CYANOTECH CORPORATION
                             1995 STOCK OPTION PLAN
                             ----------------------

                                   ARTICLE ONE
                                     GENERAL
                                     -------

I.      PURPOSE OF THE PLAN

        A.      This 1995 Stock Option Plan ("Plan") is  intended to promote the
interests of Cyanotech Corporation, a Nevada corporation (the "Corporation"), by
providing  (i) key employees  (including  officers) of the  Corporation  (or its
subsidiary  corporations) and (ii) consultants and other independent contractors
who  provide   valuable   services  to  the   Corporation   (or  its  subsidiary
corporations)  with the  opportunity  to  acquire  a  proprietary  interest,  or
otherwise  increase  their  proprietary  interest,  in  the  Corporation  as  an
incentive for them to join or remain in the service of the  Corporation  (or its
subsidiary corporations).

        B.     The Plan shall become effective immediately upon approval of the
Corporations' stockholders at the 1995 Annual Stockholders Meeting to be held on
August 9, 1995.  Such date is hereby  designated  as the  Effective  Date of the
Plan.

        C.     For  purposes of the various equity incentive programs in effect
under the Plan, the following definitions apply:

                Board: the Corporation's Board of Directors.

                Common Stock: shares  of  the  Corporation's  common  stock, par
value $0.005 per share.

                Change  in  Control:  a  change  in  ownership or control of the
Corporation effected through either of the following transactions:

                (i)     any  person or related  group of persons (other than the
        Corporation or  a  person  that  directly  or  indirectly  controls,  is
        controlled  by,  or  is  under  common  control  with,  the Corporation)
        directly  or  indirectly  acquires  beneficial  ownership   (within  the
        meaning  of  Rule  13d-3 of the  Securities  Exchange  Act of  1934,  as
        amended,  "1934  Act") of stock possessing more than fifty percent (50%)
        of  the total  combined  voting power of the  Corporation's  outstanding
        stock  pursuant  to  a tender or  exchange  offer made  directly  to the
        Corporation's  stockholders  which  the Board  does not  recommend  such
        stockholders accept; or

               (ii)     there is a change in the composition of the Board over a
        period of thirty-six (36)  consecutive   months  or  less  such  that  a
        majority  of the Board  members  (rounded  up to the next whole  number)
        ceases,  by  reason  of one  or more  proxy contests for the election of
        Board members, to be comprised of persons who either (A) have been Board
        members continuously since the beginning of such period or (B) have been
        elected or nominated  for  election as Board  members during such period
        by at least a majority of

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        the  Board  members  described in clause (A) who were still in office at
        the time such election or nomination was approved by the Board.

                Corporate Transaction: any of the following stockholder-approved
transactions to which the Corporation is a party:

                        (i)     a  merger   or   consolidation   in  which   the
        Corporation  is not the surviving  entity,  except for a transaction the
        principal  purpose  of  which is  to  change  the  State  in  which  the
        Corporation is incorporated,

                       (ii)     the  sale,  transfer or other disposition of all
        or  substantially  all  of  the  assets  of  the Corporation in complete
        liquidation or dissolution of the Corporation, or

                      (iii)     any  reverse merger in which the  Corporation is
        the  surviving  entity  but in which  stock  possessing  more than fifty
        percent (50%)  of the total combined  voting power of the  Corporation's
        outstanding  stock  are transferred to person or persons  different from
        those who held such stock immediately prior to such merger.

                Employee:  a person who performs services while in the employ of
the Corporation or one  or more subsidiary corporations,  subject to the control
and direction of the employer entity not only as to the work to be performed but
also as to the manner and method of performance.

                Fair Market Value:  the  last  reported  price  per share of the
Common Stock on the day in question on the NASDAQ  Small-Cap  Market,  or if the
Common  Stock is  regularly  traded in some other  market or on an exchange  the
closing selling price per share of the Common Stock on the date in question,  as
such price is officially quoted by a national reporting service.  If there is no
such reported price on the date in question, then the fair market value shall be
the price on the last preceding date for which such quotation exists.

                Hostile  Take-Over:  a  change  in  ownership of the Corporation
through the following transaction:

                        (i)     any person or related  group of  persons  (other
        than  the Corporation or a person that directly or indirectly  controls,
        is  controlled  by, or is under common  control with,  the  Corporation)
        directly  or  indirectly  acquires  beneficial  ownership   (within  the
        meaning  of  Rule  13d-3 of the  Securities  Exchange  Act of  1934,  as
        amended) of stock  possessing more than fifty percent (50%) of the total
        combined  voting power of the  Corporation's  outstanding stock pursuant
        to  a tender  or  exchange  offer  made  directly  to the  Corporation's
        stockholders  which  the Board does not recommend such  stockholders  to
        accept, and

                       (ii)     more than  fifty  percent  (50%) of the stock so
        acquired  in such tender or exchange  offer are  accepted  from  holders
        other  than  the  officers  and  directors  of the  Corporation  who are
        subject to  the  short-swing  profit  restrictions  of Section 16 of the
        1934 Act.


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                Service:  the performance of services on a periodic basis to the
Corporation (or any subsidiary corporation) in the capacity of an Employee or an
independent consultant, except to the extent  otherwise specifically provided in
the applicable stock option agreement.

                Take-Over  Price:  the  greater of (a) the Fair Market Value per
share of Common Stock on the date the option is surrendered  to the  Corporation
in connection  with a Hostile  Take-Over or (b) the highest  reported  price per
share of Common  Stock paid by the  tender  offerer in  effecting  such  Hostile
Take-Over. However, if the surrendered option is an Incentive Option, as defined
in Section IV (C) of this Article One, the Take-Over  Price shall not exceed the
clause (a) price per share.

        D.      The  following provisions shall be applicable in determining the
subsidiary corporations of the Corporation:

                Each  corporation  (other  than  the Corporation) in an unbroken
         chain  of  corporations   beginning  with  the  Corporation   shall  be
         considered  to be a subsidiary of the  Corporation,  provided each such
         corporation  (other than the last  corporation)  in the unbroken  chain
         owns, at the time of the determination,  stock possessing fifty percent
         (50%) or more of the total  combined  voting  power of all  classes  of
         stock in any other corporation in such chain.

II.      STRUCTURE OF THE PLAN

        A.      Option Programs.  The  Plan  shall  be divided into two separate
equity  incentive programs:  the Discretionary Option Grant Program specified in
Article  Two  and  the Discount Option Grant Program specified in Article Three.
Under  the  Discretionary  Option  Grant  Program,  eligible persons may, at the
discretion of the Committee, be granted options  to  purchase  shares of  Common
Stock  in  accordance  with  the  provisions of Article Two.  Under the Discount
Option  Grant  Program,  eligible  persons  may elect,  in  accordance  with the
provisions of Article  Three,  to have a portion of their  base  salary  reduced
each  year  in  return  for  options  to  purchase  shares of Common Stock at an
aggregate discountfrom the Fair Market  Value of the option  shares on the grant
date equal to the salary reduction amount.

        B.      GENERAL   PROVISIONS.   Unless  the  context  clearly  indicates
otherwise,  the  provisions  of  Articles  One  and  Four  shall  apply  to  the
Discretionary  Option  Grant  Program  and the Discount Option Grant Program and
shall accordingly govern the interests of all persons under the Plan.

III.    ADMINISTRATION OF THE PLAN

        A.      The   Plan  shall  be  administered  by  the  Stock  Option  and
Compensation Committee of the Board ("Committee")  or other named  Committee  of
the Board, subject to the requirements of 1934 Act Rule 16b-3:

                (i)     The Committee of two  (2)  or  more  non-employee  Board
        members  shall  be  appointed  by  the  Board to have sole and exclusive
        authority to administer the  Discretionary  Option  Grant  and  Discount
        Option Grant Programs. No Board member shall be eligible to serve on the
        Committee  if  such  person  has,  within  the  twelve (12)-month period
        immediately  preceding the date he or she is  to  be  appointed  to  the
        Committee, received an option grant or stock issuance under this Plan or
        any other stock option, stock

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        appreciation,  stock  bonus or other stock plan of the  Corporation  (or
        any  subsidiary  corporation),  other  than plans  permitted by 1934 Act
        Rule 16b-3.

               (ii)     Members of the  Committee  shall  serve for such term as
        the Board may  determine and shall be subject to removal by the Board at
        any time.


        B.      The Committee  shall have full power and  authority  (subject to
the express provisions of the Plan) to establish  such rules and  regulations as
it  may  deem  appropriate  for  the proper  administration of the Discretionary
Option  Grant and Discount Option Grant Programs and to make such determinations
under,  and issue such  interpretations  of, the provisions of each such program
and  any  outstanding  option  grants  thereunder  as  it  may deem necessary or
advisable.   All   decisions   of   the   Committee  within  the  scope  of  its
administrative  functions  under  the  Plan  shall  be  final and binding on all
parties  who  have  an interest in the  Discretionary  Option  Grant or Discount
Option   Grant   Program  under  its  jurisdiction  or  any  outstanding  option
thereunder.

        C.      Service  on  the  Committee  shall constitute service as a Board
member, and members of the Committee shall  accordingly   be  entitled  to  full
indemnification  and  reimbursement  as Board  members for their  service on the
Committee.  No member of the  Committee  shall be liable for any act or omission
made in good faith with respect to the Plan or any option grant under the Plan.

IV.     ELIGIBILITY

        A.      The  persons eligible to participate in the Discretionary Option
Grant  Program  under  Article  Two  and the Discount Option Grant Program under
Article Three ("Optionees") are as follows:

                        (i)     officers and other employees of the  Corporation
        (or  its subsidiary  corporations)  who render services which contribute
        to  the management,  growth and financial success of the Corporation (or
        its subsidiary corporations); and

                       (ii)     those    consultants    or   other   independent
        contractors  who  provide  valuable  services to the Corporation (or its
        subsidiary corporations).

        B.      Non-employee  Board members shall not be eligible to participate
        in the Discretionary Option Grant or Discount Option Grant Program or in
        any other  stock option, stock purchase, stock bonus or other stock plan
        of  the Corporation (or its subsidiary  corporations),  except for plans
        permitted by 1934 Act Rule 16b-3.

        C.      The  Committee  shall  have  full  authority  to determine which
        eligible  persons  are to receive option grants, the number of shares to
        be  covered  by  each  such  grant,  the status of the granted option as
        either an incentive stock option ("Incentive  Option")  which  satisfies
        the  requirements  of Section 422 of the  Internal  Revenue  Code  or  a
        non-qualified option not intended to meet such requirements, the time or
        times at which  each  granted  option  is to  become exercisable and the
        maximum term for which the option may remain outstanding.

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V.      STOCK SUBJECT TO THE PLAN

        A.      Shares  of the  Corporation's  Common  Stock shall be  available
for issuance under the Plan and shall be drawn  from  either  the  Corporation's
authorized  but  unissued  shares of Common Stock or from  reacquired  shares of
Common  Stock,  including  shares  repurchased  by the  Corporation  on the open
market.  The maximum  number of shares of Common  Stock which may be issued over
the term of the Plan shall not exceed 800,000 shares, subject to adjustment from
time to time in accordance with the provisions of this Section V.

        B.      Should one or more outstanding options under this Plan expire or
terminate  for any  reason  prior to  exercise  in full  (including  any  option
canceled in accordance with the cancellation-regrant provisions of Section IV of
Article Two of the Plan),  then the shares subject to the portion of each option
not so exercised shall be available for subsequent  option grant under the Plan.
Shares subject to any option or portion  thereof  surrendered in accordance with
the stock  appreciation  right  provisions  of the Plan and all share  issuances
under the Plan, shall reduce on a share-for-share  basis the number of shares of
Common Stock available for subsequent option grants under the Plan. In addition,
should the exercise price of an  outstanding  option under the Plan be paid with
shares of Common Stock or should shares of Common Stock otherwise issuable under
the Plan be withheld by the Corporation in satisfaction of the withholding taxes
incurred in  connection  with the  exercise of an  outstanding  option under the
Plan, then the number of shares or Common Stock available for issuance under the
Plan  shall be  reduced  by the gross  number of shares  for which the option is
exercised,  and not by the net number of shares of Common Stock actually  issued
to the option holder.

        C.      Should  any change be made to the Common  Stock  issuable  under
the  Plan  by  reason  of  any  stock  split,  stock dividend, recapitalization,
combination  of  shares,  exchange  of  shares  or  other  change  affecting the
outstanding  Common  Stock  as a class  without  the  Corporation's  receipt  of
consideration,  then  appropriate  adjustments  shall be made to (i) the maximum
number and/or class of stock  issuable  under and (ii) the number  and/or  class
of stock and price per share in effect under each option  outstanding  under the
Discretionary  Option  Grant  or  Discount Option Grant. Such adjustments to the
outstanding  options  are  to be effected in a  manner which shall  preclude the
enlargement  or  dilution  of  rights  and   benefits  under such  options.  The
adjustments  determined by the Committee shall be final, binding and conclusive.


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                                   ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM
                       ----------------------------------

I.      TERMS AND CONDITIONS OF OPTIONS

        Options  granted  pursuant to  the  Discretionary  Option Grant  Program
shall be  authorized  by action of the  Committee  and may,  at the  Committee's
discretion,  be either Incentive Options or non-qualified  options.  Persons who
are not Employees of the Corporation may only be granted non-qualified  options.
Each granted  option shall be evidenced by one or more  instruments  in the form
approved by the Committee;  provided,  however,  that each such instrument shall
comply with the terms and conditions specified below. Each instrument evidencing
an Incentive Option shall, in addition,  be subject to the applicable provisions
of Section II of this Article Two.

        A.      Option Price.
                ------------

                1.      The  option price per share under this Article Two shall
be fixed by the Committee in accordance with the following provisions:

                        (i)     The option price per share of the  Common  Stock
        subject  to  an  Incentive  Option  shall in no  event be less  than one
        hundred  percent (100%) of the Fair Market Value of such Common Stock on
        the grant date.

                       (ii)     The option  price per share of the Common  Stock
        subject  to  a  non-qualified  stock  option  shall  be  in  the  amount
        determined  by the Committee at the time of grant and  may be less than,
        equal to or  more than the Fair Market Value of such Common Stock on the
        grant date.

                2.      The  option  price  shall  become  immediately  due upon
exercise  of  the  option  and  shall be payable in one of the alternative forms
specified below;

                        (i)     full  payment  in  cash or check made payable to
        the Corporation's order:

                       (ii)     full  payment in shares of Common Stock held for
        the  requisite period  necessary to avoid a charge to the  Corporation's
        earnings  for  financial  reporting  purposes  and valued at Fair Market
        Value  on the  Exercise  Date (as such term is  hereinafter  defined  in
        subparagraph 2);

                      (iii)     full  payment  in  a  combination  of  shares of
        Common  Stock held for the requisite  period necessary to avoid a charge
        to the  Corporation's  reported earnings and valued at Fair Market Value
        on  the  Exercise  Date and cash or check  payable to the  Corporation's
        order; or

                       (iv)     full payment  through a  broker-dealer  sale and
        remittance  procedure  pursuant  to which the Optionee (I) shall provide
        irrevocable  written  instructions  to  a designated  brokerage  firm to
        effect  the  immediate  sale  of the  purchased  shares and remit to the
        Corporation,  out of the sale proceeds available on the settlement date,
        sufficient

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        funds  to cover the  aggregate  option price  payable for the  purchased
        shares plus all applicable Federal and State income and employment taxes
        required to be withheld by  the  Corporation  in  connection  with  such
        purchase and (II) shall provide written directives to the Corporation to
        deliver  the  certificates  for the purchased  shares directly  to  such
        brokerage firm in order to complete the sale transaction.

                For purposes of this subparagraph 2, the Exercise Date shall  be
the date on which written  notice of the of the option  exercise is delivered to
the  Corporation.  Except  to  the  extent the sale and remittance  procedure is
utilized in  connection  with the exercise of the option,  payment of the option
price for the purchased shares must accompany such notice.

        B.      Term and Exercise of Options.
                ----------------------------

                Each   option   granted   under   this   Article  Two  shall  be
exercisable  at such time or times,  during such period,  and for such number of
shares as shall be determined  by the Committee and set forth in the  instrument
evidencing such option. No granted option shall, however, have a maximum term in
excess of ten (10)  years.  During the  lifetime  of the  Optionee,  the option,
together with any stock appreciation rights pertaining to such option,  shall be
exercisable  only by the Optionee and shall not be  assignable  or  transferable
other than by transfer of the option  effected by will or by the laws of descent
and  distribution  following the  Optionee's  death,  or pursuant to a qualified
domestic  relations  order as defined by the Internal  Revenue Code of 1986,  as
amended,  or Title I of the Employment  Retirement  Income  Security Act, or the
rules thereunder.  Notwithstanding the provisions of the preceding sentence,  at
the discretion of the Committee,  the instrument evidencing an option may permit
the  transferability  of such  option by the  Optionee  solely to members of the
Optionee's  immediate  family or a trust or  partnership  for the benefit of the
Optionee or such persons, in which case such option shall be exercisable by such
transferee.

        C.      Termination of Service.
                ----------------------

                1.      In   the   event   the  Optionee  should  cease  Service
while holding one or more options  under this Article Two, then each such option
shall  not  remain  exercisable  beyond the limited post-Service exercise period
specified by the Committee in the instrument  evidencing  the grant,  unless the
Committee  otherwise  extends  such  period  in accordance with subparagraph C.5
below.

                2.      During  the post-Service exercise period, the option may
not be exercised for more than the number of option shares (if any) in which the
Optionee is vested at the time of cessation of Service.  Upon the  expiration of
such  post-Service  exercise  period or (if earlier) upon the  expiration of the
option term, the option shall  terminate and cease to be  outstanding.  However,
each option shall immediately terminate and cease to be outstanding, at the time
of the  Optionee's  cessation of Service,  with respect to any option shares for
which such option is not otherwise at the time exercisable.

                3.      Should the optionee  die  while   holding  one  or  more
outstanding  options  under  this  Article  Two,  then each such  option  may be
exercised,  subject to the  limitations of subparagraph 2 above, by the personal
representative  of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or the laws of descent and
distribution.


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                4.      Should (i) the  Optionee's  Service  be  terminated  for
misconduct  (including,  but not  limited  to,  any act of  dishonesty,  willful
misconduct,  fraud or  embezzlement)  or (ii) the optionee make any unauthorized
use  or  disclosure  of  confidential   information  or  trade  secrets  of  the
Corporation or its subsidiaries,  then in any such event all outstanding options
held by the Optionee  under this  Article Two shall  terminate  immediately  and
cease to be outstanding.

                5.      The  Committee  shall  have  full power and authority to
extend  the  period  of  time  for  which  the  option is to remain  exercisable
following the Optionee's  cessation of Service or death from the limited  period
specified in the instrument evidencing such grant to such greater period of time
as the  Committee  shall deem appropriate under the circumstances.  In no event,
however, shall such option be exercisable after the specified expiration date of
the option term.

                6.      The   Committee   shall    have   complete   discretion,
exercisable either at the time the option is granted  or at any time the  option
remains  outstanding,  to  permit one or more options granted under this Article
Two to be  exercised  not only for the  number of  shares  for  which  each such
option  is  exercisable  at  the  time  of  the Optionee's  cessation of Service
but also for one or more subsequent installments of purchasable shares for which
the option would otherwise have become exercisable had such cessation of Service
not occurred.

        D.      Stockholder Rights.
                ------------------

                An Optionee has none of the rights of a stockholder with respect
to any option  shares  until  such  person has exercised the option and paid the
option price for the purchased shares.


II.     INCENTIVE OPTIONS

        The  terms and  conditions  specified  below shall be  applicable to all
Incentive Options granted under this Article Two.  Incentive Options may only be
granted to persons  who are  Employees  of the  Corporation.  Options  which are
specifically  designated as  "non-qualified"  options when issued under the Plan
shall not be subject to such terms and conditions.

         A.     DOLLAR LIMITATION.  The  aggregate Fair Market Value (determined
as of the respective date of dates of grant of the Common Stock for which one or
more  options granted  to any Employee under this Plan (or any other option plan
of the  Corporation  or its  subsidiary  corporations)  may for the  first  time
become  exercisable as incentive stock options under the Federal tax laws during
any one calendar year shall not exceed the sum of One Hundred  Thousand  dollars
($100,000).  To the extent the Employee holds two (2) or more such options which
become  exercisable  for the first time in the same calendar year, the foregoing
limitation  on the  exercisability  of such options as incentive  stock  options
under the  federal  tax laws shall be applied on the basis of the order in which
such options are granted.  Should the number of shares of Common Stock for which
any Incentive  Option first becomes  exercisable in any calendar year exceed the
applicable one hundred thousand dollar  ($100,000)  limitation,  then the option
may  nevertheless  be exercised in that  calendar  year for the excess number of
shares as a non-qualified option under the Federal tax laws.

        B.      10% STOCKHOLDER.  If  any  person to whom an Incentive Option is
granted  is  the  owner  of  stock  (as  determined  under Section 424(d) of the
Internal Revenue Code) possessing ten percent (10%) or

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more  of the  total  combined  voting  power  of all  classes  of  stock  of the
corporation or any one of its subsidiary corporations, then the option price per
share  shall not be less than one  hundred  and ten  percent  (110%) of the fair
market  value per share of Common  Stock on the grant date,  and the option term
shall not exceed five (4) years, measured from the grant date.

        Except  as modified by the preceding  provisions of this Section II, the
provisions  of  Articles  One,  Two and  Four of the  Plan  shall  apply  to all
Incentive Options granted hereunder.


III.    CORPORATE TRANSACTIONS / CHANGES IN CONTROL

        A.      Each  option which is outstanding  under this Article Two at the
time of a Corporate  Transaction  shall  automatically  accelerate  so that each
such option  shall,  immediately  prior  to the  specified  effective  date  for
such  Corporate  Transaction, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such  option  and may be
exercised for all or any portion of such shares.  However, an outstanding option
under this Article Two shall not so  accelerate  if and to the extent:  (i) such
option is, in connection with the Corporate Transaction, either to be assumed by
the successor  corporation or parent thereof or to be replaced with a comparable
option to purchase  shares of the capital stock of the successor  corporation or
parent thereof, (ii) such option is to be replaced with a cash incentive program
of the successor  corporation  which preserves the option spread existing at the
time  of the  Corporate  Transaction  and  provides  for  subsequent  payout  in
accordance with the same exercise  schedule  applicable to such option, or (iii)
the acceleration of such option is subject to other  limitations  imposed by the
Committee,  at the  time  of the  option  grant.  The  determination  of  option
comparability under clause (i) above shall be final, binding and conclusive. The
Committee  shall also have full power and  authority to grant  options under the
Plan which are to automatically accelerate in whole or in part immediately prior
to  the  Corporate  Transaction  or  upon  the  subsequent  termination  of  the
Optionee's Service,  whether or not those options are otherwise to be assumed or
replaced in connection with the consummation of such Corporate Transaction.

        B.      Upon   the  consummation  of  the  Corporate  Transaction,   all
outstanding  options  under  this  Article Two shall  terminate  and cease to be
outstanding,  except  to  the extent assumed by the successor corporation or its
parent company.

        C.      Each outstanding  option under this Article Two which is assumed
in  connection  with  the  Corporate  Transaction or is otherwise to continue in
effect  shall  be  appropriately  adjusted,  immediately  after  such  Corporate
Transaction, to apply and pertain to the number and class of stock  which  would
have  been  issued  to  the  option  holder,  in  consummation of such Corporate
Transaction,  had  such  person  exercised  the option immediately prior to such
Corporate Transaction.  Appropriate adjustments shall also be made to the Option
price payable per share,  provided the  aggregate  option price payable for such
stock  shall remain the same.  In  addition,  the  class  and  number  of  stock
available  for  issuance  under  the  Plan  following  the  consummation  of the
Corporate Transaction shall be appropriately adjusted.

        D.      The  grant  of  options  under  this Article Two shall in no way
affect  the  right  of  the  Corporation  to  adjust,  reclassify, reorganize or
otherwise  change its capital or business  structure  or to merge,  consolidate,
dissolve,  liquidate  or  sell  or  transfer  all or any part of its business or
assets.

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<PAGE>

        E.      The   Committee   shall   have   the   discretionary  authority,
exercisable either in advance of any  actually-anticipated  Change in Control or
at  the  time  of  an  actual  Change  in  Control, to provide for the automatic
acceleration of one or more outstanding  options under this Article Two upon the
occurrence of the Change in Control.  The  Committee  shall also have full power
and  authority  to  condition any such option  acceleration  upon the subsequent
termination  of  the  Optionee's Service within a specified period following the
Change in Control.

        F.      Any options accelerated in connection with the Change in Control
shall remain fully exercisable until the expiration or sooner termination of the
option term or the surrender of such option in accordance with Section V of this
Article Two.

        G.      The  exercisability as incentive stock options under the Federal
tax laws of any options accelerated under this Section III in connection  with a
Corporate  Transaction  or Change in Control shall remain  subject to the dollar
limitation of Section II of this Article Two.

IV.     CANCELLATION AND REGRANT OF OPTIONS

        The Committee  shall have the authority to effect,  at any time and from
time to time, with the consent of the affected  Optionees,  the  cancellation of
any or  all  outstanding  options  under  this  Article  Two  and  to  grant  in
substitution  new options under the Plan covering the same or different  numbers
of shares of Common Stock but with an option price per share based upon the Fair
Market Value of the Common Stock on the new grant date.

V.      STOCK APPRECIATION RIGHTS

        A.      One or more Optionees may be granted the right, exercisable upon
such terms and  conditions as the Committee may  establish,  to surrender all or
part  of an  unexercised  option  under  this  Article  Two  in  exchange  for a
distribution  from the  Corporation  in an amount equal to the excess of (i) the
Fair  Market  Value (on the option  surrender  date) of the number of shares for
which the option is at the time  exercisable  (or surrendered  portion  thereof)
over (ii) the aggregate option price payable for such shares.

        B.      No  such  option  surrender  shall  be  effective  unless  it is
approved  by  the  Committee.  If  the  surrender  is  so  approved,   then  the
distribution to which the Optionee shall accordingly  become entitled under this
Section V may be made in shares of Common Stock  valued at Fair Market  Value on
the option  surrender  date, in cash, or partly in shares and partly in cash, as
the Committee shall in its sole discretion deem appropriate.

        C.      If the surrender of an option is rejected by the Committee, then
the Optionee shall retain whatever rights the Optionee had under the surrendered
option (or  surrendered  portion  thereof) on the option  surrender date and may
exercise  such  rights at any time  prior to the later of (i) five (5)  business
days after the receipt of the rejection notice or (ii) the last day on which the
option is otherwise  exercisable in accordance  with the terms of the instrument
evidencing  such option,  but in no event may such rights be exercised more than
ten (10) years after the date of the option grant.

        D.      One   or  more  officers  of  the  Corporation  subject  to  the
short-swing  profit  restrictions  of  the  Federal  securities laws may, in the
Committee's sole  discretion,  be granted limited stock  appreciation  rights in
tandem  with  their  outstanding  options  under this Discretionary Option Grant
Program. Upon the

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<PAGE>

occurrence of a Hostile Take-Over, each such officer holding one or more options
with  such a limited  stock  appreciation  right in effect  for at least six (6)
months shall have the  unconditional  right  (exercisable  for a thirty (30)-day
period  following  such Hostile  Take-Over) to surrender each such option to the
Corporation,  to the extent the option is at the time exercisable. In return for
the  surrendered  option,  the officer shall be entitled to a cash  distribution
from the Corporation in an amount equal to the excess of (i) the Take-Over Price
of the  shares  of  Common  Stock  which  are  at the  time  vested  under  each
surrendered  option (or  surrendered  portion) over (ii) the aggregate  exercise
price  payable  for such vested  shares.  Such cash  distribution  shall be paid
within five (5) days following the option  surrender date.  Neither the approval
of the  Committee  nor the consent of the Board shall be required in  connection
with such option surrender and cash distribution.  The balance of the option (if
any) shall  continue in full force and effect in accordance  with the instrument
evidencing such grant.


                                       11

<PAGE>

                                  ARTICLE THREE

                          DISCOUNT OPTION GRANT PROGRAM
                          -----------------------------

I.      ELIGIBILITY

        The Committee shall have authority to select, prior to the start of each
calendar   year,   the  particular  key  employees  who  will  be  eligible  for
participation  in the Discount  Option Grant  Program for the calendar  year. In
order to become an actual  participant  for a  particular  calendar  year,  each
selected  person must,  prior to the start of that calendar year,  file with the
Committee (or its designate) an irrevocable  authorization pursuant to which the
Corporation  is to reduce  his or her base  salary for that  calendar  year by a
designated multiple of five percent (5%).

        The  Committee  shall  review  the filed  authorizations  and  determine
whether to approve, in whole or in part, one or more of these authorizations. To
the  extent  the  Committee  approves  one  or  more  such  authorizations,  the
participants who filed those  authorizations shall be granted options under this
Article Three option program.  To the extent one or more  authorizations are not
approved by the Committee,  those  authorizations  shall have no force or effect
and no discounted options shall be granted with respect to the unapproved salary
reductions.

        To the  extent  options  are granted  under the  Discount  Option  Grant
Program, such options shall be non-qualified options evidenced by instruments in
such form as the Committee shall from time to time approve;  provided,  however,
that  each such  instrument  shall  comply  with and  incorporate  the terms and
conditions specified below.

II.     TERMS AND CONDITIONS OF OPTION

        A.      Option Price.
                ------------

                1.     The  option price per  share  shall be  thirty-three  and
one-third  percent  (33-1/3%) of the Fair Market Value per share of Common Stock
on the grant date.

                2.     The  option  price  shall  become  immediately  due  upon
exercise  of  the  option  and shall be payable in one of the alternative  forms
specified in Section I(A)(2) of Article Two.

        B.      Number of Option Shares.
                -----------------------

                1.      The  number  of  shares  of Common  Stock for which each
grant under this Article  Three  is to be  made  to a  selected  Optionee  shall
be determined pursuant to the following formula:
                X = A / (B x 66-2/3%)

where           X is the number of option shares,

                A  is  the  dollar  amount  of  the  approved  reduction  in the
                Optionee's base salary for the calendar year, and

                B is the Fair Market Value per share of Common Stock on the date
                of the grant.

                                       12

<PAGE>

        C.      Term and Exercise of Options.
                ----------------------------

                1.     Each  option shall have a maximum  term of ten (10) years
measured from the grant date.  Provided the Optionee  continues in Service,  the
option shall become exercisable for (A) fifty percent (50%) of the option shares
on last day of June next following the grant date and (B) for the balance of the
option shares in a series of six (6) successive  equal monthly  installments  on
the last day of each of the next six (6) calendar months.

                2.     During  the Optionee's  lifetime,  the  option,  shall be
exercisable  only by the Optionee and shall not be  assignable  or  transferable
other  than by  transfer  of the  option by will or by the laws of  descent  and
distribution following the Optionee's death, or pursuant to a qualified domestic
relations order as defined by the Internal Revenue Code of 1986, as amended,  or
Title  I of  the  Employment  Retirement  Income  Security  Act,  or  the  rules
thereunder.


        D.      Effect of Termination of Service.
                --------------------------------

                1.      Should an  Optionee  cease  Service for any reason after
one or more of his outstanding options under  this  Article  Three  have  become
exercisable in whole or in part, then each such option shall remain exercisable,
for any or all of the shares for which the option is  exercisable on the date of
such cessation of Service, until the expiration of the ten (10)-year option term
or its sooner termination,  under Section F(1) of this Article Three.  Following
the Optionee's death,  each such option may be exercised,  for any or all of the
shares for which the option is exercisable at the time of the Optionee's  death,
by the  personal  representative  of the  Optionee's  estate or by the person or
persons to whom the option is transferred  pursuant to the Optionee's will or in
accordance with the laws of descent and distribution, but any such exercise must
be effected prior to the expiration or sooner termination of the option term.

                2.      Should the Optionee  die  before  one  or  more  of  his
outstanding  options under this Article Three become  exercisable for any of the
option shares, then the personal  representative of the Optionee's estate or the
person  or  persons  to  whom  such  options  are  transferred  pursuant  to the
Optionee's will or in accordance with the laws of descent and distribution shall
nevertheless  have the right to exercise  each such option for up to that number
of option shares equal to (A)  one-twelfth  (1/12) of the total number of option
shares  multiplied  by (B) the number of full  calendar  months  which will have
elapsed  between  the first  day of the  calendar  year for which the  option is
granted and the last day of the calendar month during which the Optionee  ceases
Service.  Such exercise must occur prior to the specified expiration date of the
option term or (if earlier) the first  anniversary of the date of the Optionee's
death.  Upon the occurrence of the earlier event, the option shall terminate and
cease to be exercisable.  Each such option shall, with respect to the balance of
the option shares for which it is not  exercisable at the time of the Optionee's
cessation of Service,  terminate  immediately upon such cessation of Service and
shall cease to be outstanding with respect to those option shares.

                3.      Should the Optionee  become  permanently   disabled  (as
determined  in accordance  with Section 22(e) of the Internal  Revenue Code) and
cease  by  reason  thereof  to  remain  in  Service  before  one or  more of his
outstanding  options under this Article Three become  exercisable for any of the
option shares,  then the Optionee shall  nevertheless have the right to exercise
each such option for up to that

                                       13

<PAGE>
number of option shares equal to (A)  one-twelfth  (1/12) of the total number of
option shares  multiplied  by (B) the number of full calendar  months which will
have elapsed  between the first day of the calendar year for which the option is
granted and the last day of the calendar month during which the Optionee  ceases
Service.  Each such exercise must,  however, be effected prior to the expiration
of the ten (10)-year option term or its sooner termination under Section F(1) of
this Article Three. The option shall,  with respect to the balance of the option
shares for which it is not  exercisable at the time of the Optionee's  cessation
of Service, terminate immediately upon such cessation of Service and shall cease
to be outstanding with respect to those option shares.

                4.      Except to the limited extent  specifically  provided  in
subparagraphs 2 and 3 above,  should the Optionee cease for any reason to remain
in Service  before one or more of his  outstanding  options  under this  Article
Three  become  exercisable  for any of the  option  shares,  then each such non-
exercisable  option shall  immediately  terminate upon such cessation of Service
and cease to be outstanding.

        E.      STOCKHOLDER RIGHTS.  The  Optionee shall have none of the rights
of a stockholder with respect to  any option shares until such person shall have
exercised the option and paid the option price for those shares.

        F.      Corporate Transaction / Change in Control.
                -----------------------------------------

                1.      Should   any   Corporate  Transaction  occur  while  the
Optionee remains in Service, then each outstanding  option held by such Optionee
under  this  Article  Three  shall become exercisable,  immediately prior to the
specified effective date of such Corporate Transaction, for all of the shares at
the  time  subject  to  such  option and may be exercised for any or all of such
shares.  Upon  the  consummation of the Corporate Transaction,  each such option
shall terminate unless assumed by the successor corporation or parent thereof.

                2.      Should a Change in Control occur while the  Optionee  is
still in Service,  then each outstanding option held by such Optionee under this
Article Three shall,  immediately  prior to the effective date of such Change in
Control, become exercisable with respect to the total number of shares of Common
Stock at the time  subject to such  option and may be  exercised  for all or any
portion of such shares at any time prior to the expiration or sooner termination
of the option term.

                3.      The  grant of  options under this Article Three shall in
no way affect the right of the  Corporation  to adjust,  reclassify,  reorganize
or otherwise change its capital or business structure or to merge,  consolidate,
dissolve,  liquidate  or sell or  transfer  all or any part of its  business  or
assets.


                                       14

<PAGE>

                                  ARTICLE FOUR

                                  MISCELLANEOUS
                                  -------------

I.      LOANS OR INSTALLMENT PAYMENTS

        A.      The Committee may assist any Optionee (including any officer) in
the  exercise  of one or more outstanding options under the Discretionary Option
Grant  or  Discount  Option Grant Program by (a)  authorizing the extension of a
loan to such Optionee from the  Corporation  or (b)  permitting  the Optionee to
pay the  option  price for the  purchased  Common Stock in  installments  over a
period  of  years.  The terms of any such loan or installment  method of payment
(including the interest rate and terms of repayment) shall be established by the
Committee in its sole discretion.  Loans and installment payments may be granted
without  security  or collateral,  but the maximum  credit  available per person
shall not  exceed  the sum of  (i) the aggregate  option price of the  purchased
shares plus  (ii) any Federal,  State and local  income tax and  employment  tax
liabilities incurred by the person in connection with the exercise of the option
or the acquisition of the shares.

        B.      The  Committee  may,  in its absolute discretion, determine that
one  or  more  loans  extended under this financial  assistance program shall be
subject to forgiveness by the Corporation in whole or in part  upon  such  terms
and conditions as the Committee may deem appropriate.

II.     AMENDMENT OF THE PLAN AND AWARDS

        A.      The  Board  has  complete  and  exclusive power and authority to
amend or modify the Plan (or any equity incentive program  hereunder)  in any or
all  respects  whatsoever.  However,  no  such  amendment  or modification shall
adversely  affect  rights  and  obligations  with respect to options at the time
outstanding  under  the  Plan,  unless  the Optionee consents to such amendment.
In  addition,  the  Board  may  not,  without  the approval of the Corporation's
stockholders,  amend  the Plan to (i) materially  increase the maximum number of
shares issuable under the Plan, except for permissible adjustments under Section
V(C) of Article One,  (ii)  materially  modify the eligibility  requirements for
plan  participation  or  (iii)  materially  increase  the  benefits  accruing to
Optionees.

        B.      Options to purchase  shares of Common Stock may be granted under
the Discretionary Option Grant and the Discount  Option Grant Programs which are
in excess of the number of shares then available  for  issuance  under the Plan,
provided any excess shares actually issued under the Discretionary  Option Grant
or the  Discount  Option  Grant  Program  are held in escrow  until  stockholder
approval is obtained for a sufficient increase in the number of shares available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess  option grants or excess
share  issuances  are  made,  then  (I) any  unexercised  excess  options  shall
terminate and cease to be exercisable  and (II) the  Corporation  shall promptly
refund the purchase price paid for any excess shares  actually  issued under the
Plan and held in escrow,  together with interest (at the  applicable  Short Term
Federal Rate) for the period the shares were held in escrow.

                                       15

<PAGE>

III.    TAX WITHHOLDING

        A.      The  Corporation's  obligation to deliver shares of Common Stock
upon exercise of stock options or the vesting of shares acquire upon exercise of
such  options  under  the  Plan  shall  be  subject to the  satisfaction  of all
applicable  Federal,  State and  local income tax and employment tax withholding
requirements.

        B.      The Committee may, in its discretion and in accordance  with the
provisions of this Section III and such supplemental  rules as the Committee may
from time to time adopt (including the applicable safe-harbor provisions of 1934
Act Rule 16b-3), provide any or all holders of non-qualified options or unvested
shares  under  the  Plan  with  the  right  to use  shares  of  Common  Stock in
satisfaction  of all or part of the  Federal,  State  and local  income  tax and
employment  tax  liabilities  incurred by such  holders in  connection  with the
exercise  of their  options.  Such right may be  provided  to any such holder in
either or both of the following formats:

                        (i)     Stock   Withholding:     The   holder   of   the
        non-qualified  option  may be  provided  with the  election  to have the
        Corporation  withhold,  from  the  shares  of   Common  Stock  otherwise
        issuable  upon the exercise of such  non-qualified  option, a portion of
        those  shares  with  an   aggregate  Fair  Market  Value  equal  to  the
        percentage  of the applicable Taxes (up to one hundred (100%)) specified
        by such holder.

                       (ii)     Stock  Delivery:  The  Committee  may,   in  its
        discretion,  provide  the  holder of the  non-qualified  option with the
        election  to deliver to the Corporation,  at the time the  non-qualified
        option  is exercised, one or more shares of Common Stock already held by
        such  person with an aggregate  Fair Market Value (100%) as specified by
        such  person)  of the Taxes  incurred  in  connection  with such  option
        exercise.


IV.     EFFECTIVE DATE AND TERM OF PLAN

        A.      This  Plan shall become effective on August 9, 1995, immediately
upon approval by the Corporation's stockholders at the 1995 Annual Meeting.

        B.      The Plan shall terminate  upon the earlier of (i) August 8, 2005
or  (ii)  the  date on which all shares  available  for issuance  under the Plan
shall have been  issued or  canceled  pursuant  to the  exercise  of  options or
stock appreciation rights granted under the Plan.  If the date of termination is
determined  under clause (i) above,  then all option  grants and unvested  stock
issuances  outstanding on such date shall thereafter  continue to have force and
effect in accordance  with the  provisions of the  instruments  evidencing  such
grants or issuances.

V.      USE OF PROCEEDS

        Any  cash proceeds  received by the Corporation  from the sale of shares
pursuant to option  grants  under the Plan shall be used for  general  corporate
purposes.

                                       16
<PAGE>
VI.     REGULATORY APPROVALS

        A.      The implementation of the Plan, the granting of any option under
the Plan,  and the  issuance of Common  Stock upon the  exercise or surrender of
the  option  grants  made  hereunder  shall  be  subject  to  the  Corporation's
procurement of all approvals and permits  required  by  regulatory   authorities
having jurisdiction over the Plan, the options  granted under it, and the Common
Stock issued pursuant to it.

        B.      No  shares  of  Common  Stock or other  assets  shall be  issued
or  delivered  under this Plan unless and until there shall have been compliance
with all applicable requirements of Federal and State securities laws, including
the  filing  and  effectiveness  of the Form S-8 registration  statement for the
shares  of  Common  Stock  issuable  under  the Plan, and all applicable listing
requirements  of  any  securities  exchange  on  which  the Common Stock is then
listed.

VII.    NO EMPLOYMENT/SERVICE RIGHTS

        Neither  the action of the Corporation in establishing the Plan, nor any
action taken by the Committee hereunder,  nor any provision of the Plan shall be
construed so as to grant any person the right to remain in the employ or service
of the  Corporation (or any subsidiary  corporation)  for any period of specific
duration,  and the  Corporation  (or any  subsidiary  corporation  retaining the
services of such person) may terminate  such  person's  employment or service at
any time and for any reason, with or without cause.

VIII.   MISCELLANEOUS PROVISIONS

        A.      The right to acquire Common Stock or other assets under the Plan
may not be assigned, encumbered or otherwise transferred by any Optionee, except
as specifically provided in the Plan.

        B.      The  provisions  of the Plan relating to the exercise of options
and the vesting of shares shall  be governed by the laws of the State of Hawaii,
as such laws are applied to contracts entered into.

        C.      The provisions of the Plan shall inure to the benefit of, and be
binding  upon,  the  Corporation  and its  successors  or  assigns,  whether  by
Corporate Transaction or otherwise, and the Optionees, the legal representatives
of their  respective  estates,  their  respective  heirs or  legatees  and their
permitted assignees.



                                       17