TERM LOAN AGREEMENT


        THIS TERM LOAN AGREEMENT,  is made, entered into and effective as of the
_____  day of  April,  2000,  by and among  CYANOTECH  CORPORATION  (hereinafter
referred to as the  "Borrower"),  and B & I LENDING,  LLC,  having its principal
offices at 3353 Peachtree Road, North Tower, Suite 1130, Atlanta,  Georgia 30326
(the "Lender").

                              W I T N E S S E T H:
                              - - - - - - - - - -


        WHEREAS,  Borrower  has applied to Lender for  financing  of the type or
types more particularly described hereinbelow; and

        WHEREAS, Lender is willing to extend financing to Borrower in accordance
with the terms hereof upon the execution of this Agreement by Borrower, provided
that  Borrower  is in  compliance with all of the terms and provisions  of  this
Agreement  and  has  fulfilled all conditions precedent to  Lender's obligations
herein contained;

        NOW,  THEREFORE,  in consideration of the sum of $100.00,  the foregoing
premises  and for other good and valuable  consideration,  the  sufficiency  and
receipt of all of which are  acknowledged  by Borrower,  and Lender and Borrower
agree as follows:

                                    ARTICLE I

                        DEFINITIONS, TERMS AND REFERENCES

        1.1.    CERTAIN  DEFINITIONS.   In  addition  to  such  other  terms  as
elsewhere defined  herein,  as  used  in this Agreement and in any exhibits, the
following terms  shall have the  following meanings, unless the context requires
otherwise:

TERM_AGR.DOC

<PAGE>

        "ACCOUNTS  RECEIVABLE  COLLATERAL" shall mean all rights of the Borrower
and of Nutrex, Inc., a Hawaii corporation, which is a wholly owned subsidiary of
the Borrower ("Nutrex") to payment for goods sold or leased, or to be sold or to
be leased, or for services rendered, howsoever evidenced or incurred, including,
without  limitation,  all  accounts,  instruments,  chattel  paper  and  general
intangibles,  all tax refunds and tax refund claims, all returned or repossessed
goods and all books, records, computer tapes, programs, and ledger books arising
therefrom  or  relating  thereto,  and as  further  described  in  the  Security
Instruments, whether now owned or hereafter acquired or arising.

        "AGREEMENT"  shall  mean  this  Term  Loan  Agreement,   as  amended  or
supplemented from time to time.

        "BANKRUPTCY  CODE"  shall mean Title 11 of the United  States  Code,  as
amended from time to time.

        "BORROWING  BASE  CERTIFICATE"  shall mean a Borrowing Base  Certificate
acceptable  to the Lender in form and content and  consistent  with the terms of
Section 10.37.

        "BORROWER" shall mean CYANOTECH CORPORATION, a corporation organized and
existing under the laws of the State of Nevada, and their respective  successors
and permitted assigns.

        "BUSINESS  DAY" shall mean a day on which Lender is open for the conduct
of banking  business at its office located at 3353 Peachtree Road,  North Tower,
Suite 1130, Atlanta, Georgia 30326.

        "CLOSING  DATE" shall mean the date of the  execution of this  Agreement
and the date on which the Term Loan is made pursuant hereto.

                                       -2-

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        "COLLATERAL" shall mean the Accounts  Receivable  Collateral,  Inventory
Collateral,  Equipment Collateral,  Fixtures Collateral, Property Collateral and
Maintenance  Reserve Account  Collateral all defined herein,  and all collateral
described in the Security Instruments, and in which Lender has, or is to have, a
security interest pursuant hereto, as security for payment of the Term Note.

        "COLLATERAL   LOCATIONS"  shall  mean  those  locations  set  forth  and
described on Exhibit "B" attached hereto.

        "DEBT SERVICE  COVERAGE"  shall mean annual  earnings  before  interest,
taxes,  depreciation  and  amortization  divided by all  principal  and interest
payments owed in one year.

        "DEFAULT  CONDITION" shall mean the occurrence of any event which, after
satisfaction  of any  requirement for the giving of notice or the lapse of time,
or both, would become an Event of Default.

        "DEFAULT  RATE"  shall mean that  interest  rate per annum equal to five
percent (5%) plus the stated  interest rate  effective  under the Term Note from
time to time.

        "EQUIPMENT  COLLATERAL"  shall mean all  equipment  and machinery of the
Borrower, whether now owned or hereafter acquired,  together with all furniture,
furnishings,  improvements, equipment, tools and personal property of every kind
of the Borrower, together with all accessories, parts, components,  attachments,
repairs,  replacements,   modifications,   renewals,  additions,   improvements,
upgrades and accessions of, to or upon such items of equipment and/or machinery,
and as further described in the Security Instruments.

        "EVENT OF DEFAULT" shall mean any of the events or conditions  described
in Article XII,  provided that any  requirement  for the giving of notice or the
lapse of time, or both, has been satisfied.

                                       -3-

<PAGE>

        "EXECUTIVE OFFICE" shall mean the offices of Borrower located at 73-4460
Queen  Kaahumanu  Highway,  Suite 102,  Kailua-Kona,  Hawaii 96740  ("Borrower's
Address").

        "FACILITY"  shall mean all of the real  property  and  improvements  now
existing or  hereafter  constructed  on those  tracts of land more  particularly
described in Exhibit "A",  upon which  Borrower  operates the business and which
are used as collateral for this loan wherever such may be located.

        "FINANCIAL STATEMENTS" shall mean the consolidated audited balance sheet
and  statement  of change in  financial  position  of  Borrower  and the  income
statements of Borrower.

        "FISCAL YEAR" shall mean the fiscal year of Borrower, which shall be the
twelve (12) month period  ending March 31 in each year,  or such other period as
the Borrower may  designate  and Lender may approve in writing.  Fiscal  quarter
shall mean the corresponding fiscal quarters within such Fiscal Year.

        "FIXTURES   COLLATERAL"   shall  mean  all  buildings,   structures  and
improvements of every nature whatsoever now or hereafter situated on the Land as
described  in  Exhibit  "A" (as  such  term  is  hereinafter  defined),  and all
fixtures,  machinery,  building  materials,  appliances,  and  equipment  of the
Borrower of every nature now or hereafter  located on or upon, or intended to be
used  in  connection  with,  the  Land  as  described  in  Exhibit  "A"  or  the
improvements  thereon,  including,  but not by way of limitation,  those for the
purposes of operating the Facility;  supplying or distributing heating, cooling,
electricity, gas, water, air and light; and all related machinery and equipment;
all  plumbing;  and all like  personal  property  and fixtures of every kind and
character now or at any time hereafter  located in or upon the Land as described
in Exhibit "A" or the  improvements  thereon,  or which may now or  hereafter be
used or obtained in connection therewith,  including all extensions,  additions,
improvements,  betterments,  after-acquired property, renewals, replacements and


                                       -4-

<PAGE>

substitutions,  or proceeds from  a permitted sale  or any of the foregoing, and
all the right,  title and interest of Borrower in any such fixtures,  machinery,
equipment,  appliances and personal  property subject to or covered by any prior
security agreement, conditional sales contract, chattel mortgage or similar lien
or claim, together with the benefit of any deposits or payments now or hereafter
made by Borrower or on behalf of Borrower,  or any  improvements  thereon or any
part thereof or are now or hereafter acquired by Borrower; and all equipment and
fixtures  constituting  proceeds  acquired  with  cash  proceeds  of  any of the
property described herein, and all other interest of every kind and character in
all of the real,  personal,  and mixed properties described herein that Borrower
may now own or at any time hereafter  acquire,  all of which are hereby declared
and shall be deemed to be fixtures  and  accessions  to the Land as described in
Exhibit "A", as between the parties hereto and all persons  claiming by, through
or under them, as further described in the Security Instruments.

        "FUNDING" shall mean the act of Lender  disbursing  money to Borrower or
for the benefit of Borrower  under and  pursuant to the terms of this  Agreement
and Term Note.

        "GAAP"  means,  as in  effect  from  time to  time,  generally  accepted
accounting principles consistently applied.

        "GUARANTY  FEE" shall mean a fee payable to the RD at the Closing in the
amount of $56,000.00.

        "INDEBTEDNESS"  means  any (i)  obligations  for  borrowed  money,  (ii)
obligations  whether or not  assumed,  secured  by Liens or  payable  out of the
proceeds or  production  from property now or hereafter  owned or acquired,  and
(iii) the amount of any other obligation (including  obligations under financing
leases)  which  would be shown as a  liability  on a balance  sheet  prepared in
accordance with GAAP.


                                       -5-

<PAGE>

        "INVENTORY  COLLATERAL" shall mean all inventory of Borrower and Nutrex,
whether now owned or hereafter acquired,  located in the Facility,  on the Land,
or wherever located,  including,  without limitation, all goods of Borrower held
for sale or lease or furnished or to be  furnished  under  contracts of service,
all goods held for  display  or  demonstration,  goods on lease or  consignment,
returned and repossessed  goods, all raw materials,  work-in-progress,  finished
goods and supplies  used or consumed in Borrower's  business,  together with all
returns,   repossessions,   substitutions,   replacements,   parts,   additions,
accessions and all documents,  documents of title, dock warrants, dock receipts,
warehouse  receipts,  bills of lading or orders, for the delivery of all, or any
portion, of the foregoing, and as further described in the Security Instruments.

        "LAND" shall mean all those certain  tracts,  pieces and parcels of land
described on Exhibit "A" attached hereto.

        "MORTGAGE"  shall mean that certain  leasehold  Real Property  Mortgage;
Security  Agreement;  Assignment of Rents; and Financing  Statement of even date
herewith from Borrower in favor of or for the benefit of Lender.

        "LENDER"  shall mean B & I LENDING,  LLC  having  its  principal  office
located at 3353 Peachtree Road, North Tower, Suite 1130, Atlanta, Georgia 30326,
and its successors and assigns.

        "LIABILITIES"  shall have the meaning given in accordance with generally
accepted accounting principles consistently applied.

        "LIEN" shall mean any voluntary or involuntary mortgage,  security deed,
deed of trust, lien,  pledge,  assignment,  security  interest,  title retention
agreement, financing lease, levy, execution,  encumbrance of any kind, including
those  contemplated  by or  permitted  in  this  Agreement  and the  other  Loan
Documents.

                                       -6-

<PAGE>

        "LOAN  DOCUMENTS"  shall mean,  collectively,  this Agreement,  the Term
Note,  any financing  statements,  deeds to secure debt,  or mortgages  covering
portions of the Collateral,  security agreement, guaranty agreement, and any and
all other documents,  instruments,  certificates and agreements  executed and/or
delivered by Borrower in connection  herewith,  or any one,  more, or all of the
foregoing, as the context shall require.

        "LOAN  OBLIGATIONS"  shall  mean  all  advances,   debts,   liabilities,
obligations,  covenants and duties owing,  arising, due or payable from Borrower
to Lender as it  relates  to this Term Loan of any kind or  nature,  present  or
future,  whether or not  evidenced  by any note or term note,  guaranty or other
instrument,  whether arising under this Agreement or under any of the other Loan
Documents,   and  whether  direct  or  indirect  (including  those  acquired  by
assignment), absolute or contingent, primary or secondary, due or to become due,
now  existing or  hereafter  arising and however  acquired.  The term  includes,
without limitation,  all interest,  charges,  expenses, fees, attorneys fees and
all other sums  chargeable to Borrower  under this Agreement or any of the other
Loan Documents.

        "MAINTENANCE  RESERVE  ACCOUNT"  shall mean that account with the Lender
holding  $500,000.00  from Borrower's  proceeds,  which shall be funded from the
loan proceeds allocated for working capital, and more particularly  described in
that Assignment and Pledge of Maintenance Reserve Account of even date herewith,
which  funds may be used by Lender in its sole  discretion  to cover  delinquent
loan payments and other contingencies, and which must be replenished by Borrower
upon any such withdrawal such that a minimum of $500,000.00 shall be held in the
Maintenance  Reserve  Account  at all times  during  the term of the Term  Loan.

                                       -7-

<PAGE>



        "PERMITTED ENCUMBRANCES" shall mean those security interests,  liens and
encumbrances,  if any, set forth and  described on Exhibit "C" attached  hereto,
pertaining to the type of Collateral involved, as shown thereon.

        "PERSON"  means any person,  firm,  corporation,  partnership,  trust or
other entity.

        "PROPERTY"  shall mean the real estate located in  Kailua-Kona,  Hawaii,
more particularly described in Exhibit "A" attached hereto.

        "PROPERTY  COLLATERAL"  shall mean the Land and all of the  interest  of
Borrower in all easements, rights-of-way, licenses, operating agreements, strips
and gores of land,  vaults,  streets,  ways,  alleys,  passages,  sewer  rights,
waters, water courses,  water rights and powers, oil and gas and other minerals,
tobacco poundage allotments and all increases thereto,  flowers,  shrubs,  fresh
inventory crops,  trees, timber and other emblements now or hereafter located on
the  Land or under or above  the  same or any part or  parcel  thereof,  and all
estates,   rights,  titles,   interests,   privileges,   liberties,   tenements,
hereditament  and  appurtenances,   reversion  and  reversions,   remainder  and
remainders,  whatsoever,  in any way belonging,  relating or appertaining to the
Land or any part thereof,  or that hereafter shall in any way belong,  relate or
be appurtenant thereto, whether now owned or hereafter acquired by Borrower, and
as further described in the Security Instruments.

        "RD" shall mean the Rural  Development,  an agency of the United  States
Department   of   Agriculture,   and  any   successor   department,   agency  or
instrumentality  authorized to administer the Business and Industrial Guaranteed
Loan Program.

        "RD  Guarantee"  shall mean the Loan Note  Guarantee  backed by the full
faith and credit of the United States  provided by RD of a specified  percentage
of the outstanding amount of the Loan pursuant to the RD Guaranty Commitment.

                                       -8-

<PAGE>

        "RD GUARANTY COMMITMENT" shall mean that certain Conditional  Commitment
for  Guarantee  issued by the RD on April  ___,  2000,  being  known as Case No.
61-005-0911206026, a copy of which is attached hereto as Exhibit "M".

        "SECURITY  INSTRUMENTS"  shall  include,  but  not be  limited  to,  the
following security documents executed by Borrower to Lender, each being dated of
even date  herewith,  as  security  for the Term  Loan:  the  Mortgage;  Uniform
Commercial Code Financing  Statements;  Security  Agreement;  and Assignment and
Pledge of Maintenance  Reserve Account;  and the Security  Agreement executed by
Nutrex.

        "SOFT COSTS" shall mean all costs,  expenses and fees incurred by Lender
or Borrower in preparing and  documenting  this  Agreement and all documents and
instruments  related  thereto,  together  with the Lender  Origination  Fee, the
Guaranty  Fee and all other  loan  related  fees and  costs,  including  but not
limited  to  filing  and  recording   fees,   costs  of   appraisals,   surveys,
environmental studies or reports, insurance and attorneys fees.

        "TERM LOAN" shall mean the THREE MILLION FIVE HUNDRED  THOUSAND & NO/100
DOLLARS  ($3,500,000.00) term loan made by Lender to Borrower which is evidenced
by the  Term  Note  described  immediately  hereafter  and as  pursuant  to this
Agreement.

        "TERM  NOTE"  shall  mean those two (2)  certain  term notes each in the
amount of  $1,400,000.00  and that one (1)  certain  term note in the  amount of
$700,000.00  all of even date  herewith  from  Borrower  in favor of the  Lender
(hereinafter   collectively   referred  to  as  "Term  Note"),   as  amended  or
supplemented   from  time  to  time,  in  the  aggregate   principal  amount  of
$3,500,000.00,  together with any renewals or extensions thereof, in whole or in
part. The Term Note shall be  substantially  in the form of Exhibit "D" attached
hereto.  Repayment  schedule as to the Term Note is  attached  hereto as Exhibit
"L".

                                       -9-

<PAGE>

        "UCC" shall mean the  Uniform  Commercial  Code - Secured  Transactions,
Hawaii Revised  Statutes,  chapter 490:9, as adopted in Hawaii,  as in effect on
the date hereof, and as hereinafter amended.

        1.2.    USE  OF  DEFINED TERMS.  All terms defined in this Agreement and
the  exhibits  shall  have the same defined meanings when used in any other Loan
Document, unless the context shall require otherwise.

        1.3.    ACCOUNTING TERMS. All accounting terms not specifically  defined
herein  shall  have  the  meanings  generally  attributed  to  such  terms under
generally accepted accounting principles consistently applied.

        1.4.    UCC TERMS.  The terms "instruments", "general  intangibles"  and
"equipment",  as and  when  used in the  Loan  Documents,  shall  have  the same
meanings given such terms under the UCC.

        1.5.    TERMINOLOGY.  All  personal  pronouns  used  in  this Agreement,
whether  used in  the  masculine,  feminine or neuter gender,  shall include all
other  genders;  the singular  shall include  the plural,  and the  plural shall
include the singular.  Titles of articles and sections in this Agreement are for
convenience  only,  and  neither  limit  nor  amplify  the  provisions  of  this
Agreement,  and  all  references  in  this  Agreement  to  articles,   sections,
subsections,  paragraphs, clauses,  subclauses or  exhibits  shall  refer to the
corresponding  article, section,  subsection,  paragraph,  clause, subclause of,
or exhibit attached to, this Agreement, unless specific reference is made to the
articles,  sections or other subdivisions divisions of,  or exhibit to,  another
document or instrument.

        1.6.    EXHIBITS.  All  exhibits attached hereto are by reference made a
part hereof.

                                      -10-

<PAGE>

                                   ARTICLE II

                                    THE LOAN

        2.1.    THE LOAN.  Borrower has agreed to borrow from Lender, and Lender
has agreed to make the Loan to Borrower,  subject to Borrower's  compliance with
and  observance  of  the terms,  conditions,  covenants and  provisions of  this
Agreement, the Term Note, and the other Loan Documents, and  Borrower  has  made
the covenants, representations, and warranties herein and  therein as a material
inducement to Lender to make the Loan.

        2.2.    TERM AND INTEREST RATE.  The Term Loan shall be evidenced by the
Note described in Exhibit "D" attached hereto.  The Term Note shall be amortized
over a ten (10) year term.  The rate of  interest  as set forth in the Term Note
cannot be changed  more often  than  quarterly,  and must rise and fall with the
selected  prime rate,  all as more  particularly  set forth in Exhibit  "D". The
Lender shall  amortize the principal over the term of the Term Loan as set forth
in Exhibit  "D",  and make an  adjustment  of payment  installments  only by the
amount of rise or fall  resulting  from the interest  rate change.  The interest
rate on the loan  evidenced  by the Term Note  will be the  Prime  Rate plus one
(1.00%) per annum,  adjustable  calendar  quarterly.  The Prime Rate will be the
lowest New York prime, as quoted in the Wall Street  Journal.  Interest shall be
calculated on the actual basis of a year of 360 days.

        2.3.    SECURITY FOR THE LOAN.  The Loan will be secured by the Security
Instruments.

        2.4.    REPAYMENT OF LOAN. Each payment of the Loan Obligations shall be
paid  directly to the Lender in lawful money of the United  States of America at
the Lender's main office  located in 3353  Peachtree  Road,  North Tower,  Suite
1130, Atlanta,  Georgia 30326, or such other place as the Lender shall designate
in writing  to the  Borrower.  Each such  payment  shall be paid in  immediately
available funds by 2:00 p.m., Atlanta, Georgia time, on the date such payment is
due, except if such
                                      -11-

<PAGE>
date is not a Business Day such payment shall then be due on the first  Business
Day  after  such date,  but  interest  shall  continue to accrue  until the date
payment  is received.  Any  payment received  after 2:00 p.m., Eastern  Standard
time,  shall be  deemed to  have  been  received on  the  immediately  following
Business Day for all purposes,  including,  without  limitation,  the accrual of
interest on principal.  The  Borrower,  at the  request of Lender,  shall  allow
Lender to  automatically debit a  designated account of Borrower for the purpose
of making monthly loan payments.

                                  ARTICLE III

                              CONDITIONS PRECEDENT

        Unless  waived in  writing  by Lender at or prior to the  execution  and
delivery of this  Agreement,  the  conditions  set forth in Sections 3.1 through
3.17 shall constitute express  conditions  precedent to any obligation of Lender
hereunder.

        3.1.    COMPLIANCE.  Borrower shall have performed and complied with all
terms and conditions required by this Agreement to be performed or complied with
by it prior to or at the date  of  any Funding by Lender and shall have executed
and delivered to Lender the Term Note.

        3.2.    BOARD RESOLUTIONS AND INCUMBENCY CERTIFICATE.  Lender shall have
received  certificates from the President or Secretary (or Assistant  Secretary)
of the Borrower and of Nutrex certifying to Lender that appropriate consents and
resolutions  have been  entered  into by their  respective  Boards of  Directors
incident hereto and that the officers of the corporation whose signatures appear
hereinbelow,  on the other Loan Documents,  and on any and all other  documents,
instruments  and agreements  executed in connection  herewith,  and the officers
executing the same, are duly  authorized by Borrower or Nutrex,  as the case may
be, and by the Boards of Directors of such  corporations  to execute and deliver
this Agreement,  the other Loan Documents and such other documents,  instruments
and  agreements,  and  to  bind  such corporation  accordingly  thereby,  all in

                                      -12-

<PAGE>
form and substance substantially  similar to those board  resolutions  set forth
and described on Exhibit "E" attached hereto.

        3.3.    CERTIFICATE  OF  GOOD  STANDING.  Lender  shall  have received a
certificate  of  good  standing with respect to the Borrower and Nutrex from the
Secretary of State of the state of  incorporation within thirty (30) days of the
date hereof.

        3.4.    ARTICLES OF INCORPORATION/BY-LAWS.  Lender  shall have  received
copies of the articles of  incorporation  and by-laws of the Borrower and Nutrex
as in effect on the date  hereof,  certified  as to truth  and  accuracy  by the
corporate secretary of the Borrower.

        3.5.    LOAN  DOCUMENTS  AND  RD GUARANTY COMMITMENT.  Lender shall have
received  all  the  other  Loan  Documents  and  the RD Guaranty Commitment duly
executed in form and substance acceptable to Lender.

        3.6.    INSURANCE CERTIFICATE.  Lender shall have received a certificate
in respect of all insurance required hereunder, in form and substance acceptable
to Lender.

        3.7.    FINANCING  STATEMENTS.    Lender  shall  have  received  Uniform
Commercial Code Financing Statements in respect of the Collateral, duly executed
by the owner thereof and in form and substance acceptable to Lender.

        3.8.    OPINION  OF  COUNSEl.   Lender shall have received an opinion of
counsel  satisfactory  to  it  from  independent  legal  counsel  to Borrower in
substantially the form of Exhibit "F" attached hereto.

        3.9.    OPERATION AND MANAGEMENT OF THE FACILITY.  The Facility shall be
operated  and managed by the  Borrower.  The  operation  and  management  of the
Facility  shall not be  transferred  to any other  party;  the  transfer of such
responsibility  in violation of the foregoing in this sentence shall  constitute
an Event of Default,  the same as if such event had been described and contained
in

                                      -13-

<PAGE>
Article XII of this Agreement.

        3.10.   LICENSES  AND  PERMITS.  Borrower  shall have received and shall
provide  evidence  of  same  to Lender  that Borrower has obtained all licenses,
permits,  certificates  and other governmental permission to own and operate the
Facility.

        3.11.   APPRAISALS.  Lender  shall  have  received  an  appraisal by  an
appraiser approved by Lender for the Facility and Collateral or portions thereof
as requested by Lender in an amount acceptable to the Lender.

        3.12.   RECEIPT OF EVIDENCE OF TAX  PAYMENTS. Lender shall have received
evidence,  in  form  and  substance  acceptable  to  Lender,  in the  form of an
affidavit made by Borrower,  that Borrower has paid all federal, state and local
income  taxes,  that all amounts  required to be withheld from  employees'  wage
payments  have  been  withheld  and have been  paid to the  proper  governmental
agency,  and  that no  judgment  or tax lien is in  existence  with  respect  to
Borrower.

        3.13.   TITLE INSURANCE.  Lender shall have received a commitment from a
title insurance  company approved by Lender and authorized to do business in the
State of Hawaii to issue a title  insurance  policy with respect to the Property
Collateral,  and the total amount shall be the  appraised  value of the Property
Collateral,  with no exceptions other than those approved by Lender.  Such title
insurance  commitment  shall recite that Lender shall have a first priority lien
on the Property Collateral.

        3.14.   ZONING,  BUILDING,  SUBDIVISION  CODES  AND  OSHA  REQUIREMENTS.
Lender  shall have received evidence  as requested by Lender with respect to the
Facility that the same is not in violation of any zoning, building, subdivision,
sanitary or Occupational Safety and Health Administration rules, requirements or
laws.

        3.15.   ENVIRONMENTAL MATTERS.  With respect to the Property Collateral,
Lender shall have
                                      -14-

<PAGE>

received  from the Borrower,  the form FmHA 1940-20  Request  for  Environmental
Information as executed by Borrower on February 17, 2000.

        Borrower covenants and agrees that all Property  Collateral or interests
in real  property  pledged as  collateral  security for the Loan are free of any
substantial  amounts of waste or debris,  and are free from any material amounts
of contamination, including:

                (a)     (1)  "Any Hazardous Waste," as defined  by the  Resource
                Conservation   and  Recovery  Act  of  1976  or  any  "Hazardous
                Substance"  as defined in Hawaii law,  both as amended from time
                to time, and regulations promulgated thereunder;

                        (2)  "Any   Hazardous  Substance"   as  defined  by  the
                Comprehensive Environmental Response, Compensation and Liability
                Act of 1989,  as  amended  from  time to time,  and  regulations
                promulgated thereunder;

                        (3)  Any  substance,  the  presence of which on the real
                property is prohibited  by any law similar to those set forth in
                this section; and

                        (4)  Any material which, under federal, state  or  local
                law,  statute,  ordinance or regulation, or court administrative
                order or decree, or private agreement, requires special handling
                in collection, storage, treatment or disposal.

                (b)     Borrower  has not  filed any notice under any federal or
        state law indicating past or present treatment, storage or disposal of a
        hazardous waste,  substance or constituent,  or other substance into the
        environment.  None of the  operations  of  Borrower  is the  subject  of
        federal or state  litigation  or  proceedings,  or of any  investigation
        evaluating whether any remedial action involving a material  expenditure
        is needed to  respond to any  improper  treatment,  storage,  recycling,
        disposal  or  release  into  the  environment of any  hazardous or toxic
        substance,  waste or constituent.  None of the operations of Borrower is
        subject  to any
                                      -15-

<PAGE>

        judicial  or  administrative  proceeding  alleging  the violation of any
        federal,  state or  local environmental,  health or safety  statute,  or
        regulation. Borrower does not transport any hazardous wastes, substances
        or constituents.

                (c)     All    notices,    permits,    licenses    or    similar
        authorizations,  if any,  required to be obtained or filed in connection
        with the operation  or use of any and all Property Collateral pledged as
        collateral security  for the Loan,  including,  without limitation, past
        or  present  treatment,  storage,  disposal  or  release  of a hazardous
        substance  or  solid  waste  into  the  environment,  have  been, to the
        knowledge of the Borrower, duly obtained or filed.

                (d)     Borrower will take and continue to take prompt action to
        remedy all environmental  pollution and  contamination,  hazardous waste
        disposal and other environmental  clean-up problems,  if any, whether or
        not such clean-up  problems have resulted from the order or request of a
        municipal,  state,  federal,  administrative or judicial  authority,  or
        otherwise. Borrower will not violate any applicable municipal ordinance,
        state or federal statute, administrative rule or regulation, or order or
        judgment  of any  court  with  respect  to  environmental  pollution  or
        contamination,  hazardous  waste  disposal  or any  other  environmental
        matter.

                (e)     Borrower will indemnify and hold Lender,  its  officers,
        directors,  employees,  representatives,  agents and affiliates harmless
        against,  and  promptly  pay on  demand or  reimburse  each of them with
        respect to, any and all claims, demands, causes of action, loss, damage,
        liabilities,  costs  and  expenses  of any  and  every  kind  or  nature
        whatsoever  asserted  against or incurred by any of them by reason of or
        arising  out  of or in  any  way  related  to  (i)  the  breach  of  any
        representation  or warranty as set forth regarding  Hazardous  Materials
        Laws (as defined in paragraph  (a) on page 8 of the  Mortgage),  or (ii)
        the failure of Borrower

                                      -16-

<PAGE>
        to perform any obligation  herein required to be  performed  pursuant to
        Hazardous  Materials Laws.  The provisions of this section shall survive
        the final payment of the Loan and the termination of this Agreement, and
        shall  continue  thereafter  in full  force and effect.

                (f)     Notwithstanding  anything contained in this paragraph to
        the  contrary,  any  covenants  of Borrower concerning any environmental
        matter  addressed herein shall  not be applicable to any condition which
        is first created or introduced after a foreclosure,  conveyance or other
        transfer  of  title  of  the  Property  Collateral pledged as collateral
        security for the Loan.

        3.16.   CONTINUING COMPLIANCE. At the time of the Term Loan, there shall
not exist any  event,  condition  or act that  constitutes  an Event of  Default
hereunder or any  condition,  event or act which with  notice,  lapse of time or
both would  constitute  such Event of  Default.  There  would not exist any such
event, condition, or act immediately after the disbursement, were it to be made.

        3.17.   MISCELLANEOUS.  Lender shall have received such other documents,
certificates,  instruments  and  agreements  as  shall  be required hereunder or
provided for herein or as Lender or  Lender's  counsel may reasonably require in
connection herewith.

                                   ARTICLE IV

                                    FINANCING

        4.1.    TERM LOAN.  Lender agrees to make a term loan to Borrower in the
principal  amount  of THREE  MILLION  FIVE  HUNDRED  THOUSAND  & NO/100  DOLLARS
($3,500,000.00),  which shall be repayable with interest in accordance  with the
terms of the Term Note.

        4.2.    USE OF PROCEEDS.   Borrower agrees that the proceeds of the Term
Loan shall be disbursed as follows:

                                      -17-

<PAGE>

                (a)     The approximate sum of $1,697,000.00  shall be disbursed
        at the Closing to refinance Borrower's debt.

                (b)     Approximately $1,643,000.00 shall be  disbursed  at  the
        Closing to Borrower as working  capital,  $500,000.00  of which shall be
        deposited in the Maintenance Reserve Account.

                (c)     Approximately  $160,000.00  shall  be  disbursed  at the
        Closing to pay for Soft Costs.

                                    ARTICLE V

                         SECURITY INTEREST -- COLLATERAL

        5.1.    COLLATERAL.  To  secure the  prompt payment  and performance  to
Lender  of the Loan Obligations,  Borrower  hereby grants to Lender a continuing
security interest in and lien upon all of the following  property and  interests
in property of Borrower, whether now owned or  existing  or  hereafter  created,
acquired or arising and wheresoever located, namely the:

                (a)     Property Collateral;
                (b)     Equipment Collateral;
                (c)     Fixtures Collateral;
                (d)     Inventory Collateral;
                (e)     Accounts Receivable Collateral;
                (f)     Maintenance Reserve Account Collateral
                (g)     All products  and/or  proceeds  of  any  and  all of the
foregoing,  including, without limitation,  insurance proceeds, and Lender shall
record UCC-1  financing  statements  covering such  Collateral in the applicable
recording offices executed by Borrower as requested by Lender.

         5.2.   SECURITY  INSTRUMENTS.  With  respect to the Property Collateral

                                      -18-

<PAGE>


and Fixtures  Collateral  located within  the State  of Hawaii,  Borrower  shall
deliver to Lender at the Closing, a Mortgage in the form as shown on Exhibit "G"
attached hereto, duly executed,  which shall be recorded by Lender in the Bureau
of   Conveyances  of  the  State  of  Hawaii  (the   "Bureau"),   together  with
corresponding UCC financing statements in respect of the Fixtures Collateral.

        With respect to the Accounts Receivable Collateral, Inventory Collateral
and  Equipment  Collateral,  Borrower  shall  deliver to Lender at the Closing a
Security  Agreement  in the form as shown on Exhibit "H" attached  hereto,  duly
executed,  and Lender shall  record UCC-1  financing  statements  covering  such
Collateral in the applicable recording offices.  With respect to the Maintenance
Reserve Collateral, Borrower shall deliver to Lender at the Closing a Assignment
and Pledge of Maintenance  Reserve Account in the form as shown in Exhibit "H-1"
attached  hereto,  duly  executed,  and Lender  shall  record a UCC-1  financing
statement covering such collateral in the applicable recording offices.

                                   ARTICLE VI

                   REPRESENTATIONS, WARRANTIES, AND COVENANTS
                        APPLICABLE TO PROPERTY COLLATERAL

        With respect to the Property  Collateral,  Borrower  hereby  represents,
warrants  and  covenants  to Lender as set forth in Sections  6.1  through  6.6,
inclusive.

        6.1.    SALE  OF  PROPERTY  COLLATERAL.  Borrower  will not sell, lease,
exchange,  or  otherwise  dispose  of any of the Property Collateral without the
prior written consent of Lender.

         6.2.   INSURANCE.  Borrower agrees that it  will  obtain  and  maintain
insurance on the Property  Collateral  with such company and in such amounts and
against such risks as Lender may reasonably request, with loss payable to Lender
as its interests may appear.  Such insurance  shall not be canceled by Borrower,
unless  with the prior  written  consent of  Lender.  Such  insurance


                                      -19-

<PAGE>

policy or  policies  shall contain the  "New York  Standard  Mortgagee  Clause",
stating in effect,  that the interest of Lender shall not be  invalidated by (i)
any  act  or  neglect  of Borrower  (including  arson or a related act); (ii) by
foreclosure or other proceedings relating to the Property  Collateral;  (iii) by
any change in the title or ownership of the property; or (iv) the  occupation of
the  premises  for purposes  more  hazardous  than  permitted by the policy.  In
addition,  if the  Property  Collateral is located within a special flood hazard
area, Borrower will obtain  and  maintain  federal  flood  insurance  (including
mud slide and soil erosion protection) if eligible, in amounts of coverage equal
to  the  lesser  of  (i)  the  outstanding  balance  of the Term Loan;  (ii) the
insurable  value  of  the  property;  or (iii)  the  maximum  limit of  coverage
available.  A  surveyor's  affidavit  evidencing  an  examination of an official
flood map must be delivered to Lender at the Closing if required by Lender.

        In addition,  and as referenced in Section 3.14,  Lender shall receive a
title insurance  policy on the Property  Collateral  naming Lender as insured as
soon as the same shall  issue  after  recordation  of all  Security  Instruments
related  to  the  transactions   contemplated   herein  in  form  and  substance
satisfactory to Lender. Borrower shall pay all premiums and fees related to such
title insurance.

        6.3.    GOOD TITLE; NO EXISTING ENCUMBRANCES. Borrower owns the Property
Collateral  free and clear of any and all  prior  security  interests,  liens or
encumbrances  thereon  other than any Permitted  Encumbrances,  and no financing
statements or other evidence of the grant of a security interest  respecting the
Property Collateral exist on the public records as of the date hereof other than
any evidencing the Permitted Encumbrances.

        6.4.    RIGHT  TO  GRANT  SECURITY  INTEREST;  NO  FURTHER ENCUMBRANCES.
Borrower  has  the right to grant a security interest in the Property Collateral
to  Lender.  Borrower  shall  also  grant  the  Lender at the Closing and at the
beginning  of each  Fiscal Year  until this  Term Loan  has been paid

                                      -20-

<PAGE>

in full, a first lien on all fresh inventory crops.  Borrower will pay all taxes
and other charges against the  Property  Collateral.  Borrower  will not use the
Property Collateral illegally or allow the Property Collateral to be encumbered,
except  for the security  interest in favor of Lender  granted herein and except
for any Permitted Encumbrances.

        6.5.    ENCROACHMENT. The Survey Map dated April 14, 2000 (the "Survey")
prepared by Donald C. McIntosh,  Licensed Professional Land Surveyor,  describes
and shows an encroachment on to a lot adjacent to the Land identified as Lot 9-R
on the Survey.  Borrower  shall,  within  sixty (60) days of the  Closing  Date,
obtain an amendment  of Sublease  K-4  (defined in Exhibit "A" attached  hereto)
that amends Sublease K-4 to include Lot 9-R in the premises  covered by Sublease
K-4, in form and substance reasonably acceptable to Lender.

        6.6.    LOCKBOX AND MONEY MARKET ACCOUNT.  Within ten (10) business days
of  the Closing Date,  Borrower and Lender will establish in the names of Lender
and  Borrower  (1) a bank account (the  "Lockbox")  in  which  customers  of the
Borrower and Nutrex shall send in their payments  for funds due to the  Borrower
and Nutrex, and (2) a money market account, the  opening  balance of which (less
normal  expenses of the business to be paid within ten (10) business days of the
Closing  Date) shall  consist of the portion of the loan  proceeds  disbursed to
Borrower for working  capital,  and into which funds  deposited into the Lockbox
shall  be  transferred;   all  pursuant  to  agreements,  terms  and  conditions
acceptable to Lender and Borrower.

                                   ARTICLE VII

                   REPRESENTATIONS, WARRANTIES, AND COVENANTS
           APPLICABLE TO EQUIPMENT COLLATERAL AND FIXTURES COLLATERAL

        With  respect  to the  Equipment  Collateral  and  Fixtures  Collateral,
Borrower  hereby  represents,  warrants and  covenants to Lender as set forth in
Sections 7.1 through 7.5, inclusive.

                                      -21-

<PAGE>

        7.1.    SALE OF EQUIPMENT COLLATERAL AND FIXTURES COLLATERAL.  Except as
permitted herein and elsewhere in this Agreement, Borrower will not sell, lease,
exchange,  or otherwise dispose of any of the Equipment  Collateral and Fixtures
Collateral without the prior written consent of Lender; provided,  however, that
with notice to but without the necessity of consent of Lender, from time to time
hereafter,  in the ordinary course of business,  Borrower may sell,  exchange or
otherwise  dispose  of  portions  of  its  Equipment   Collateral  and  Fixtures
Collateral which are obsolete,  worn out or unsuitable for continued use, if the
Equipment Collateral and Fixtures Collateral is replaced promptly with equipment
constituting  Equipment Collateral and Fixtures Collateral having a market value
equal to or greater than the  Equipment  Collateral  and Fixtures  Collateral so
disposed of and in which Lender shall obtain and have a first priority  security
interest pursuant hereto.

        7.2.    INSURANCE.  Borrower agrees that it  will  obtain  and  maintain
insurance  on  the  Equipment  Collateral  and  Fixtures  Collateral  with  such
companies  and in such amounts and against  such risks as Lender may  reasonably
request, with loss payable to Lender as its interests may appear. Such insurance
shall not be canceled by  Borrower,  unless  with the prior  written  consent of
Lender.

        7.3.    GOOD  TITLE;   NO  EXISTING  ENCUMBRANCES.   Borrower  owns  the
Equipment Collateral  and  Fixtures  Collateral  free  and  clear  of any  prior
security  interest,  lien or encumbrance,  and no financing  statements or other
evidences  of  the  grant  of  a  security  interest  respecting  the  Equipment
Collateral  and  Fixtures  Collateral exist on the public records as of the date
hereof  other  than  any evidencing the Permitted  Encumbrances,  and other than
financing statements that will be paid off and canceled of record, with proceeds
of this Loan.

        7.4.    RIGHT  TO  GRANT  SECURITY  INTEREST;  NO  FURTHER ENCUMBRANCES.
Borrower has the right to grant a security interest in the Equipment  Collateral
and Fixtures Collateral to Lender. Borrower

                                      -22-

<PAGE>

will  pay  all  taxes  and  other  charges  against the Equipment Collateral and
Fixtures  Collateral,  and will not  use the  Equipment  Collateral and Fixtures
Collateral illegally or allow the same to be encumbered, except for the security
interest  in  favor  of  Lender  granted  herein  and  except for any  Permitted
Encumbrances.  Nothing  herein,  however,  shall prevent  Borrower  from leasing
any  Equipment  required in the operation of the Facilities.

        7.5.    LOCATION.  As of the date hereof, the Equipment  Collateral  and
Fixtures Collateral are located only at the Collateral  Locations,  and Borrower
hereby covenants with Lender not to move any portion of the Equipment Collateral
and Fixtures  Collateral  without at least thirty (30) days prior written notice
to Lender;  provided,  however, that nothing contained herein shall be deemed to
prohibit Borrower, without notice to or the consent of Lender, from transferring
temporarily  (for  periods  not to exceed  thirty  (30) days in any  event)  any
Equipment  Collateral  and Fixtures  Collateral  from a  Collateral  Location to
another  location  at any time or from time to time  hereafter  for the  limited
repairing,  refurbishing or overhauling such equipment in the ordinary course of
business.

                                  ARTICLE VIII

            REPRESENTATIONS, WARRANTIES, AND COVENANTS APPLICABLE TO
             ACCOUNTS RECEIVABLE COLLATERAL AND INVENTORY COLLATERAL

        With respect to the Inventory  Collateral,  Borrower hereby  represents,
warrants  and  covenants  to Lender as set forth in  Section  8.1  through  8.4,
inclusive.

        8.1.    SALE OF ACCOUNTS RECEIVABLE COLLATERAL AND INVENTORY COLLATERAL.
Borrower  will not sell,  lease,  exchange,  or otherwise  dispose of any of the
Accounts  Receivable  Collateral  and  Inventory  Collateral  without  the prior
written consent of Lender,  provided,  however, that Inventory Collateral may be
sold in the ordinary course of Borrower's business.

                                      -23-

<PAGE>

        8.2.    GOOD TITLE; NO EXISTING ENCUMBRANCES. Borrower owns the Accounts
Receivable  Collateral  and  Inventory  Collateral  free and  clear of any prior
security  interest,  lien or encumbrance,  and no financing  statements or other
evidence of the grant of a security interest  respecting the Accounts Receivable
Collateral and Inventory  Collateral  exist on the public records as of the date
hereof other than any evidencing the Permitted Encumbrances.

        8.3.    RIGHT  TO  GRANT  SECURITY  INTEREST;  NO  FURTHER ENCUMBRANCES.
Borrower  has the right to grant  a security interest in the Accounts Receivable
Collateral and Inventory Collateral to Lender.  Borrower will pay all  taxes and
other  charges   against  the  Accounts  Receivable   Collateral  and  Inventory
Collateral, and will not use the Accounts Receivable  Collateral  and  Inventory
Collateral illegally or allow the same to be encumbered, except for the security
interest  in  favor  of  Lender  granted  herein  and  except  for any Permitted
Encumbrances.

        8.4.    LOCATION.  As  of  the  date  hereof,  the  Accounts  Receivable
Collateral  and  Inventory  Collateral  are  located  only  at  the   Collateral
Locations, or within the boundaries of Kailua-Kona, Hawaii, and Borrower  hereby
covenants  with Lender,  except for in the  ordinary course of business,  not to
move any portion of the Accounts Receivable  Collateral and Inventory Collateral
without at least thirty (30) days prior written notice to Lender.  Borrower will
execute and cause any other parties to execute any and all security  agreements,
financing statements,  or  other  agreements  requested  by  Lender  related  to
any  such Collateral and Collateral Locations as reasonably requested by Lender.

                                   ARTICLE IX

                     GENERAL REPRESENTATIONS AND WARRANTIES

        In order to induce Lender to enter into this Agreement,  Borrower hereby
represents  and  warrants to Lender as set forth in Sections  9.1 through  9.19,
inclusive.

                                      -24-

<PAGE>

        9.1.    PRINCIPAL BUSINESS ACTIVITY. Borrower is engaged in the business
of owning and operating a microalgae growing and processing facility.

        9.2.    CORPORATE   EXISTENCE   AND   QUALIFICATION.   The  Borrower  is
organized, validly  existing and in good standing under the laws of the State of
Nevada and authorized to do business in Hawaii.  Borrower's  principal  place of
business, chief  executive  office and office where it keeps  principally all of
its books and records are located at the Executive Office.

        9.3.    CORPORATE POWER AND  AUTHORITY;  VALIDITY  AND  BINDING  EFFECT.
Borrower has the power to make,  deliver and perform  under the Loan  Documents,
and Borrower has the right to borrow hereunder, and all of the foregoing parties
have taken all  necessary  and  appropriate  corporate  action to authorize  the
execution,  delivery  and  performance  of the Loan  Documents.  This  Agreement
constitutes,  and the remainder of Loan  Documents,  when executed and delivered
for value received, will constitute,  the valid obligations of Borrower, legally
binding upon them and  enforceable  against  Borrower in  accordance  with their
respective  terms. The undersigned  officers of Borrower are duly authorized and
empowered to execute, attest and deliver this Agreement and the remainder of the
Loan  Documents for and on behalf of Borrower and to bind  Borrower  accordingly
thereby.

        9.4.    FINANCIAL  STATEMENTS.  The balance sheets and income statements
of Borrower  were submitted  to Lender in connection  herewith,  copies of which
are  attached hereto  as Exhibit "I",  are true and complete  and accurately and
fairly  represent  the  financial  condition  of  the  Borrower,  the results of
operations and the transactions in the  equity  accounts  as of the date and for
the  periods referred to therein, and have been prepared in accordance with GAAP
applied on a consistent basis throughout the  period  involved.   There  are  no
material Liabilities, direct or indirect, fixed or contingent, as of the date of
such Financial Statements that are not reflected therein or in the note thereto.

                                      -25-

<PAGE>

There  has  been  no  material  adverse  change  in  the  financial   condition,
operations,  or prospects of the Borrower  since the date of the latest  balance
sheet  contained in such Financial  Statements.  If, by the time of the Closing,
the  Borrower's  Financial  Statements  are more than ninety (90) days old,  the
Lender may require current Financial Statements, which shall be submitted to the
RD.

        9.5.    PENDING MATTERS.  No  action  or  investigation  is  pending  or
threatened before or by any court or administrative agency which might result in
any material adverse change in the financial condition, operations, or prospects
of  the  Borrower,  nor is the  Borrower  in  violation  of any  agreement,  the
violation of which might  reasonably  be expected to have a  materially  adverse
effect on their  business or assets,  nor is the  Borrower in  violation  of any
order,  judgment,  or  decree  of any  court,  or any  statute  or  governmental
regulation to which such Borrower is subject.

        9.6.    DISCLOSURE.  All information furnished or to be furnished by the
Borrower to the Lender in connection with the Loan or any of the Loan Documents,
is, or will be at the time the same is  furnished,  accurate  and correct in all
material  respects  and  complete  insofar as  completeness  may be necessary to
provide the Lender a true and accurate knowledge of the subject matter. Borrower
has no knowledge  of any  liability of any nature,  whether  accrued,  absolute,
contingent or  otherwise,  which  singularly  or in the  aggregate  could have a
materially  adverse  effect  upon the  economic  condition  of  Borrower  or the
Facility.

        9.7.    TRADE NAMES. The Borrower has not changed its name or been known
by any other name within the last five (5) years.

        9.8.    ERISA.  Borrower is in compliance with all applicable provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").

                                      -26-

<PAGE>

        9.9.    PROCEEDINGS PENDING. There are no proceedings pending or, to the
best  of  the  Borrower's  knowledge,  threatened,  to  acquire  any part of the
Property Collateral by any power of condemnation or eminent domain, or to enjoin
or similarly prevent or restrict the use of the Property or the operation of the
Facility in any manner.

        9.10.   COMPLIANCE  WITH  APPLICABLE LAWS. The Facility and the property
on which it is situated comply with all applicable laws,  ordinances,  rules and
regulations,  including, without limitation, the Americans with Disabilities Act
and  regulations  thereunder,  and all laws,  ordinances,  rules and regulations
relating to zoning,  building  codes,  setback  requirements  and  environmental
matters.

        9.11.   NO MATERIAL LITIGATION.  Except  as  set  forth on  Exhibit  "J"
attached hereto,  there are no proceedings pending or, so far as Borrower knows,
threatened,  before any court or administrative  agency that might materially or
adversely affect the financial condition or operations of Borrower.

        9.12.   NO DEFAULT. Except as set forth in Exhibit "J" attached  hereto,
Borrower  is not in default in the payment of any of its  material  obligations,
and there  exists  no event,  condition  or act  which  constitutes  an Event of
Default as defined herein, and no condition,  event, or act which with notice or
lapse of time would constitute such event of default.

        9.13.   TAXES.  Borrower has filed or caused to be filed all tax returns
required to be filed by it and has paid all taxes shown to be due and payable on
said returns or on any assessments made.

        9.14.   ADVERSE CONTRACTS.  Except as set forth on Exhibit "K"  attached
hereto,  Borrower is not a party to any contract or agreement, or subject to any
charge,  corporate restriction,  judgment,  decree or order which materially and
adversely  affects its businesses,  property,  assets,  operations or condition,
financial or otherwise.

                                      -27-

<PAGE>

        9.15.   INSOLVENCY. After giving effect to the execution and delivery of
the Loan  Documents  and the  making of any  disbursements  under the Term Note,
Borrower will not be  "Insolvent"  within the meaning of such term as defined in
Section 101(26) of the Bankruptcy  Code, or be unable to pay its debts generally
as such debts become due.

        9.16.   TITLE.  Borrower  has  good  and  marketable  title  to  all the
Collateral,  subject  to  no  material  lien  of  any  kind  except as otherwise
disclosed in writing to Lender, and except for the Permitted Encumbrances.

        9.17.   NO  VIOLATIONS.  The  execution,  delivery  and  performance  by
Borrower  of  this  Agreement  and  the  other  Loan  Documents  has  been  duly
authorized by all  necessary corporate actions,  if necessary,  and does not and
will not require any  additional  consent  or  approval  of the shareholders and
directors of Borrower and  will  not  violate  any  provision of any law,  rule,
regulation  (including,  without  limitation,  Regulation  X  of  the  Board  of
Governors of the Federal Reserve System),  order,  writ,  judgment,  injunction,
decree,  determination  or  award  presently in effect having  applicability  to
Borrower or the charter or by-laws of  Borrower,  or  result  in a breach  of or
constitute  a  default  under any indenture  or  loan  or  credit  agreement  or
any  other  agreement,  lease  or instrument to which  Borrower is a party or by
which it or its properties may be bound  or  affected;  and  Borrower  is not in
default  under  any  law,  rule,  regulation, order, writ, judgment, injunction,
decree, determination  or award  or  any  such  indenture,  agreement, lease  or
instrument,  except as may be disclosed in Exhibit "J".

        9.18.   RD GUARANTY COMMITMENT REPRESENTATIONS.  Without limiting any of
the representations,  warranties,  or certifications  otherwise made by Borrower
herein,   Borrower   hereby   makes   the   warranties,   representations,   and
certifications  required of Borrower under the RD Guaranty  Commitment  attached
hereto  as  Exhibit  "M",  which is  incorporated  herein  by  reference  in its
entirety.

                                      -28-

<PAGE>

        9.19.   CONTINUING  REPRESENTATIONS.   These  representations  shall  be
considered to  have been  made again  at and as of the date of each advance made
under the Term Note and shall be true and correct as of that date.

                                    ARTICLE X

                          GENERAL AFFIRMATIVE COVENANTS

        Borrower  covenants  and agrees with Lender that from and after the date
hereof, and so long as the Term Loan remains outstanding,  that they will comply
with the covenants set forth in Sections 10.1 through 10.37, inclusive.

        10.1.   PAYMENT OF  LOAN/PERFORMANCE  OF  LOAN  OBLIGATIONS.   Duly  and
punctually  pay or cause to be paid the  principal and interest of the Term Note
in accordance with its terms and duly and punctually pay and perform or cause to
be paid or performed  all Loan  Obligations  hereunder  and under the other Loan
Documents.

        10.2.   MAINTENANCE  OF EXISTENCE.  The Borrower  shall  maintain in the
state of its incorporation,  and, in each jurisdiction in which the character of
the property  owned by them or in which the  transaction of their business makes
qualification necessary, good standing.

        10.3.   USE OF PROCEEDS.  Borrower will use the net proceeds of the Term
Loan  only  for  the  purposes  set  forth  in Section 4.2 in the conduct of the
business in which it is presently engaged,  or in which it presently proposes to
engage.

        10.4.   ACCRUAL AND PAYMENT OF TAXES.  The Borrower,  during each Fiscal
Year,  shall  accrue all  current tax  liabilities  of all kinds,  all  required
withholding of income taxes of employees,  all required old age and unemployment
contributions,  and all required payments to employee benefit plans, and pay the
same when they become due.

                                      -29-

<PAGE>

        10.5.   PAYMENT  OF  TAXES  AND  OBLIGATIONS.   Borrower  will  pay  and
discharge  promptly all taxes,  assessments and other  governmental charges  and
claims levied or imposed upon it or its property, or any part thereof, provided,
however, that it shall have the right in good faith to contest  any such  taxes,
assessments,  charges or claims,  and,  pending the outcome of such contest,  to
delay or refuse  payment  thereof  provided  that adequate  funded  reserves are
established by it to pay and discharge any such taxes, assessments,  charges and
claims.  Borrower shall, on an annual basis not later than sixty (60) days after
the end of each tax year, provide reasonable  evidence to Lender that all income
and withholding taxes have been paid.

        10.6.   RECORDS RESPECTING COLLATERAL. Adequate records of Borrower with
respect to the Collateral will be kept at the Executive Office (subject to being
changed  pursuant to Section  11.10) and will not be removed  from such  address
without the prior written consent of Lender.

        10.7.   RIGHT TO INSPECT. Lender (or any person or persons designated by
it)  shall,  in its  sole  discretion,  have the  right to call at any  place of
business of Borrower at any reasonable  time, and,  without  hindrance or delay,
inspect,  audit,  appraise,  check and make  extracts  from any books,  records,
journals, orders, receipts and any correspondence and other data relating to the
Collateral and to Borrower's  business or to any other transactions  between the
parties hereto, subject to confidentiality  restrictions reasonably requested by
Borrower and reasonably approved by Lender.

        10.8.   FINANCIAL AND OTHER INFORMATION.   The Borrower shall provide or
cause  to  be  provided  to  Lender,  the  following  Financial  Statements  and
information on a continuing basis and as Lender may require from time to time:

                (a)     QUARTERLY  FINANCIAL  STATEMENTS OF BORROWER.  Within 45
days after the end of each calendar quarter the Borrower will provide the Lender
with an internally prepared compilation report which,  as a minimum,  includes a
consolidated  balance sheet and profit and loss statement of the business of the

                                      -30-

<PAGE>
Borrower together with a statement providing an aging of accounts receivable and
accounts payable, showing the status at the end of the quarter, and signed by an
appropriate  officer of the Borrower.  The officer will comment  relative to the
required  loan  covenants  being met  and/or not met and any  corrective  action
necessary or planned.  The Borrower  shall provide to Lender the  aforementioned
quarterly  reports for a minimum  period of  thirty-six  (36)  months  after the
Closing and during the remaining life of the Loan with the only exception  being
that the  Borrower  has been  current  with the  guaranteed  loan  payments  for
twenty-four  (24)  consecutive  months,  is maintaining a greater than 1.10 to 1
debt  service  coverage,  and is in  compliance  with all  other  applicable  RD
regulations.  The Borrower  shall  promptly from time to time as required by the
Lender,  submit such other information  concerning the business,  conditions and
affairs of the  Borrower,  as the Lender may  reasonably  request.  Lender  will
provide  Borrower's  quarterly  financial  statements to RD; however,  no formal
analysis or report will be prepared by Lender and  provided to RD unless  deemed
necessary by Lender due to adverse change in Borrower's financial condition.

                (b)     ANNUAL  FINANCIAL  STATEMENTS.  Commencing at the end of
the first full Fiscal Year after the date hereof, Borrower shall furnish Lender,
within ninety (90) days of the end of Borrower's  Fiscal Year,  annual certified
Financial  Statements  of the  Borrower's  affairs  prepared  by an  independent
certified public accountant satisfactory to the Lender and certified in a manner
satisfactory to the Lender as accurately reflecting the condition and affairs of
the business of the Borrower,  which report shall contain among other matters, a
balance  sheet as of the end of the  Borrower's  Fiscal  Year, a profit and loss
statement  showing the result of operations of the Borrower for the Fiscal Year,
a  reconciliation  of surplus,  and any applicable  accountant's  notes,  all as
prepared in accordance with GAAP and applied on a basis consistently  maintained
throughout the period involved.  Furthermore,  the independent  certified public
accountant will notify Lender if
                                      -31-

<PAGE>
Borrower  is  not  in  compliance  with any financial covenant contained in this
Agreement, and the RD Guaranty Commitment.  Borrower shall also submit to Lender
such other  information  concerning  the  conditions and affairs of the business
as the Lender may reasonably request.

        10.9.   MAINTENANCE OF INSURANCE. In addition to and cumulative with any
other  requirements  herein  imposed on  Borrower  with  respect  to  insurance,
Borrower shall maintain insurance with responsible  insurance  companies on such
of its properties  and  employees,  in such amounts and against such risks as is
customarily maintained by similar businesses operating in the same vicinity, but
in any event to include loss, damage,  flood,  windstorm,  fire, theft, extended
coverage,  crop  insurance,  workers  compensation  and products  liability  and
business  interruption  insurance in amounts  satisfactory to Lender, which such
insurance  shall not be  canceled  by  Borrower  unless  with the prior  written
consent of Lender. Borrower shall file with Lender, upon its request, a detailed
list of such  insurance  then in  effect  stating  the  names  of the  insurance
companies,  the amounts and rates of insurance,  the date of expiration thereof,
the properties and risks covered  thereby and the insured with respect  thereto,
and,  within  thirty (30) days after notice in writing from Lender,  obtain such
additional insurance as Lender may reasonably request.

        10.10.  CHANGE   OF   PRINCIPAL  PLACE  OF  BUSINESS.   Borrower  hereby
understands and agrees that if, at any time  hereafter,  Borrower elects to move
its principal place of business,  or if Borrower elects to change its respective
name,  identity or structure,  Borrower will obtain Lender's approval in writing
at least thirty (30) days prior thereto.

        10.11.  WAIVERS.  With respect to the Collateral Location, Borrower will
obtain such waivers of lien, estoppel  certificates or subordination  agreements
as Lender may reasonably require to insure the priority of its security interest
in that portion of the Collateral situated at such locations.

                                      -32-

<PAGE>

        10.12.  COMPLIANCE   WITH   LAWS.    Borrower   shall  comply  with  the
requirements  of all  applicable  laws,  rules,  regulations  and  orders of any
governmental   authority,   including,   without   limitation,   all  applicable
environmental  laws  and  Hazardous  Materials  Laws  and  shall  pay all taxes,
assessments,  charges, claims  for labor,  supplies,  rent and other obligations
which, if unpaid, might give rise to a Lien against the Collateral, except Liens
to the  extent  permitted  in  Section  11.1  of  this  Agreement.  The Borrower
certifies  that the Facility is  accessible to the public in compliance with the
Americans with Disabilities Act.  The  noncompliance with the aforesaid shall be
construed to constitute a material adverse effect upon the business or credit of
Borrower.

        10.13.  JUNIOR  FINANCING.  Borrower shall not without the prior written
consent of Lender incur any additional  indebtedness relating to the Facility or
create or permit to be created or to remain, any mortgage,  pledge, lien, lease,
encumbrance or charge on, or conditional sale or other title retention agreement
whether prior to or  subordinate  to the liens of the Mortgage,  with respect to
the Facility,  or any part thereof,  or income therefrom other than the Mortgage
provided for herein.  The Lender  acknowledges  that the Mortgage only encumbers
the leasehold estate and not the fee simple estate.  Notwithstanding  the above,
Lender acknowledges that Borrower is seeking  subordinated/convertible  debt and
agrees to  reasonably  cooperate  with  Borrower  in its  efforts to obtain such
financing.

        10.14.  BOOKS AND RECORDS.  Borrower shall permit,  and cause to permit,
persons  designated by Lender to inspect any and all of the properties and books
and  records  of the  Borrower  and those  books  and  records  of the  Borrower
pertaining  to the  Facility,  and to  permit  Lender  to make  copies of and to
discuss the  affairs of the  Borrower  and the  Facility  with  officers of such
parties as  designated  by Lender,  all at such times as Lender  shall  request,
subject to  confidentiality  restrictions  reasonably  requested by Borrower and
reasonably approved by Lender.

                                      -33-

<PAGE>

        10.15.  PAYMENT OF INDEBTEDNESS.  Borrower shall duly and punctually pay
or cause to be paid all  Indebtedness  now owing or  hereafter  incurred  by the
Borrower  in  accordance  with  the  terms  of such  Indebtedness,  except  such
Indebtedness  owing to those other than Lender which is being  contested in good
faith and with respect to which any execution against collateral of the Borrower
have been  effectively  stayed and for which reserves  adequate for payment have
been established.

        10.16.  RECORDS  OF  ACCOUNTS.  Borrower  shall  maintain  all  records,
including records pertaining to accounts receivable of the Borrower at the chief
executive offices of Borrower as set forth in this Agreement.

        10.17.  NOTICE OF LOSS.  Borrower shall immediately notify the Lender of
any event causing a loss or depreciation in value of Borrower's assets in excess
of  $100,000.00  and the amount of such loss or  depreciation,  except  Borrower
shall not be required to notify Lender of depreciation in building and equipment
resulting from ordinary use thereof.

        10.18.  CONDUCT OF BUSINESS.  Borrower  shall cause the operation of the
Facility to be conducted  at all times in a prudent  manner in  compliance  with
applicable  laws and  regulations  relating  thereto  and  cause  all  licenses,
permits,  certificates,  and  any  other  agreements  necessary  for the use and
operation of the Facility to remain in effect.

        10.19.  CONDITION  OF  PROPERTIES.  Borrower  shall keep all  buildings,
improvements, machinery and equipment located on or used or useful in connection
with the  respective  Facility  in good  repair,  working  order and  condition,
reasonable  wear and tear  excepted,  and from time to time make all  needed and
proper repairs,  renewals,  replacements,  additions and improvements thereto to
keep the same in good operating condition.

                                      -34-

<PAGE>

        10.20.  INVENTORY, FIXTURES AND EQUIPMENT.  Borrower shall maintain,  or
cause to be  maintained,  sufficient inventory,  fixtures and equipment of types
and quantities  at the Facility  necessary to enable  the Borrower adequately to
perform operations at such Facility.

        10.21.  CERTIFICATE.  Upon Lender's written request, furnish Lender with
a certificate stating that Borrower has complied with and is in compliance  with
all terms,  covenants and  conditions of the Loan  Documents and there exists no
Default  or Event  of  Default  or,  if such is not the  case,  that one or more
specified  events have  occurred,  and that the  representations  and warranties
contained  herein  are true with the same  effect as though  made on the date of
such certificate.

        10.22.  SUBORDINATIONS.   Borrower   shall   provide   Lender   with   a
subordination  agreement,  in a form satisfactory to Lender, from any party whom
Borrower is or hereafter becomes indebted for money borrowed,  subordinating its
respective  right of  payment  and  claim of such  indebtedness  and any  future
advances  thereon to the claims of Lender in respect of the Term Note so long as
any amount remains unpaid on the Term Note.

        10.23.  LITIGATION;  DEFAULT CONDITIONS AND EVENTS OF DEFAULT.  Upon its
receipt of notice or knowledge thereof,  Borrower will report to Lender: (i) any
lawsuit or  administrative  proceeding in which Borrower is a defendant  wherein
the amount of damages  claimed  exceeds  $50,000.00;  or (ii) the  existence and
nature of any Default Condition or Event of Default hereunder.

        10.24.  COSTS.  Borrower shall pay or reimburse Lender for all costs and
fees incurred by Lender in preparing and documenting this Agreement and the Term
Loan, and all amendments and modifications thereof.

        10.25.  EXECUTION  OF OTHER  DOCUMENTS.  Borrower  will,  upon demand by
Lender, promptly execute all such additional agreements,  contracts, indentures,
documents and  instruments in connection  with this Agreement as Lender,  in its
sole discretion, may reasonably consider necessary.

                                      -35-

<PAGE>

        10.26.  LITIGATION  AND  ATTORNEYS  FEES.  Borrower will pay promptly to
Lender  without  demand,  reasonable  attorneys  fees and all  costs  and  other
expenses paid or incurred by Lender in collecting or compromising  the Term Loan
or in enforcing or exercising its rights or remedies  created by, connected with
or provided in this Agreement or any other  agreement or instrument  required by
Lender in connection with the Term Loan, whether or not suit is filed.

        10.27.  ARMS  LENGTH  TRANSACTIONS.  All  of the Borrower's transactions
will be at arms length and competitive with  any  of  the  officers,  employees,
directors,  or their spouses and family  members that may buy, sell, or trade to
it. The same will apply to any entity that they may be stockholder, director, or
own any interest in, as well as a spouse or family member.

        10.28.  FURTHER  ASSURANCES.  Borrower shall duly execute and/or deliver
(or  cause to be duly  executed  and/or  delivered)  to Lender  any  instrument,
invoice, document,  document of title, warehouse receipt, bill of lading, order,
financial statement,  assignment,  waiver, consent or other writing which may be
reasonably  necessary to Lender to carry out the terms of this Agreement and any
of the  other  Loan  Documents  and to  perfect  its  security  interest  in and
facilitate the collection of the Collateral, the proceeds thereof, and any other
property at any time constituting security to Lender.  Borrower shall perform or
cause to be performed  such acts as Lender may request to establish and maintain
for Lender a valid and perfected  security interest in and security title to the
Collateral,  free and clear of any liens,  encumbrances  or  security  interests
other than in favor of Lender.

        10.29.  DEBT  TO  BE  BORROWER'S  DEBT.  All debt to be repaid from loan
proceeds is debt of Borrower and not debt of any other entity.

        10.30.  MINIMUM  TANGIBLE  BALANCE  SHEET  EQUITY.  The  Borrower  shall
maintain a Tangible Balance Sheet Equity, as defined in GAAP, of at least 10% at
the  time of  the  execution of this  Agreement,  and all times  during the term
hereof.

                                      -36-

<PAGE>

        10.31.  MAXIMUM  DEBT  TO  WORTH.  The Borrower shall maintain a maximum
debt to net worth ratio, as defined in GAAP, of 1.5 to 1 for the Fiscal Year end
of 2000, and 1.3 to 1 for each Fiscal Year end thereafter.

        10.32.  CURRENT  RATIO.  The  Borrower  shall  maintain  a  consolidated
Current  Ratio of at  least 1.15 to 1 for  the Fiscal Year end 2000 and 1.3 to 1
for each Fiscal Year end thereafter.

        10.33.  MINIMUM DEBT SERVICE COVERAGE.  The  Borrower  shall  maintain a
minimum Debt Service Coverage of 1.0 to 1 for the Fiscal Year end 2001, and 1.25
to 1 for Fiscal Year end 2002 and for each Fiscal Year end thereafter.

        10.34.  RD GUARANTY COMMITMENT. The Borrower agrees that it shall comply
with each and every  provision of that certain RD Guaranty  Commitment as issued
by the RD, and Borrower agrees to provide all information and certifications and
any other matters to Lender that Lender deems necessary for issuance of Lender's
certifications  required  in the RD  Guaranty  Commitment,  attached  hereto  as
Exhibit "M".

        10.35.  EMPLOYEE  REPORTS.  The  Borrower shall submit a report annually
to the  Lender and RD as of December 31,  indicating the total number permanent,
part-time and seasonal employees.

        10.36.  PAYMENT SCHEDULE.  A schedule detailing payment and amortization
of the loan is attached as Exhibit "L."

        10.37.  BORROWING BASE CERTIFICATE.  Not  later  than the fifth business
day of each month, the Borrower  shall  provide  Lender  with a  Borrowing  Base
Certificate  computed as of the last business day of the  immediately  preceding
month,  signed by the President or the chief financial  officer of the Borrower.
At all  times,  the  Total  Borrowing  Base  must be  greater  than or  equal to
$1,300,000.00.  The  Total  Borrowing  Base  shall  be  determined  based on the
following definitions and formula in the reasonable discretion of the Lender:

                                      -37-

<PAGE>

        "Eligible  Inventory"  shall mean and include the  Inventory,  excluding
        work in process, valued at the lower of cost or market value, determined
        on a first-in-  first-out  basis,  which is not,  in  Lender's  opinion,
        obsolete,  slow moving or  unmerchantable  and which Lender, in its sole
        discretion,   shall  not  deem  ineligible  Inventory,   based  on  such
        considerations  as  Lender  may  from  time  to  time  deem  appropriate
        including,  without  limitation,  whether the  Inventory is subject to a
        perfected,  first  priority  security  interest  in favor of Lender  and
        whether  the  Inventory   conforms  to  all  standards  imposed  by  any
        governmental agency, division or department thereof which has regulatory
        authority over such goods or the use or sale thereof. Eligible Inventory
        shall include all Inventory in-transit for which title has passed to the
        Borrower, as the case may be, which is insured to the full value thereof
        and for which Lender  shall have in its  possession  (a) all  negotiable
        bills of lading properly  endorsed and (b) all  non-negotiable  bills of
        lading issued in Lender's name.

        "Eligible  Receivables"  shall  mean  and  include  each  Receivable  of
        Borrower  arising in the ordinary course of its respective  business and
        which Lender, in its sole credit judgment,  shall deem to be an Eligible
        Receivable, based on such considerations as Lender may from time to time
        deem appropriate.  A receivable shall not be deemed eligible unless such
        receivable  is subject to Lender's  first  priority  perfected  security
        interest and to no other lien (other than Permitted  Encumbrances),  and
        is evidenced by an invoice or other documentary evidence satisfactory to
        the Lender. In addition,  no receivable shall be an Eligible  Receivable
        if:
                (a)     it arises out of a sale made by Borrower to an affiliate
                of such entity or to a Person controlled by an affiliate of such
                entity;

                (b)     it is due or unpaid more than ninety (90) days after the
                original   invoice   date,   provided,   however,  that  certain
                Receivables which remain due or unpaid up to one  hundred  fifty
                (150)  days  after  the  original  invoice  date,   may  in  the
                Lender's  sole discretion be included as "Eligible Receivables";

                (c)     fifty percent (50%) or more of the Receivables  from any
                customer   are   not   deemed  Eligible  Receivables  hereunder;
                provided,  however,  that  such percentage may, in Lender's sole
                discretion, be increased or decreased from time to time;

                (d)     any  covenant,  representation  or warranty contained in
                this   Agreement  with  respect  to  such  Receivable  has  been
                breached;

                (e)     the customer shall (i) apply for, suffer,  or consent to
                the appointment of, or the taking of possession  by, a receiver,
                custodian, trustee or  liquidator  of  itself  or  of  all  or a

                                      -38-

<PAGE>
                substantial part of  its  property  or  call  a  meeting  of its
                creditors, (ii) admit in writing its inability,  or be generally
                unable,  to pay its debts as they become due or cease operations
                of its present business, (iii) make a general assignment for the
                benefit of creditors, (iv)  commence a voluntary  case under any
                state  or  federal  bankruptcy  laws  (as  now  or  hereafter in
                effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a
                petition seeking to take advantage  of any  other law  providing
                for the  relief of debtors,  (vii) acquiesce to, or fail to have
                dismissed,  any  petition  which  is  filed  against  it  in any
                involuntary case under such bankruptcy laws, or (viii)  take any
                action for the purpose of effecting any of the foregoing;

                (f)     the sale is to a customer outside the United  States  of
                America and Canada,  unless  the sale is on  letter  of  credit,
                guaranty or acceptance  terms,  or the  customer  has a  payment
                history   acceptable   to   Lender  over  the  three  (3)  years
                immediately   preceding   the   date   of   the  Borrowing  Base
                Certificate,  in  each  case  acceptable  to  Lender in its sole
                discretion;

                (g)     the   sale  to  the  customer  is  on  a  bill-and-hold,
                guaranteed sale, sale-and-return, sale on approval,  consignment
                or  any  other  repurchase  or  return  basis or is evidenced by
                chattel paper;

                (h)     the   Lender   believes,  in  its  sole  judgment,  that
                collection  of   such  Receivable   is  insecure  or  that  such
                Receivable may not be paid by reason of the customer's financial
                inability to pay;

                (i)     the customer is the United States of America,  any state
                or any department, agency or  instrumentality  of  any of  them,
                unless the  Borrower assigns  its  right   to  payment  of  such
                Receivable to Lender pursuant to the Assignment of Claims Act of
                1940,  as  amended  (31 U.S.C.  Sub-Section  3727  et  seq.  and
                41 U.S.C. Sub-Section 15 et seq.),  or any successor  statute or
                regulation, or has  otherwise  complied  with  other  applicable
                statutes  or ordinances;

                (j)     the goods giving rise to such Receivable  have  not been
                shipped to the customer  or the  services  giving  rise  to such
                Receivable have not  been  performed  by  the  Borrower  or  the
                Receivable otherwise does not represent a final sale;

                (k)     the Receivables of the  customer  exceed a credit  limit
                determined by Lender, in its sole discretion, to the extent such
                Receivable exceeds such limit;

                (l)     the Receivable is  subject  to  any  offset,  deduction,
                defense,  dispute,  or counterclaim,  the  customer  is  also  a
                creditor  or  supplier  of  the  Borrower  or  the Receivable is
                contingent in any respect or for any reason;

                                      -39-

<PAGE>

                (m)     the  Borrower has made any  agreement  with any customer
                for any deduction therefrom,  except for discounts or allowances
                made in the ordinary course of business for prompt payment,  all
                of   which   discounts   or  allowances  are  reflected  in  the
                calculation of the face value of each respective invoice related
                thereto;

                (n)     any return, rejection or repossession of the merchandise
                has occurred or the rendition of services has been disputed;

                (o)     such  Receivable  is  not payable to the Borrower or any
                wholly owned subsidiary of the Borrower; or

                (p)     such  Receivable is not otherwise satisfactory to Lender
                as determined in good faith by Lender  in  the  exercise  of its
                discretion in a reasonable manner.

        "Inventory" shall mean and include the Inventory  Collateral  defined in
         Section 1.1 hereof.

        "Inventory Advance Rate" shall mean fifty percent (50%).

        "Receivables"  or  "Receivable"  shall  mean and  include  the  Accounts
         Receivable Collateral defined in Section 1.1 hereof.

        "Receivables Advance Rate" shall mean seventy five percent (75%).

        The Total Borrowing Base shall be determined according to the formula in
        the following table:

<TABLE>
<CAPTION>
        Asset $ (a)                     Advance Rate % (b)                      Borrowing Base $
        -----------------               ------------------                      ---------------------------
<S>     <C>                             <C>                                     <C>
        Accounts Receivable

        Minus:

        Ineligible Accounts
        Receivable

        (c) Eligible Accounts           75%                                     = (a) x (b)
        Receivable


        Inventory

        Minus:

        Ineligible Inventory

        (d) Eligible Inventory          50%                                     = (a) x (b)

        (e) Maintenance                 N/A                                     = (e)
        Reserve Account
        Balance


        Total Borrowing Base                                                    = c + d + e
</TABLE>


                                      -40-

<PAGE>

                                   ARTICLE XI

                               NEGATIVE COVENANTS

        Borrower  covenants  and agrees with Lender that from and after the date
hereof and so long as any amount  remains  unpaid on the Term Loan, it will not,
without the prior  written  consent of Lender,  do any of the things or acts set
forth in Sections 11.1 through 11.17, inclusive, as provided therein.

        11.1.   NO ENCUMBRANCES.  Borrower will not create,  incur,  assume,  or
suffer to exist  any deed to  secure  debt,  mortgage,  deed of  trust,  pledge,
assignment, lien, charge, encumbrance on, or security interest or security title
of any kind on the Land and/or Collateral  described in Section 5.1 of this Term
Loan  Agreement or on any of their personal  property  except for: (i) liens for
taxes not yet due or being contested as permitted by this Agreement;  (ii) liens
at any time existing in favor of the Lender;  (iii) any Permitted  Encumbrances;
(iv)  inchoate  Liens  arising by  operation  of law for the  purchase of labor,
services,  materials,  equipment  or  supplies,  provided  payment  shall not be
delinquent and, if such Lien is a lien upon the Collateral,  which Lien is fully
subordinate to the applicable Deed,  Mortgage and/or Security Agreement covering
such  Collateral,  is disclosed to Lender and is being contested by the Borrower
in good faith and Borrower is diligently  pursuing  such contest to  completion,
and adequate reserves,  as determined by Lender, are being maintained therefore;
and (v) liens  incurred in the ordinary  course of business in  connection  with
workmen's  compensation,  unemployment  insurance or other forms of governmental
insurance  or  benefits,   or  to  secure  performance  of  tenders,   statutory
obligations,  leases and contracts  (other than for money borrowed or for credit
received in respect of property  acquired)  entered into the ordinary  course of
business as presently  conducted or to secure  obligations  for surety or appeal
bonds.

                                      -41-

<PAGE>

        11.2.   DIVIDENDS/BONUSES. The Borrower will not, without Lender's prior
written consent,  make any bonuses to any officers of the Borrower or declare or
pay any  dividends  on its own  common  stock,  or  authorize  or make any other
distribution  with  respect  to any of its stock now or  hereafter  outstanding.
Notwithstanding the foregoing,  the Borrower shall be permitted to pay dividends
or bonuses  provided  that the  Borrower  has been  current on the Term Loan for
twelve (12)  consecutive  months,  an after-tax profit was made in the preceding
Fiscal  Year,  all of the  Borrower's  debts are paid to a current  status,  the
business of the Borrower is maintaining a greater than 1.10 to Cash Flow to Debt
Service  Ratio,  the  Borrower  is  still in  compliance  with  all  other  loan
conditions and regulations of the RD, and prior written consent of the Lender is
obtained.  After the Lender has determined that all of the above parameters have
been met and a  deduction  has been  made for any  accounts  payable,  such cash
dividends  or bonuses to  officers of the  Borrower,  will not exceed 50% of net
earnings of the Borrower.

        11.3.   MERGER, SALE, ASSIGNMENTS, ETC.  The Borrower will not liquidate
or  dissolve  or  otherwise  terminate  its  legal  status  or  enter  into  any
consolidation,  merger,  partnership,  reorganization or other  combination,  or
convey, or sell,  assign,  lease or otherwise dispose of all or the greater part
of its assets or businesses  (now owned or hereafter  acquired)  (whether in one
transaction  or in a series of  transactions),  or permit the  Borrower to sell,
assign,  lease or otherwise dispose of, all or the greater part of the assets or
business  of  another,  or made any  substantial  change  in the  basic  type of
business  conducted  by it as of the date  hereof,  without  the  prior  written
consent of the  Lender,  which may be  granted or refused by Lender in  Lender's
sole discretion.

        11.4.   DISPOSITION  OF  ASSETS.  The  Borrower  will  not  sell, lease,
transfer  or otherwise dispose of Collateral,  unless any such disposition shall
be in the ordinary course of business  for a full and fair consideration,  which
in  no  event shall  include  a transfer  for full or  partial satisfaction of a
preexisting debt.

                                      -42-

<PAGE>

        11.5.   CHANGE  IN  BUSINESS.  The Borrower  will not make  any material
change  in the nature  of its business  as it is being  conducted as of the date
hereof,  without the prior consent of the Lender, which will not be unreasonably
withheld.

        11.6.   CHANGES IN ACCOUNTING.  The Borrower will not change its methods
of accounting, unless such change is permitted by GAAP, and provided such change
does not have the  effect of curing or  preventing  what would  otherwise  be an
Event of Default or default had such change not taken place.

        11.7.   ERISA FUNDING AND TERMINATION.  The Borrower will not permit (a)
the funding  requirements  of ERISA with respect to any employee plan to be less
than the minimum  required by ERISA at any time,  or (b) any employee plan to be
subject to involuntary termination proceedings at any time.

        11.8.   TRANSACTIONS WITH AFFILIATES.  The Borrower  will not enter into
any transaction  with any Person  affiliated  with such  Borrower  other than in
the ordinary course of its business and on fair  and  reasonable  terms  no less
favorable  to such  Borrower  than  those  they  would  obtain  in a  comparable
arms-length transaction with a Person not an affiliate.

        11.9.   CHANGE OF USE.  The Borrower will not alter or change the use of
the Facility or enter into any lease or  management  agreement  for the Facility
other than the leases and management  agreements in place as of the date of this
Agreement,  unless  Borrower first notifies Lender and provides Lender a copy of
the proposed lease or management agreement, obtains Lender's written consent and
obtains and provides Lender with a subordination  agreement in form satisfactory
to Lender from such lessee or manager subordinating to all rights of Lender.

                                      -43-

<PAGE>

        11.10.  PLACE OF  BUSINESS.  The  Borrower  will not  change  its  chief
executive  offices or open any new place of business without first giving Lender
at least thirty (30) days prior written  notice  thereof and promptly  providing
Lender such information as Lender may request in connection therewith.

        11.11.  NO ADVANCES. The Borrower shall not, during the life of the Term
Loan, make any advances or loans to any officer,  owner,  stockholder,  director
and/or affiliate of the Borrower,  during this Term Loan, without Lender's prior
written consent.

        11.12.  NO INCREASE IN  THE  BORROWER'S COMPENSATION.  The Borrower will
not  increase  the  salaries  and  compensations  of  officers and owners of the
Borrower  unless  the Borrower  has been current with the Term Loan payments for
twelve (12)  consecutive  months,  an after-tax profit was made in the preceding
Fiscal Year,  all of the  Borrower's  debts  are paid to a current  status,  the
business is maintaining a minimum  1.10 to 1 Cash Flow to Debt Service  Coverage
after the Closing, and the Borrower is in compliance with all loan conditions.

        11.13.  [Reserved.]

        11.14.  NO SALE OR DISPOSITION OF BUSINESS COLLATERAL. The Borrower will
not  sell  or  otherwise  dispose of collateral described in Section 5.1 of this
Agreement, other than as permitted herein and by RD regulations.

        11.15.  CHANGE OF OWNERSHIP. The Borrower will not materially change the
ownership  of the  Borrower  such that the  change  would  result in a change of
control of the  Borrower,  without  obtaining  the Lender and RD's  consent  and
without complying with all applicable RD regulations.

        11.16.  PURCHASE OF FIXED ASSETS.  The Borrower shall not make purchases
of fixed assets in excess of  $500,000.00  annually,  without the prior  written
consent  of the  Lender.  This  prohibition  does not  apply  upon the  Borrower
purchasing  machinery  and  equipment  being  replaced  due to  depreciation  or
obsolescence.

                                      -44-

<PAGE>

        11.17.  LIABILITIES  OF  THIRD  PARTIES.   Borrower  will  refrain  from
assuming any liabilities or obligations of any third parties,  including but not
limited to, the officers or directors of the Borrower. The Borrower will refrain
from  co-signing or endorsing  liabilities  or obligations  or  indebtedness  of
other persons or entities during the life of this Term Loan.  Also, the Borrower
will  not obligate  itself  without  approval of the Lender for  liabilities  of
other persons or entities in excess of $100,000.00 outside of the normal  course
of business.

                                   ARTICLE XII

                                EVENTS OF DEFAULT

        The  occurrence of any events or  conditions  described in Sections 12.1
through 12.8 shall constitute an Event of Default  hereunder,  provided that the
requirements  for the  giving of notice  and the lapse of time  provided  for in
Section 12.8 have been satisfied.

        12.1.   TERM NOTE. Borrower shall fail to make any payments of principal
of or interest on  the Term Note when due and not cure same within ten (10) days
of the occurrence of the default.

        12.2.   MISREPRESENTATIONS.  Any certificate, statement, representation,
warranty  or audit  heretofore  or  hereafter  furnished  by or on behalf of the
Borrower,  pursuant  to  or in  connection  with  this  Agreement  or  otherwise
(including, without limitation,  representations and warranties contained herein
or in any Loan  Documents) or as an inducement to Lender to extend any credit to
or to enter into this or any other  agreement  with the Borrower,  in connection
with this Term Loan,  proves to have been false in any  material  respect at the
time when the facts  therein  set forth were stated or  certified,  or proves to
have  omitted any  substantial  contingent  or  unliquidated  liability or claim
against the Borrower,  or on the date of execution of this Agreement there shall
have been any material adverse change in any of the facts  previously  disclosed
by any such certificate, statement,
                                      -45-

<PAGE>
representation, warranty or audit,  which change  shall not have been  disclosed
to Lender in  writing at or prior to the time of such execution.

        12.3.   COVENANTS.  Borrower shall fail to perform,  keep or observe any
other   term,   provision,   condition   covenant,   undertaking,   warranty  or
representation contained in this Agreement or in the other Loan Documents, which
is required to be  performed,  kept or observed and such failure is not cured to
Lender's  satisfaction  within  thirty  (30) days after  Lender  gives  Borrower
written notice  identifying such failure;  or any Event of Default as defined in
any other Loan Document occurs.

        12.4.   OTHER DEBTS.  Borrower  shall  default  on any other  agreement,
document or instrument to which Borrower is a party, which default shall cause a
material  adverse  effect  on the  businesses  of  Borrower,  the  value  of the
Collateral,  or Lender's  interest  therein.  Nutrex or any other  wholly  owned
subsidiary of the Borrower shall default in any agreement, document, instrument,
loan, or obligation owed to Borrower.

        12.5.   VOLUNTARY  BANKRUPTCY.  Borrower shall file a voluntary petition
in bankruptcy  or a  voluntary   petition   or   answer   seeking   liquidation,
reorganization, arrangement, re-adjustment of its debts, or for any other relief
under  the  Bankruptcy  Code,  or  under  any  other  act or law  pertaining  to
insolvency  or  debtor  relief,  whether  state,  Federal,  or  foreign,  now or
hereafter  existing;  Borrower  shall enter into any  agreement  indicating  its
consent to,  approval of, or  acquiescence  in, any such petition or proceeding;
Borrower shall apply for or permit the appointment by consent or acquiescence of
a receiver,  custodian or trustee of Borrower for all or a  substantial  part of
its property; Borrower shall make an assignment for the benefit of creditors; or
Borrower shall be unable or shall fail to pay its debts  generally as such debts
become due, or Borrower shall admit, in writing, its inability or failure to pay
debts generally as such debts become due.

                                      -46-

<PAGE>

        12.6.   INVOLUNTARY BANKRUPTCY.  There  shall  have been  filed  against
Borrower  an  involuntary   petition  in  bankruptcy  or  seeking   liquidation,
reorganization, arrangement, readjustment of debts or any other relief under the
Bankruptcy  Code,  or under any other act or law  pertaining  to  insolvency  or
debtor relief, whether State, Federal or foreign, now or hereafter existing, and
such petition is not dismissed  within sixty (60) days after the entry of filing
thereof;  Borrower  shall  suffer or permit  the  involuntary  appointment  of a
receiver,  custodian or trustee of Borrower for all or a substantial part of its
property and such appointment is not dismissed within sixty (60) days after such
appointment was first made; or Borrower shall suffer or permit the issuance of a
warrant  of  attachment,  execution  or  similar  process  against  all  or  any
substantial  part of the  property  of  Borrower  and the same is not  dismissed
within sixty (60) days of the application thereof.

        12.7.   RD GUARANTEE.  The  RD Guarantee shall be voided, repudiated, or
breached.

        12.8.   RIGHT OF CURE.  Any  provision of this Agreement to the contrary
notwithstanding,  Lender shall not exercise any of its remedies for any Event of
Default hereunder (including,  without limitation,  the right to acceleration of
the balance of the indebtedness  evidenced by the Term Note) until the thirtieth
(30th) day after written notice from Lender to Borrower of said Event of Default
or, in the Event of Default under Section 12.1 hereinabove, the tenth (10th) day
after written notice. Written notice shall specify the nature of all such Events
of Default and will be provided  according  to Section  14.8  herein  below.  If
Borrower has not cured all such Events of Default  after receipt of such notice,
and the  expiration of all cure  periods,  Lender shall be empowered to exercise
all of its remedies under this Agreement. Lender is only required to provide the
Borrower three (3) written default notices in any given calendar year.

        Notwithstanding  anything in the foregoing Article,  all requirements of
notice shall be deemed eliminated if Lender is prevented from giving such notice
by bankruptcy or other

                                      -47-

<PAGE>
applicable law. The cure period,  if any, shall then run from the occurrence  of
the event or condition of Default  rather than from the date of notice.

                                  ARTICLE XIII

                                    REMEDIES

        Upon the occurrence or existence of any Event of Default, or at any time
thereafter,  without  prejudice  to the rights of Lender to  enforce  its claims
against  Borrower  for  damages  for  failure by  Borrower to fulfill any of its
obligations  hereunder,  subject  only to prior  receipt by Lender of payment in
full of the Term Loan in a form  acceptable to Lender,  Lender shall have all of
the rights and remedies described in Sections 13.1 through 13.4, inclusive,  and
it may exercise any one, more, or all of such remedies,  in its sole discretion,
without thereby waiving any of the others.

        13.1.   ACCELERATION OF THE TERM LOAN. Lender, at its option, subject to
Section  14.7,  may declare  the Term Loan to be  immediately  due and  payable,
whereupon the same shall become immediately due and payable without presentment,
demand,  protest,  notice of  nonpayment  or any other  notice  required  by law
relative thereto, all of which are hereby expressly waived by Borrower. Anything
contained herein to the contrary  notwithstanding and, in connection  therewith,
if Lender so elects, by further written notice to Borrower,  Lender may increase
the rate of interest  charged on the Term Note then outstanding by an amount not
to exceed the Default Rate until any and all monies advanced under the Term Note
plus any and all interest accrued thereon is paid in full.

        13.2.   REMEDIES OF A  SECURED  PARTY.  As it  relates  to the  personal
property  collateral defined herein,  Lender shall thereupon have the rights and
remedies  of a  secured  party  under  the UCC in  effect  on the  date  thereof
(regardless of whether the same has been enacted in the  jurisdiction  where the
rights or remedies are asserted),  including,  without limitation,  the right to
take  possession of any  of the Collateral,  subject to the UCC, or the proceeds
thereof,  to sell or

                                      -48-

<PAGE>
otherwise  dispose of the same,  and to apply the proceeds therefrom to the Term
Loan in such  order and  manner  as  Lender,  in its sole discretion, may elect.
Lender shall give Borrower  written notice  of the time and  place of any public
sale of the  Collateral  or the time after  which any other intended disposition
thereof is to be made. The requirement of sending reasonable notice shall be met
if such notice is given to Borrower  pursuant to Section 14.8 at least  five (5)
days  before   such  disposition.   Expenses  of  retaking,  holding,  insuring,
preserving,  protecting,  preparing for sale or selling or the like with respect
to the Collateral  shall include,  in any event, reasonable  attorneys  fees and
other  legally  recoverable collection expenses,  all of which  shall constitute
obligations of Borrower.

        13.3.   REPOSSESSION OF THE  COLLATERAL.  As it relates to the  personal
property  collateral  defined  herein,  Lender  may take the  Collateral  or any
portion thereof into its possession, by such means (without breach of the peace)
and through  agents or otherwise as it may elect (and, in connection  therewith,
demand that  Borrower  assemble the  Collateral at a place or places and in such
manner as Lender shall  prescribe),  and sell, lease or otherwise dispose of the
Collateral  or any  portion  thereof  in its then  condition  or  following  any
commercially  reasonable preparation or processing,  which disposition may be by
public  or  private  proceedings,  by one or  more  contracts,  as a unit  or in
parcels,  at any  time  and  place  and on any  terms,  so long as the  same are
commercially reasonable.

        13.4.   OTHER AND ADDITIONAL  REMEDIES.  In  addition  to the rights and
remedies of a secured party under the laws of the State of Hawaii and the rights
and remedies granted in this Agreement,  Lender shall have all of the rights and
remedies set forth in the Mortgage,  the Security Agreement,  the Assignment and
Pledge of Maintenance  Reserve Account,  and in all of the other Loan Documents,
which rights and remedies may be exercised successively or concurrently.

                                      -49-

<PAGE>

                                   ARTICLE XIV

                                  MISCELLANEOUS

        14.1.   WAIVER.  No remedy conferred upon, or reserved to, the Lender in
this Agreement or any of the other Loan Documents is intended to be exclusive of
any other remedy or remedies,  and each and every remedy shall be cumulative and
shall be in addition to every other remedy  given  hereunder or now or hereafter
existing in law or in equity.  Exercise or omission to exercise any right of the
Lender shall not affect any subsequent  right of Lender to exercise the same. No
course of dealing between  Borrower and Lender or any delay on the Lender's part
in  exercising  any  rights  shall  operate  as a waiver of any of the  Lender's
rights.  No waiver of any Default under this  Agreement or any of the other Loan
Documents  shall extend to or shall affect any subsequent or other then existing
Default or shall impair any rights, remedies or powers of Lender. Except for any
defense which would constitute a compulsory counterclaim, Borrower hereby agrees
that any and all causes of action and claims  which it may ever have against the
Lender shall not be raised by Borrower as a defense or  counterclaim in any suit
or  proceeding  brought  by  Lender  against  it  for  collection  of  the  Loan
Obligations or enforcement of this Agreement,  but shall instead be brought,  if
at all, by a separate suit or proceeding.

        14.2.   COSTS AND  EXPENSES.  Borrower  will  bear all  taxes,  fees and
reasonable  expenses  (including  reasonable  fees and  expenses  of counsel for
Lender) in connection  with the preparation of this Agreement and the other Loan
Documents, and in connection with any modifications thereto and the recording of
any of the Loan Documents. If, at any time, a Default occurs or Lender becomes a
party to any suit or proceeding in order to protect its interests or priority in
any  collateral  for  any  of  the  Loan  Obligations  or its  rights under this
Agreement or any of the Loan Documents, or if Lender is made a party to any suit
or proceeding by virtue of the Term Loan,  this  Agreement

                                      -50-

<PAGE>
or  any  collateral for  any  Loan Obligations  and as a  result of  any of  the
foregoing,  the   Lender   employs   counsel   to   advise   or   provide  other
representation with respect to this Agreement, or to collect  the balance of the
Loan  Obligations,  or  to  take  any  action in  or with respect to any suit or
proceeding   relating  to this Agreement,  any of the other Loan Documents,  any
collateral  for  any  of  the  Loan Obligations,  or  to  protect,  collect,  or
liquidate any of the security  for the  Loan Obligations,  or attempt to enforce
any  security  interest  or lien  granted to  the  Lender  by  any  of the  Loan
Documents,  then  in  any  such  events,  all  of the reasonable attorney's fees
arising  from  such  services,  including  fees on appeal and in any  bankruptcy
proceedings,  and any  reasonable  expenses,  costs and charges relating thereto
shall  constitute  additional  obligations of Borrower to the Lender  payable on
demand of the Lender.  Without  limiting  the  foregoing, Borrower  shall pay or
reimburse  the Lender for all  recording and filing fees, revenue or documentary
stamps or taxes,  intangibles  taxes, and other expenses and charges  payable in
connection with this Agreement, any of the Loan Documents, the Loan Obligations,
or  the  filing of  any  financing  statements  or other instruments required to
effectuate the purposes of this Agreement.

        14.3.   PERFORMANCE OF LENDER. At its option, upon Borrower's failure to
do so, the Lender may make any  payment or do any act on the  Borrower's  behalf
that the Borrower or others are required to do to remain in compliance with this
Agreement or any of the other Loan  Documents,  and Borrower agrees to reimburse
the Lender, on demand,  for any payment made or expense  reasonably  incurred by
Lender pursuant to the foregoing authorization,  including,  without limitation,
reasonable attorneys' fees.

        14.4.   HEADINGS. The headings of the Sections of this Agreement are for
convenience of reference only, are not to be considered a part hereof, and shall
not limit or otherwise affect any of the terms hereof.

                                      -51-

<PAGE>

        14.5.   SURVIVAL    OF    COVENANTS.     All    covenants,   agreements,
representations  and  warranties  made  herein  and  in certificates  or reports
delivered  pursuant hereto shall be deemed to have been material and  relied  on
by  Lender, notwithstanding any  investigation  made by or on behalf of  Lender,
and shall survive  the  execution  and  delivery  to  Lender  of the  Term  Note
and this Agreement.

        14.6.   NO ASSIGNMENT BY BORROWER. No assignment hereof shall be made by
Borrower without the prior written consent of Lender.

        14.7.   SEVERABILITY.  If any provision  of any of the Loan Documents or
the application  thereof to any party thereto shall be invalid or  unenforceable
to any extent, the remainder of such Loan Documents and the application  of such
provisions to any other party thereto shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.

        14.8.   NOTICES.  Any and all notices, elections, demands,  requests and
responses  thereto  permitted or required to be given under this Agreement shall
be in writing, signed by or on behalf of the party giving the same, and shall be
deemed to have been properly given and shall be effective upon being  personally
delivered,  or upon being deposited in the United States mail,  postage prepaid,
certified  with  return  receipt  requested,  or upon  being  deposited  with an
overnight commercial delivery service requiring proof of delivery,  to the other
party or parties at the  address of such other  party or parties set forth below
or at such other  address  within the  continental  United  States as such other
party or parties may designate by notice specifically  designated as a notice of
change of address and given in accordance herewith;  provided, however, that the
period in which a response to any such notice, election,  demand or request must
be given shall  commence on the date of receipt  thereof;  and provided  further
that no notice of change of address shall be effective until the date of receipt
thereof.  Personal  delivery  to a party or to any  officer,  partner,  agent or
employee
                                      -52-

<PAGE>
of  such  party at  said  address shall  constitute receipt.  Rejection or other
refusal to accept or inability to deliver  because of  changed  address of which
no notice,  election,  demand,  request or  response,  if given to Lender, shall
be addressed as follows:

                               B & I LENDING, LLC
                               3353 Peachtree Road
                               North Tower, Suite 1130
                               Atlanta, Georgia 30326
                               Attn:  Patrick J. Tracy

with a copy to:
                               LAWSON, DAVIS, PICKREN & SEYDEL
                               2500 Marquis Two Tower
                               285 Peachtree Center Avenue, N.E.
                               Atlanta, Georgia 30303
                               Attn:  REID H. HARBIN, ESQ.

and, if given to Borrower, shall be addressed as follows:

                               CYANOTECH CORPORATION
                               73-4460 Queen Kaahumanu Highway, Suite 102
                               Kailua-Kona, Hawaii 96740
                               Attn:  Ronald P. Scott

        14.9.   BENEFITS.  All  of  the  terms  and provisions of this Agreement
shall bind and inure to the benefit of the parties hereto and  their  respective
successors  and  assigns.  No Person  other  than  Borrower  or Lender  shall be
entitled to rely upon this  Agreement  or be  entitled  to the  benefits of this
Agreement.

        14.10.  PARTICIPATION.  Borrower acknowledges  that  Lender may,  at its
option,  sell  participation  interests in the Term Loan to other  participating
banks. Borrower agrees with each present and future participant in the Term Loan
that if an Event of Default  should occur,  each present and future  participant
shall have all of the rights and  remedies of Lender with respect to any deposit
due  from  any  participant  agreement  with  Lender,  and  the execution by the
Borrower of this Agreement, regardless of the order of execution by the Borrower
of this  Agreement,  regardless  of

                                      -53-

<PAGE>
the order of  execution,  shall  evidence an  agreement between the Borrower and
said participant in accordance with the terms  of this Section.  The Lender will
maintain a minimum of five (5%) percent of the unguaranteed portion of the total
loan amount of the Term Loan.  The  remaining  unguaranteed  portion can only be
sold through  participation with other lenders  and no part of the guaranteed or
unguaranteed  loan can be sold to the applicant  or anyone having an interest in
the applicant.

        14.11.  SUPERSEDES PRIOR AGREEMENTS;  COUNTERPARTS.  This  Agreement and
the   instruments   referred   to   herein   supersede   and   incorporate   all
representations,  promises,  and statements,  oral or written, made by Lender in
connection with the Term Loan.  This  Agreement may not be varied,  altered,  or
amended except by a written  instrument executed by an authorized officer of the
Lender and the RD. This Agreement may be executed in any number of counterparts,
each of which,  when  executed  and  delivered,  shall be an original,  but such
counterparts shall together constitute one and the same instrument.

        14.12.  TIME OF THE ESSENCE.  Time  is  of the essence in this Agreement
and the other Loan Documents.

        14.13.  INTERPRETATION.   No   provision  of  this  Agreement  shall  be
construed against or interpreted to the disadvantage  of any party hereto by any
court or other governmental or judicial authority by reason of such party having
or being deemed to have structured or dictated such provision.

        14.14.  LENDER NOT A JOINT VENTURER.  Neither  this  Agreement  nor  any
agreements,   instruments,   documents  or  transactions   contemplated   hereby
(including the Loan Documents)  shall in any respect be  interpreted,  deemed or
construed  as making  Lender a partner or joint  venturer  with  Borrower  or as
creating any similar  relationship  or entity,  and Borrower agrees that it will
not

                                      -54-

<PAGE>
make any contrary assertion,  contention,  claim or  counterclaim in any action,
suit or other legal proceeding involving Lender.

        14.15.  JURISDICTION.   Borrower   agrees   that  any  legal  action  or
proceeding with respect to this  Agreement  may be  brought in the courts of the
State of  Georgia in Fulton County or in the courts of the State of Hawaii,  all
as Lender may elect.  By execution of this Agreement, Borrower  submits  to each
such jurisdiction, hereby expressly waiving whatever rights may correspond to it
by  reason of  its present or  future domicile.  Nothing herein shall affect the
right  of  Lender  to  commence  legal  proceedings or otherwise proceed against
Borrower in any other  jurisdiction or to serve process in any manner  permitted
or required by law.

        14.16.  ACCEPTANCE.  This Agreement,   together  with   the  other  Loan
Documents,  shall not become  effective  unless and until delivered to Lender at
its office located at 3353 Peachtree  Road,  North Tower,  Suite 1130,  Atlanta,
Georgia  30326 and  accepted in writing by Lender  thereafter  at such office as
evidenced by its execution  hereof  (notice of which delivery and acceptance are
hereby waived by Borrower).

        14.17.  PAYMENT ON  NON-BUSINESS  DAYS.  Whenever any payment to be made
hereunder or under the Term Note shall be stated to be due on a Saturday, Sunday
or a public holiday,  such payment may be made on the next  succeeding  Business
Day,  and  such  extension  of time  shall  in  such  case  be  included  in the
computation of payment of interest hereunder or under the Term Note.

        14.18.  WAIVER OF RIGHTS. Borrower hereby waives all rights which it has
or may have regarding, without limitation, the right to notice and to a judicial
hearing  prior to seizure of any  Collateral  by Lender.  In addition,  Borrower
waives any right  which it has or may have under UCC  Section  9-404(1)  to have
Lender file UCC  termination  statements with respect to the Collateral,  or any
part thereof,  and Borrower  further agrees that Lender shall not be required to
file such UCC
                                      -55-
<PAGE>
termination  statements  unless  and until the Term Note has been  paid in full;
provided,  however,  that  after  such  event,  Lender will file UCC termination
statements promptly upon request by Borrower.

        14.19.  CURE OF DEFAULTS BY LENDER.  If, hereafter, Borrower defaults in
the  performance of any duty or obligation to Lender  hereunder,  Lender may, at
its option,  but without  obligation,  cure such default and any costs, fees and
expenses  incurred  by  Lender  in  connection  therewith   including,   without
limitation,  for the purchase of insurance, the payment of taxes and the removal
or  settlement of liens and claims,  shall be deemed to be advances  against the
Term Note, whether or not this creates an over-advance thereunder,  and shall be
payable in accordance with its terms.

        14.20.  ATTORNEY-IN-FACT.   Borrower  hereby  designates,  appoints  and
empowers  Lender  irrevocably as its  attorney-in-fact,  at Borrower's  cost and
expense, to do in the name of Borrower any and all actions which Lender may deem
necessary or  advisable to carry out the terms hereof upon the failure,  refusal
or inability of Borrower to do so and Borrower  hereby  agrees to indemnify  and
hold Lender harmless from any costs,  damages,  expenses or liabilities  arising
against or  incurred  by Lender in  connection  therewith.  Without  limitation,
Borrower specifically authorizes all federal, state and municipal authorities to
furnish reports of examinations,  records and other information  relating to the
affairs of Borrower to Lender upon Lender's request.

        14.21.  PREPAYMENT PREMIUM.  The principal balance of this Term Note may
be prepaid in whole or in part at any time  provided  that in each  instance (a)
the Borrower  shall give at least thirty (30) days prior written  notice of such
prepayment   to   Lender;   (b)  the   Borrower   shall   pay  to  the   Lender,
contemporaneously with such prepayment,  a prepayment premium in an amount equal
to seven percent (7%) of the outstanding  principal balance of the Term Loan, if
prepaid  during the first year of the Term Loan;  the Borrower  shall pay to the
Lender, contemporaneously with such
                                      -56-

<PAGE>
prepayment, a prepayment premium in  an amount equal to six percent  (6%) of the
outstanding  principal  balance of the Term Loan,  if prepaid  during the second
year of the Term Loan;  the  Borrower shall pay to the Lender, contemporaneously
with such prepayment,  a prepayment  premium in an amount  equal to five percent
(5%) of the  outstanding  principal  balance of the Term Loan, if prepaid during
the  third  year  of  the  Term  Loan;  the  Borrower  shall  pay to the Lender,
contemporaneously  with such prepayment, a prepayment premium in an amount equal
to four  percent (4%) of the  outstanding principal balance of the Term Loan, if
prepaid  during the fourth  year of the Term Loan; the Borrower shall pay to the
Lender, contemporaneously with such prepayment a prepayment premium in an amount
equal to three percent  (3%)  of  the  outstanding principal balance of the Term
Loan, if prepaid during the fifth year  of the Term Loan; the Borrower shall pay
to the Lender, contemporaneously with such prepayment a prepayment premium in an
amount equal to two percent  (2%)  of the  outstanding  principal balance of the
Term Loan, if prepaid during the sixth year of the Term Loan; the Borrower shall
pay to the Lender,  contemporaneously  with such prepayment a prepayment premium
in an amount equal to one percent (1%) of the outstanding  principal  balance of
the Term Loan, if prepaid  during the seventh year of the Term Loan;  and (c) no
prepayment  premium is due for the balance of the term of the Term Loan.  In the
event the  business  is sold as a  going  concern  or if same is  acquired,  the
prepayment penalty  shall  be as follows:  three percent (3%) of the outstanding
principal balance of the Term Loan, if prepaid during the first year of the Term
Loan; two percent (2%) of the  outstanding  principal  balance of the Term Loan,
if  prepaid  during  the  second  year of the Term Loan; one percent (1%) of the
outstanding  principal  balance  of the Term Loan,  if prepaid during the third,
fourth, fifth, sixth or seventh year of the Term Loan.

                                      -57-
<PAGE>

        In the event the business is sold or acquired, Lender shall also receive
common shares of stock of the  Corporation,  which may be  unregistered  shares,
equal to four percent (4%) of the outstanding principal balance of the Term Loan
in year  one if  prepaid  in year  one;  four  percent  (4%) of the  outstanding
principal  balance of the loan in year two if prepaid in year two;  four percent
(4%) of the outstanding  principal  balance of the loan in year three if prepaid
in year three;  three percent (3%) of the outstanding  principal  balance of the
loan in year four if prepaid in year four;  two percent (2%) of the  outstanding
principal  balance  of the loan in year  five if  prepaid  in year  five and one
percent  (1%) of the  outstanding  principal  balance of the loan in year six if
prepaid  in year six at the  lesser of: (a) the per share book value at the time
of the USDA RD Loan closing, or (b) the per share book value at the time of sale
or acquisition of the business.

        Should the Borrower elect to refinance this loan,  Lender shall have the
first  right of refusal to match any  refinancing  proposals.  In the event that
Lender elects to do so, Lender will waive the prepayment premium as applicable.

        14.22.  FORCE  MAJEURE.   Borrower   agrees  that  Lender  will  not  be
responsible  for any loss or damage due to delays or  failures  to perform  that
result from circumstances  beyond Lender's control (such as telecommunication or
electrical outages and malfunctions,  postal strikes or delays,  computer system
failures (e.g., Year 2000) or natural disasters.

        14.23.  ASSUMPTION. It is the express intent of Borrower and Lender that
this shall be a fully-assumable Loan.  Accordingly,  Lender covenants and agrees
that  this Loan  shall be fully  assumable  by a third  party,  upon  Borrower's
receipt  of  Lender's  prior  written  consent,   which  consent  shall  not  be
unreasonably  withheld;  provided,  that such third party's net worth and credit
shall be equal to or greater  than the net worth and credit of  Borrower  at the
time the Borrower  made application to the Lender for the Loan herein,  and that
Lender shall be in receipt of any proposed

                                      -58-

<PAGE>
third party's application on Lender's form and the financial  statements of such
third  party  along with  the payment of an  assumption fee equal to one percent
(1%)  of  the  outstanding  principal  balance  of  the  Loan at the time of the
assumption.  The foregoing is subject to the Loan  being  current,  and no Event
of  Default  remaining  uncured  and  that  the  third  party  execute  a formal
assumption agreement,  in form and substance satisfactory to the  Lender.   Said
assumption  by  any  such third  party shall not  relieve the  Borrower from any
liability or obligation under the Loan.

        14.24.  CONFLICTS.  In  the event of any conflict between this Agreement
and the RD Guaranty Commitment, the RD Guaranty Commitment shall control.

        14.25.  SERVICING FEE. The Lender shall charge a one percent (1%) annual
servicing fee equal to one percent (1%) of the  outstanding  balance of the Term
Loan for the monitoring and servicing of the accounts receivable,  inventory and
Borrowing Base Certificate, which shall be assessed on the Closing Date and each
year on the same date thereafter.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      -59-

<PAGE>

        IN  WITNESS  WHEREOF,  Borrower and Lender each have set their hands and
seals, as of the day and year first above written.

                                        BORROWER:

                                        CYANOTECH CORPORATION


                                        BY: /s/Gerald R. Cysewski
----------------------                      ----------------------
Witness                                     GERALD R. CYSEWSKI, President

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

                                                      [CORPORATE SEAL]


                                        LENDER:

                                        B & I LENDING, LLC


                                        BY:
----------------------                      ----------------------
Witness

                                        TITLE: Senior Vice President



                                      -60-

<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF EXHIBITS


<S>                     <C>                                                          <C>
EXHIBIT                 DESCRIPTION OF EXHIBIT                                       SECTION
-------                 ----------------------                                       -------


A                       Facility/Land                                                1.1

B                       Collateral Locations                                         1.1

C                       Permitted Encumbrances                                       1.1

D                       Term Note                                                    1.1

E                       Board Resolutions                                            3.2

F                       Borrower's Opinion of Counsel                                3.8

G                       Real Property Mortgage; Security Agreement;
                          Assignment of Rents; and Financing Statement               5.2

H                       Security Agreement                                           5.2

H-1                     Assignment and Pledge of Maintenance                         5.2
                        Reserve Account

I                       Financial Statements                                         9.4

J                       Material Litigation                                          9.11

K                       Adverse Contracts                                            9.14

L                       Payment Schedule                                             1.1

M                       RD Guaranty Commitment                                       1.1

</TABLE>


                                      -61-