,  whose address is 1001 Kamokila  Boulevard,  Suite 305,
Kapolei, Hawaii 96707, hereinafter called the "Secured Party",

                                WITNESSETH THAT:

A.  OBLIGATIONS AND LIABILITIES SECURED BY THIS SECURITY AGREEMENT.  The Debtor
does hereby covenant and agree as follows:

     1. THIS SECURITY AGREEMENT DOES HEREBY SECURE the repayment of that certain
loan (the  "Loan")  made by the  Secured  Party to the  Debtor in the  principal
amount  of  NINE  HUNDRED   SEVENTY  FIVE  THOUSAND  AND  NO/100  DOLLARS  (U.S.
$975,000.00),  and all renewals,  extensions and modifications thereof, together
with interest thereon, and the payment (including,  but not limited to, all sums
expended or advanced  pursuant to), the observance and the  performance  of, all
covenants, conditions and agreements required to be paid, observed and performed
by the Debtor under the following loan documents:

                  (1) This Security Agreement covering the furniture,  fixtures,
         equipment, appliances, inventory, farm products and accounts receivable
         and any  other  personal  property  now or  hereafter  acquired  by the
         Debtor,  on the  property  described  as Kalaoa  1st - 4th and Ooma 1st
         North Kona, Island of Hawaii identified by Tax Map Key 7-3-43,  portion
         42 (3)  and  wherever  else  located,  and  all  production  equipment,
         research  and  development  lab  equipment,   tool  and  equipment  and
         stockpiled crushed rock, arising out of or respecting the operations of
         the Debtor;

                  (2)  That  certain   Promissory  Note  executed   concurrently
         herewith  by  the  Debtor,  as  Maker,  such  note  and  any  renewals,
         extensions and modifications  thereof being hereinafter  referred to as
         the "Note";

                  (3) That  certain  Financing  Statement  (UCC-1)  covering the
         furniture,  fixtures,  equipment,  appliances,  inventory  and accounts
         receivable and any other personal property now or hereafter acquired by
         the Debtor, on the property  described as Kalaoa 1st - 4th and Ooma 1st
         North Kona, Island of Hawaii identified by Tax Map Key 7-3-43,  portion
         of 42 (3) and wherever  else  located,  and all  production  equipment,
         research  and  development  lab  equipment,   tool  and  equipment  and
         stockpiled crushed rock, arising out of or respecting the operations of
         the Debtor; and

                  (4) Any other instruments or agreements  executed by any party
         concurrently   herewith  or  otherwise  in  connection  with  the  loan
         documents,

all of the foregoing  loan  documents,  together  with all future  modifications
thereof, being hereinafter collectively referred to as the "Loan Documents";

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     2. THIS  SECURITY  AGREEMENT  DOES ALSO  HEREBY  SECURE the  payment by the
Debtor  to the  Secured  Party of all  other  sums now or  hereafter  loaned  or
advanced by the Secured Party to the Debtor,  or  expended by the Secured  Party
for the account of the Debtor,  or  otherwise owing by the Debtor to the Secured
Party,  directly or  indirectly,  on any and every account whatsoever; and

     3. THIS SECURITY  AGREEMENT DOES ALSO HEREBY SECURE all judgment  issued by
any court in favor of the Secured Party or the Secured  Party's  assigns against
the Debtor related to or arising out of any default of the Debtor under the Loan
Documents.

B.       GRANT OF SECURITY INTEREST

         THE DEBTOR DOES HEREBY grant, assign,  convey,  transfer,  deliver, and
set over to the Secured  Party,  its  successors  and  assigns,  absolutely  and
forever, the following described property,  as a security interest, as that term
is defined in the Uniform Commercial code (Chapter 490, Hawaii Revised Statutes,
as amended), upon the terms and conditions hereinafter set forth:

         FIRST:

                  All right,  title and interest of the Debtor in and to any and
         all assets and personal property interests of the Debtor (the "Debtor's
         Property and Assets")  related to or located at the property  described
         as  Kalaoa  1st - 4th  and  Ooma  1st  North  Kona,  Island  of  Hawaii
         identified by Tax Map Key 7-3-43,  portion 42 (3) (the  "Property")  or
         wherever  else  located  in  the  State  of  Hawaii,  and in and to the
         business  carried on by the Debtor in any  location,  and in and to any
         replacements thereof or additional or supplementary  agreements related
         thereto;

                  Together  with all of the Debtor's  rights and remedies  under
         the  Debtor's  Property  and Assets,  and the benefit of all  covenants
         therein;

         SECOND:

                  All right,  title and interest of the Debtor in and to any and
         all   furniture,   furnishings,   machinery,   apparatus,   appliances,
         equipment, fittings, fixtures,  improvements,  decorations and articles
         of  personal  property  of every  kind and nature  whatsoever,  now and
         hereafter  located in the building or buildings erected on the premises
         located  on the  Property  or  wherever  else  located  in the State of
         Hawaii, or any part thereof,  and used or usable in connection with the
         business of the  Debtor,  or in  connection  with any present or future
         occupancy  of said  building or  buildings  and now owned or  hereafter
         acquired by the Debtor  (hereinafter  called  "furniture,  fixtures and
         equipment"),  including,  but without  limiting the  generality  of the
         foregoing,  all heating,  lighting,  incinerating  and power equipment,
         engines, pipes, pumps, tanks, motors, conduits, switchboards, plumbing,
         lifting, cleaning, fire prevention, fire extinguishing,  refrigerating,
         ventilating  and  communications   apparatus,  air  attached  cabinets,
         partitions,  ducts and compressors,  save and except personal property,
         if any, belonging to others than the Debtor, the Debtor hereby agreeing
         that all such  furniture,  fixtures and  equipment  shall be a part and
         parcel of the premises and appropriated to the use thereof and, whether
         affixed or annexed to the premises or not;

                  Together  with all  substitutions  therefor and  additions and
         accessions to the  furniture,  fixtures and equipment and parts used or
         intended to be used therewith.


                                       -2-

<PAGE>



         THIRD:

                  All  production   equipment,   research  and  development  lab
         equipment,  tool and equipment and stockpiled crushed rock, arising out
         of or respecting the operations of the Debtor;

                  Together  with all  substitutions  therefor and  additions and
         accessions thereto.

         FOURTH:

                  All accounts, accounts receivable, other receivables, contract
         rights, chattel paper,  instruments and documents, and notes; any other
         obligations  or  indebtedness  owed to the Debtor from whatever  source
         arising;  all rights of the Debtor to receive  any  performance  or any
         payments in money or kind; all guaranties of the foregoing and security
         therefor;  all of the right,  title and  interest  of the Debtor in and
         with respect to the goods,  services,  or other property that gave rise
         to or that  secure any of the  foregoing  and  insurance  policies  and
         proceeds  relating  thereto,  and all rights of the Debtor as an unpaid
         seller of goods services,  including, but not limited to, the rights to
         stoppage  in transit,  replevin,  reclamation,  and resale;  all of the
         foregoing  whether  now  owned or  existing  or  hereafter  created  or
         acquired  by  the  Debtor,   hereinafter  separately  and  collectively
         referred  to as the  "Accounts".  The word  "Accounts"  as used in this
         Security  Agreement  also  includes   "documents,"   "instruments"  and
         "chattel  paper" as such terms are  defined in the  Uniform  Commercial
         Code.

                  Together  with all of the Debtor's  rights and remedies  under
         the Accounts, and the benefit of all covenants therein and all proceeds
         therefrom.

         FIFTH:

                  All of the right,  title and  interest of the Debtor in and to
         any and all  goods,  merchandise,  or other  property,  raw  materials,
         parts,  supplies,  work-in-process  and finished  products intended for
         sale,  of every kind and  description,  in the  custody or  possession,
         actual or constructive,  of the Debtor,  including  insurance  proceeds
         from  insurance on any of the above,  any returns upon any Accounts and
         other  proceeds,  resulting  from  sale  or  disposition  of any of the
         foregoing,     including    without    limitation,    raw    materials,
         work-in-process,   and  finished  goods,   hereinafter  separately  and
         collectively  referred  to as the  "Inventory";  all  of the  foregoing
         whether now owned or existing or  hereafter  created or acquired by the
         Debtor.

                  Together  with all  substitutions  therefor and  additions and
         accessions to the Inventory.

         SIXTH:

                  All of the right,  title and  interest of the Debtor in and to
         all crops, livestock,  supplies used or produced in farming operations,
         unmanufactured products of crops livestock or aquaculture,  hereinafter
         separately and collectively referred to as the "Farm Products";  all of
         the  foregoing  whether now owned or existing or  hereafter  created or
         acquired by the Debtor.


                                       -3-

<PAGE>



         All  articles of property  described in items FIRST  through  SIXTH are
hereinafter  sometimes  collectively  called  the  "Personal  Property"  and the
"Collateral".

         TOGETHER  WITH all right,  title and  interest of the Debtor in, and to
use, lease or dispose of, the  Collateral as well as any proceeds  deriving from
such Collateral;

         TO HAVE AND TO HOLD the same unto the Secured Party and its  successors
and assigns, absolutely and forever, as security as aforesaid;

         UPON  CONDITION  that if the  Debtor  shall  well and  truly pay to the
Secured Party the principal  amount of the Note,  with interest and premium,  if
any,  according to its  provisions  and effect and shall  discharge  any and all
obligations  that  now  or  hereafter  may  be  or  become  owing,  directly  or
indirectly,  by the Debtor to the Secured Party under the Loan  Documents on any
and every account, whether or not the same are matured, of which obligations the
books of the  Secured  Party shall be prima  facie  evidence,  and if the Debtor
shall fully and faithfully perform and observe all of the covenants,  conditions
and agreements to be performed and observed by the debtor in the Loan Documents,
including  this  Security  Agreement,  and any and  every  other  instrument  or
document  secured hereby,  and if the Debtor shall pay the cost of release,  the
Secured Party will, upon request of the Debtor,  release the Collateral from the
security interest created by this Security Agreement and these presents shall be
void, it being understood,  however, that an affidavit,  certificate,  letter or
statement  of any  officer of the  Secured  Party  showing  that any part of the
indebtedness remains unpaid or any terms,  covenants,  conditions and agreements
remain unperformed shall constitute evidence of the validity,  effectiveness and
continuing force of this Security Agreement.

         Subject  to the  terms  hereof,  until  the  happening  of an  Event of
Default,  as  hereinafter  defined,  the Debtor  shall be entitled to use and to
possess the Collateral.

     C.  EVENTS  OF  DEFAULT.  If any  one or  more  of  the  following  events,
hereinafter called "Events of Default" shall occur:

     (1) The Debtor shall default in the payment of principal or interest on the
Note or any other obligation secured hereby; or

     (2)  The  Debtor  shall  default  in the  due and  punctual  observance  or
performance  of any  other  covenant,  condition  or  agreement  required  to be
observed or performed under this Security Agreement,  and such default shall not
be remedied within twenty (20 days) after the occurrence of such default; or

     (3) Any one or more of the  Events of  Default  defined  in any of the Loan
Documents shall occur; or

     (4) There shall be any attachment,  execution or other judicial seizure of,
or affecting, the Collateral, or any part thereof, unless the Debtor sets aside,
dissolves,  bonds off or  otherwise  eliminates  such  attachment,  execution or
seizure within twenty (20 days) after its occurrence; or

     (5) The  Debtor  shall  become  insolvent  or shall  admit in  writing  its
inability  to meet its  debts as they  become  due,  or shall  file a  voluntary
petition in bankruptcy,  or make an assignment for the benefit of creditors,  or
consent to the  appointment  of a receiver or trustee  for all or a  substantial
part of its properties,  or file a petition,  answer or other instrument seeking
or  acquiescing  to  the  arrangement  of  its  debts, or other relief under the
federal  bankruptcy  laws  or  any other applicable law of the  United States of
America or any state or territory for the relief of debtors; or


                                       -4-

<PAGE>

     (6) A decree or order of a court having  jurisdiction in the premises shall
be  entered  (i)  adjudging  the Debtor to be  bankrupt  or  insolvent,  or (ii)
appointing a receiver or trustee or assignee in  bankruptcy or insolvency of the
Debtor or its  properties,  or (iii)  directing the winding up or liquidation of
its affairs; or

     (7) Any  representation  or  warranty  herein  made by the Debtor  shall be
untrue in any material respect; or

     (8) The forfeiture or seizure by any governmental authority under 18 U.S.C.
ss.981, or under any other federal, state or other law, of any of the Collateral
or any of the properties which are covered by the security instruments which are
part of the Loan Documents; or

     (9) The failure of the Debtor to file cash transaction receipts as required
by federal law; or limited to 18 U.S.C. ss.1956(a)(3).

D.  REMEDIES FOR EVENT OF DEFAULT.

         UPON THE OCCURRENCE OF ANY ONE OR MORE OF EVENTS OF DEFAULT, THEN, AND
IN ANY SUCH EVENT,

     1. The Secured Party,  without obligation to do so and without releasing or
waiving any of its rights,  shall have the right, power, and authority,  without
notice, presentment or demand to declare the unpaid principal amount of the Note
and any other indebtedness secured hereby, whether matured or not, together with
any interest thereon accrued and unpaid, to be immediately due and payable,  and
such indebtedness and interest shall thereupon become and be immediately due and
payable,  and shall bear interest  until fully paid at the rate specified in the
Note to be paid in the event of default; and

     2. The Secured Party may, at its option, without notice and irrespective of
whether declaration of default is required to be delivered to any party named in
the Loan  Documents  or other  instrument  or  obligations  securing the Note or
secured hereunder or whether remedies under other security instruments have been
exercised,  exercise  all rights and remedies  contained in the Loan  Documents,
including  this  Security  Agreement,  or any  other  security  instruments  and
obligations,  and shall have all rights and  remedies  available  to the Secured
Party under the Uniform Commercial code or other applicable laws.

     3. Without limiting the generality of the foregoing, upon the occurrence of
an Event of Default:

         a. The  Secured  Party may, at the  Secured  Party's  option and at the
Debtor's expense,  either in the Secured Party's own right or in the name of the
Debtor and in the same  manner  and to the same  extent  that the  Debtor  might
reasonably so act if this Security Agreement had not been made:

                  (1) demand, sue for, collect,  recover,  receive and otherwise
         enforce payment of all proceeds and other sums due and payable from the
         Collateral,  the Debtor hereby  requesting  and  instructing  all other
         parties liable to the Debtor in connection  with the Collateral to make
         all payments then due or which may thereafter  become due thereunder or
         thereby to the Secured Party,  and the Debtor further agreeing that the
         receipt by the Secured Party of any such

                                       -5-

<PAGE>



         payments  shall  be  a complete release and discharge of the obligor or
         obligors thereof to the extent of the payment or payments so made;

                  (2) to exercise all the rights, remedies and privileges of the
         Debtor arising from the Collateral, or any party thereof, including the
         compromising,   waiving,  excusing,  or  in  any  manner  releasing  or
         discharging  of any  obligation  of any  party to or  arising  from the
         Collateral;

                  (3)  take possession of the books, papers, and accounts of the
         Debtor, wherever located, relating to the Collateral;

                  (4) receive,  and the Debtor will  forthwith  surrender to the
         Secured  Party,  the possession of the  Collateral,  and, to the extent
         permitted by law, the Secured  Party may itself or by such  officers or
         agents as it may appoint (A) manage or operate  the  Collateral  or any
         part  thereof,   (B)  exclude  the  Debtor,  its  agents  and  servants
         therefrom, (C) fix or modify purchase prices, and lease the Property or
         Personal Property,  or any part thereof, and (D) do all acts, including
         the making of contracts,  which the Secured  Party deems  necessary for
         the care or management of the Property or Personal Property; and

                  (5)  sue or otherwise collect and receive money.

         b. The Secured  Party may  foreclose  this  Security  Agreement  in the
manner now or hereafter provided or permitted by law, including treatment of the
Collateral as real property subject to judicial  foreclosure pursuant to Chapter
667, Hawaii Revised Statutes,  as amended, and shall have the immediate right to
receivership  on ex parte order and without  bond pending  foreclosure,  and may
sell,  assign,  transfer or  otherwise  dispose of the  Collateral  at public or
private sale, in whole or in part, and the Secured Party may, in its own name or
as the irrevocably appointed  attorney-in-fact of the Debtor, effectually assign
and transfer the Collateral,  or any part thereof,  absolutely,  and execute and
deliver all necessary assignments,  deeds, conveyances,  bills of sale and other
instruments  with power to substitute one or more persons or  corporations  with
like power; and, if the Secured Party so instructs the Debtor,  the Debtor shall
assemble,  without  expense to the Secured  Party,  all of the  Collateral  at a
convenient  place on the island  where the  Property is located,  and the Debtor
shall  ratify and confirm any such sale or  transfer  by  delivering  all proper
instruments  to such persons or  corporations  as may be  designated in any such
request. Any such foreclosure sale,  assignment or transfer shall, to the extent
permitted  by law, be a perpetual  bar,  both at law and in equity,  against the
Debtor and all persons and entities lawfully claiming by or through or under the
Debtor.  Any such sale may be adjourned  from time to time.  Upon any sale,  the
Secured Party may bid for and purchase the Collateral,  or any part thereof, and
upon compliance with the terms of sale, may hold, retain and possess and dispose
of the Collateral, in its absolute right without further accountability, and any
purchaser,  including the Secured  Party,  at any such sale may, if permitted by
law,  after  allowing for the proportion of the total purchase price required to
be  paid  in cash  for  the  costs  and  expenses  of the  sale,  commissioner's
compensation  and other charges,  in paying  purchase  money,  turn in the Note,
including interest and charges thereon,  in lieu of cash, up to the amount which
shall, upon distribution of the net proceeds of such sale, be payable thereon.

         c. In case of any Event of  Default,  neither  the  Debtor  nor  anyone
claiming by, through or under the Debtor,  to the extent the Debtor may lawfully
so  agree,  shall  or will  set up,  claim  or  seek  to take  advantage  of any
appraisement,  valuation,  stay, extension or redemption law now or hereafter in
force in any  locality  where  any of the  Collateral  is  situated  in order to
prevent or hinder the  enforcement of this Security  Agreement,  or the absolute
sale of the  Collateral,  or the  final and  absolute  putting  into  possession
thereof,  immediately after such sale, of the purchasers thereat; and the Debtor
in the Debtor's own right and for all who may claim under the

                                       -6-
<PAGE>
Debtor,  hereby  waives,  to the full extent that the Debtor may lawfully do so,
the benefit of all such laws and any and all right to have the estates comprised
in the security intended to be created hereby marshalled upon any enforcement of
the  lien  hereof  and  agrees  that  the  Secured  Party  or any  court  having
jurisdiction  to foreclose  such lien may sell the  Collateral in parts or as an
entirety.  The Secured  Party may apply the proceeds of any such sale first,  to
the costs and expenses of such sale and all proceedings in connection therewith,
including  counsel fees; next, to the payment of any  disbursements  made by the
Secured  Party for taxes or  assessments  or other charges prior to the Security
interest  of this  Security  Agreement  which the  Secured  Party  shall deem it
expedient to pay; next, to the repayment of any other  disbursements made by the
Secured Party according to the terms hereof;  next, to the payment of the unpaid
principal of and interest on the Note,  and any other  obligations of the Debtor
under the Loan Documents;  and the remainder,  if any, shall be paid over to the
Debtor.  If  such  proceeds  shall  be  insufficient  to  discharge  the  entire
indebtedness  owing  by the  Debtor  under  the  Security  Agreement,  the  Loan
Documents, and any other instrument or obligation secured hereunder, the Secured
Party may have any other legal recourse against the Debtor for the deficiency.

         d.  Nothing in this  Security  Agreement  or the Note shall  impair the
right, which is unconditional and absolute, of the holder of the Note to enforce
payment of the principal of, and interest on, the Note and all fees, charges and
other sums due under the Loan  documents at or after the date therein  expressed
as the date when the same shall  become  due,  or the  obligation  of the Debtor
secured  hereunder,  which is likewise  unconditional and absolute,  to pay such
amounts at the respective times and places therein expressed.

E. THE  DEBTOR'S  WARRANTIES.  The Debtor  warrants and  represents  to the
Secured Party as follows:

     1. Warranties Regarding the Collateral.  The Debtor warrants and represents
to the Secured Party as follows:

                  a. The Debtor is the lawful  owner of the  Collateral  and has
         the  right to the use and  possession  of the  Collateral  and has good
         right to grant or  convey  the same as  security  under  this  Security
         Agreement.

                  b. The Collateral is free and clear of any lien or right prior
         to or on a parity with the lien of this Security Agreement,  and except
         for any prior existing liens,  including without  limitation,  liens in
         favor of Spirulina International B.V.

                  c. The Debtor  will,  on behalf of the Secured  Party,  defend
         forever against any claims or demands thereon made by all persons.

                  d. There exist no offsets, counterclaims or defenses to the
                     Debtor's rights therein or thereto.

F. THE DEBTOR'S COVENANTS.  The Debtor hereby covenants and agrees with the
Secured Party as follows:

     1. Payment of Taxes,  Assessments,  etc. The Debtor will punctually pay and
discharge,  or  cause to be paid and  discharged  from  time to time as the same
shall become due, all taxes, rates, assessments,  impositions,  duties and other
charges of every description to which the Collateral,  or any part thereof,  may
during the term of this  Security  Agreement  become liable by authority of law,
the payment of which  shall be secured by this  Security  Agreement.  The Debtor
will,  upon request,  deposit  copies of the receipts  therefor with the Secured
Party at least

                                       -7-

<PAGE>
twenty  (20)  days  prior to the  final  date such  taxes,  rates,  assessments,
impositions, duties and other charges may be paid without penalty.

     2. Indemnification. The Debtor will indemnify and hold and save the Secured
Party  harmless and against any and all  liability,  loss,  damage or expense of
whatever kind or nature, including reasonable attorneys' fees, which the Secured
Party may at any time sustain or incur hereunder, including, but not limited to,
any claims or demands whatsoever which may be asserted against the Secured Party
as a result of any  failure  on the part of the  Debtor to  perform,  observe or
discharge its obligations involving any of the Collateral. Prior to actual entry
and taking  possession  of any  property by the  Secured  Party,  this  Security
Agreement shall not operate to place  responsibility  upon the Secured Party for
the control,  care,  management or repair of any property  constituting security
hereunder.

     3. Duplicate  Originals.  At the request of the Secured  Party,  the Debtor
will furnish to the Secured Party a duplicate original of each material Contract
now existing or hereafter executed by the Debtor.

     4.  Litigation.  The  Debtor  will  appear  in and  defend  any  action  or
proceeding  at law or in  equity  affecting  in any  manner  all or  part of the
Collateral;  and in such event (except where the purported  defect affecting the
security  hereof  arises or  results  from any act or  omission  of the  Secured
Party),  the Debtor will pay all costs,  charges and expense,  including cost of
evidence  of title and  reasonable  attorneys'  fees  incurred,  and will  fully
indemnify  the  Secured  Party from and against  any loss,  damage,  or expense,
including reasonable attorneys' fees, sustained or incurred by the Secured Party
as a  result  of any  failure  on the  part of the  Debtor  to  comply  with its
obligations under this paragraph.

     5.  Liens.  The Debtor will  maintain  the valid  security  interest of the
Secured Party in the Collateral and the sums due  thereunder,  free and clear of
all liens,  claims,  and encumbrances that may be, or are threatened to be, made
prior to or on a parity with the security  interest of the Secured Party herein,
except liens for taxes or assessments not yet payable or payable without penalty
so long as payable.  The Debtor will not claim any credit on interest payable on
the Note or on any other  payment  secured  hereby for any  portion of the taxes
assessed  against the  Collateral,  and the  provisions of any law entitling the
Debtor to such  credit are hereby  expressly  waived by the Debtor to the extent
they may be lawfully waived.

     6. Further  Assurances.  The Debtor will assist in the  preparation  of and
execute and acknowledge  from time to time, alone or with the Secured Party, and
deliver, file or record any further instruments,  including security agreements,
financing or continuation  statements,  mortgages or other  instruments,  and do
such  further  acts as the  Secured  Party may  request to  confirm,  establish,
continue,  maintain  and perfect the  security  interest of the  Security  Party
created by this  Security  Agreement  and to subject the  Collateral to the lien
hereof,  including  all  renewals,  additions,  substitutions,  replacements  or
betterments  thereto and all proceeds  therefrom,  and  otherwise to protect the
same against the rights and interests of third parties,  the Debtor  agreeing to
pay the cost of preparing, filing and recording the same.

     7.  Acknowledgment of Debt. The Debtor,  within five (5) days after request
by the Secured Party in writing,  will furnish to the Secured  Party,  or to any
proposed  assignee  of  this  Security  Agreement,   a  written  statement  duly
acknowledged  of the amount due under this Security  Agreement and the Note, and
whether any offsets, counterclaims or defenses exist against the secured debt.

     8. Personal Property.  The Debtor agrees: (a) to keep all Personal Property
intact  and in good  condition,  order  and  repair  reasonable  wear  and  tear
excepted; (b) at the Debtor's own expense to replace any

                                       -8-

<PAGE>
portion  thereof which may be broken or become obsolete or worn out or unfit for
use; (c) to comply with all laws,  rules and  regulations  made by  governmental
authority and applicable thereto; (d) not to commit or suffer any strip or waste
of the Personal Property; and (e) not to alienate,  assign, pledge, transfer, or
encumber any of the rights or interests of the Debtor therein and thereto.

     9. Insurance. The Debtor will, during the terms of this Security Agreement,
keep all of the Personal  Property insured against hazards of such type or types
and in such amount or amounts  and form of policy as the Secured  Party may from
time to time  reasonably  require and will  provide  copies of the  premiums and
costs of all insurance required hereunder and, upon demand of the Secured Party,
will furnish  evidence of payment of such  premiums.  The debtor,  not less than
twenty (20) days prior to the expiration  date of each policy,  shall deliver to
the Secured Party a copy of renewal policy or policies,  accompanied by evidence
of payment  satisfactory to the Secured Party. All insurance  required hereunder
shall be  effected  under valid and  enforceable  policies  issued by  insurance
companies  authorized  to do business in the State of Hawaii,  the Debtor hereby
acknowledging  receipt of written  notice from the Secured Party that the Debtor
is free to procure any such insurance from any insurance  company so authorized.
The  Secured  Party  shall  not be  responsible  for such  insurance  or for the
collection  of any  insurance  moneys,  or for the  insolvency of any insurer or
insurance  underwriter.  The amount  collected from any fire or other  insurance
policy may be applied by the Secured Party upon any indebtedness  secured hereby
and in such order as the Secured Party may  determine,  or, at the option of the
Secured  Party,  the entire  amount so collected,  or any part  thereof,  may be
applied to the restoration of the Personal Property,  or released to the Debtor,
without being deemed a payment on any of the indebtedness  secured hereby.  Such
application  or release shall not cure or waive any default or notice of default
hereunder or invalidate  any act done pursuant to such notice.  No lien upon any
of such policies of insurance, or upon any refund or return premium which may be
payable on the  cancellation  or termination  thereof,  shall be given to anyone
other  than the  Secured  Party,  except by proper  endorsement  affixed to such
policy and  approved  by the  Secured  Party.  In the event of loss or  physical
damage to the Personal Property,  the Debtor shall give immediate notice thereof
by mail to the Secured  Party,  and the Secured  Party may make proof of loss if
the same is not made promptly by the Debtor. In the event of foreclosure of this
Security  Agreement,  or  other  transfer  of  title  to the  Collateral  in the
extinguishment of the indebtedness secured hereby, all right, title and interest
of the Debtor in and to any  insurance  policies then in force shall pass to the
purchaser  or the  grantee.  All  such  policies  or  other  contracts  for such
insurance issued by the respective insurers shall, to the extent obtainable,  be
without  contribution and contain an agreement by the insurer that the policy or
other  contract  shall not be cancelled or materially  changed  without at least
thirty (30) days', prior written notice to the Secured Party.

     10. No Violation of Forfeiture  Laws. The Debtor  warrants and covenants as
follows:

         a.  The  Debtor  will  not  violate  any  federal,   state,   or  other
governmental law, including but not limited to 18 U.S.C. ss.1956(a)(3), that may
in any way  affect  or  impair  the value of the  Collateral  or the  properties
covered by the security  instruments which are part of the Loan Documents or the
Secured Party's priority therein;

         b. To the best of the Debtor's  knowledge,  there has been no violation
of any federal,  state,  or other law  affecting  or impairing  the value of the
Collateral or the properties covered by the security  instruments which are part
of the Loan Documents; and

         c. The  Debtor  shall make  every  good  faith  effort to  prevent  any
violation of any federal,  state, or other  governmental law,  including but not
limited  to 18 U.S.C.  ss.1956(a)(3),  that may in any way  affect or impair the
value of the  Collateral or the properties  covered by the security  instruments
which are part of the Loan Documents or the Secured Party's priority therein.


                                       -9-

<PAGE>
         In the event that the  Secured  Party has  reasonable  cause to believe
that any portion of the Collateral or any other property or collateral  securing
the Loan might be or become subject to forfeiture  under the foregoing laws, the
Debtor agrees that the Secured Party may, in its sole  discretion,  and addition
to its other remedies  under this  Agreement and at law or in equity,  refuse to
make any further disbursements of Loan proceeds,  of any kind whatsoever,  until
the Secured  Party no longer has any  reasonable  belief that any portion of the
Collateral or any other  property or collateral  securing the Loan is subject to
or may become subject to forfeiture under any of the foregoing laws.

G. MUTUAL COVENANTS. The Debtor and the Secured Party mutually covenant and
agree each with the other as follows:

     1. The Secured  Party Not Obligated to Perform.  Neither the  acceptance of
this  Security  Agreement by the Secured  Party,  nor the exercise of any rights
hereunder by the Secured  Party,  shall be construed in any way as an assumption
by the  Secured  Party of any  obligations,  responsibilities  or  duties of the
Debtor  arising from the  collateral  assigned  hereunder or otherwise  bind the
Secured Party to the performance of any of the terms and provisions contained in
any obligations  respecting the Personal Property, it being expressly understood
that the Secured  Party shall not be obligated to perform,  observe or discharge
any  obligation,  responsibility,  duty, or liability of the Debtor under any of
the  Collateral,  including,  but not limited to,  appearing in or defending any
action, expending any money or incurring any expenses in connection herewith.

     2. Right of the Secured  Party to Defend  Action  Affecting  Security.  The
Secured Party may, at the Debtor's  expense,  appear in and defend any action or
proceeding at law or in equity purporting to affect the Secured Party's security
interest under this Security Agreement.

     3. Right of the Secured Party to Prevent or Remedy  Default.  If the Debtor
shall fail to perform any of the covenants,  conditions and agreements  required
to be performed and observed by the Debtor under the Loan  Documents,  including
this Security Agreement,  or any other instruments secured hereby, or in respect
of the Personal  Property,  the Secured Party (a) may but shall not be obligated
to take action the Secured  Party deems  necessary  or  desirable  to prevent or
remedy any such  default  by the Debtor or  otherwise  to protect  the  security
interest of the Secured Party under this Security Agreement,  and (b) shall have
the absolute and immediate  right to enter in and upon or take possession of the
Property,  Collateral  or any part  thereof  to such  extent and as often as the
Secured Party, in its sole discretion,  deems necessary or desirable in order to
prevent or to cure any such  default by the Debtor,  or otherwise to protect the
security of this  Security  Agreement.  The Secured  Party may advance or expend
such sums of money for the  account of the Debtor,  as the Secured  Party in its
sole discretion deems necessary for any such purpose.

     4. The Secured Party's Expenses. All reasonable advances,  costs, expenses,
charges and attorneys' fees which the Secured Party may make, pay or incur under
any provision of this Security  Agreement for the  protection of its security or
for  the  enforcement  of  any  of  its  rights  hereunder,  or  in  foreclosure
proceedings  commenced  and  subsequently   abandoned,  or  in  any  dispute  or
litigation  in which the  Secured  Party or the  holder  of the Note may  become
involved  by reason of or  arising  out of the Loan  Documents,  including  this
Security Agreement, or any other instrument secured hereby, or the Collateral or
the care and  management of the  Collateral,  shall be paid by the Debtor to the
Secured  Party,  upon  demand,  and shall bear  interest  until paid at the rate
specified  by the Note to be paid in the  event of  default  thereunder,  all of
which obligations shall be additional charges upon the Collateral and be equally
secured hereby.


                                      -10-

<PAGE>



     5. The Secured  Party's  Right of Set-Off.  Upon the happening of any event
entitling  the Secured  Party to pursue any remedy  provided  herein,  or if the
Secured Party shall be served with  garnishee  process in which the Debtor shall
be named as defendant,  whether or not the Debtor shall be in default  hereunder
at the time,  the Secured  Party may,  but shall not be required to, set off any
indebtedness  owing by the Secured Party to the Debtor against any  indebtedness
secured hereby,  without first  resorting to the security  hereunder and without
prejudice to any other  rights or remedies of the Secured  Party or its security
interest herein.

     6. No Waiver. In case the Secured Party shall have proceeded to enforce any
right or remedy hereunder and such proceedings  shall have been  discontinued or
abandoned  for any reason,  then in every such case,  the Debtor and the Secured
Party shall be restored to their  former  positions  and rights  hereunder  with
respect to the  Collateral,  and all rights,  remedies and powers of the Secured
Party shall  continue  as if no such  proceeding  had been taken.  No failure or
delay on the part of the Secured Party in exercising any right,  remedy or power
under this Security  Agreement or in giving or insisting upon strict performance
by the Debtor  hereunder or in giving notice hereunder shall operate as a waiver
of the same or any other  power or right,  and no single or partial  exercise of
any such power or right shall preclude  another or further  exercise  thereof or
the   exercise  of  any  other  such  power  or  right.   The   Secured   Party,
notwithstanding any such failure, shall have the right thereafter to insist upon
the strict  performance by the Debtor of any and all of the terms and provisions
of this Security  Agreement to be performed by the Debtor.  The  collection  and
application of proceeds,  the entering and taking  possession of the Collateral,
and the  exercise  of the  rights of the  Secured  Party  contained  in the Loan
Documents,  including  this  Security  Agreement,  shall  not cure or waive  any
default,  or affect any notice of default,  or invalidate any acts done pursuant
to such notice. No waiver by the Secured Party of any breach or default of or by
any party  hereunder,  shall be deemed to alter or affect  the  Secured  Party's
rights hereunder with respect to any prior or subsequent defaults.

     7.  Remedies.  No right or remedy  herein  reserved to the Secured Party is
intended to be exclusive  of any other right or remedy,  but each and every such
remedy shall be cumulative and is not in lieu of but shall be in addition to any
other rights or remedies given under this Security Agreement. Any and all of the
Secured  Party's  rights and remedies may be exercised  from time to time and as
often as such exercise is deemed necessary or desirable by the Secured Party.

     8.  Right of the  Secured  Party to  Extend  Time of  Payment,  Substitute,
Release Security, etc. Without affecting the liability of any person,  including
the Debtor,  for the payment of any indebtedness  secured hereby, or the lien of
this Security  Agreement on the Collateral,  or the remainder  thereof,  for the
full amount of any indebtedness unpaid, the Secured Party may from time to time,
without  notice or without  affecting  or impairing  any of the Secured  Party's
rights under this Security Agreement:

         (a) release  any  person  liable  for  the  payment  of  any  of  the
indebtedness,

         (b) extend the time or  otherwise  alter the terms of payment of any of
the indebtedness or accept a renewal Note or Notes to evidence such an extension
or alteration,

         (c) accept  payments or prepayments of principal  without  reducing the
aggregate amount secured by this Agreement,  and make subsequent advances to the
Debtor up to the amount described herein;

         (d) accept additional security therefor of any kind, including (but not
limited to) deeds of trust or mortgages,


                                      -11-

<PAGE>
         (e) alter,  substitute  or  release  from any security interest or lien
held by the Secured Party any property securing the indebtedness,

         (f) resort  for  the  payment of the indebtedness secured hereby to its
several securities therefor in such order and manner as it may deem fit,

         (g) join in granting any easement  or creating any restriction thereon,
or

         (h) join in any extension,  subordination or other agreement  affecting
this Security Agreement or the lien or charge thereof.

H.  MISCELLANEOUS

     1. Terms  Commercially  Reasonable.  The terms of this  Security  Agreement
shall be deemed  commercially  reasonable  within  the  meaning  of the  Uniform
Commercial Code.

     2.  Definitions.  The  terms  "advances",  "costs",  and  "expenses"  shall
include,  but  shall not be  limited  to  reasonable  attorneys'  fees  whenever
incurred. The terms "indebtedness" and "obligations" shall mean and include, but
shall not be limited  to,  all  claims,  demands,  obligations  and  liabilities
whatsoever,  however arising,  whether owing by the Debtor  individually or as a
joint  venturer,  or  jointly or in common  with any other  party,  and  whether
absolute or contingent,  and whether owing by the Debtor as principal  debtor or
as accommodation maker or as endorser, liquidated or unliquidated,  and whenever
contracted, accrued or payable. In this Security Agreement, whenever the context
so requires, the neuter gender includes the masculine and feminine, and singular
number includes the plural and vice versa.

     3. Paragraph Headings.  The headings of paragraphs herein are inserted only
for  convenience  and  shall in no way  define,  describe  or limit the scope or
intent of any provisions of this Security Agreement.

     4. Change, Amendment, etc. No change, amendment, modification, cancellation
or discharge or any provision of this Security  Agreement  shall be valid unless
consented to in writing by the Secured Party.

     5. Assignment of Secured Party's Interest. The Secured Party shall have the
right to assign its interest in this Security Agreement to any subsequent holder
of the Note.

     6. Applicable Laws; Severability. This Security Agreement shall be governed
by and shall be construed and interpreted  under and pursuant to the laws of the
State of Hawaii.  If any  provision  of this  Security  Agreement  is held to be
invalid or unenforceable, the validity or enforceability of the other provisions
of this Security Agreement shall remain unaffected.

     7. Terms and Conditions of this Security  Agreement  Supplement  Other Loan
Documents. The terms and conditions of this Security Agreement applicable to the
Debtor and the  covenants,  representations  and  warranties of the Debtor under
this Security  Agreement  shall not be deemed to supersede,  amend or modify the
obligations  and duties of the Debtor or other parties under the Loan Documents.
The  terms  and  conditions  of  this  Security  Agreement  and  the  covenants,
representations and warranties of the Debtor hereunder merely supplement, and do
not supplant or supersede  provisions of similar effect or subject matter in the
other Loan Documents.


                                      -12-

<PAGE>


     8.  Notices.  All  notices,  demands or  documents  which are  required  or
permitted  to be given or served  hereunder  shall be in writing and  personally
delivered,  or sent by registered or certified  mail addressed to the parties at
their  respective  addresses set forth on page 1 hereof.  Such  addresses may be
changed from time to time by the addressee by serving notice as provided  above.
Service of such notice or demand  shall be deemed  complete  upon the earlier of
the date of actual delivery or the third day after the date of mailing if mailed
in Hawaii.

     9. Parties in Interest.  As and when used  herein,  the terms  "Debtor" and
"Secured  Party"  shall  mean and  include  the  Debtor  and the  Secured  Party
above-named and their respective heirs,  personal  representatives,  successors,
successors-in-trust,  and assigns, and all covenants and agreements herein shall
be binding  upon and inure to the benefit of the Debtor and the  Secured  Party,
and   their   respective   heirs,    personal    representatives,    successors,
successors-in-trust, and assigns.

     10.  Counterparts.  This Security  Agreement may be executed in two or more
counterparts,  each of which shall be deemed to be an original, but all of which
shall  constitute  one and the  same  instrument,  and in  making  proof of this
Security  Agreement,  it shall not be  necessary  to produce or account for more
than one such counterpart.

         IN WITNESS WHEREOF,  the parties hereto have executed these presents on
the day and year first above written.


                              CYANOTECH CORPORATION


                              By /s/Gerald Cysewski
                                 ------------------
                                 Gerald Cysewski
                                 President and CEO

                              By /s/Ronald P. Scott
                                 ------------------
                                 Ronald P. Scott
                                 Executive Vice President & CFO

                                 "Debtor"



                                      -13-