March 30, 1998



HAND DELIVERY

E. Laurence Gay, Esq.
Goodsill Anderson Quinn & Stifel
1800 Alii Place
1099 Alakea Street
Honolulu, Hawaii 96813

                  Re:      Workout/Suspension Agreement - Kiewit Pacific Co.
                           and Cyanotech Corporation

Dear Mr. Gay:

                  I am writing to  memorialize  the key terms and  conditions of
the  Workout/Suspension  Agreement  negotiated by and between Kiewit Pacific Co.
"Kiewit" and Cyanotech Corporation "Cyanotech"  (collectively referred to as the
"Parties") on Friday, March 13, 1998.

                  A.  The  Parties agree that the amount presently due and owing
on the Construction  Contract  dated April 10, 1997 between Kiewit and Cyanotech
is $975,000.

                  B.  Cyanotech  agrees  to  execute  a  promissory  note in the
principal amount of $975,000 in favor of Kiewit. The Note shall bear Interest at
the  rate of  Prime  plus 2% as set  forth in  article  7.2 of the  Construction
Contract (AIA A-101).  The Note shall contain customary terms and conditions for
financing of this nature  including but not limited to  providing:  for costs of
collection  including  attorney fees, that upon default the entire amount is due
and owing,  and for late fees.  Interest  under the Note shall begin to run from
January 1, 1998.

                  C.  Payments under the Note shall be as follows:

                      1.      First payment shall be made no later than April 1,
                              1998 and shall be a principal and interest payment
                              in the amount of $150,000.
<PAGE>
E. Laurence Gay, Esq.
March 30, 1998
Page 2

                      2.      Second payment shall be made no later than June 1,
                              1998 and shall be a principal and interest payment
                              in the amount of $100,000.

                      3.      The  third  through  eight  payments shall each be
                              made  on  the  first  business  day  of  the month
                              starting   July   1,   1998  and  running  through
                              December  1,  1998.   These   payments  shall   be
                              principal and interest  payments in the amount of
                              $100,000.

                      4.      The  final  payment shall  be made on December 31,
                              1998   and  shall  be  a  principal  and  interest
                              payment in such  amount  as  to completely pay off
                              all remaining amounts due under the Note.

                  D.  There is no penalty for early repayment of the Note.

                  E.  In the event Cyanotech obtains new funding by way of debt,
equity or any other form of financing,  the Note shall be immediately prepaid to
the extent of such funding or paid off in its entirety,  if the funding  exceeds
the balance on the Note.

                  F.  No later than  April 1, 1998,  Cyanotech  shall  execute a
security  agreement  and  UCC 1  granting  to  Kiewit  a  security  interest  in
Cyanotech's inventory,  equipment, accounts receivable,  furniture and fixtures,
stockpiled  construction  material  (including but not limited to any stockpiled
rock), and any proceeds thereof and after acquired good.

                  G.  Kiewit agrees to suspend work on the Construction Contract
until December  31,1998.  If Kiewit is not authorized to re-start work under the
Construction  Contract to begin in or before January 1, 1999 in a reasonable and
customary  manner in accordance  with the terms of the contract and at a minimum
billable rate of $150,000/mo, then the contract shall be considered to have been
terminated  by Cyanotech  and each party shall retain all rights with respect to
the termination of the contract.

                  H.  The  Parties  agree to meet on or before November 30, 1998
to discuss  the  possibility  of  an  additional  period  of  suspension  of the
Construction Contract.  However,  there is no obligation to extend the period of
suspension.

<PAGE>
E. Laurence Gay, Esq.
March 30, 1998
Page 3

                  I.  Cyanotech  shall  provide such  financial  information  as
reasonably requested by Kiewit, including quarterly financial statements,  and a
copy of the State of Hawaii  Facilities  Lease.  In the event any payment is not
made as required under this agreement and the promissory note referenced herein,
Cyanotech  shall  immediately  provide to Kiewit a copy of its customer list and
its equipment vendor lists. Kiewit shall keep this information confidential.

                  J.  The Parties to execute a suspension agreement.

                  K.  Unless otherwise specifically modified herein,  all  other
terms of the Construction Contract shall remain in full force and effect.

                  It is my understanding from our phone  conversations that this
is agreeable to your client.  Please have your client  execute  where  indicated
below to bind  Cyanotech to the terms and conditions of this  agreement.  I will
forward  the  drafts  of the  note,  security  agreement,  UCC 1 and  suspension
agreement to you for your review shortly.  Tomorrow  morning I will also provide
you with the information necessary to transfer the funds to Kiewit by Wire.


                                                      Very truly yours,
                                                      /s/CHARLES W. GALL
                                                      -------------------------
                                                         CHARLES W. GALL
                                                                 for
                                                       KOBAYASHI, SUGITA & GODA

cc:      Lance Wilhelm
         Dave Beaudoin, Esq.


Execution binds Cyanotech, Inc.
to the Terms and Conditions
Set Forth Herein Above

Cyanotech, Inc.

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