UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

          (X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934


                               FOR THE FISCAL YEAR
                             ENDED OCTOBER 31, 2002

                                COMMISSION FILE
                               NUMBER 33-23460-LA

                           MERA PHARMACEUTICALS, INC.
                           (FORMERLY AQUASEARCH, INC.)
                 ----------------------------------------------
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)


         DELAWARE                                     04-368-3628
 (STATE OF INCORPORATION)                   (I.R.S. EMPLOYER IDENTIFICATION NO.)


                        777 SOUTH HIGHWAY 101, SUITE 215
                             SOLANA BEACH, CA 92075
                                 (858) 847-9000
             (ADDRESS AND TELEPHONE OF PRINCIPAL EXECUTIVE OFFICES)

                   73-4460 QUEEN KA'AHUMANU HIGHWAY, SUITE 110
                            KAILUA-KONA, HAWAII 96740
                                 (808) 326-9301
             (ADDRESS AND TELEPHONE OF PRINCIPAL OPERATIONS OFFICES)


           Securities registered pursuant to Section 12(b) of the Act:  None

           Securities registered pursuant to Section 12(g) of the Act:  None

           Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [ X ]
No[ ]

           Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

           Mera Pharmaceuticals' revenues for its most recent fiscal year:
$662,072.

           The aggregate market value of the common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold as of January 14, 2003, was $19,417,617.

           Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by a court: [ X ] Yes [ ] No

           The number of shares outstanding of common stock, as of October 31,
2002, was 388,803,300, $0.0001 par value.

           Documents Incorporated by Reference:  None

           Transitional Small Business Disclosure Format (check one):
[ ] Yes [X] No



<PAGE>



                           MERA PHARMACEUTICALS, INC.
                                TABLE OF CONTENTS

                                     PART 1

ITEM 1.  DESCRIPTION OF BUSINESS........................... 1

ITEM 2.  DESCRIPTION OF PROPERTIES.........................16

ITEM 3.  LEGAL PROCEEDINGS.................................17

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS........................................17

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS............................17

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............19

ITEM 7.  FINANCIAL STATEMENTS..............................37

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................37

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT...............................................38

ITEM 10.  EXECUTIVE COMPENSATION...........................41

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................................42

ITEM 12.  CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.......................................43

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.................44

ITEM 14.  CONTROLS AND PROCEDURES..........................46



<PAGE>


                                     PART I

THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, INCLUDING STATEMENTS THAT INDICATE WHAT WE "BELIEVE", "EXPECT" AND
"ANTICIPATE" OR SIMILAR EXPRESSIONS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE OUR ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE
INFORMATION CONTAINED UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS ANNUAL
REPORT. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH REFLECT OUR MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL
REPORT. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISION OF THESE FORWARD-LOOKING STATEMENTS. YOU ARE STRONGLY URGED TO READ THE
INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS" FOR A MORE DETAILED
DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES.


ITEM 1.  DESCRIPTION OF BUSINESS

HISTORY

Aquasearch, Inc. ("Aquasearch")(predecessor to Mera Pharmaceuticals, Inc. (the
"Company," or "Mera," which shall, when used in reference to the period
preceeding the Reincorporation Merger, refer to Aquasearch)) was incorporated in
Colorado in 1987 for the purpose of developing useful products from aquatic
microorganisms and making their production economically feasible. On July 25,
2002, Aquasearch merged with and into Mera, a Delaware corporation formed in
June 2002, for the purpose of changing the corporation's name to Mera
Pharmaceuticals, Inc. and to change its state of incorporation from Colorado to
Delaware (the "Reincorporation Merger"). Mera is the surviving corporation and
successor issuer to Aquasearch and continues Aquasearch's operations and
business. Each share of Aquasearch's common stock outstanding at the time of the
Reincorporation Merger was exchanged for one share of common stock of Mera.
Following the Reincorporation Merger, the former stockholders of Aquasearch
continued to own 100% of the Company's issued and outstanding capital stock.

On September 16, 2002, Aqua RM Co., Inc., a privately-held, non-operating
Delaware corporation established specifically for the purpose of facilitating
Aquasearch's reorganization under Chapter 11 of the U.S. Bankruptcy Code ("Aqua
RM"), merged with and into the Company (the "Reorganization Merger"). The
Company was the surviving corporation of the Reorganization Merger. Each share
of Aqua RM common stock outstanding at the time of the Reincorporation Merger
was exchanged for 100 shares of the Company's common stock. Following the
Reorganization Merger, former Aqua RM stockholders held approximately 68% of the
Company's common stock.

The Reorganization Merger was the last material event in the fulfillment of the
Company's Chapter 11 Plan of Reorganization (the "Plan"), discussed below.



                                      -1-
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SUMMARY OF REORGANIZATION PROCEEDINGS

The Company underwent reorganization pursuant to Chapter 11 of the U.S.
Bankruptcy Code during its fiscal year 2002. The following summarizes the
material events of the reorganization.

The Company was the subject of an involuntary bankruptcy petition filed on
October 30, 2001 by certain of its creditors. On November 30, 2001 the Company
consented to entry of an order for relief, submitting to the jurisdiction of the
U.S. Bankruptcy Court, District of Hawaii, (the "Court") and on December 3,
2001, the Court granted the Company's motion to incur indebtedness. The Company
entered into a Debtor in Possession financing arrangement with Chardan Ventures,
LLC a consulting group involved in the reorganization of the Company, under
which the Company received $500,000 in debt financing. On March 27, 2002 the
Company filed its Motion to Approve Disclosure Statement and Schedule Hearing to
Confirm Plan of Reorganization with the Court. On May 20, 2002, the Court
approved the Company's Disclosure Statement.. On June 17, 2002, after approval
of the Plan by all voting classes, the Court entered an order confirming the
Plan. As of September 16, 2002, the effective date of the Plan, the Company had
materially complied with all of the obligations and conditions of the Plan,
including the following:

     o     ADMINISTRATIVE AND PRIORITY CLAIMS. All administrative and priority
           claims were paid in full on or prior to the effective date of the
           Plan.

     o     UNSECURED CLAIMS. General unsecured creditors were paid $0.175 for
           each dollar of allowed claims held, and the balance of the debt was
           discharged.

     o     CAPITAL STOCK UPON CONFIRMATION OF THE PLAN. Upon confirmation of the
           Plan, each existing share of the Company's common stock (no shares of
           preferred stock were issued or outstanding at the time) issued prior
           to reorganization became one share of common stock in the Company as
           the reorganized debtor. All such shares issued by the reorganized
           debtor were deemed issued pursuant toss.1145 of the Bankruptcy Code
           (11 USCss.1145), and, therefore, exempt from registration. Upon the
           effective date of the Plan, the Company issued one share of its
           common stock for each five warrants to purchase shares of its common
           stock that were outstanding as of June 17, 2002, the date of
           confirmation of the Plan. These shares were also exempt from
           registration under 11 USC 1145.

     o     THE REINCORPORATION MERGER. On July 25, 2002, the Company changed its
           name to Mera Pharmaceuticals, Inc. and its state of incorporation to
           Delaware. Mera is the surviving corporation and the successor issuer.
           Each share of Aquasearch common stock outstanding at the time of the
           Reincorporation Merger was exchanged for one share of common stock in
           Mera.

     o     THE REORGANIZATION MERGER. The Reorganization Merger between Mera and
           Aqua RM Co., Inc., a Delaware corporation established specifically
           for the purpose of facilitating the Company's reorganization,
           occurred. Mera is the surviving corporation and it issued 100 shares
           of Mera common stock in exchange for each share of Aqua RM Co., Inc.
           common stock issued and outstanding as of the date of the
           Reorganization Merger.



                                      -2-
<PAGE>


     o     CHANGES IN DIRECTORS AND OFFICERS. Upon confirmation of the Plan, the
           resignations of directors David Tarnas, Earl Fusato and Mark Huntley,
           PhD, submitted on June 14, 2002, took effect. By action taken at a
           June 14, 2002 meeting of the Board of Directors and pursuant to the
           Plan, Richard D. Propper, MD, Gregory F. Kowal and Daniel P. Beharry
           were appointed to the Board of Directors effective June 17, 2002. In
           addition, pursuant to the Plan, Dr. Propper was named Chief Executive
           Officer and Harry Dougherty was named President.

OVERVIEW OF THE COMPANY'S BUSINESS

The Company develops and commercializes natural products derived principally
from microalgae using our patented photobioreactor technology known as the Mera
Growth Module ("MGM").

Microalgae are a diverse group of microscopic plants estimated to consist of
more than 30,000 species. They have a wide range of physiological and
biochemical characteristics. Microalgae produce many different substances and
bioactive compounds that have existing and potential applications in a variety
of commercial areas, including human nutrition, pharmaceuticals, and other high
value commodities.

The major challenge to commercial exploitation of microalgae has been the
availability of photobioreactors large enough to achieve commercial production
levels at an economic cost. As late as the mid-1990s, most photobioreactors were
used exclusively for research, and few exceeded more than 50 gallons (180
liters) in capacity. Our proprietary photobioreactor. the MGM, at more than
6,000 gallons (22,000 liters), is one of the largest photobioreactors in
existence - and one of the only photobioreactors used for commercial production
of microalgae. In addition, the MGM incorporates a very high level of
computerized process-control, resulting in a higher degree of reproducible
performance at high efficiency levels. This increased reliability is due in
large measure to the use of turbulence to control the exposure of the algae to
light and nutrients at a frequency that improves yields. Mera owns the basic
patent for use of turbulence in this way. We believe patents, our proprietary
process controls and the very low cost of constructing the AGM makes it the most
advanced, cost-effective and scalable technology of its kind.

The Company has used its advantage in photobioreactor technology to take
leadership in the production and marketing of its first commercial product,
ASTAFACTOR(R), a nutraceutical and source of natural astaxanthin. Astaxanthin, a
carotenoid found in many species of fish and seafood (it gives salmon its
distinctive color) has long been recognized as a valuable nutritional
supplement. The Company's development of the MGM has enabled it to produce
astaxanthin for commercial distribution at an affordable cost.

The Company's business strategy is to exploit its leading position in microalgae
cultivation technology to expand the sales of ASTAFACTOR(R) while preserving
margins. We also plan to develop and introduce additional microalgae-based
nutritional products to the marketplace while continuing plans to identify and
develop prescription pharmaceutical products for infectious and proliferative
diseases.

The Company currently manufactures its products at a five-acre research,
development and production facility in Kailua-Kona, Hawaii. The design of a
large-scale cultivation and production facility is underway in China (the
"Chinese Facility"). The Chinese Facility will be owned and operated by a third
party entity that includes a Chinese pharmaceutical company. That entity will
utilize the Company's intellectual property under license from the Company for
the production of ASTAFACTOR(R). Extension of the license to additional products
will only occur upon agreement regarding license and royalty payments and the
price of sales back to the Company for those products. In return, the Company
will receive a license fee and is guaranteed favorable pricing on all of its
ASTAFACTOR(R) requirements. Marketing and sales activities for ASTAFACTOR(R)
currently include sales to third party distributors and direct sales utilizing
links to the Company's website and toll-free ordering number.



                                      -3-
<PAGE>


Competition varies according to product area. In the drug-discovery area, many
biopharmaceutical companies are involved in searching for sources of new drugs;
however, we believe that there are relatively few companies currently exploring
microalgae as their principal drug-discovery source, due to their lack of access
to the technology needed to cultivate the organisms. In the pharmaceutical
market, we also face significant competition from large global pharmaceutical
companies that have greater resources than us. In nutraceuticals, we face
significant potential competition for ASTAFACTOR(R), although we are the only
company that is currently pursuing mass retail, food and drug, which offers the
greatest potential for increasing sales, as its principal distribution channel.
We expect that other nutraceutical products that the Company may launch in the
future will face meaningful competition. We explored the market for animal feed
supplements for a time with our product AQUAXAN, an astaxanthin-rich microalgae
fish feed supplement, but we have decided to forego engaging directly in
marketing or distribution of this product due to the low profit margins that it
affords. However, we have licensed rights to AQUAXAN to the entity developing
the Chinese Facility.

More broadly, we do not believe that any commercial entity has developed a
photobioreactor that matches the MGM's combination of large size, low cost and
level of process control or sustained performance, although a number of other
companies are developing closed environment production systems for marine
micro-organisms. We believe that competition in each of these areas may increase
significantly over time as alternatives to the Company's patented technology are
developed. For more information on our competition, see "Risk Factors; Risks
Related to Our Industry."

Mera Pharmaceuticals' patents and intellectual property include issued and
pending patents relating to the MGM and general processes for cultivating
microalgae in photobioreactors. The Company intends to continue efforts to
expand its portfolio of patents and technical know-how and believes that
intellectual property relative to aquatic organism biotechnology will become
much more important, challenging and complex in the future. We intend to develop
intellectual property as a means of maintaining an advantage over our
competitors.

Government regulation and product testing are strong factors in the markets for
the products we are developing and producing. Our products, both current and
future, are subject to regulation by the U.S. Food and Drug Administration or
similar agencies in foreign countries and may require extensive testing for
safety and efficacy before being released for sale.

Our leased facility at the Hawaii Ocean Science and Technology Business Park is
ideally located for our research and development and the commercial production
of microalgae. We have access to large volumes of deep ocean water in a stable
tropical climate, conditions that are well-suited to microalgae cultivation.
Although Hawaii's distance from many markets increases certain costs of
operation, on balance, there are few locations, domestic or international, that
are as well-suited to our cultivation processes. The location of the Chinese
Facility, on Hainan Island, was chosen specifically because of its similarities
to our Hawaii location. Once completed, the Chinese Facility will provide us
with large, efficient production capacity that will support distribution in
China and other international markets and our expanding domestic markets as
well.



                                      -4-
<PAGE>


Our principal executive team is located in San Diego, a major biotechnology
center. The San Diego location has enabled us to attract highly qualified
personnel to head our research efforts, and it facilitates drawing upon a wealth
of resources that are readily available on a contract basis, helping us to
manage our overhead effectively

RATIONALE FOR MICROALGAE AS A SOURCE OF COMMERCIAL PRODUCTS

Microalgae represent approximately half of all plant species. Many of their
characteristics make them attractive for commercial production.

     1)    UNTAPPED RESOURCE

           o   Fewer than 5,000 out of the estimated total of 30,000 species
               have been cultivated in the laboratory
           o   Fewer than 1,000 species have been carefully investigated for new
               substances
           o   Fewer than 10 species have been cultivated at commercial scale

     2)    DEMONSTRATED SOURCE OF NEW SUBSTANCES

           o   Several hundred new bioactive substances have been discovered in
               the small number of microalgae that have been researched to date

     3)    SOURCE OF VALUABLE SUBSTANCES

           o   Many molecules derived from microalgae are already known to be
               valuable for use as enzymes, pigments, vitamins, nutraceuticals,
               pharmaceuticals and the like
           o   Bioactive compounds extracted from microalgae have substantial
               potential value as pharmaceuticals

     4)    RAPID GROWTH RATE

           o   Growth rate ranges from about 1 to 10 divisions per day
           o   Growth rates are faster than any other plants

     5)    LOW COST OF RAW MATERIALS

           o   Water, sunlight fertilizer and carbon dioxide are plentiful and
               economical


THE COMPANY'S MGM TECHNOLOGY

FEATURES OF MGM TECHNOLOGY. The key features of MGM technology are sterility,
size (25,000 liters) and enhanced control over virtually all environmental
factors affecting growth rates, such as temperature, pH, nutrient mix and
distribution, light, pests and contaminants.

This combination of size and control has been the goal of international research
efforts for the past several decades. The MGM has achieved that goal. Although
it is among the largest photobioreactors ever operated, the MGM's patented
technology allows a far greater degree of control of the growth environment than
has been possible in systems a tenth, or even one-hundredth, that size.



                                      -5-
<PAGE>


PROCESS CONTROL SYSTEMS - THE KEY TO REPRODUCIBLE PERFORMANCE. In order to take
greatest advantage of the MGM technology, we have developed proprietary,
computerized process control systems for the MGM that make it possible to
conduct the following operations automatically:

     o     monitoring of key production variables at intervals more frequent
           than one minute;
     o     data archiving for comprehensive analysis of system performance;
     o     automated control of all operations performed more than once a day
           (both a control improvement and labor cost saving);
     o     immediate alarm system for any system component not operating within
           parameters; and
     o     automated maintenance for hundreds of system components, reducing
           failures and preventing contamination.

Increasing process control produces several benefits. Product quality and
consistency go up, the scale at which processes are controllable increases and
the amount of capital and labor required to accomplish a given amount of
production decreases. This combination of effects translates into enhanced
efficiency, which translates into lower cost per unit of production and higher
margins.

COMPETITIVE PRODUCTION SYSTEMS. We are not aware of any closed system
photobioreactor that compares favorably with the MGM. Most photobioreactors are:

     o     operated or owned by universities or research laboratories;
     o     less than 55 gallons (200 liters) in capacity (1% the capacity of the
           MGM), and
     o     used for research purposes only.

Such experimental photobioreactors are operated in Italy, Israel, Australia,
Germany, U.K., France, Singapore, Netherlands and the United States, and perhaps
other places.

We believe that the advantages of the MGM over these other systems include size,
cost-effectiveness, higher yields and the ability to cultivate hundreds of
microalgal species at commercial scale that cannot be effectively produced by
other means.

PRODUCTS FROM MICROALGAE

(1) ASTAFACTOR(R) BRAND OF ASTAXANTHIN - OUR FIRST COMMERCIAL PRODUCT

DESCRIPTION AND PROPERTIES. Astaxanthin is a red-orange, carotenoid pigment. It
is closely related to other well-known carotenoids, such as beta-carotene,
lutein and zeaxanthin.

All of these molecules are antioxidants, but astaxanthin has by far the
strongest antioxidant activity. Some studies indicate that it is ten times more
potent than beta-carotene, and more than 500 times more potent than vitamin E -
another well known antioxidant.

Astaxanthin is one of the main pigments in aquatic animals. It gives the flesh
of salmon its characteristic color, for example. Yet, it is far more than a
pigment. Astaxanthin has been shown to perform many essential biological
functions, including:

     o     protecting against the harmful effects of UV light;
     o     enhancing the immune response;
     o     protecting against the oxidation of essential polyunsaturated fatty
           acids;



                                      -6-
<PAGE>

     o     stimulating pro-vitamin A activity and vision;
     o     improving reproductive capacity; and
     o     assisting in communication.

In species like salmon or shrimp, astaxanthin is essential to normal growth and
survival and has been attributed vitamin-like properties. Some of these unique
properties are also effective in mammals. Studies in human and animal models
suggest that astaxanthin may substantially improve human health by virtue of its
antioxidant properties, with regard to vision, reducing inflammation (recently
shown to be a major factor in heart attacks) slowing neurodegenerative diseases
and preventing certain cancers. We plan to conduct a full array of clinical
studies to verify these effects and others.

THE ASTAFACTOR(R) MARKET. We market an astaxanthin food supplement under the
brand ASTAFACTOR(R). We believe that the market for this product is likely to
expand rapidly over the next few years. There is growing evidence in the
scientific and medical literature that astaxanthin contributes to the general
well-being of humans. Although we face competition in this market, we believe
that our technology, combined with the cost advantages associated with the large
scale production capabilities of the Chinese Facility that under development,
give us significant cost and quality advantages over our competitors.

We began sales of ASTAFACTOR(R) in Hawaii on March 30, 2000 and Longs Drugs
agreed to expand our distribution in San Diego County in Fall 2001.
ASTAFACTOR(R) is now distributed system-wide in over 400 Longs stores in 7
Western states, and we have continued to make progress in expanding our mass
retail, food and drug distribution of ASTAFACTOR(R).

(2) PRODUCT LINE EXPANSION

           The Company is currently evaluating several product line extensions
           for its ASTAFACTOR(R) product and is also exploring additional
           microalgae sources for development as nutraceutical products. Among
           these is zeaxanthin, a carotenoid accumulated by certain microalgal
           species (for example, cyanobacteria and rhodophytes). The absence of
           zeaxanthin is associated with macular degeneration, the most frequent
           cause of blindness among the elderly. We are aware of no current
           commercial production of zeaxanthin from microalgae.

We believe that many more nutraceutical products could be developed from
microalgae, such as omega-3 fatty acids, vitamins and anti-oxidants, but they
remain unexamined and unexploited because there has been no feasible way to grow
them at a large enough scale. The MGM opens a path to this untapped resource by
combining effective, reproducible control with commercial scale production.

(3) PHARMACEUTICAL DRUG DISCOVERY

The Company has always understood the potential to discover pharmaceuticals that
are based on bioactive compounds produced by aquatic plants. We have now
prepared to place a greater emphasis on this aspect of our business.

The likelihood of finding significant lead pharmaceutical compounds among
microalgae is substantial. More than 50% of all current prescription drugs are
of biological origin, but nearly all of these products have been derived from
terrestrial plants, such as fungi and bacteria. Although their bio-diversity is
comparable to that of land-based plants, microalgae have been nearly ignored as
a source of drug candidates, not because they lack medical value, but because
they could not be grown in sufficient quantities with the necessary quality. As
is the case with nutraceuticals, the MGM opens the way to exploitation of this
unexploited drug discovery resource.



                                      -7-
<PAGE>


Our own effort in drug discovery is aimed at identifying and characterizing
bioactive compounds in a wide variety of algae, then developing the cultivation
processes and controls needed to produce the compounds at commercial scale. An
intensive, automated screening program will enable us to evaluate the
pharmaceutical potential of compound libraries derived from a large number of
species at a relatively low cost. That will allow us to devote the substantial
scientific resources needed to isolate and characterize specific bioactive
compounds once the potential is demonstrated, an approach that is expected to
raise our "hit rate" significantly.

To the extent we are successful in developing compound libraries containing
large numbers of bioactive compounds, we believe that many pharmaceutical and
biotechnology companies will be interested in collaborating with us in the
profiling and characterization process. We have already created such a library
with the assistance of another company. In June 2000 we created our first
Microalgae Compound Library, in conjunction with EnzyMed (recently acquired by
Albany Molecular Research; NASDAQ:AMRI). Shortly thereafter, we submitted the
library to the U.S. National Cancer Institute for screening against 60 cancer
cell lines. The library continues to be under investigation.

While collaboration with drug companies may be appropriate and desirable in many
cases, in some cases it may be even more advantageous to complete a number of
steps in the discovery and development process before entering into
collaboration agreements. Our focus on natural products, which face fewer
regulatory hurdles and which may allow many of our products to qualify as
"botanical drugs," a new class of pharmaceutical that faces reduced and time
compressed regulatory requirements, makes totally independent development more
feasible.

The Company intends to pursue licenses to microalgae collections and to
establish relationships with research groups in the United States and abroad as
our capabilities to screen the chemistry of large numbers of organisms for
bioactive compounds increase.

While we believe that our focus on microalgae and the highly automated,
high-volume screening process that we will put in place significantly increases
the probability of identifying lead compounds that will ultimately prove
successful relative to more traditional means of doing so, our efforts to
develop pharmaceutical products from microalgae involve many significant risks
and uncertainties, and our efforts in this area may ultimately prove
unsuccessful.

DEPENDENCE ON KEY CUSTOMERS

Our business currently depends on key distribution relationships in Hawaii and
California. Sales to our largest customer, Longs Drugs, currently represents
approximately one-fifth of our ASTAFACTOR(R) sales. The balance of our sales is
made through smaller distribution arrangements and via direct sales. If we were
to lose the Longs Drugs account, or if Longs does not continue buying our
products at the current and anticipated purchase levels, then our revenues could
decrease. In addition, the loss of one or more of these customers may adversely
affect our reputation, and we could have difficulty attracting new customers.



                                      -8-
<PAGE>


OUR STRATEGIES

Our objective is to sustain Mera Pharmaceuticals' global leadership in
microalgae cultivation technology and to identify, optimize and directly
commercialize high-value microalgae products for human healthcare markets
worldwide. We have several strategies to achieve these goals.

     1)    INCREASE SALES OF NUTRACEUTICAL PRODUCTS. The Company intends to
           increase sales of its current product, ASTAFACTOR(R), by expanding
           distribution into new regional markets, utilizing both direct
           marketing to the consumer and established third party distribution
           channels. The strategy will be to focus on mid-size retail chains as
           a way to build consumer awareness through more targeted advertising.
           Once the benefits of our product are more fully understood by the
           general public, we will focus on entering national chains with the
           potential for delivering high sales volumes and efficient
           distribution.

           A key element of our ASTAFACTOR(R) sales expansion efforts is the
           distribution agreement with the Chinese joint venture that is
           developing the Chinese Facility. China is a hospitable marketplace
           for natural products. We believe that the royalty revenue potential
           from Chinese sales is substantial. The Company is also contemplating
           strategic third-party relationships to expand distribution of
           ASTAFACTOR(R) into other Asia-Pacific markets.

           Additionally, the Company expects to continue research activities to
           identify and optimize additional microalgae nutraceutical products.
           We will also utilize the learning gained as a key subcontractor in a
           $2.4 million U.S. Department of Energy project to accelerate product
           development.

     2)    EXPAND DRUG DISCOVERY CAPABILITIES. A cornerstone of the Company's
           plans for drug discovery activities is to obtain access to existing
           collections of microalgae in order to determine optimal conditions
           for developing valuable products through their cultivation. Both
           internally and through research collaborations with universities, we
           would extract the cell chemistry and compile it into a library of
           compounds to be made available for screening against bioassays to
           identify lead compounds. Then, we will screen the libraries for
           bioactivity and isolate the bioactive compounds responsible for it.
           Those lead compounds will then be characterized to determine if they
           are unique. If so, production methods for the organisms responsible
           for generating these lead compounds will be developed and optimized
           at our Kona, Hawaii research and development facility in order to
           produce a sufficient quantity of the lead compounds to support
           pre-clinical and clinical trials.

     3)    LICENSE WORLDWIDE RIGHTS TO ASTAXANTHIN ANIMAL FEEDS. Because the
           market for animal feed supplements, including AQUAXAN, is extremely
           price competitive, Mera Pharmaceuticals has licensed the worldwide
           right to make and distribute AQUAXAN to the entity developing the
           Chinese Facility. Doing so allows the Company to focus its attention
           and resources on the higher value, higher margin nutraceutical and
           pharmaceutical markets.

     4)    CONTINUALLY IMPROVE AND ENHANCE OUR CORE PLATFORM TECHNOLOGY. Our MGM
           technology has led to the production of the first new commercial
           product derived from photosynthetic microalgae in 25 years. We
           believe that our proprietary technologies and processes provide us
           with a significant competitive advantage over other known microalgae
           cultivation technologies. We intend to devote meaningful resources to
           continue to improve our underlying technology and our automated
           process control systems to increase product quality, yield and
           productivity per employee.



                                      -9-
<PAGE>


     5)    AGGRESSIVELY EXPAND STRATEGIC ALLIANCES. We intend to strengthen
           existing relationships and develop new ones to accelerate our efforts
           to commercialize microalgae products. When appropriate, we will
           collaborate with biopharmaceutical companies that possess world-class
           expertise in the optimization, development, marketing, sales and/or
           distribution of ethical pharmaceutical products, as well as the
           financial resources to conduct such programs on a worldwide basis, in
           order to accelerate the commercialization of future Mera
           Pharmaceuticals' discoveries.

MANUFACTURING

Although the Company intends to continue some production of astaxanthin and
other products at its Kona facility in the future primarily for research and
development purposes, it plans to source additional commercial production from
the Chinese Facility when it is operational.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs include salaries, development materials, plant
and equipment depreciation and costs associated with operating our five-acre
research and development/production facility. Research and development costs
were approximately $912,707 for the fiscal year ended October 31, 2002 compared
with approximately $1.7 million for the fiscal year ended October 31, 2001. The
decrease in fiscal year 2002 reflects reductions in personnel and constraints in
our operations associated with our reorganization proceeding, as well as a shift
in focus to commercial production. Beginning with fiscal 2003, we expect that
research and development costs, including expenditures on clinical trials, will
increase significantly.

MARKETING AND SALES

The Company's marketing strategy for its non-prescription nutraceutical products
may vary depending on the specific product and its target market, but is
generally built on three fundamental tenets:

     1)    CREATE ALLIANCES WITH EFFICIENT, HIGH-QUALITY DISTRIBUTORS IN KEY
           U.S. REGIONAL MARKETS AND SUPPORT THOSE DISTRIBUTORS WITH EFFECTIVE
           ADVERTISING AND PROMOTION TO THE CONSUMER. Mera Pharmaceuticals
           currently markets ASTAFACTOR(R) to mass retail outlets in Hawaii, San
           Diego and the Western United States through distribution arrangements
           with established companies.

     2)    SELL ASTAFACTOR(R) DIRECTLY TO THE CONSUMER. This approach allows us
           to reach consumers in areas that are not yet covered by our mass
           retailers. Web-based and specialty media promotion are also used to
           reinforce our marketing efforts and product visibility to all
           consumers.

     3)    PHARMACEUTICALS AND DRUG DISCOVERY PROGRAMS. The Company will
           "market" its drug discovery programs to the biopharmaceutical
           industry. We believe that microalgae-derived substances with
           demonstrated bioactivity represent a substantial new source of
           potential pharmaceuticals. We intend to evaluate, with respect to
           each compound we discover, whether it is more effective to develop,
           commercialize and carry the drug candidate through the process of
           regulatory approval on our own, or to rely on strategic alliances
           with established industry members to take drug candidates through
           pre-clinical development and human clinical trials, as well as manage
           the regulatory process and commercialize successful products. If the
           Company chooses to rely on strategic alliances, we would expect to
           enter into partnerships that include traditional industry financial
           components - technology access and license fees, development
           milestone payments and royalties on sales of successful products.
           This will allow the Company to conserve its resources to be applied
           in the areas of its true competitive advantage, our expertise in
           microalgae cultivation and biochemistry.



                                      -10-
<PAGE>


STRATEGIC ALLIANCES AND KEY RELATIONSHIPS

To date the Company has established commercial relationships with several
recognized industry leaders as a way of leveraging our expertise. A brief
description of each follows:

ENZYMED

In December 1998 we entered into a Compound Library Agreement with EnzyMed to
develop libraries of compounds that would be researched for new drug candidates.
As part of this collaboration, we have agreed to (1) identify and cultivate
bioactive microalgae species, and (2) chemically extract, test, and purify the
bioactive fractions. Our tests rely on cell cultures, human tissue cultures and
genomic screens, conducted in collaboration with university research
laboratories. EnzyMed has agreed to apply its proprietary process of
"Combinatorial Biocatalysis" to our unique extracts of microalgae. From each
unique extract, this enzymatic process typically creates multiple compounds,
many of which may be new to medical science. EnzyMed's demonstrated capability
in Combinatorial Biocatalysis is of significant potential value in accomplishing
our drug discovery objectives. In 2001, EnzyMed was acquired by Albany Molecular
Research (NASDAQ: AMRI). Albany and the Company completed our first Compound
Library in June 2000.

We have agreed with Albany to market these libraries jointly to biotechnology
and pharmaceutical companies, which would screen the libraries for new drug
candidates.

ANCILE PHARMACEUTICALS, INC.

Ancile Pharmaceuticals ("Ancile") is a privately-held specialty pharmaceutical
company focusing on the development and commercialization of prescription
botanical drugs for major chronic disease conditions. Botanical drugs, as
defined by the U.S. Food and Drug Administration ("FDA"), are finished, labeled
drug products that contain plant matter as ingredients. These products are
typically derived from herbal medicines and are prepared as complex mixtures
rather than refined, highly purified chemical compounds that are typical of more
traditional pharmaceuticals. Such products have the potential to address growing
consumer and practitioner demand for safer and more efficacious alternatives to
synthetic new chemical entities ("NCEs"), which often have serious side effects.

In July 2001, the Company entered into a non-binding Letter of Intent with
Ancile to form a strategic alliance around the development of microalgae-based
"botanical drugs." In May 2002, the term of this Letter of Intent was extended
until April 2003.

On January 3, 2003, the Company entered into a binding Memorandum of
Understanding with Ancile to effect a merger with Ancile. If consummated, this
merger will effect the Company's acquisition of Ancile's business and Ancile
will become a wholly-owned subsidiary of Mera. The Company expects to consummate
this merger during the second quarter of the 2003 fiscal year.



                                      -11-
<PAGE>


The Company currently subleases office and laboratory space from Ancile in San
Diego, California. The Company expects to terminate its sublease with Ancile in
connection with the merger between the two companies and to expand its leased
corporate office space to accommodate Ancile personnel in February 2003.

COMPETITION

The Company believes that its proprietary technology and process control systems
and software give it a significant advantage relative to its competitors.
However, there are a number of companies that are engaged in efforts to develop
microalgae-based products that compete with ours, either directly or indirectly.

We believe that original MGM technology was the first closed-system,
process-controlled photobioreactor ever to be operated at commercial scales
larger than 2,750 gallons (10,000 liters). We are aware of only two companies in
the world - Biotechna of Australia and MicroGaia of Hawaii - that possess
proprietary photobioreactor technology. Our information regarding these other
systems is that, compared to the MGM, they:

     o     are much smaller in scale;
     o     have a more limited operating history; and
     o     are subject to significant cost barriers.

Although many other photobioreactors are in operation, to our knowledge all are
operated by universities or research institutes, are 100 times smaller than our
MGM (25,000 liters) and are not used for commercial purposes. It is possible
that competing photobioreactor technologies that could adversely affect our
perceived technical and competitive advantages already exist or may emerge in
the future. However, we believe that MGM technology is now more advanced than
any other photobioreactor technology currently available.

COMPETITORS FOR ASTAFACTOR(R). Our competitors for ASTAFACTOR(R), our
nutraceutical astaxanthin product, include: MicroGaia, Inc.; AstaCarotene, AB;
Cyanotech Corporation; and Minapro. MicroGaia, Inc. is a Hawaii-based subsidiary
of Fuji Chemical Industries, Inc. that has established a market for its product
in Japan. AstaCarotene AB of Sweden, which was recently acquired by MicroGaia,
has produced and sold its nutraceutical astaxanthin for several years Western
Europe. Cyanotech Corporation, based in Hawaii, sells a competing nutraceutical
astaxanthin product. Minapro, a company based in Israel, also sells a competing
nutraceutical product. Potential competitors include producers of the synthetic
material as well. However, to our knowledge neither BASF, a large German
chemical company, nor Hoffman-LaRoche, a large Swiss pharmaceutical company,
both large global producers of synthetic astaxanthin, has indicated an interest
in this market. Furthermore, we believe that consumers of nutraceuticals prefer
products from natural sources to synthetic sources and will not pay premium
prices for synthetics, even if they are available. We are aware of many
companies that are interested in or are actually marketing nutraceutical
astaxanthin, but only MicroGaia, AstaCarotene, Cyanotech and Minapro produce the
product from HAEMATOCOCCUS, the most productive microalgae microorganisms that
occur throughout the world and the microalgae we derive our products from. We
believe our production process has cost advantages over all three of those
companies.



                                      -12-
<PAGE>


PHARMACEUTICALS AND DRUG DISCOVERY PROGRAMS

Competition in the search for new pharmaceuticals is more intensive than it has
ever been, particularly in the areas of anti-infectives, where multiple drug
resistance is rendering many old products ineffective, and cancer, where
extended life expectancies result in a greater incidence rate in a population
that is growing proportionately older. The majority of new drugs originate from
natural sources and bacteria, fungi, plants and animal reservoirs continue to be
a principal target of drug discovery efforts by companies worldwide.

While there are a great number of companies seeking to develop pharmaceutical
products using a variety of processes, we believe the number of companies that
have targeted aquatic microorganisms as a source of lead compounds are
relatively few. That is because, even though this source is believed to contain
a large number of candidates, until Mera's recent technological innovations,
they could not be developed, even if discovered.

Any potential competitor seeking to discover and develop pharmaceuticals from
microalgae-derived compounds must have access to the ability to cultivate
kilogram quantities of raw material under controlled conditions that assure
acceptable quality. We believe that our MGM technology makes this possible, and
that no other existing system can accomplish the same level of results with the
same degree of reliability. The pharmaceuticals that we derive from the
screening libraries we obtain from natural products will compete with products
under development at various biotechnology companies based in North America that
are also focusing efforts on natural product pharmacology.

COMPETITION IN GENERAL

We intend to identify, screen and, in some cases, optimize molecules extracted
from microalgae that will compete with existing natural and synthetic products
and those to be developed. Competition to discover and develop pharmaceutical
products generally is already intense, and many of our competitors are very
well-funded major companies with far greater resources than we have. We also
expect that, if we demonstrate the success we anticipate, competition to develop
additional microalgae products will intensify quickly. Our future competitors
could include major pharmaceutical, food processing, chemical and specialized
biotechnology companies, many of which will have financial, technical and
marketing resources significantly greater than ours. Specialized biotechnology
companies may form collaborations with large established companies to support
research, development and commercialization of products that may compete with
our future products. Academic institutions, governmental agencies and other
public and private research organizations are conducting research activities and
seeking patent protection and may commercialize products that compete with ours.
Any products of which we are not aware, or products that may be developed in the
future, may adversely affect the marketability of new products we develop.

Our competitive position will also depend on our ability to attract and retain
qualified scientific and other personnel, develop effective proprietary
products, successfully perform under any supply agreements, implement research
and development and production plans, obtain patent protection and secure
adequate capital sources.



                                      -13-
<PAGE>


PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY

We rely upon a combination of patents, copyrights, trade secrets, know-how,
continuing technological innovation and licensing opportunities to develop and
maintain our competitive position. Our future prospects depend in part on our
ability to obtain patent protection for our products and processes. We need to
preserve our copyrights, trademarks and trade secrets. We also need to operate
without infringing the proprietary rights of third parties.

PATENTS. We have been awarded or have filed applications for fifteen patents
relating to various processes, including, but not limited to the process and
apparatus for the production of photosynthetic microbes and the method of
control of microorganism growth process. These patents are active in the United
States, the People's Republic of China, Europe, Hong Kong, Japan and South
Korea. The original duration of these patents varies from fifteen to twenty
years from the date of filing or issuance and the Company's current patents will
be active for eight to twelve years as long as the fees associated with such
patents are maintained.

Others may have filed and in the future are likely to file patent applications
that are similar or identical to ours. To determine the priority of inventions,
we may have to participate in interference proceedings declared by the United
States Patent and Trademark Office. Such proceedings could result in substantial
cost to us. We cannot ensure that any such third-party patent application will
not have priority over ours. Additionally, the laws of certain foreign countries
may not protect our patent and other intellectual property rights to the same
extent as the laws of the United States.

Our future prospects also depend in part on our neither infringing on patents or
proprietary rights of third parties nor breaching any licenses that may relate
to our technologies and products. We cannot guarantee that we will not infringe
on the patents, licenses or other proprietary rights of third parties. We have
not conducted an exhaustive patent search and we cannot ensure that patents do
not exist or could not be filed that would have a material adverse effect on our
ability to develop and market our products. There are many United States and
foreign patents and patent applications in our area of interest.

The enactment of legislation implementing the General Agreement on Trade and
Tariffs, effective June 8, 1995, has changed certain United States patent laws.
Most notably, the term of patent protection for patent applications filed on or
after that date is no longer a period of seventeen years from the date of grant.
The new term of United States patents begins on the date of issuance and
terminates twenty years after the effective date of filing. This change in the
law could substantially shorten the term of our patent protection, which may
adversely affect our patent position.

We attempt to control the disclosure and use of our proprietary technology,
know-how and trade secrets under agreements with the parties involved. However,
we cannot ensure that others will honor all confidentiality agreements. We
cannot prevent others from independently developing similar or superior
technology, nor can we prevent disputes that could arise concerning the
ownership of intellectual property.

LICENSE AND ROYALTY AGREEMENTS. We have licensed production of ASTAFACTOR(R) and
its distribution in China to Hainan Sunshine Ocean Bioengineering, Ltd., the
entity that is developing the Chinese Facility. By doing so, the Company will be
able to realize increased production capabilities to meet increased demand as
well as retain a potential source of royalty revenues while allowing us to focus
our efforts on the higher margin activities of discovery, development and
commercialization of human nutraceutical and pharmaceutical products. We have
also licensed the production and worldwide distribution rights to our AQUAXAN
animal feed supplement to Hainan Sunshine Ocean Bioengineering, Ltd. The terms
of both of these licenses continue as long as Hainan Sunshine Ocean
Bioengineering, Ltd. continues to utilize the Company's intellectual property.



                                      -14-
<PAGE>


TRADEMARKS AND SERVICE MARKS. The following trademarks and service marks have
been registered or are claimed marks that the Company has not registered but
which it believes it has established a common law right of use and as to which
it has no information to the contrary. The registered trademark on ASTAFACTOR(R)
is valid through March 2012 and the claimed marks that the Company believes it
has established a common law right of use are valid for the standard period of
duration as provided in applicable common law:

ASTAFACTOR(R)
AQUAXAN
MERA PHARMACEUTICALS
MERA GROWTH MODULE (MGM)
MERA PROCESS CONTROL SYSTEM (MPCS)
MERA REMOTE DATA WEB ACCESS (RDWA)
DRUGS FROM THE SEA
ZEAFACTOR
BETAFACTOR

GOVERNMENT REGULATION AND PRODUCT TESTING

Our current and potential products and our manufacturing and research
activities, are or may become subject to varying degrees of regulation by many
government authorities in the United States and other countries. Such regulatory
authorities could include the State of Hawaii Department of Health or
Agriculture Department, the FDA, and comparable authorities in foreign
countries. Each existing or potential microalgae product intended for human use
that we develop or market, either directly or through licensees or strategic
partners, may present unique regulatory problems and risks. Relevant regulations
depend on product type, use and method of manufacture. The FDA regulates, in
varying degrees and in different ways, dietary supplements, other food products,
medical devices and pharmaceutical products. Regulations govern manufacture,
testing, exportation, labeling and advertising.

Prescription pharmaceuticals and certain types of medical devices are regulated
more vigorously than foods, such as dietary supplements. Any products we develop
for use in human nutrition, pharmaceuticals, or cosmetics, could require that we
develop and adhere to Good Manufacturing Practices ("GMP") as suggested by the
FDA, International Standards Organization ("ISO") standards in Europe, and any
other applicable standards mandated by federal, state, local or foreign laws,
regulations and policies. Our current cultivation and processing facilities and
procedures are not yet required to comply with GMP or ISO standards, although
our extraction and encapsulation facilities must meet GMP standards, and they
do. We believe we are prepared to meet these requirements more broadly when
needed. The contract with the Chinese production facility that is under
development requires that it operate in accordance with GMP standards, and
consideration is being given to qualifying under the ISO 9000 standard as well.

The pharmaceutical industry is subject to stringent regulation by a wide range
of authorities. Even if we obtain regulatory approval for a drug candidate, the
approval may not be obtained in a timely manner or under technically or
commercially feasible conditions. We and our collaborators cannot market a
pharmaceutical product in the United States until it has completed rigorous
preclinical testing and clinical trials and an extensive regulatory clearance
process implemented by the FDA. Satisfaction of regulatory requirements
typically takes many years, depends upon the type, or complexity and novelty of
the product and requires substantial resources. Of particular significance are
the FDA's requirements covering research and development, testing,
manufacturing, quality control, labeling and promotion of drugs for human use.



                                      -15-
<PAGE>


We are or may become subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of products, importation of
organisms and occupational safety, among others. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. We are also working with certain
consultants regarding compliance with FDA, GMP and ISO policies and regulations.
We cannot ensure that any of our products will satisfy applicable regulatory
requirements. Changes could occur in federal, state and foreign laws,
regulations and policies and, particularly with respect to the FDA or other such
regulatory bodies, such changes could be retroactive. Such changes could have a
material adverse effect on our business, financial condition, results of
operations and relationships with corporate partners.

The Company currently distributes ASTAFACTOR(R) in the United States and it
intends to distribute it in certain foreign countries, including China, the
European Union, Japan, Canada and Australia. Regulatory approvals in foreign
markets vary by country. We believe the approval process for ASTAFACTOR(R) in
China, Australia, Japan and certain other Asian countries will come under their
"natural" status and be approved relatively quickly; however, we can provide no
assurances in this regard.

Outside the United States, the ability to market products intended for human
consumption is contingent upon receiving a marketing authorization from the
appropriate regulatory authorities. The requirements governing the conduct of
clinical trials, marketing authorization, pricing and reimbursement vary widely
from country to country. At present, foreign marketing authorizations are
administered at a national level, although within the European Community, or EC,
registration procedures are available to companies wishing to market a product
in more than one EC member state. Only after the appropriate regulatory
authority is satisfied that adequate evidence of safety, quality and efficacy
has been presented will it grant a marketing authorization. In addition, United
States and foreign government regulations control access to and use of some
human or other tissue samples in our research and development efforts. United
States and foreign government agencies may also impose restrictions on the use
of data derived from human or other tissue samples.

We are also subject to numerous environmental and safety laws and regulations,
including those governing the use and disposal of hazardous materials. The
Company incurs approximately $3,000 per year for costs associated with
compliance with federal, state and local environmental laws. Any violation of,
and the cost of compliance with, these regulations could have a material adverse
effect on our business, financial condition, results of operations and
relationships with corporate partners.

EMPLOYEES. As of October 31, 2002, the Company had twenty-four full-time
employees, of whom four have PhDs. We consider relations with our employees to
be good. None of our employees is covered by a collective bargaining agreement.


ITEM 2.  DESCRIPTION OF PROPERTIES

Our research, development and production facilities are located in the Hawaii
Ocean Science and Technology (HOST) Business Park in Kailua-Kona, Hawaii. Our
facility currently consists of approximately five leased acres containing a
number of MGMs, finishing ponds, a processing facility, several laboratories,
administrative offices and additional space for production and research and
development. All our products are currently produced at this facility.



                                      -16-
<PAGE>


The Company is currently negotiating the terms of the lease covering our
five-acre parcel with the Natural Energy Laboratory of Hawaii Authority (NELHA),
the entity that administers the HOST Business Park. We anticipate reaching
agreement on the terms of the lease, to cover a period of not less than give (5)
years, during the first calendar quarter of 2003.

The Company's corporate headquarters and principal executive offices are located
in Solana Beach, California where the Company leases office space. In addition,
the Company subleases office and laboratory space from Ancile in San Diego,
California. The Company expects to terminate this sublease with Ancile once the
merger between the Company and Ancile takes place. The Company plans to lease
additional office space in Solana Beach in February 2003 to accommodate Ancile
personnel.


ITEM 3.  LEGAL PROCEEDINGS

The Company is not currently a party to any pending legal proceedings nor is its
property the subject of a pending legal proceeding.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted during the fourth quarter of Mera's fiscal year
covered by this report on Form 10-KSB to a vote of security holders, at a
meeting or otherwise.


                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded in the over-the-counter market on the NASD
"Electronic Bulletin Board" (Symbol: "MRPI"). The following table shows for the
periods indicated the high and low bid quotations for our common stock, as
reported by publicly-available internet data information. These quotations are
believed to represent inter-dealer quotations without adjustment for retail
mark-up, mark-down or commissions, and may not represent actual transactions.


PERIOD                          HIGH BID                   LOW BID
------                          --------                   -------

FISCAL 2001
    First Quarter                $0.43                      $0.19
    Second Quarter               $0.37                      $0.21
    Third Quarter                $0.29                      $0.24
    Fourth Quarter               $0.26                      $0.12

FISCAL 2002
    First Quarter                $0.16                      $0.05
    Second Quarter               $0.07                      $0.05
    Third Quarter                $0.16                      $0.04
    Fourth Quarter               $0.15                      $0.06



                                      -17-
<PAGE>


HOLDERS

As of October 31, 2002, we had approximately 685 record holders of our
388,803,300 outstanding shares of common stock.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The Company's 1996 Stock Option Plan was terminated during the Company's
reorganization proceedings. The Company plans to adopt another Stock Option Plan
during fiscal 2003.

DIVIDEND POLICY

We have never paid cash dividends on our capital stock. We currently intend to
retain all available funds to operate and expand our business, and therefore, we
do not anticipate paying any cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

On September 16, 2002, the Company issued a total of 263,992,029 shares of
common stock to common stockholders of Aqua RM Co., Inc. pursuant to a merger
between the two companies that occurred on the same day. Mera is the surviving
corporation of the merger and it issued 100 shares of Mera common stock in
exchange for each share of Aqua RM Co., Inc. common stock held by the
stockholders of that company.

On July 23, 2002 and September 27, 2002, the Company issued promissory notes for
$2,350,000 and $350,000, respectively, in exchange for funds invested into the
Company by a certain limited liability company which is an accredited investor.
The terms of these notes include interest payable at 6% per annum and maturity
dates of July 22, 2004 and September 26, 2004, respectively. The Company repaid
$2,026,000 of the outstanding principal on these notes on December 24, 2002 and
December 30, 2002, and the proceeds of the repayments were thereafter reinvested
into the Company as equity investments.

Pursuant to our reorganization proceedings and the Plan, the following actions,
affecting various types of the Company's outstanding securities, took place: (i)
on June 17, 2002, the date of confirmation of our Plan, all shares of
unregistered common stock held by the Company's stockholders of record as of
October 30, 2001 became unrestricted pursuant to such Plan and 11 USC 1145; (ii)
on June 17, 2002, all outstanding convertible promissory notes of the Company
that had not been converted into stock as of that date were cancelled and
holders of such convertible promissory notes received payments of 17.5% of their
allowed claims, in cash, from the Company; and (iii) on September 16, 2002, also
pursuant to the Plan and 11 USC 1145, every five (5) validly issued and
outstanding warrants held by the Company's stockholders of record as of October
30, 2001 were exchanged for one (1) share of the Company's unrestricted common
stock.



                                      -18-
<PAGE>



Unless otherwise noted, the above-referenced transactions were exempt from
registration under the Securities Act pursuant to Section 4(2), which applies to
transactions by an issuer not involving a public offering. Each of the
purchasers in these transactions had access to publicly-filed and other
information on the Company and were accredited or sophisticated investors with
investment and business experience and the ability to understand financial
information. In addition, in each of the transactions listed above, the
securities were offered only to a small number of investors and resale
restrictions were imposed on all sales of securities. Direct contact was made
between the Company and the offerees and there were no general solicitations or
advertisements made in connection with the transactions. No underwriters were
involved in any of these transactions.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Since inception, our primary operating activities have consisted of basic
research and development and production process development, recruiting
personnel, purchasing operating assets and raising capital. From inception
through October 31, 2001 and as of October 31, 2002, we had an accumulated
deficit of approximately $20.4 million and $900,000 (after application of fresh
start accounting principles subsequent to our reorganization proceedings),
respectively. Our losses to date have resulted primarily from costs incurred in
research and development and from general and administrative expenses associated
with operations. We expect to continue to incur operating losses for at least
the next year as we increase the expansion of our product pipeline. We expect to
have quarter-to-quarter and year-to-year fluctuations in revenues, expenses and
losses, some of which could be significant.

The Company has devoted most of its efforts since inception to research and
development, and accordingly was considered a development stage company until
fiscal 2001. Beginning fiscal 2001, the Company is no longer in the development
stage.

We have a limited operating history. Your assessment of our prospects should
include the technology risks, market risks, expenses and other difficulties
frequently encountered by development stage companies, and particularly
companies attempting to enter competitive industries with significant technology
risks and barriers to entry. We have attempted to address these risks by, among
other things, hiring and retaining highly qualified persons and forging
strategic alliances with companies and universities that complement and leverage
our technical strengths. However, our best efforts cannot guarantee that we will
overcome these risks in a timely manner, if at all.

On October 30, 2001 certain creditors of Aquasearch, a corporate predecessor to
the Company, filed a petition for involuntary bankruptcy against Aquasearch. On
November 30, 2001, Aquasearch stipulated to the entry of an Order for Relief,
agreeing to the jurisdiction of the Court for purposes of resolving the petition
that had been filed. On December 3, 2001, Aquasearch's motion to incur
indebtedness was granted, and Aquasearch entered into a Debtor in Possession
financing arrangement. On March 27, 2002, Aquasearch filed its Motion to Approve
Disclosure Statement. On June 17, 2002, the Court, after hearing held that same
date, entered an order confirming the Plan. All obligations and conditions of
the Plan were satisfied on September 16, 2002, and, as of that date, the Company
successfully emerged from bankruptcy and was reorganized.



                                      -19-
<PAGE>


As a result of our bankruptcy proceedings, our financial statements as of
October 31, 2002 reflect the effects of the reorganization process and the
application of fresh start accounting principles. Fresh start accounting
principles require, among other things, the elimination of liabilities subject
to compromise, the restatement of asset values to fair value, the elimination of
the Company's accumulated deficit and the restatement of the Company's capital
structure based on an estimated reorganization value. As a result of the
application of fresh start accounting principles in 2002, the Company's
financial statements as of October 31, 2002 vary significantly from those as of
October 31, 2001.

CRITICAL ACCOUNTING POLICIES

This discussion and analysis of the Company's financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates. The
Company bases its estimates on historical experience and on other assumptions
that it believes to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt securities purchased with original
or remaining maturities of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market. The
Company determines cost on a first-in, first-out basis. On an ongoing basis, the
company tests its inventory for obsolescence.

REVENUE RECOGNITION

Product revenue is recognized upon shipment to customers. Contract services
revenue is recognized as services are performed on a cost reimbursement basis.
Royalties are recognized as received.

PLANT AND EQUIPMENT

Plant and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company accounts for long-lived assets in accordance with the provisions of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.



                                      -20-
<PAGE>


STOCK ISSUED FOR SERVICES

The value of stock issued for services is based on management's estimate of the
fair value of the Company's stock at the date of issue or the fair value of the
services received, whichever is more reliably measurable.

RESEARCH AND DEVELOPMENT

Research and Development costs are expenses as incurred.

INCOME TAXES

The Company uses the asset and liability method of accounting for income taxes
as required by Statement of Financial Accounting Standards No. 109 (SFAS 109),
Accounting for Income Taxes. SFAS 109 requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of certain assets and
liabilities.

Since its inception, the Company has incurred net operating losses. SFAS 109
requires that any benefits recognized in relation to net operating losses be
reduced by a valuation allowance if there is uncertainty about future
deductibility. For financial statement purposes, the deferred tax asset for loss
carryforwards has been fully offset by a valuation allowance since it is
uncertain whether any future benefit will be realized.

FRESH START ACCOUNTING

On September 16, 2002, the Company adopted "fresh start" accounting as a result
of the completion of bankruptcy proceedings. Accordingly, all assets and
liabilities were restated to reflect their respective fair values.

GOODWILL

As a result of fresh start accounting, goodwill was established in the amount of
$66,550. In 2002, the Company adopted FASB Statement No. 142, "Goodwill and
Other Intangible Assets," which provides that goodwill should not be amortized
but instead should be tested for impairment annually at the reporting unit
level. In accordance with No. 142, the Company completed a transitional goodwill
impairment test that resulted in no impairment loss being recognized. Goodwill
will be tested for impairment on an annual basis and more often if indications
of impairment exist.

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's financial instruments, including cash,
accounts receivable, notes receivable, accounts payable and notes payable are
deemed to approximate fair value due to their short-term nature.



                                      -21-
<PAGE>


RESULTS OF OPERATIONS

The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of our
results of operations and financial condition. This discussion should be read in
conjunction with the financial statements and footnotes, which appear elsewhere
in this prospectus.

        RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002
               COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 2001

REVENUES

During the years ended October 31, 2002 and 2001, we had revenues of
approximately $662,072 and $1,032,000, respectively. The decrease in our
revenues in fiscal 2002 as compared to fiscal 2001 principally relate to lower
royalty revenues earned under a settlement agreement with Cyanotech Corporation
(as a result of lower sales by Cyanotech in 2002 as compared to 2001) and the
Company's inability to financially support its sales and marketing efforts to
increase sales during the reorganization process.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs include salaries, development materials, plant
and equipment depreciation, costs associated with operating our five-acre
research and development/production facility and cost associated with our
research agreements with the University of Hawaii, which has been terminated.
Research and development costs were approximately $912,707 in fiscal 2002
compared with approximately $1.8 million for fiscal 2001. The decrease reflects
reductions in personnel and constraints in our operations associated with our
reorganization proceedings.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses consist principally of salaries and fees for
professional services. General and administrative expenses were approximately
$1.2 million for fiscal 2002 compared with approximately $2.6 million for fiscal
2001. The decrease for the year ended October 31, 2002 reflects costs associated
with reductions in personnel in 2002, reduced efforts on expansion of production
capacity as compared to fiscal 2001 and constraints on spending, all resulting
from our reorganization proceedings.

INTEREST EXPENSE

Interest expense for fiscal 2002 was approximately $104,000 as compared to
approximately $300,000 for fiscal 2001. The decrease in fiscal 2002 resulted
mainly from the cancellation and settlement of outstanding promissory notes in
2002 pursuant to the Company's bankruptcy proceedings.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations until now through public and private sales of
debt and equity securities and debt instruments. During the years ended October
31, 2002 and 2001, we raised approximately $2.7 million and $2.8 million,
respectively, of net proceeds from the sale of shares of common stock and/or the
issuance of debt in private placement transactions.



                                      -22-
<PAGE>


During fiscal 2002, cash used in operating activities was approximately $2.7
million compared with $3.0 million for fiscal 2001. Additionally, capital
expenditures for fiscal year 2002 and 2001 were approximately $8,000 and
$269,000, respectively. Due to difficulties in raising capital and involuntary
bankruptcy proceedings, we significantly reduced our headcount and operating
costs.

In December 2001 and March 2002, in connection with the Company's reorganization
under Chapter 11 of the federal bankruptcy code, the Company entered into a
Debtor in Possession financing arrangement with Chardan Ventures, LLC, a venture
capital and consulting group, under which it received $500,000. The principal
and $28,000 in interest were repaid to Chardan Ventures, LLC in July 2002.

During the fiscal year ended October 31, 2002, the Company received $2,700,000
in financing in the form of a promissory note. The terms of this note include
interest payable at 6% per annum. We used these funds to begin repayment of our
pre-bankruptcy obligations and Debtor in Possession financing, as authorized in
the Plan, which was confirmed by the Court on June 17, 2002. We also used these
funds to pay operating expenses incurred by the Company during the year.

We are planning on raising additional funds through public and private sales of
debt and equity securities in 2003.

RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION TO ALL
OTHER INFORMATION INCLUDED IN THIS REPORT ON FORM 10-KSB, BEFORE YOU DECIDE TO
INVEST IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS OCCURS, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY
AFFECTED. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THE
FOLLOWING RISKS OR OTHERS NOT YET IDENTIFIED BY MANAGEMENT, AND YOU COULD LOSE
ALL OR PART OF YOUR INVESTMENT.

RISKS RELATED TO OUR BUSINESS

We have incurred substantial operating losses and expect to incur future losses.
Our future financial results are uncertain, and we may never become a profitable
company.

We have had quarterly and annual operating losses since our inception in 1988.
Our net loss in fiscal year 2002 was approximately $2.4 million and our
accumulated deficit at October 31, 2002 was approximately $900,000 (after
application of fresh-start accounting principles subsequent to our
reorganization proceedings). Our losses to date are primarily due to the costs
of research and development, and the general and administrative costs associated
with our operations. Furthermore, we plan to increase our operating expenses as
we continue to expand our product offerings. As a result, our losses may
increase in the future even if we achieve our revenue goals.

Should we achieve profitability, we may be unable to sustain or increase
profitability on a quarterly or annual basis. Many factors could affect our
ability to achieve and maintain profitability, including:



                                      -23-
<PAGE>


     o    our ability to complete successfully the commercialization and
          production cost optimization of our products;
     o    our ability to manage production costs and yield issues associated
          with increased production of our products;
     o    the progress of our research and development programs for developing
          other microalgal products;
     o    the time and costs associated with obtaining regulatory approvals for
          our products;
     o    our ability to protect our proprietary rights;
     o    the costs of filing, protecting and enforcing our patent claims;
     o    competing technological and market developments;
     o    changes in our pricing policies or the pricing policies of our
          competitors;
     o    the costs of commercializing and marketing our existing and potential
          products; and
     o    the inability to achieve a level of sales of our products necessary to
          generate sufficient revenues to cover research, development and
          operating costs.

If our revenues grow more slowly than we anticipate, or if our operating
expenses exceed our expectations and cannot be reduced, our losses could
continue beyond our present expectations and we may never become a profitable
company.

We may be unable to raise additional capital or generate the capital necessary
to support our planned level of research and development activities and TO
manufacture and market our products.

We will require substantial expenditures to support our research and development
activities and to manufacture and market our products. Over the next twelve
months, we project expenditures of approximately $6 million in operating
capital, before any planned capital expenditures. Many factors will determine
our future capital requirements, including:

     o    market acceptance of our products;
     o    our ability to manufacture our products cost-effectively in quantities
          needed to sustain growing sales of ASTAFACTOR(R);
     o    the extent and progress of our research and development programs;
     o    the time and costs of obtaining regulatory clearances for some of our
          products;
     o    the progress and success of pre-clinical and clinical studies, where
          applicable;
     o    the costs of filing, protecting and enforcing patent claims;
     o    competing technological and market developments;
     o    the cost of developing and/or operating production facilities for our
          existing and potential products;
     o    the ability of a third party contractor to complete timely a major
          cultivation and processing facility and to operate it in a manner that
          meets our product requirements; and
     o    the costs of commercializing our products.

Product sales have begun to pay some of our operating costs, but we still need
additional funding. We are seeking investment from various sources. However,
additional financing may not be available on favorable terms, if at all. If we
do not have adequate funds, we may have to curtail operations significantly. In
addition, we may have to enter into unfavorable agreements that could force us
to relinquish certain technology or product rights, including patent and other
intellectual property rights. If we cannot raise enough capital, then we may
have to cut back on production, limit our product development activities, reduce
marketing activities or delay other plans intended to increase revenue and help
us achieve profitability.



                                      -24-
<PAGE>


WE HAVE TAKEN STEPS THAT WILL INCREASE THE EXPENDITURES WE WILL MAKE TO SUPPORT
RESEARCH AND DEVELOPMENT EFFORTS ON PHARMACEUTICAL PRODUCTS, IN ADDITION TO
THOSE FOCUSED ON OUR TRADITIONAL NUTRACEUTICAL PRODUCTS. AS A RESULT, WE ARE NOW
EXPOSED TO RISKS ASSOCIATED WITH THE DEVELOPMENT AND COMMERCIALIZATION OF
PHARMACEUTICAL PRODUCTS.

There are many uncertainties, complexities and delays inherent in the research
and development, manufacturing, marketing and sale of pharmaceutical products,
including: (i) large upfront and continual capital requirements, (ii) efficacy
and safety concerns, (iii) delays in the receipt of or the inability to obtain
required approvals, (iv) the suspension or revocation of the authority necessary
for manufacture, marketing or sale, (v) the imposition of additional or
different regulatory requirements, such as those affecting labeling, (vi)
seizure or recall of products, (vii) the failure to obtain, the imposition of
limitations on the use of, or the loss of patent and other intellectual property
rights, and (viii) manufacturing or distribution problems.

THERE ARE INHERENT DIFFICULTIES AND UNCERTAINTIES IN THE DEVELOPMENT OF NEW
PHARMACEUTICAL PRODUCTS.

The outcome of the lengthy and complex process of new pharmaceutical product
development is inherently uncertain. A product candidate can fail at any stage
of the process, and one or more late-stage product candidates could fail to
receive regulatory approval. New product candidates may appear promising in
development but fail to reach the market because of efficacy or safety concerns,
the inability to obtain necessary regulatory approvals, the difficulty or
excessive cost to manufacture product candidates or products, and the costs
associated with preventing the infringement of our patents or intellectual
property rights by others. Furthermore, the sales of new products may fail to
reach anticipated levels.

BECAUSE OUR PHARMACEUTICAL DRUG CANDIDATES ARE IN AN EARLY STAGE OF DEVELOPMENT,
THERE IS A HIGH RISK OF FAILURE.

Drug candidates that appear promising at early stages of development may not
enter clinical development or reach the market for a number of reasons,
including the possibility that the drug candidates will:

     o    be found during preclinical testing or clinical trials to be
          ineffective or cause harmful side effects;
     o    fail to receive the regulatory clearances required to market them as
          drugs;
     o    be subject to proprietary rights held by others, requiring the
          negotiation of a license agreement prior to marketing, which license
          may not be available on favorable terms, or at all;
     o    be difficult or expensive to manufacture on a commercial scale;
     o    not be developed rapidly enough to compete with drug candidates or
          other treatments commercialized by our competitors; or
     o    fail to generate market acceptance.



                                      -25-
<PAGE>


As promising drug candidates are identified, we may decide to continue
developing them independently or we may decide to do so in collaboration with
other companies as a means of generating revenue, reducing risk or obtaining
access to additional resources to support the development process. We or our
collaborators will need to conduct significant additional research, preclinical
testing and clinical trials before filing applications with the FDA for product
approval of our drug candidates. Clinical trials are expensive, can take several
years to complete and have a high risk of failure. If research and testing are
not successful or our drug candidates fail to obtain regulatory approval, we or
our collaborators will be unable to market and sell products derived from our
drug candidates. As a result, we may not receive product royalty revenues
payments and our ability to continue operations could be jeopardized.

THE PROGRESS AND RESULTS OF PRECLINICAL AND CLINICAL TESTING ARE INHERENTLY
UNCERTAIN, WHICH COULD DELAY OUR EFFORTS AND THE EFFORTS OF OUR COLLABORATORS TO
COMMERCIALIZE DRUGS.

Both preclinical and clinical testing are long, expensive and uncertain
processes. It may take several years to complete the preclinical testing and
clinical development necessary to commercialize a pharmaceutical drug, and
failure can occur at any stage. Commercialization of product candidates derived
from our pharmaceutical drug candidates depends upon successful completion of
clinical trials. Interim results of trials do not necessarily predict final
results, and success in preclinical testing and early clinical trials does not
ensure that later clinical trials will be successful. A number of companies in
the pharmaceutical industry, including other biotechnology companies, have
suffered significant setbacks in advanced clinical trials, even after promising
results in earlier trials. We have never successfully completed clinical
development of any of our drug candidates. In addition, we do not know whether
future clinical trials will begin on time or whether they will be completed on
schedule, or at all. The length of time necessary to initiate and complete
clinical trials varies significantly and may be difficult to predict. We plan to
outsource certain of our activities that involve drug testing in small rodents
to third parties.

Any drug is likely to produce some toxicities or undesirable side effects in
animals and in humans when administered at sufficiently high doses and/or for
sufficiently long periods of time. Our emphasis on natural products may reduce,
but cannot eliminate, such effects. Unacceptable toxicities or side effects may
occur at any dose level and at any time in the course of studies of animals
designed to identify unacceptable effects of a drug candidate or during clinical
trials of our potential products. The appearance of any unacceptable toxicity or
side effect could cause our collaborators or regulatory authorities to
interrupt, limit, delay or abort the development of any of our drug candidates
and could ultimately prevent clearance by the required regulatory authorities of
these candidates for any or all targeted indications.

WE OR OUR COLLABORATORS MUST OBTAIN REGULATORY APPROVAL TO MARKET PRODUCTS
DERIVED FROM OUR PHARMACEUTICAL DRUG CANDIDATES.

The pharmaceutical industry is subject to stringent regulation by a wide range
of authorities, both in the United States and abroad. Even if we obtain
regulatory approval for a drug candidate, the approval may not be obtained in a
timely manner or under technically or commercially feasible conditions. We and
our collaborators cannot market a pharmaceutical product in the United States
until it has completed rigorous preclinical testing and clinical trials and an
extensive regulatory clearance process implemented by the FDA. Similar approval
processes apply in most, if not all, of the foreign markets in which we intend
to sell our products. Satisfaction of regulatory requirements typically takes
many years, depends upon the type, or complexity and novelty of the product and
requires substantial resources. Of particular significance are the FDA's
requirements covering research and development, testing, manufacturing, quality
control, labeling and promotion of drugs for human use.



                                      -26-
<PAGE>


Outside the United States, the ability to market a product is contingent upon
receiving a marketing authorization from the appropriate regulatory authorities.
The requirements governing the conduct of clinical trials, marketing
authorization, pricing and reimbursement vary widely from country to country. At
present, foreign marketing authorizations are administered at a national level,
although within the European Community, or EC, registration procedures are
available to companies wishing to market a product in more than one EC member
state. Only after the appropriate regulatory authority is satisfied that
adequate evidence of safety, quality and efficacy has been presented will it
grant a marketing authorization. In addition, United States and foreign
government regulations control access to and use of some human or other tissue
samples in our research and development efforts. United States and foreign
government agencies may also impose restrictions on the use of data derived from
human or other tissue samples.

Our products and production activities are subject to government regulation and
action, which are subject to change.

We are subject be being affected by changes in or the imposition of governmental
regulations and actions, including: (i) new laws, regulations and judicial
decisions related to pharmaceutical and nutraceutical products, (ii) changes in
the United States Food and Drug Administration and foreign regulatory approval
processes that may delay or prevent the approval of new pharmaceutical products
and result in lost market opportunity, (iii) new laws, regulations and judicial
decisions affecting pricing or marketing of pharmaceutical and nutraceutical
products and (iv) changes in the tax laws relating to Mera Pharmaceuticals'
operations.

We have limited manufacturing experience, and if we cannot overcome the
challenges of producing microalgae on a commercial scale, we may be unable to
satisfy our obligations under agreements with our customers.

Both we and the third party that has agreed to supply our product requirements
in the future have limited experience in cultivating microalgae and processing
them into commercial products. To be successful, we and our contractor must
produce products at acceptable cost while ensuring that the quantity and quality
of our products comply with contractual and regulatory requirements and
regulations. Many factors complicate the production of microalgal products and
could at any time limit production, including:

     o    microbial contamination;
     o    variability in production cycle times due to technical, environmental
          and biological factors; and
     o    losses of final product due to inefficient processing.

We currently have sufficient inventory to meet the requirements of our
customers. However, if we are unable to increase production of our products, at
our current production facility in Hawaii, or if completion or successful
startup of the third party production facility in China is delayed beyond the
anticipated date of late 2003, we may be unable to satisfy our supply
obligations under any future agreements. Our inability to increase production
would limit our revenues, and could cause us to forego customers that require an
assured source of supply or to lose customers if we cannot meet their demand for
product.



                                      -27-
<PAGE>


IF WE CHOOSE TO CONVERT SOME OF OUR PRODUCTION CAPACITY OF NATURAL ASTAXANTHIN
TO THE PRODUCTION OF OTHER MICROALGAL PRODUCTS OR TO RESEARCH AND DEVELOPMENT
ACTIVITIES, WE MAY BE UNABLE TO MEET CUSTOMER DEMAND FOR NATURAL ASTAXANTHIN.

We introduced our first retail nutraceutical product, ASTAFACTOR(R) in March
2000. We plan to produce limited quantities of natural astaxanthin in order to
meet anticipated demand for this new product until our third party supplier is
able to meet our supply requirements. By limiting the production of natural
astaxanthin, we risk being unable to supply the requirements of our customers,
and we may lose some or all of them.

IF THE DEMAND FOR NATURAL ASTAXANTHIN OR OUR OTHER PRODUCTS EXCEEEDS OUR
PRODUCTION CAPABILITIES, WE MAY EXPERIENCE SIGNIFICANT FINANCIAL, TECHNICAL AND
BIOLOGICAL CHALLENGES.

We believe that demand for our natural astaxanthin product will eventually
approach or exceed one hundred kilograms per month. Achieving that level of
production is possible only through our third party supplier agreement. We will
also have to rely on that third party for production of other products. We have
entered into agreements to assist a Chinese entity in the design and
construction of the Chinese Facility under which we will utilize our patented
technology under license to supply our requirements for natural astaxanthin and
potentially other products. The planned facility has a capacity that is
approximately thirty times greater than our current facility in Hawaii, with
potential to expand if demand justifies doing so. We anticipate that facility
will begin operating by the late 2003, in time to meet the projected growth in
our sales. If we fail to expand our current production facility or if the
production facility in China is not completed in the proposed timeframe, we may
be unable to meet demand for product and could lose the opportunity to increase
our revenues. We could also lose customers, both current and potential, who may
rely on our ability to deliver product. In addition, once the production
facility in China is completed, it may take time for it to reach the efficiency
of our Hawaii facility, and it may never do so.

OUR CUSTOMER BASE IS CONCENTRATED AMONG RELATIVELY FEW CUSTOMERS, AND THE LOSS
OF ANY OF THESE CUSTOMERS WOULD MATERIALLY ADVERSELY AFFECT OUR REVENUES.

Our business currently depends on key distribution relationships in Hawaii,
California and several other Western states. These customers currently purchase
approximately 60% of the natural astaxanthin products we sell, with the
remainder being sold directly to consumers. If we lose one or more of these
customers, or if they do not continue buying our products at the current and
anticipated purchase levels, then our revenues could decrease. In addition, the
loss of one or more of these customers may adversely affect our reputation, and
we could have difficulty attracting new customers as a result.

IF WE FAIL TO MAINTAIN CURRENT OR FUTURE STRATEGIC RELATIONSHIPS, OUR BUSINESS
WOULD SUFFER.

An important component of our business strategy is to develop strategic
relationships with companies that have established research and development,
sales, marketing and distribution capabilities for the microalgal products that
we intend to develop.



                                      -28-
<PAGE>


We intend to enter into strategic relationships with other companies to develop
additional applications for our technology, commercialize our future products,
assist us in obtaining regulatory approvals and provide sources of funding. We
cannot guarantee that any of the companies with which we collaborate at present
or in the future will perform their obligations to us, or that we will be able
to perform our obligations to them. Additionally, our strategic relationships
could be adversely affected by many additional factors, including:

     o    the development of competing technologies or products by a
          collaborating company;
     o    the failure of a collaborating company to devote sufficient resources
          to developing and commercializing our products;
     o    our inability to enter into competitive arrangements;
     o    our failure to obtain timely regulatory approvals; or
     o    the premature termination of an agreement with a collaborator.

If we are unable to establish appropriate strategic relationships, we may need
to raise additional capital to finance these activities at our own expense. If
we cannot rely on strategic relationships for assistance and instead have to
develop our own expertise in these areas, then we may experience delays and
additional expense in launching, marketing, selling and distributing products.
Any delay could create additional costs and limit our ability to expand our
business.

IF WE FAIL TO ATTRACT AND RETAIN KEY PERSONNEL WE WILL BE UNABLE TO EXECUTE OUR
BUSINESS PLAN, AND OUR BUSINESS WILL SUFFER.

Our success depends on the continued efforts of the principal members of our
management and scientific team. The Company has hired several key members of
those teams that it needs to retain and will need to attract additional senior
management in order to execute its plans fully. Success in doing so cannot be
assured.

We are also highly dependent on our ability to attract and retain key
scientific, technical, management and operating personnel, including
consultants. We may be unable to attract and retain qualified personnel or
develop the expertise needed in these areas. If we lose or fail to attract key
personnel, we may be unable to execute our business plan.

OUR BUSINESS WILL NOT OPERATE EFFICIENTLY AND OUR RESULTS OF OPERATIONS WILL BE
NEGATIVELY AFFECTED IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY.

Until 2002 we focused almost exclusively on product research and technology
development. As we began full-scale commercial production of microalgal products
we have had to initiate or expand many activities, including outsourcing,
customer relations, engineering, construction, recruiting and training. During
this transition, the size of our organization increased rapidly. During the
Company's reorganization, the size of our organization decreased again. It is
anticipated that only a marginal increase in personnel will be made during 2003.
In addition, our growth will require significant improvement in the planning and
management of our organization.

We expect significant demands on our financial and management control systems to
increase this year, including the adoption of new accounting software to address
better the needs of our growing organization. If we fail to upgrade our
financial and management control systems, or if we encounter difficulties during
these upgrades, then we may not be able to manage our human and financial
resources effectively. Such ineffectiveness could make it difficult to retain or
attract employees and could directly or indirectly create unnecessary expenses
or lead to incorrect decisions by management.



                                      -29-
<PAGE>


AS WE EXPAND OUR PRODUCT LINE AND ATTEMPT TO PENETRATE ADDITIONAL MARKETS, WE
MAY FACE SIGNIFICANT CHALLENGES TO SUCCESS.

We are actively developing several product lines, including nutraceuticals,
compound libraries to use in drug discovery internally or to offer to other
companies and pharmaceuticals. The success of our nutraceutical product line
will depend on our ability to implement our marketing strategy and comply with
the standards of Good Manufacturing Practice, or GMP, as and when applicable. We
believe the prospects for nutraceutical astaxanthin will depend, in the short
term, on product quality and education of consumers regarding its benefits. Our
ability to penetrate new markets for natural astaxanthin products will, we
believe, depend strongly on regulatory approval in several major markets outside
the United States. We expect the success of our compound library products to
depend primarily on our ability to attract corporate customers in the
biopharmaceutical industry and, ultimately, on their discovery of new drug
candidates. We believe the success of our pharmaceutical products will depend on
our ability to develop new products, finance clinical trials and obtain
regulatory approval for such products.

We cannot assure successful development of any potential microalgae-based
products, nor can we guarantee market acceptance of any of our products,
existing or future. We have limited marketing experience in nutraceutical or
pharmaceutical markets. We have less than two years of experience in electronic
marketing or in direct retail sales. We cannot assure you that we, our
consultants or contractors will be successful in our marketing efforts, nor can
we prevent them from competing with us or assisting our competitors. If we are
unable to develop or commercialize any of our product lines successfully, then
our revenues will fail to grow.

WE MAY BE UNABLE TO PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS
ADEQUATELY, AND OUR EFFORTS TO DO SO COULD BE TIME CONSUMING AND EXPENSIVE AND
COULD DIVERT MANAGEMENT ATTENTION FROM EXECUTING OUR BUSINESS STRATEGY.

We regard the protection of our patents, copyrights, trade secrets and know-how
(collectively intellectual property) as critical to our success. We rely on a
combination of patent, copyright and trade secret laws and contractual
restrictions to protect our intellectual property and maintain our competitive
position. Our future prospects depend in part on our ability to protect our
intellectual property while operating without infringing the intellectual
property rights of third parties.

We cannot guarantee that any of our pending patent applications will result in
issued patents. We may be unable to develop any additional patentable
technologies. We cannot be certain that any patents issued to us or available to
us through a license arrangement will establish the means to produce or provide
us with any competitive advantage for any product or products. Third parties
could challenge our patents or could obtain patents that have a material adverse
effect on our ability to do business efficiently and effectively.

The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal and
factual questions. Patent law continues to evolve in the scope of claims in the
technology area in which we operate. Therefore, the degree of future protection
for our proprietary rights is uncertain. We cannot guarantee that others will
not independently develop similar or alternative technologies. Other parties may




                                      -30-
<PAGE>

duplicate our technologies, or, if patents are issued to us, they may design
around those patented technologies. Other parties may have filed or could file
patent applications that are similar or identical to some of ours. These patent
applications could have priority over ours. To determine the priority of
inventions, we may have to participate in interference proceedings declared by
the United States Patent and Trademark Office, which could be very costly. In
addition, the laws of some foreign countries may not protect our patents and
other intellectual property rights to the same extent as the laws of the United
States.

We could incur substantial costs in litigation if we need to defend ourselves
against patent infringement claims brought by third parties, or if we choose to
initiate claims against others. We have in the past, and we may in the future,
be required to dedicate significant management time and financial resources to
prosecute or defend infringement actions. In addition, a finding of
non-infringement or declaration of invalidity of our patent could reduce or
eliminate the exclusivity of our proprietary technology. Present and potential
collaborators may terminate or decide not to enter into relationships with us if
our intellectual property position is weakened. In addition, a finding of
non-infringement or declaration of invalidity of our patents could reduce our
ability to obtain future financing.

There could be significant litigation in our industry regarding patent and other
intellectual property rights. For example, third parties may bring infringement
or other claims against us for using intellectual property that we internally
developed or license from third parties. In addition, although nondisclosure
agreements generally control the disclosure and use of our proprietary
technology, know-how and trade secrets, we cannot guarantee that all
confidentiality agreements will be honored or that our proprietary technology,
know-how and trade secrets will not be disseminated, or that any party
responsible for doing so will be able to compensate us adequately for such loss.

We may not prevail in the prosecution or defense of any action, nor can we
predict whether third parties will license necessary intellectual property
rights to us on commercially acceptable terms, if at all. Any of these outcomes
could be very costly and could diminish our ability to develop and commercialize
future products.

IF WE ARE UNABLE TO COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS, OUR BUSINESS
MAY BE HARMED.

We are subject to federal, state and local laws and regulations governing the
use, manufacture, storage, handling and disposal of hazardous materials and
waste products. We currently maintain a supply of several hazardous materials at
our facilities. In the event of an accident, we could be held liable for any
damages that result, and the liability could exceed our resources.

OUR PRODUCTION CAPABILITY IS HIGHLY DEPENDENT ON ENVIRONMENTAL AND CLIMATIC
FACTORS BEYOND OUR CONTROL.

All of our production capacity is now located at a single facility in Kona,
Hawaii. Since we maintain minimal finished goods inventory, any future event
that caused a disruption in production at our facility would significantly
impair our ability to meet customer demand. These events could include fire,
volcanic eruption, earthquake, tidal wave, hurricane or other natural disaster.
In addition, some or all of consistent sunlight, high ambient temperatures and
an ample supply of fresh water are necessary for microalgal growth. If we
experience any significant or unusual change in climate, or should our water
supplies be threatened by microbial contamination we cannot control, there could
be an adverse impact on our production. If we cease production for any
significant period, the success of our business would be threatened from a
resulting loss of customers, revenues, and valuable employees.



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CURRENCY FLUCTUATIONS AND DIFFERENT STANDARDS, REGULATIONS AND LAWS RELATING TO
INTERNATIONAL OPERATIONS MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

We expect to sell many of our products on a global scale, because their use is
more highly developed in Europe and Asia than in the United States. We also
expect that our compound libraries will be marketed internationally.
International business is generally more difficult than domestic business and
can create costs and delays not associated with business conducted solely within
the United States. These additional risks include foreign government controls
and regulations, economic conditions, currency fluctuations, duties and taxes,
political and economic instability or unrest, imposition of or increases in
tariffs, disruptions or delays in shipments and other trade restrictions. These
factors, among others, can all lead to interference with or increased costs of
operation and the ability to sell products in international markets. If any such
factors were to render the conduct of business in a particular country
undesirable or impracticable, there could be a material adverse effect on our
business, our financial condition and the results of operations. In addition,
there can be no assurance that our products or marketing efforts will be
successful in foreign markets.

In addition, fluctuations in currency exchange rates could make our products
more expensive in some countries, resulting in the loss of customers in those
markets.

WE MAY BE SUBJECT TO PRODUCT LIABILITY LAWSUITS, AND OUR INSURANCE MAY BE
INADEQUATE TO COVER DAMAGES.

Clinical trials or marketing of any of our current or potential products may
expose us to liability claims arising from the use of these products. Even the
most thorough of clinical trials could fail to detect a significant side effect
associated with long-term use of a product, and it is possible that liabilities
will arise even after our products receive any required regulatory approvals.
Even if such claims are not well-founded, defending them will be very costly and
consume substantial management attention and energy. We cannot ensure that our
current product liability insurance, together with indemnification rights under
our existing or future licenses and collaborative arrangements, will be adequate
to protect us against any claims and resulting liabilities. As we expand our
business, we may be unable to obtain additional insurance on commercially
reasonable terms. We could suffer harm to our financial condition and our
reputation if a product liability claim or recall exceeds the limits of our
insurance coverage.

BECAUSE OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT CONTROL OF OUR MANAGEMENT
AND AFFAIRS, THESE STOCKHOLDERS MAY BE ABLE TO CONTROL US AND ALSO PREVENT
POTENTIALLY BENEFICIAL ACQUISITIONS OF OUR COMPANY BY OTHERS.

As of October 31, 2002, our current directors and executive officers, as a
group, beneficially owned approximately 30% of the 388,803,300 outstanding
shares of our common stock. As a result, our officers and directors may be able
to exert considerable influence over the actions of the Board of Directors and
matters requiring approval of our stockholders. This concentration of ownership
could delay or prevent a change in control, and may adversely affect the ability
of other stockholders to adopt a position in opposition to these directors and
officers. Our principal stockholders may have interests that differ from our
other stockholders, particularly in the context of potentially beneficial
acquisitions of our Company by others, and they may legitimately vote as
shareholders in a manner that protects their interests. For example, to the
extent that these stockholders are our employees, they may be less inclined to
support an acquisition of our Company by others if that acquisition would
terminate their employment, diminish their responsibilities or reduce their
compensation.



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<PAGE>


RISKS RELATED TO OUR INDUSTRY

IF WE FAIL TO COMPETE EFFECTIVELY AGAINST LARGER, MORE ESTABLISHED COMPANIES
WITH GREATER RESOURCES, OUR BUSINESS WOULD SUFFER.

Competition in the nutraceutical and pharmaceutical markets is intense. Factors
affecting competition include financial resources, research and development
capabilities and manufacturing and marketing experience and resources.

Our nutraceutical astaxanthin product will compete directly with the products of
several companies that sell a similar nutraceutical product. Three of these
companies have a product that, like ours, is based on astaxanthin derived from
HAEMATOCOCCUS PLUVIALIS. MicroGaia, Inc. is a Hawaii-based subsidiary of Fuji
Chemical Industries, Inc. that has established a market for its product in
Japan. AstaCarotene AB of Sweden, which was recently acquired by MicroGaia, has
produced and sold its nutraceutical astaxanthin for several years Western
Europe. Cyanotech Corporation, based in Hawaii, sells a competing nutraceutical
astaxanthin product. Minapro, a company based in Israel, also sells a competing
nutraceutical product. We expect our nutraceutical astaxanthin product will
compete on the basis of product quality, price, efficiencies derived from our
intellectual property and an effective marketing strategy. However, if our
competitors develop a proprietary position that inhibits our ability to compete,
or if our marketing strategy is not successful, then our revenues may not
increase.

Our pharmaceuticals derived from natural products and screening libraries will
compete with various biotechnology companies based in North America and
elsewhere that are focusing efforts on natural product pharmacology. In many
cases, the approaches of such competing companies are complementary to our
approach rather than directly competitive, because such companies are accessing
different sources of natural products than our sources. Acera Biosciences, Inc.
clones biosynthetic pathways into cultured host microorganisms to develop
natural products while Albany Molecular Research, Inc. develops screening
libraries that could compete with our libraries and also uses biotransformation,
enzyme modification and chemical derivation to modify molecular structures.
Similar to Mera, AquaArtis, a private company based in France, identifies,
develops and commercializes lead compounds and nutraceutical products from
microalgae and cyanobacteria using proprietary culture and extractive chemistry
technologies. Cubist Pharmaceuticals, Inc. focuses on capturing natural product
pathways from various microorganisms, generating new natural product
biosynthesis pathways and screening libraries from fungi and plants and Diversa
Corporation focuses on environmental DNA and microbial genomics. Ecopia
Biosciences, Inc. develops screening libraries from microorganisms and uses
bacterial genomics to guide choices of strains. Harbor Branch Oceanographic
Institution develops drugs from marine microorganisms and invertebrates, and
Kosan Biosciences, Inc. develops drug candidates from natural product compounds.
Nereus Pharmaceuticals, Inc. focuses on drug development through a marine
microbiology platform. Phytomedics, Inc., Phyton Catalytic, Inc. and Sequoia
Sciences, Inc. all develop screening libraries from vascular plants.



                                      -33-
<PAGE>


There are various companies using microalgae cultivation technology processes
that compete with our processes. We are aware of two U.S. companies, Martek of
Maryland and Omega-Tech of Colorado, that produce commercial quantities of
microalgae using modified fermentation processes. We are also aware of one
company, Cell Tech of Oregon, which harvests microalgae from natural
environmental sources. There are two other companies in the world - Biotechna of
Australia and MicroGaia of Hawaii - that possess proprietary photobioreactor
technology and use it for commercial purposes. While there are other
photobioreactors in operation, to our knowledge, they are all operated by
universities or research institutes and are not used for commercial purposes. It
is possible that competing photobioreactor technologies which could adversely
affect our perceived technical and competitive advantages already exist or may
emerge in the future.

We also anticipate that the competition to develop microalgal-based products
other than natural astaxanthin will be intense. We expect competitors to include
major pharmaceutical, food processing, chemical and specialized biotechnology
companies. Many of these companies will have financial, technical and marketing
resources significantly greater than ours. There are also other emerging marine
biotechnology companies that could form collaborations with large established
companies to support research, development and commercialization of products
that may compete with our current and future products. Also, academic
institutions, governmental agencies and other public and private research
organizations are conducting research activities and seeking patent protection
for microalgal products and may commercialize products that compete with ours on
their own or through joint ventures. In addition, there may be technologies we
are unaware of, or technologies that may be developed in the future, that could
adversely affect our perceived technical and competitive advantage.

INCREASED COMPETITION MAY SIGNIFICANTLY REDUCE THE MARKET PRICE OF NATURAL
ASTAXANTHIN.

Astaxanthin can be produced either naturally, as we do, or through synthesis of
chemical compounds. We are not aware that synthetic astaxanthin is approved for
direct human consumption in any jurisdiction, although the FDA approved the
Hoffman-LaRoche, Ltd. synthetic astaxanthin product as a food additive in fish
feed in 1995. We believe that the cost of producing synthetic astaxanthin is
significantly lower than that for natural astaxanthin. If we succeed in
commercializing natural astaxanthin to the extent we project, synthetic
producers of astaxanthin may increase their efforts to obtain approval of their
product for human consumption. Studies have shown that natural astaxanthin is
more effective than synthetic astaxanthin when used with various fish and
shellfish populations. However, we have not determined that to be the case in
human applications. The introduction of synthetic astaxanthin into the human
nutraceutical marketplace could adversely affect the price at which we sell our
product and the market share that we can obtain. While we believe that there are
substantial hurdles to the approval of synthetic astaxanthin for human
consumption in the U.S. and other major markets, we cannot be certain that such
approval will not occur. A single producer, Hoffman-LaRoche, Inc., currently
dominates the synthetic astaxanthin market. Hoffman-LaRoche has maintained the
market price of its synthetic astaxanthin, which is derived from petrochemicals,
at approximately $1,800 per kilogram in recent times, down from a decade-long
price of approximately $2,500 per kilogram. That is substantially below the
price at which we currently sell astaxanthin in finished nutraceutical form.



                                      -34-
<PAGE>


IF WE ARE UNABLE TO COMPLY WITH GOVERNMENT REGULATION OF OUR PRODUCTS AND
PRODUCTION ACTIVITIES, WE MAY BE FORCED TO DISCONTINUE PRODUCTION OF CURRENT OR
FUTURE PRODUCTS.

We are subject to federal, state, local and foreign laws and regulations
governing our products and production activities. This makes us vulnerable to:
(i) the imposition of new laws, regulations and judicial decisions related to
pharmaceutical and nutraceutical products, (ii) changes in the United States
Food and Drug Administration and foreign regulatory approval processes that may
delay or prevent the approval of new pharmaceutical products and result in lost
market opportunity, (iii) delays in the receipt of or the inability to obtain
required approvals, (iv) new laws, regulations and judicial decisions affecting
pricing or marketing of pharmaceutical and nutraceutical products, (v) the
suspension or revocation of the authority necessary for manufacture, marketing
or sale of our products, (vi) the imposition of additional or different
regulatory requirements, such as those affecting labeling, (vii) seizure or
recall of products, and (ix) the failure to obtain, the imposition of
limitations on the use of, or the loss of patent and other intellectual property
rights.

Each existing or potential microalgal product that we develop, produce, market
or license presents unique regulatory problems and risks. Relevant regulations
depend on product type, use and method of manufacture. The FDA regulates, in
varying degrees and in different ways, dietary supplements, other food products,
medical devices and pharmaceutical products. Regulations govern manufacture,
testing, exportation, labeling and advertising.

Prescription pharmaceuticals and certain types of medical devices are regulated
more vigorously than dietary supplements. Any products we develop for use in
human nutrition, pharmaceuticals, or cosmetics, may require that we and our
contractors and licensees develop and adhere to GMP as established by the FDA,
ISO standards as suggested in Europe, and any other applicable standards
mandated by federal, state, local or foreign laws, regulations and policies or
customer requirements. Each potential pharmaceutical product that we develop,
produce, market or license requires us to go through a lengthy, expensive and
rigorous FDA drug approval process which includes pre-clinical animal studies
and Phase I (toxicity), Phase II (dosage) and Phase III (efficacy) human
clinical studies. Our current cultivation and processing facilities and
procedures are not yet required to comply with GMP or ISO standards, although
our extraction and encapsulation facilities must meet GMP standards, and they
do. We believe we are prepared to meet these requirements more broadly when
needed. The contract with the Chinese production facility that is under
development requires that it operate in accordance with GMP standards, and
consideration is being given to qualifying under the ISO 9000 standard as well.

We are or may become subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of products, importation of
organisms and occupational safety, among others. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. We cannot ensure that any of our
products will satisfy applicable regulatory requirements. Changes could occur in
federal, state and foreign laws, regulations and policies and, particularly with
respect to the FDA or other such regulatory bodies, such changes could be
retroactive. Such changes could have a material adverse effect on our business,
financial condition, results of operations and relationships with corporate
partners.

Nutraceutical products that we develop will be viewed as human dietary
supplements. The FDA requires pre-market clearance in the United States and
other countries where these nutraceutical products are marketed if they are
intended for human consumption. The process of obtaining FDA clearance for
either a food additive or a human dietary supplement can be expensive and time
consuming, although significantly less expensive than the process for obtaining
clearances for a new pharmaceutical. With natural products such as ours there is
often a brief and inexpensive waiting period before marketing of a nutraceutical
can begin. Extensive information is required on the toxicity of the additive,



                                      -35-
<PAGE>

including carcinogenicity studies and other animal testing. FDA clearance to
market dietary supplements is obtained by notifying the FDA in writing of our
intention to market a certain product and providing supporting documentation
regarding toxicity. If the FDA does not object within a specified period of
time, approval is deemed granted. Aquasearch, a corporate predecessor to Mera,
received FDA clearance for the ASTAFACTOR(R) in early 2000. While we believe
that the natural products on which we are focused will be subject to few
objections in this approval process, we cannot ensure that any of our future
products will be cleared by the FDA on a timely basis, if at all.

The ASTAFACTOR(R), our nutraceutical astaxanthin product, is likely to be
distributed in foreign countries, including the European Union, China, Japan,
Canada and Australia. Regulatory approvals in foreign markets vary by country.
We believe the approval process for the ASTAFACTOR(R) in China, Australia, Japan
and certain other Asian countries will come under their "natural product" status
and be approved relatively quickly. However, we can provide no assurances in
this regard.

THE PRICE OF OUR COMMON STOCK MAY BE HIGHLY VOLATILE.

The trading price of our common stock has been and is likely to continue to be
highly volatile. We could be subject to wide fluctuations in price in response
to various factors, many of which are beyond our control, including:

     o    announcements of technological innovations or new commercial products
          by us or our competitors;
     o    developments concerning proprietary rights, including patents, by us
          or our competitors;
     o    publicity regarding actual or potential benefits or drawbacks relating
          to products under development by us or our competitors;
     o    conditions or trends in the life sciences, nutraceutical or
          pharmaceutical markets;
     o    changes in the market valuations of other biotechnology and life
          sciences companies;
     o    general regulatory developments affecting our products in both the
          United States and foreign countries; and
     o    developments concerning our collaborations.

In addition, technology companies have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of those companies. There has been particular volatility in the
market prices of securities of life science companies. These broad market and
industry factors may seriously harm the market price of our common stock,
regardless of our operating performance.

RISKS RELATED TO THE SECURITIES MARKETS AND OUR COMMON STOCK

OUR COMMON STOCK IS TRADED IN THE OVER-THE-COUNTER MARKET, WHICH MAY MAKE THE
STOCK MORE DIFFICULT TO TRADE ON THE OPEN MARKET.

Our common stock is currently traded in the over-the-counter market on the NASD
Electronic Bulletin Board. Securities on the NASD Electronic Bulletin Board are
generally more difficult to trade than those on the Nasdaq National Market, the
Nasdaq SmallCap Market or the major stock exchanges. Since the initial public
offering of our common stock in January 1989, the average daily trading volume
of our common stock has been relatively low. We cannot ensure that a more active
public trading market will ever develop for our common stock. In addition,
accurate price quotations are difficult to obtain and price volatility is common
for companies whose securities trade on the NASD Electronic Bulletin Board.



                                      -36-
<PAGE>


THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK BY STOCKHOLDERS
COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.

As of October 31, 2002, we had 388,803,300 shares of common stock outstanding.
Of these shares, approximately 125,000,000 have either been registered under the
Securities Act of 1933, as amended (the "Securities Act"), are freely tradable
without volume limitations under Rule 144(k) of the Securities Act or are exempt
from registration under 11 USC 1145.

We cannot predict the effect, if any, that sales of shares of our common stock
or the availability of these shares for sale will have on prevailing market
prices. However, if substantial amounts of our common stock were sold in the
public market, then market prices for our common stock could decrease so much
that we may not be able to raise additional capital through the sale of equity
securities.

We expect to need additional funding for capital expenditures. If we raise
additional funds by selling equity securities, the share ownership of our
existing investors could be diluted. In addition, new equity purchasers may
obtain rights, preferences or privileges that are superior to those of our
existing stockholders.

THE ABILITY OF OUR BOARD OF DIRECTORS TO ISSUE PREFERRED STOCK COULD ADVERSELY
AFFECT THE INTERESTS OF OUR STOCKHOLDERS.

Our Certificate of Incorporation authorizes the issuance of up to 10,000 shares
of "blank check" preferred stock. Our Board of Directors has the power to
determine all designations, rights, preferences, privileges and restrictions of
this preferred stock. In addition, our Board of Directors is not required to
obtain stockholder approval to issue preferred stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of our common stock. The Board of Directors could
issue the preferred stock to discourage, delay or prevent a change in control of
our Company, even if a change of control would be beneficial to our
stockholders.


ITEM 7.  FINANCIAL STATEMENTS

Audited balance sheet as of October 31, 2002 and the related statements of
operations and accumulated deficit, cash flows and stockholders' equity
(deficit) for the years ended October 31, 2002 and 2001 together with related
notes and the report of Buttke Bersch & Wanzek, PC, independent auditors, appear
on pages F-1 through F-20 of this Report.


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were no changes in or disagreements with accountants on accounting and
financial disclosure during fiscal 2002 or 2001.



                                      -37-
<PAGE>



                                    PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding our current
directors and executive officers.

NAME                                    AGE         POSITION


Richard D. Propper, MD..............     56         Chief Executive Officer,
                                                    Chairman of the Board and
                                                    Director
Harry Dougherty.....................     60         President (1)
Daniel P. Beharry...................     50         Chief Operating Officer,
                                                    Secretary and Director
Steven J. Gould, PhD ...............     56         Chief Science Officer
Jeffrey Primes......................     47         President of Nutraceuticals
                                                    division
Miguel Olaizola, PhD ...............     40         Research Manager
Richard L. Sherman..................     56         Director
Gregory F. Kowal ...................     54         Director

(1) Mr. Dougherty submitted a resignation letter to the Company to resign from
his position as President, effective February 28, 2002.

RICHARD D. PROPPER, MD, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD, has
served as Chief Executive Officer, Chairman of the Board and a director of our
Company since June 2002. He received his B.Sc. from McGill University and his
M.D. from Stanford University. Following his pediatric training in Los Angeles,
Dr. Propper went to Boston as a Research Fellow in Pediatrics at the Harvard
Medical School and became an Assistant Professor. During his medical career, Dr.
Propper published numerous papers and textbook chapters, and is renowned for his
research in the treatment of thalassemia major. In 1984, he founded Montgomery
Medical Ventures, a $135,000,000 seed stage venture capital firm. Dr. Propper
was a director and/or founding shareholder of Alteon, Northfield Laboratories,
Applied Immune Sciences, Somatix Therapy Corporation, Advanced Medica and
others. In 1993 he left to pursue international ventures on his own (including
the sale of Health Demographics (1998) and the founding of both medibuy, Inc.
(1998) and Parentech (2000)). In 2001 he formed Chardan Ventures, a management
and financial strategic consulting firm based in Southern California.



                                      -38-
<PAGE>


HARRY DOUGHERTY, PRESIDENT, has served as President of our Company since
December 2001. He formerly served as Chief Executive Officer of our Company from
December 2001 until June 2002. Mr. Dougherty attended Villanova University,
where he studied physics, and the University of Delaware, where he studied
chemistry. Mr. Dougherty worked with Unclaimed Freight of Connecticut, a Top 100
furniture retailer, as President from 1983 to 1987. In 1987, he was appointed
President and Chief Executive Officer of Pennsylvania House Furniture Company, a
retail furniture company, and served in that position for five years. Mr.
Dougherty then founded Waterbed Gallery, a retail waterbed company, in 1991,
where he served as President until 1995 and helped grow it into a multi-million
dollar business. In 1995, Mr. Dougherty acquired a retail-based home products
company that was in bankruptcy called Tropical Sleep Center, Inc. (a subsidiary
of Hawaii Sleep Center, Inc.). Mr. Dougherty turned Tropical Sleep Center into a
successful business and sold it in 2002. In 2002, Mr. Dougherty formed Hawaii
Sleep, Inc. (dba Designers Outlet), a high-end retail furniture store, and
currently serves as President of that company, in addition to his role as
President of Mera.

DANIEL P. BEHARRY, CHIEF OPERATING OFFICER, SECRETARY AND DIRECTOR, has served
as Chief Operating Officer and a director of our Company since June 2002. He
received his undergraduate degree from Yale College and his law degree from the
University of Southern California. After 17 years in private legal practice, Mr.
Beharry joined the legal and management staff of Caradon Inc. (now Novar, Inc.),
the North American corporate headquarters of Caradon plc, a $3 billion per year
British building materials conglomerate. His responsibilities at Caradon
included implementation of a quality improvement process in more than 30 North
American operations. Mr. Beharry began working with Dr. Propper on development
stage companies in 1997, and beginning in 1998 he participated in the founding
of medibuy, Parentech, Inc. and numerous other businesses. In 2001 Mr. Beharry
and Dr. Propper formed Chardan Ventures, LLC and Pacific Asia Ventures, LLC,
both of which played a critical role in the creation and development of Mera.

STEVEN J. GOULD, PHD, CHIEF SCIENTIFIC OFFICER, has served as our Chief Science
Officer since May 2002, including the time he was in that role at Aqua RM Co.,
Inc. prior to its merger with Mera. He is a renowned international leader in
natural products chemistry who received his B.Sc. from UCLA and his Ph.D. from
MIT. Following postdoctoral research in Switzerland at the ETH in Zurich, he
joined the Syva Research Institute in Palo Alto, where he was involved in
developing diagnostic assays for drugs. He then joined the faculty of the
University of Connecticut School of Pharmacy for 8 years. This was followed by
15 years at Oregon State University in the Department of Chemistry, where Dr.
Gould developed a major new program in the chemistry, biochemistry and molecular
genetics of antibiotic biosynthesis. He joined Merck in 1997 to lead its
division of Natural Products Drug Discovery, his principal area of
responsibility with Mera. Dr. Gould has published over 117 research papers and
book chapters during his distinguished career.

JEFFREY PRIMES, PRESIDENT OF NUTRACEUTICALS DIVISION, has served in that role
since May 2002, including his tenure with Aqua RM Co., Inc. prior to its merger
with Mera. He received his B.A. from U.C.L.A. in 1976 and his J.D. from the
University of San Diego in 1979. Mr. Primes has over 20 years of business
management experience at the executive level and has devoted most of his career
to the sales and marketing of consumer goods in both small and medium sized
consumer companies. He has directed the growth of two separate companies from $1
million in sales to over $10 million, precisely the role he is to play at Mera.
Prior to joining Mera, he served as Director of Sales for Tash Inc., a $100
million general merchandise distributor, and before that he was National Sales
Manager for Puritan Quartz Pharmaceuticals, a manufacturer of nutritional
products and OTC pharmaceuticals. Mr. Primes is also a member of the California
State Bar.



                                      -39-
<PAGE>

MIGUEL OLAIZOLA, PHD, RESEARCH MANAGER, received his Ph.D. in Biological
Oceanography from the State University of New York at Stony Brook in 1993. Dr.
Olaizola has led research in pigment biosynthesis, microalgal physiology and
productivity since joining Aquasearch in 1996. He also administers our
internship program and manages our quality control laboratory. Dr. Olaizola
devoted his graduate and post-graduate research to the study of carotenoid
biosynthesis in microalgae, primarily diatoms and cyanobacteria, the latter
being a principal area of focus for Mera. During 1993 to 1995, Dr. Olaizola was
a Post-Doctoral Fellow at the Joint Research Center of the European Commission
in Italy. During 1995 and 1996, Dr. Olaizola was a Post-Doctoral Researcher at
Scripps Institution of Oceanography, University of California, San Diego, where
he studied microalgal growth and physiology. He was recently appointed as an
Affiliate Professor of Aquaculture at the University of Hawaii at Hilo and
Adjunct Associate Researcher at the University of Hawaii at Manoa.

RICHARD L. SHERMAN, DIRECTOR, has served as a director since April 2001. Mr.
Sherman is a former deputy general counsel to SmithKline Beckman Corporation,
where for 13 years he structured and negotiated major commercial transactions,
acquisitions and strategic alliances. He managed SmithKline's legal department
and accumulated experience in dealing with companies throughout Europe, Asia,
Africa and the former Soviet Union. In 1992, he founded QED Technologies, which
provides strategic advice to science-based companies in maximizing their
business and technology assets. QED's clients are pharmaceutical, biotechnology,
chemical, diagnostic and medical device firms, universities and independent
research centers, investment groups and funds. Since 1993, Mr. Sherman has also
been a principal of CIP Capital Management, an investment firm in the
life-science, communications, advanced materials and financial services
industries and in 2002 became a principal of CityVentures SBIC, L.P. He is
Counsel to the Honolulu, HI law firm of Goodsill Anderson Quinn & Stifel and is
Senior Vice President of Business Development and General Counsel of Hawaii
Biotech, Inc. Mr. Sherman is a director of Biophage, a Montreal, Canada,
biotechnology firm, Kenna Technologies, Inc., a Philadelphia-based in silico
modeling biology company, and board member of the Sbarro Health Research
Organization. He has served as director of IBAH, Inc. (now Omnicare Clinical
Research), CytoMed, Inc. (acquired by Milenium Pharmaceuticvals), Sparta
Pharmaceuticals (acquired by SuperGen Inc.) and the Pennsylvania Biotechnology
Association. Mr. Sherman holds a law degree from the New York University School
of Law. He graduated Phi Beta Kappa with a bachelor's degree from the University
of Nebraska.

GREGORY F. KOWAL, DIRECTOR, has served as a director of our Company since June
2002. Mr Kowal is co-founder of First Honolulu Securities, Inc. and has been
continuously associated with it since 1979. He currently is Chairman of the
Board and Portfolio Manager of First Honolulu Asset management and is on the
financial advisory board of Concordia Financial, a California truck leasing
servicing firm. He was also President of Hawaii Tsunami Pro Soccer Incorporated.
Prior to founding First Honolulu, he was associated with a large west coast
regional brokerage firm from 1973 until 1979. Mr. Kowal received his BSBA from
Roosevelt University (Chicago, IL) in 1972. His area of concentration at
Roosevelt included management and finance.

DIRECTOR COMPENSATION

Our directors do not receive cash for services they provide as directors. From
time to time, certain directors who are not our employees have served as
consultants to us, for which services they have been paid customary fees based
on the value of the services rendered. The Company intends to establish an
option grant program for its outside directors, but it has not yet done so. We
do not provide additional compensation for committee participation or special
assignments of the Board of Directors, but may enter into separate consulting
agreements with individual directors at times.



                                      -40-
<PAGE>



ITEM 10.  EXECUTIVE COMPENSATION

The following table sets forth the information, on an accrual basis, with
respect to the compensation of our executive officers for the three fiscal years
ended October 31, 2002.
<TABLE>
<CAPTION>

    NAME AND PRINCIPLE POSITION      YEAR ENDED OCTOBER 31,            SALARY ($)             RESTRICTED STOCK
                                                                                                AWARD(S) ($)


<S>                                           <C>                       <C>                      <C>
Richard  D.  Propper,                         2002                      $ 37,500 (1)                 $ 0
M.D.,  Chief                                  2001                        $ 0                        $ 0
Executive Officer                             2000                        $ 0                        $ 0

Mark E. Huntley, Ph.D.,                       2002                   $    119,000                    $ 0
Former President and Former Chief             2001                   $    119,000                    $ 0
Executive Officer
                                              2000                   $    115,000                    $ 0

<FN>

 (1) Dr. Propper's annual salary is $150,000. Dr. Propper became Chief Executive
Officer of the Company on June 17, 2002. The Company began paying Dr. Propper's
salary on August 1, 2002.
</FN>
</TABLE>


OPTION GRANTS IN FISCAL 2002

No stock options were granted to our named executive officers during the fiscal
year ended October 31, 2002. The Company's 1996 Stock Option Plan was terminated
during the Company's reorganization proceedings. The Company plans to adopt a
new stock option plan during fiscal year 2003.

STOCK OPTIONS EXERCISED DURING FISCAL 2002

No stock options were exercised by the named executive officers of the Company
during fiscal 2002.

FISCAL YEAR-END OPTION VALUES

Because the Company's 1996 Stock Option Plan and all outstanding stock options
were terminated during the Company's reorganization proceedings in fiscal 2002,
there were no outstanding stock options held as of October 31, 2002.

LTIP AWARDS DURING FISCAL YEAR

We did not make any long-term incentive plan awards to any executive officers or
directors during the fiscal year ended October 31, 2002.



                                      -41-
<PAGE>


DIRECTOR COMPENSATION

Our directors do not receive compensation for services they provide as
directors. From time to time, certain directors who are not our employees have
served as consultants to us for which they have been paid customary fees based
on the value of the services rendered and/or received grants of options to
purchase shares of our common stock. We do not provide additional compensation
for committee participation or special assignments of the Board of Directors.

EMPLOYMENT CONTRACTS

We currently do not have employment contracts with our named executive officers.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table provides information known to us about the beneficial
ownership of our common stock as of January 14, 2002 for: (1) each person,
entity or group that is known by us to beneficially own five percent or more of
our common stock; (2) each of our directors (and former directors, as
applicable); (3) each of our named executive officers (and former officers, as
applicable) as defined in Item 402(a)(2) of Regulation S-B; and (4) our
directors and executive officers as a group. To the best of our knowledge, each
stockholder identified below has voting and investment power with respect to all
shares of common stock shown, unless community property laws or footnotes to
this table are applicable.
<TABLE>
<CAPTION>
                                                                                                              PERCENTAGE OF
                                                                   NATURE OF                                  SHARES
                                                                   BENEFICIAL         NUMBER OF SHARES        BENEFICIALLY
DIRECTORS AND OFFICERS (1)                                         OWNERSHIP         BENEFICIALLY OWNED       OWNED     (1)
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                <C>                    <C>
Mark E. Huntley, Ph.D.
c/o Mera Pharmaceuticals, Inc.
73-4460 Queen Ka'ahumanu Highway, Suite 110
Kailua-Kona, Hawaii 96740.................................           Direct               6,252,786                  1.5%

Richard Sherman
c/o Mera Pharmaceuticals, Inc.
73-4460 Queen Ka'ahumanu Highway, Suite 110
Kailua-Kona, Hawaii 96740.................................           Direct               2,918,100                    *

Richard D. Propper, MD
c/o Mera Pharmaceuticals, Inc.
777 South Highway 101, Suite 215                                   Direct and
Solana Beach, California  92075...........................          Indirect           34,698,453 (2)                8.5%

Daniel P. Beharry
c/o Mera Pharmaceuticals, Inc.
777 South Highway 101, Suite 215                                   Direct and
Solana Beach, California  92075...........................         Indirect            31,973,695 (3)                7.9%

Gregory F. Kowal
First Honolulu Securities
900 Fort Street Mall, Suite 90
Honolulu, Hawaii  96813...................................          Indirect           25,382,670 (4)                6.2%

All directors and executive officers as a group                    Direct and
    (8 persons) ..........................................          Indirect             123,131,959                 30.0%




                                      -42-
<PAGE>


                                                                                                              PERCENTAGE OF
                                                                   NATURE OF                                  SHARES
                                                                   BENEFICIAL         NUMBER OF SHARES        BENEFICIALLY
5% STOCKHOLDERS                                                    OWNERSHIP         BENEFICIALLY OWNED       OWNED     (1)
----------------------------------------------------------------------------------------------------------------------------------


Earl S. Fusato
c/o Mera Pharmaceuticals, Inc.
73-4460 Queen Ka'ahumanu Highway, Suite 110
Kailua-Kona, Hawaii 96740   ...................................           Direct              24,163,746                  5.9%

<FN>

*  Less than one percent

(1) Applicable percentage of beneficial ownership is based on 406,985,118 shares
outstanding as of January 14, 2003. Beneficial ownership is determined in
accordance with rules and regulations of the Securities and Exchange Commission.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
or warrants held by that person that are currently exercisable or exercisable
within 60 days after January 14, 2002 are deemed outstanding, but are not deemed
outstanding for computing the percentage of any other person.

(2) This amount includes 17,023,372 shares held by Dr. Propper's spouse
(directly or indirectly) as well as 3,440,000 shares of common stock that Dr.
Propper has the right to acquire within sixty days from the date of this report
on Form 10-KSB by exercising common stock warrants he holds.

(3) This amount includes 13,381,121 shares held by Mr. Beharry's spouse
(directly or indirectly).

(4) These shares are held in the name of Aquasearch Investment Partners, of
which Mr. Kowal is a general partner.
</FN>
</TABLE>


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On December 30, 2002, the Company issued 18,181,818 shares of common stock at
$0.11 per share, for an aggregate purchase price of $2,000,000, to a Hawaiian
limited liability company managed in part by Richard D. Propper, MD and Daniel
P. Beharry, both officers and directors of the Company.

On December 30, 2002, the Company issued 325 shares of Series B preferred stock
at $625.00 per share, for aggregate consideration of $203,000, to a limited
liability company managed by Richard D. Propper, MD and Daniel P. Beharry, both
officers and directors of the Company.

During the months of July through December 2002, the Company issued various
promissory notes totaling $2,750,000 to a limited liability company managed by
Richard D. Propper, MD and Daniel P. Beharry, both officers and directors of the
Company, for investment funds borrowed by the Company. $2,076,000 of such notes
were repaid subsequent to October 31, 2002 and reinvested into the Company. All
three promissory notes were cancelled upon repayment and all accrued interest on
the notes was forgiven. A new promissory note was negotiated by the parties and
issued on December 31, 2002 by the Company for the remaining balance of
$674,000. This promissory note accrues interest at 6% per annum and has a
maturity date of December 31, 2003.



                                      -43-
<PAGE>


During the month of November 2002, the Company entered into various convertible
promissory notes totaling $185,732 with Richard D. Propper, MD, an officer and
director of the Company. The terms of the notes include interest accruing at 10%
per annum and a maturity date of March 31, 2003. In addition, these convertible
promissory notes carry 5% warrant coverage and call for issuance of common stock
warrants to the lender equal to the face amount of the promissory notes divided
by $0.05, or warrants to purchase up to 3,440,000 shares of common stock. The
exercise price of the warrants is $0.05 per share and the warrants have 5 year
terms. On January 10, 2003 a payment of $13,901 in principal and accrued
interest was made against this obligation.

On August 1, 2002, the Company entered into a month-to-month consulting
agreement with Richard L. Sherman, a director of the Company. Under the
agreement Mr. Sherman is to receive $5,500 per month. Mr. Sherman was paid a
total of $5,500 under this agreement during the year ended October 31, 2002.

During the months June through July 2002, the Company entered into various
promissory notes totaling $117,300 with: Richard D. Propper, MD, an officer and
director of the Company; Daniel P. Beharry, an officer and director of the
Company; and a limited liability company which Richard D. Propper, MD and Daniel
P. Beharry, officers and directors of the Company, are managers, officers and
members. Interest was accrued at 12% per annum. On July 23, 2002 such notes were
repaid in full.

During the two years ended October 31, 2001, Mr. Kowal, a director and
beneficial owner of over 5% of our common stock purchased 7,833,334 shares of
common stock at $0.15 per share. In connection with the purchase, Mr. Kowal
received 1,175,000 warrants with an exercise price of $0.40 per share. All of
these transactions preceeded Mr. Kowal's becoming a director of the Company on
June 17, 2002.


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

INDEX TO EXHIBITS

2.1*      Plan Confirmation Hearing and Debtor's Plan of Reorganization
2.2**     Certificate of Merger Merging Aquasearch, Inc., a Colorado
          Corporation, into Mera Pharmaceuticals, Inc., a Delaware Corporation
2.3**     Certificate of Merger Merging Aqua RM Co, Inc. into Mera
          Pharmaceuticals, Inc.
3.1**     Certificate of Incorporation
3.2       Certificate of Designation of Series A Preferred Stock of Mera
          Pharmaceuticals, Inc. and the Express Terms Thereof.
3.3       Certificate of Designation of Series B Preferred Stock of Mera
          Pharmaceuticals, Inc. and the Express Terms Thereof
3.4**     Bylaws
4.1+      Form of 1996 Bridge Loan Note
4.2+      Form of 1997 Warrant
4.3++     Form of Convertible Note
4.4++     Form of Warrant
4.5++     Form of Note and Warrant Purchase Agreement
4.6       Form of Promissory Note



                                      -44-
<PAGE>

10.1#     Distribution and Development Agreement between Cultor Ltd. and
          Aquasearch, dated May 14, 1996 (terminated)
10.2#     Stock Subscription Agreement between Cultor Ltd. and Aquasearch, dated
          May 14, 1996
10.3+     The Amended Keahole Point Facilities Use Agreement dated August 22,
          1996 by and between The National Energy Laboratory of Hawaii Authority
          and Aquasearch, Inc.
10.4$     Letter of Intent between C. Brewer and Company Limited and Aquasearch,
          Inc.
10.5##    Amendment to Distribution and Development Agreement between Cultor
          Ltd. and Aquasearch, Inc., dated June 14, 1999
10.6$$    Common Stock Purchase Agreement (including Form of Warrant) between
          Alpha Venture Capital, Inc. and Aquasearch, Inc., dated June 14, 2000
10.7$$    Registration Rights Agreement between Alpha Venture Capital, Inc. and
          Aquasearch, Inc., dated June 14, 2000
10.8      Sublease between the Company and Ancile Pharmaceuticals, Inc., dated
          August 1, 2002.
16.1***   Letter Regarding Change in Certifying Accountant. Ernst & Young
          Letter, dated January 24, 2002
16.2***   Letter Regarding Change in Certifying Accountant. Company Letter,
          dated January 16, 2002
23.1      Consent of Buttke, Bersch & Wanzek, P.C., independent auditors

*         Incorporated by reference to the exhibit filed with our Current Report
          on Form 8-K, dated July 3, 2002
**        Incorporated by reference to the exhibits filed to the exhibits of our
          Current Report on Form 8-K, dated July 30, 2002.
***       Incorporated by reference to the exhibit filed with out Current Report
          on Form 8-K, dated January 24, 2002
+         Incorporated by reference to the exhibit filed with our Annual Report
          on Form 10-KSB for the fiscal year ended October 31, 1996
++        Incorporated by reference to the exhibit filed with Amendment No. 1 to
          our Registration Statement on Form S-B filed October 28, 1998
#         Incorporated by reference to the exhibit filed with our Current Report
          on Form 8-K filed September 13, 1996
##        Incorporated by reference to the exhibit filed with Amendment No. 1 to
          the Company's Registration Statement on Form SB-2 filed November 9,
          1999
$         Incorporated by reference to our Current Report on Form 8-K, dated
          November 13, 1996
$$        Incorporated by reference to the exhibit filed with our Registration
          Statement on Form SB-2 filed July 13, 2000.



REPORTS ON FORM 8-K

The following reports on Form 8-K were filed during the last quarter of the year
ended October 31, 2002:

1. June 17, 2002 (filed September 16, 2002) reporting the confirmation of the
Plan of Reorganization, amended to defer the recognition of the discharge of
indebtedness in bankruptcy until after all material terms of the Plan of
Reorganization have been fulfilled. A condensed Balance Sheet as of June 17,
2002 (date of confirmation of the Plan of Reorganization) is included in this
report on Form 8-K.



                                      -45-
<PAGE>


2. September 16, 2002 (filed October 1, 2002) reporting the merger between Mera
Pharmaceuticals, Inc. and Aqua RM Co, Inc. as a change in control and
disposition of assets.

3. September 16, 2002 (filed December 2, 2002)(Amendment 1) including pro forma
financial statements as of July 31, 2002 and for the nine months ended July 31,
2002, related to the merger between Mera Pharmaceuticals, Inc. and Aqua RM Co.,
Inc.

4. September 16, 2002 (filed December 2, 2002)(Amendment 2) including pro forma
financial statements as of July 31, 2002 and for the nine months ended July 31,
2002, related to the merger between Mera Pharmaceuticals, Inc. and Aqua RM Co.,
Inc.


ITEM 14.        CONTROLS AND PROCEDURES

(a) Under the supervision and with the participation of our management,
including our Chief Executive Officer and Interim Controller, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended, within the 90 day period prior to
the filing date of this report. Based on this evaluation, our Chief Executive
Officer and Interim Controller concluded that our disclosure controls and
procedures were effective as of that date.

(b) There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.







                                      -46-
<PAGE>


                              FINANCIAL STATEMENTS

                            Mera Pharmaceuticals, Inc.

CONTENTS

Report of Independent Auditors...............................................F-2

Audited Financial Statements:

Balance Sheets as of October 31, 2002 and 2001...............................F-3

Statements of Operations for the Periods November 1, 2001
through September 16, 2002 September 17, 2002 through
October 31, 2002 and the Year Ended October 31, 2001.........................F-4

Statements of Stockholders' Equity (Deficit) for the Periods
November 1, 2001 through September 16, 2002
September 17, 2002 through October 31, 2002
and the Year Ended October 31, 2001..........................................F-5

Statements of Cash Flows for the Periods November 1, 2001 through
September 16, 2002, September 17, 2002 through October 31, 2002
and the Year Ended October 31, 2001..........................................F-7

Notes to the Financial Statements............................................F-8



                                      F-1



<PAGE>





REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Mera Pharmaceuticals, Inc.


We have audited the accompanying balance sheets of Mera Pharameuticals, Inc. as
of October 31, 2002 (Successor Company) and Aquasearch, Inc, as of October 31,
2001 (Predecessor Company) and the related statements of operations,
stockholder's equity/(deficit) and cash flows for the ten and one-half months
ended September 16, 2002 and the year ended October 31, 2001 (Predecessor
Company) and the month and one-half ended October 31, 2002 (Successor Company).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

As discussed in Note 3, effective September 16, 2002, the Company was
reorganized under a plan confirmed by the United States Bankruptcy Court,
District of Hawaii and adopted a new basis of accounting whereby all remaining
assets and liabilities were adjusted to their estimated fair values.
Accordingly, the financial statements for periods subsequent to the
reorganization are not comparable to the financial statements presented for
prior periods.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mera Pharmaceuticals, Inc. as
of October 31, 2002 (Successor Company) and Aquasearch, Inc, as of October 31,
2001 (Predecessor Company) and the results of their operations and their cash
flows for the ten and one-half months ended September 16, 2002 and the year
ended October 31, 2001 (Predecessor Company) and the month and one-half ended
October 31, 2002 (Successor Company) in conformity with accounting principles
generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's losses from operations and working capital
deficit at October 31, 2002 raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
be Company be unable to continue as a going concern.


/s/ Buttke, Bersch & Wanzek, P.C.
---------------------------------
Lake Havasu City, AZ
January 24, 2003

                                       F-2


<PAGE>


<TABLE>
<CAPTION>


                           MERA PHARMACEUTICALS, INC.
                            CONDENSED BALANCE SHEETS

                                                                        Successor         Predecessor
                                                                     ---------------- -------------------
                                                                     October 31, 2002 October 31, 2001
                                                                     ---------------- -------------------

                                     ASSETS
Current assets:
<S>                                                                   <C>             <C>
    Cash and cash equivalents                                         $     40,349    $     47,398
    Accounts receivable and accrued sales, net                             611,759         101,625
    Tax receivable                                                          36,914            --
    Inventories                                                          1,001,303         535,461
    Investment receivable                                                  500,000            --
    Prepaid expenses and other                                              57,893           4,326
                                                                      ------------    ------------
Total current assets                                                     2,248,218         688,810
                                                                      ------------    ------------

Plant and equipment, net                                                 3,205,768       3,449,794
Goodwill, net                                                               66,550            --
                                                                      ------------    ------------

Total Assets                                                          $  5,520,536    $  4,138,604
                                                                      ============    ============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
    Accounts payable and accrued expenses                             $    879,153    $  1,940,189
    Due to officer                                                            --           297,000
    Notes payable                                                        2,700,000       1,405,000
    Notes payable to officer                                                  --           954,362
    Deferred notes payable                                                 500,000            --
    Deferred revenue                                                       800,000            --
                                                                      ------------    ------------

Total Current Liabilities                                                4,879,153       4,596,551
                                                                      ------------    ------------

Stockholders' deficit:
    Preferred stock (5,000,000 shares authorized)                             --              --
    Common stock, $.0001 par value: 200,000,000
          shares authorized, and 122,134,419 shares issued
          and outstanding at October 31, 2001 (predecessor)                   --            13,335
    Common stock, $.0001 par value: 500,000,000
          shares authorized, and 388,803,300 shares issued
          and outstanding at October 31, 2002 (successor)                   38,880            --
    Additional paid-in capital                                           1,503,856      19,976,153
    Accumulated deficit                                                   (901,353)    (20,447,435)
                                                                      ------------    ------------

Total stockholders' equity (deficit)                                       641,383        (457,947)
                                                                      ------------    ------------

Total Liabilities and Stockholders' Equity (Deficit)                  $  5,520,536    $  4,138,604
                                                                      ============    ============

          See the accompanying notes to the financial statements

</TABLE>




                                      F-3
<PAGE>




<TABLE>
<CAPTION>


                           MERA PHARMACEUTICALS, INC.
                       CONDENSED STATEMENTS OF OPERATIONS

                                                  Successor                  Predecessor
                                             -----------------  -------------------------------------
                                             September 17, 200   November 1, 2001     Twelve Months
                                                   Through           Through              Ended
                                              October 31, 2002  September 16, 2002   October 31, 2001
                                             -----------------  -------------------------------------

Revenue
<S>                                           <C>              <C>              <C>
    Products                                  $      17,777    $     323,212    $     547,868
    Contract Services                                15,443          245,123          256,607
    Royalties                                        15,350           45,167          228,169
                                              -------------    -------------    -------------

Total Revenue                                        48,570          613,502        1,032,644
                                              -------------    -------------    -------------

Costs and Expenses
    Cost of products sold                            10,627          145,505          265,316
    Cost of subcontract services                     36,054          413,051          239,155
    Research and development costs                  158,299          754,408        1,759,619
    General and administrative                      302,147          933,725        2,559,565
    Depreciation                                     68,867          145,290             --
                                              -------------    -------------    -------------

Total costs and expenses                            575,994        2,391,979        4,823,655
                                              -------------    -------------    -------------

Operating loss                                     (527,424)      (1,778,477)      (3,791,011)

Other income (expense):
    Interest income                                     106              979             --
    Interest expense                                (17,891)         (85,893)        (300,560)
                                             -------------    -------------    -------------

Total other income (expense)                        (17,785)         (84,914)        (300,560)

Net loss before reorganization items               (545,209)      (1,863,391)      (4,091,571)
                                              -------------    -------------    -------------

Professional fees related to reorganization            --           (192,477)            --
                                              -------------    -------------    -------------

Net loss before income tax provision               (545,209)      (2,055,868)      (4,091,571)

Income tax expense                                   (1,400)          (7,190)            --
Refundable tax credit                                 4,719          214,910             --
                                              -------------    -------------    -------------

Net loss                                      $    (541,890)   $  (1,848,148)   $  (4,091,571)
                                              =============    =============    =============

Loss per share - basic and diluted                    (0.00)           (0.02)           (0.04)
Weighted average shares outstanding             308,803,300      122,131,237      113,475,945

             See the accompanying notes to the financial statements


</TABLE>




                                      F-4
<PAGE>
<TABLE>
<CAPTION>


                            MERA PHARMACEUTICALS, INC
             CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                             Common                        Additional                                 Stockholders'
                                             Stock                           Paid In         Notes     Accumulated       Equity
                                             Shares            Amount        Capital      Receivable     Deficit        (Deficit)
                                             --------------------------------------------------------------------------------------

Predecessor

<S>                                         <C>            <C>           <C>             <C>          <C>             <C>
Balance at October 31, 2000                  105,589,076    $   11,679    $ 16,970,990    $ (29,179)   $(16,355,821)   $    597,669

Issuance of stock on conversion                5,470,343           547       1,128,432         --              --         1,128,979
   of convertible notes payable
  ($0.14 to $0.44 per share)

Sales, grants, and issuance of                11,075,000         1,109       1,733,736         --              --         1,734,845
   stock upon exercise of stock options
  ($0.10 to $0.36 per share)

Payment on notes receivable                         --            --              --         29,179            --            29,179
  issued upon exercise of common
  stock options

Discount on convertible notes payable               --            --           142,995         --              --           142,995

Loss for the year ended October 31, 2001            --            --              --           --        (4,091,571)     (4,091,571)
                                            ----------------------------------------------------------------------------------------


Balance at October 31, 2001                  122,134,419        13,335      19,976,153         --       (20,447,435)       (457,947)
                                            ----------------------------------------------------------------------------------------

Loss from November 1, 2001
  through September 16, 2002                        --            --              --           --        (1,848,148)     (1,848,148)

Elimination of prior equity                 (122,134,419)      (13,335)    (19,976,153)        --        22,295,583       2,306,095

                                            ----------------------------------------------------------------------------------------

Balance September 16, 2002                          --            --              --           --              --              --
                                            ----------------------------------------------------------------------------------------







                                      F-5
<PAGE>





                            MERA PHARMACEUTICALS, INC
          CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) CONT'D

                                             Common                        Additional                                 Stockholders'
                                             Stock                           Paid In         Notes     Accumulated       Equity
                                             Shares            Amount        Capital      Receivable     Deficit        (Deficit)
                                             --------------------------------------------------------------------------------------

Successor

Distribution of new common shares -
  September 16, 2002                         388,803,300        38,880       1,503,856         --              --         1,542,736

Loss retained in merger with
  Aqua RM Co., Inc.                                 --            --              --           --          (359,463)       (359,463)

Loss from September 17, 2002
  through October 31, 2002                          --            --              --           --          (541,890)       (541,890)

                                           -----------------------------------------------------------------------------------------

Balance at October 31, 2002                  388,803,300    $   38,880    $  1,503,856    $    --      $   (901,353)   $    641,383
                                          ==========================================================================================

</TABLE>


             See the accompanying notes to the financial statements





                                      F-6
<PAGE>
<TABLE>
<CAPTION>

                    Mera Pharmaceuticals, Inc.
                Condensed Statements of Cash Flows

                                                           Successor                  Predecessor
                                                      ------------------ -----------------------------------
                                                      September 17, 2002  November 1, 2001   Twelve Months
                                                            Through            Through            Ended
                                                       October 31, 2002  September 16, 2002 Ocotber 31, 2001
                                                      ------------------ -----------------------------------
Cash Flows from Operating Activities:
<S>                                                      <C>            <C>            <C>
Net loss                                                 $  (541,890)   $(1,848,148)   $(4,091,571)
Adjustments to reconcile net loss to net cash
used in operating activities:
    Accumulated depreciation                                  20,797        231,636        266,631
    Allowance on note receivable from officer                   --             --           50,000
    Expenses paid with common stock                             --             --          430,466
    Discount on convertible notes payable                       --             --          153,582
Changes in assets and liabilities, net of effects
of debt discharge and fresh start adjustments:
    Accounts receivable                                       11,139         78,727        (89,269)
    Tax receivable                                           177,996       (214,910)          --
    Inventories                                              (87,709)      (378,133)      (535,461)
    Other current assets                                     (23,894)       (29,672)        10,610
    Accounts payable and accured expenses                    (33,590)      (217,801)       768,224
    Deferred revenue                                         100,000         56,810           --
                                                         -----------    -----------    -----------
Net cash used by operating activities                       (377,151)    (2,321,491)    (3,036,788)
                                                         -----------    -----------    -----------

Cash Flows from Investing Activities:
    Purchases of fixed assets                                   (774)        (7,633)      (269,156)
                                                         -----------    -----------    -----------
Net cash used by investing activities                           (774)        (7,633)      (269,156)
                                                         -----------    -----------    -----------

Cash Flows from Financing Activities
    Proceeds from issuance of common stock                      --             --        1,647,087
    Proceeds from short term advances                           --             --         (500,000)
    Proceeds from notes payable                              350,000      2,350,000      1,807,087
    Offering costs                                              --             --         (110,324)
                                                         -----------    -----------    -----------
Net cash provided by financing activities                    350,000      2,350,000      2,843,850
                                                         -----------    -----------    -----------

Net increase (decrease) in cash and cash equivalents         (27,925)        20,876       (462,094)
Cash and cash equivalents, beginning of the period            68,274         47,398        509,492
                                                         -----------    -----------    -----------
Cash and cash equivalents, end of the period             $    40,349    $    68,274    $    47,398
                                                         ===========    ===========    ===========

Supplemental non-cash information
    Conversion of notes payable to common stock          $      --      $      --      $ 1,112,087
    Increase (reduction) in notes payable to officer and        --             --          196,943
      related interest for exercise of stock options






             See the accompanying notes to the financial statements


</TABLE>





                                      F-7
<PAGE>

                           MERA PHARMACEUTICALS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                  FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001

1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

           ORGANIZATION -- Mera Pharmaceuticals, Inc. (the "Company"), is the
successor company to Aquasearch, Inc. Aquasearch was founded in February 1988.
The Company develops and commercializes natural products from microalgae using
its proprietary, large-scale photobioreactor technology. The Company's
operations are located in Kailua-Kona, Hawaii and its corporate offices are
located in Solana Beach, California.

           Microalgae are a diverse group of microscopic plants comprising an
estimated 30,000 species that display a wide range of physiological and
biochemical characteristics. Many of these organisms are known to contain
valuable substances that have identified and potential commercial applications
in such fields as animal and human nutrition, food colorings, cosmetics,
diagnostic products, pharmaceuticals, research grade chemicals, pigments and
dyes. Microalgae grow ten times faster than the fastest growing land-based crops
and represent a largely unexploited and renewable natural resource with a
biodiversity comparable to that of land-based plants.

           Mera Pharmaceuticals' first commercial product, AstaFactor(R), is a
nutritional supplement based on astaxanthin, a naturally occurring red pigment
derived from a freshwater microalgae.

           The Company has devoted most of its efforts since inception to
research and development, and accordingly was considered a development stage
company until fiscal 2001.

           FRESH START ACCOUNTING -- Upon emergence from bankruptcy, the Company
adopted "fresh start" accounting. As a result, all assets and liabilities were
restated to reflect their respective fair values. The condensed financial
statements after emergence are those of a new reporting entity (the "Successor")
and are not comparable to the financial statements of the pre-confirmation
company (the "Predecessor"). A black line has been drawn in the financial
statements to distinguish Predecessor and Successor Company results. (See Note 3
- "Bankruptcy Proceedings and Fresh Start Accounting").

           CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
debt securities purchased with original or remaining maturities of three months
or less to be cash equivalents. The carrying value of cash equivalents
approximates fair value.

           FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of cash
and cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair market value because of the short maturity of those
instruments. Notes payable approximate fair value.

           CREDIT RISK -- It is the Company's practice to place its cash
equivalents in high quality money market securities with one major banking
institution. Such funds are not insured by the Federal Deposit Insurance
Corporation, however the Company considers its credit risk associated with cash
and cash equivalents to be minimal.

           INVENTORIES -- Inventories are stated at the lower of cost or market.
The Company intends to determine cost on a first-in, first-out basis. At October
31,2002, inventories consisted of $864,944 of work in process and $136,359 of
finished goods and are stated at cost.





                                      F-8
<PAGE>




                           MERA PHARMACEUTICALS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                  FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001


1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

           REVENUE RECOGNITION -- Product revenue is recognized upon shipment to
customers. Contract services revenue is recognized as services are performed on
a cost reimbursement basis. Royalties are recognized as received. The Company
has adopted Securities and Exchange Commission's Staff Accounting Bulletin (SAB)
No. 101, which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements.

           PLANT AND EQUIPMENT -- Property, plant and equipment are stated at
cost less accumulated depreciation. Depreciation is recorded principally using
the straight-line method, based on the estimated useful lives of the assets
(property and plant, 10-30 years; machinery and equipment, 3-10 years).

           On September 16, 2002 in connection with the adoption of fresh start
accounting, property, plant and equipment were restated at their fair values and
new useful lives for such assets were estimated (see Note 3).

           IMPAIRMENT OF LONG LIVED ASSETS AND LONG LIVED ASSETS TO BE DISPOSED
OF -- In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes both Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of APB Opinion No. 30 ("Opinion 30"),
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that opinion).

           This statement establishes the accounting model for long-lived assets
to be disposed of by sale and applies to all long-lived assets, including
discontinued operations. This statement requires those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred. The Company
adopted SFAS No. 144 in the fiscal year ending October 31, 2002.

           SFAS 144 retains the fundamental provisions of SFAS 121 for
recognizing and measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS 121. The adoption of SFAS
144 did not have a material effect on the Company's consolidated financial
position or results of operations.

           INTANGIBLE ASSETS -- The Company accounts for intangible assets in
accordance with SFAS 144. Such assets are amortized on a straight-line basis
over the estimated useful life of the asset. Intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the fair value is less than the
carrying amount of the asset, an impairment loss is then recognized.

           PREFERRED STOCK -- The Company has authorized 10,000 shares of "blank
check" preferred stock, with such designations, rights, preferences, privileges
and restrictions to be determined by the Company's Board of Directors. No
preferred stock has been issued as of October 31, 2002.




                                      F-9
<PAGE>

                           MERA PHARMACEUTICALS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                  FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001


1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

           STOCK ISSUED FOR SERVICES -- The value of stock issued for services
is based on management's estimate of the fair value of the Company's stock at
the date of issue or the fair value of the services received, whichever is more
reliably measurable.

           RESEARCH AND DEVELOPMENT COSTS -- Research and development costs are
expensed as incurred.

           INCOME TAXES -- The Company uses the asset and liability method of
accounting for income taxes as required by Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), ACCOUNTING FOR INCOME TAXES. SFAS 109 requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax basis of certain assets and liabilities. Since its inception, the Company
has incurred net operating losses. Accordingly, no provision has been made for
income taxes.

           LOSS PER SHARE -- The Company computed basic and diluted loss per
share amounts for October 31, 2002 and 2001 pursuant to the Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." The assumed
effects of the exercise of outstanding stock options, warrants, and conversion
of notes were anti-dilutive and, accordingly, dilutive per share amounts have
not been presented in the accompanying statements of operations.

           USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
these financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

           RECLASSIFICATION -- Certain prior year amounts have been reclassified
to conform with the 2001 presentation.

           RECENT AUTHORITATIVE PRONOUNCEMENTS -- In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 141 "Business Combinations."
This statement requires business combinations initiated after June 30, 2001, to
be accounted for using the purchase method of accounting. It also specifies the
types of acquired intangible assets that are required to be recognized and
reported separately from goodwill. The Company adopted SFAS No. 141 as of
January 1, 2002. The statement is not expected to have a material effect on the
Company's financial position or results of operations.

           In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets." This statement addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted for
upon their acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The Company adopted SFAS No. 142 as of
January 1, 2002. The statement is not expected to have a material effect on the
Company's financial position or results of operations.




                                      F-10
<PAGE>
                           MERA PHARMACEUTICALS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                  FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001



1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

           In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards
for recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the asset. The statement is not expected to have a
material effect on the Company's financial position or results of operations.

           In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement establishes the
accounting model for long-lived assets to be disposed of by sale and applies to
all long-lived assets, including discontinued operations. This statement
requires those long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. The Company adopted SFAS No. 144 during the fiscal year
ending October 31, 2002. The statement is not expected to have a material effect
on the Company's financial position or results of operations.

           In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.

           In June 2002, the FASB issued Statement No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.

           In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 addresses the
disclosure requirements of a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also requires a guarantor to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for Avnet in its
quarter ended December 27, 2002. The liability recognition requirements will be
applicable prospectively to all guarantees issued or modified after December 31,
2002. Management is assessing the impact of FIN 45.




                                      F-11
<PAGE>


                           MERA PHARMACEUTICALS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                  FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001


2. GOING CONCERN

           These financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has operating and
liquidity concerns, has incurred an accumulated deficit of $901,353 through the
year ended October 31, 2002 and current liabilities exceeded current assets by
$2,630,935. The Company anticipates that future revenue will be sufficient to
cover certain operating expenditures, and, in the interim, will continue to
pursue additional capital investment. However, there can be no assurance that
the Company will be able to successfully acquire the necessary capital to
continue their on-going development efforts and bring products to the commercial
market. These factors, among others, create an uncertainty about the Company's
ability to continue as a going concern.

3. BANKRUPTCY PROCEEDINGS AND FRESH START ACCOUNTING

           On October 30, 2001, certain creditors of the Company filed an
involuntary petition under Chapter 11 of the United States Bankruptcy Code
against Aquasearch, Inc. (predecessor to Mera) in United States Bankruptcy Court
for the District of Hawaii. On November 30, 2001, the Company stipulated to an
entry of an Order for Relief, agreeing to the jurisdiction of the Bankruptcy
Court for purposes of resolving the petition. On December 3, 2001, the Company's
motion to the Bankruptcy Court to incur indebtedness was granted, and
Aquasearch, Inc. entered into a Debtor-in-Possession financing arrangement with
certain parties. On June 17, 2002, the Bankruptcy Court confirmed the Company's
Plan of Reorganization (the "Plan"). Under Chapter 11, certain claims against
the Debtor accruing prior to the filing of the petition for relief under the
federal bankruptcy laws were stayed while the Debtor continued to operate. These
claims are identified in the balance sheet as "liabilities subject to
compromise."

           Pursuant to the Plan, on July 25, 2002, Aquasearch, Inc., merged with
Mera Pharmaceuticals, Inc., a Delaware corporation, for the purpose of changing
Aquasearch's name to "Mera Pharmaceuticals, Inc." and reincorporating in
Delaware. Mera Pharmaceuticals, Inc. is the surviving corporation and is
considered the successor issuer to Aquasearch, Inc. under federal securities
laws. Pursuant to this merger, each share of Aquasearch, Inc. common stock,
issued and outstanding immediately prior to July 25, 2002, was changed and
converted into one share of Mera Pharmaceuticals, Inc. common stock.

           Also pursuant to the Plan, Aqua RM Co., Inc. ("Aqua RM") merged with
and into the Company on September 16, 2002 (the "Merger"). A total of
263,992,029 shares of the Company's common stock were issued to Aqua RM
shareholders in consummation of this merger. In addition, 2,661,332 shares of
the Company's common stock were issued pursuant to the Plan to holders of
warrants of Aquasearch, Inc. that were validly issued and outstanding as of
October 31, 2001. Total shares of common stock of Mera Pharmaceuticals, Inc.
issued and outstanding following this Merger are 388,803,300. The merger was the
final outstanding material event to achieve compliance with the requirements of
the Plan, and, as such, the effective date of the Plan (the "Effective Date")
was September 16, 2002, the date of this Merger. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 141, the merger was accounted for
using the purchase method of accounting.

           For reporting purposes the foregoing stock-exchange transaction has
been accounted for as a reverse acquisition in which Mera Pharmaceuticals, Inc.
acquired all the assets and liabilities of Aqua RM, Inc. recording them at their
fair value as if Mera Pharamaceuticals, Inc. remained the reporting entity.
Because Mera Pharamaceuticals, Inc. is the entity for legal purposes, all equity
transactions have been restated in terms of this corporation's capital
structure.





                                      F-12
<PAGE>



                           MERA PHARMACEUTICALS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                  FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001


3. BANKRUPTCY PROCEEDINGS AND FRESH START ACCOUNTING (CONT'D)

           In accounting for the effects of the reorganization, the Company
adopted "fresh start" accounting principles contained in the American Institute
of Certified Public Accountants Statement of Position 90-7 ("SOP 90-7"). The
Company applied principles contained in SOP 90-7 because after the merger with
Aqua RM, existing Mera shareholders owned less than 50% of Mera's total issued
and outstanding common stock and the reorganization value of Mera's assets upon
completion of the Plan was less than the sum of total pre-petition liabilities
allowed plus post-petition liabilities.

           Fresh start accounting principles require that the Company establish
a reorganization value. Management calculated the Company's reorganization value
to be $4,700,000 based on the following:

--------------------------------------------------------------------------
New notes payable                                            $  2,350,000
Commitment for additional notes                                   850,000
Common stock issued to existing
  Mera shareholders ($.0001 par value)                             13,335
Common stock issued to former
  Aqua RM shareholders ($.0001 par value)                          25,545
Additional paid in capital                                      1,461,120
--------------------------------------------------------------------------
Total                                                        $  4,700,000
--------------------------------------------------------------------------

           In accordance with fresh start accounting, the Company's tangible and
intangible assets were recorded at their assumed fair value. Other intangible
assets in the amount of $66,550 were established as part of fresh start
accounting. Such assets are accounted for in accordance with SFAS No. 141, and
as such, will be tested annually for impairment.

           The application of fresh start accounting on the Company's September
16, 2002 balance sheet is as follows:







                                      F-13
<PAGE>

<TABLE>
<CAPTION>



                           MERA PHARMACEUTICALS, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                  FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001

                                                                                                                  Mera
                                         Mera                                 Aqua RM CO.,     Adjustments   Pharmaceuticals
                                    Pharmaceuticals   Debt         Fresh          Inc.            For         Reorganized
                                  September 16, 2002 Discharge     Start   September 16, 2002   Merger     Setember 16, 2002
                                  ------------------------------------------------------------------------------------------
 Current assets:
<S>                                 <C>              <C>         <C>       <C>               <C>            <C>
     Cash and cash equivalents      (136,286)                                  204,560(d)                         68,274
     Accounts receivable, net        622,898                                       --                            622,898
     Tax receivable                  214,910                                       --                            214,910
     Notes receivable                336,904                                       --         (336,904)(e)          --
     Investment Receivable                            850,000(a)                                                 850,000
     Inventories                     913,595                                       --                            913,595
     Prepaid expenses and other       33,999                                       --                             33,999
                                  ------------------------------------------------------------------------------------------
 Total current assets              1,986,020          850,000                  204,560(d)     (336,904)        2,703,676
                                  ------------------------------------------------------------------------------------------

 Plant and equipment, net          3,221,780                                     4,009(d)                      3,225,789
 Goodwill                                                          48,310(c)                    18,240(f)         66,550

 Total assets                      5,207,800          850,000      48,310      208,569(d)     (318,664)        5,996,015
                                  ==========================================================================================

 Current liabilities:
 Liabilites not subject to
  compromise
     Accounts payable and
      accrued expenses                  629,971        58,948(b)               223,823(d)                        912,742
     Notes payable                    2,350,000                                336,904(d)     (336,904)(e)     2,350,000
     Deferred notes payable                           850,000(a)                                                 850,000
                                  ------------------------------------------------------------------------------------------

     Deferred revenue                   700,000                                                                  700,000
                                  ------------------------------------------------------------------------------------------

 Liabilites subject to
  compromise                          3,833,925     3,833,925)(b)

 Total current liabilities            7,513,896    (2,924,977)        --       560,727(d)     (336,904)        4,812,742
                                  ------------------------------------------------------------------------------------------

 Stockholders' deficit:
     Common stock, old                   13,335       (13,335)                                                     --
     Common stock, new                                 13,335                                   25,545(g)         38,880
     Common stock, ARM                                                           2,640(d)       (2,640)(g)         --
     Additional paid-in capital      19,976,153     1,503,856 (19,976,153)(c)  191,360(d)     (191,360)(g)     1,503,856
     Accumulated deficit            (22,295,584)    2,271,121 (20,024,463)(c) (546,158)(d)     186,695(h)       (359,463)
                                  ------------------------------------------------------------------------------------------


 Total stockholders'
  equity (deficit)                   (2,306,096)    3,774,977      48,310     (352,158)(d)      18,240         1,183,273
                                  ------------------------------------------------------------------------------------------

 Total Liabilities
  and Stockholders'
  Equity (Deficit)                    5,207,800       850,000      48,310      208,569(d)     (318,664)        5,996,015
                                  ======================================================================================
</TABLE>





                                      F-14
<PAGE>




3. BANKRUPTCY PROCEEDINGS AND FRESH START ACCOUNTING (CONT'D)

(a) Additional loan commitment received.

      (b)  Liabilities subject to compromise forgiven as of September 16, 2002
           (the effective date of the Plan) totaled $3,833,925. In accordance
           with SOP 90-7 the discharge of debt was allocated first to the new
           equity of the Company and then as gain from the forgiveness of debt.
           The allocation of the discharge of debt is as follows:

           -------------------------------------------------------------------
           Additional paid in capital                             $ 1,503,856
           Accounts payable (additional claims to be paid)             58,948
           Gain on forgiveness of debt (accumulated deficit)        2,271,121
           -------------------------------------------------------------------
           Total                                                   $3,833,925
           -------------------------------------------------------------------

      (c)  Fresh start adjustments were made to eliminate Mera's equity and
           accumulated deficit accounts through the Effective Date of the Plan
           and after the discharge of debt. Amounts in excess of these
           adjustments are recorded as goodwill and are accounted for in
           accordance with SFAS Nos. 141 and 142 (see Note 2). All other assets
           are continuing to be carried at their net book value as of the
           Effective Date of the Plan. The calculation of the portion of
           goodwill calculated prior to the Merger is as follows:

               ---------------------------------------------------------------
               Elimination of accumulated deficit                $ 20,024,463
               Elimination of additional paid in capital         (19,976,153)
               ---------------------------------------------------------------
               Excess (entered as goodwill)                        $   48,310
               ---------------------------------------------------------------

       (d) Amounts recorded on the Aqua RM balance sheet as of the Merger date.

       (e) Elimination of inter-company loans made between Mera and Aqua RM.

       (f) Additional goodwill created as the result of fresh start adjustments
       in relation to the Merger.

       (g) Elimination of Aqua RM capital as a result of the Merger and
       fresh-start accounting adjustments. All outstanding shares of Aqua RM
       common stock were exchanged for shares of Mera common stock.

       (h) As part of the Plan, Aqua RM acquired certain claims of Mera
       creditors. Aqua RM recorded an expense of $186,695 in relation to such
       claims. As part of the Merger, Aqua RM's accumulated deficit is reduced
       by this amount to more accurately reflect the additional payment as
       satisfaction of liabilities subject to compromise.

5. RELATED PARTY TRANSACTIONS

           During the two years ended October 31, 2001, Mr. Gregory Kowal, a
director and beneficial owner of over 5% of our common stock, purchased
7,833,334 shares of common stock at $0.15 per share. In connection with the
purchase, Mr. Kowal received 1,175,000 warrants with an exercise price of $0.40
per share. All of these transactions preceded Mr. Kowal's becoming a director of
the Company on June 17, 2002.





                                      F-15
<PAGE>


5. RELATED PARTY TRANSACTIONS (CONT'D)

           On August 1, 2002, the Company entered into a month-to-month
consulting agreement with Richard L. Sherman, a director of the Company. Under
the agreement Mr. Sherman is to receive $5,500 per month. Mr. Sherman was paid a
total of $5,500 under this agreement during the year ended October 31, 2002.

6. INCOME TAXES

           The Company provides for income taxes in accordance with SFAS No. 109
using an asset and liability based approach. Deferred income tax assets and
liabilities are recorded to reflect the tax consequences on future years of
temporary differences of revenue and expense items for financial statement and
income tax purposes.

           Since its formation the Company has incurred net operating losses. As
of October 31, 2002, the Company had a net operating loss carryforward available
to offset future taxable income for federal and state income tax purposes.

           SFAS No. 109 requires the Company to recognize income tax benefits
for loss carryforwards that have not previously been recorded. The tax benefits
recognized must be reduced by a valuation allowance if it is more likely than
not that loss carryforwards will expire before the Company is able to realize
their benefit, or that future deductibility is uncertain. For financial
statement purposes, the deferred tax asset for loss carryforwards has been fully
offset by a valuation allowance since it is uncertain whether any future benefit
will be realized. Current income tax expense is $8,590.

           The Company is a Qualified High Tech Business ("QHTB") in the State
of Hawaii. QHTBs qualify for certain refundable state tax credits as they relate
to research and development activities ("QHTB tax credit refunds"). During the
year ended October 31, 2002, the Company received $182,715 in QHTB tax credit
refunds. At October 31, 2002, approximately $36,914 in additional QHTB tax
credit refunds were receivable.

7. COMMITMENTS AND MATERIAL AGREEMENTS

           In January 2001 the Company entered into a research and license
agreement with a major university to access, manufacture, use and sell products
from a microalgal collection. Under terms of the research agreement, the
university is to receive reimbursement for its costs incurred in performing the
research. The budget over the initial two-year term for maintenance and research
work on the collection is approximately $550,000. The license agreement provides
for royalties to be paid to the university on income from commercialization of
products developed from the collection. During the year ended October 31, 2002,
a total of $22,675 was paid under the research agreement, and $0 was paid under
the license agreement.

           In June 2002, the Company entered into an Intellectual Property
License and Distribution Rights Agreement with Aqua RM (the "IP License
Agreement"). Under the terms of this agreement, Aqua RM is to pay the Company
$100,000 for licensing certain intellectual property rights related to its
product(s) to Aqua RM and $100,000 to for rights to market, distribute and sell
ASTAFACTOR(R) in parts of Asia. This term of this agreement continues for as
long as Aqua RM continues to use an intellectual property of the Company, unless
terminated earlier.





                                      F-16
<PAGE>


7. COMMITMENTS AND MATERIAL AGREEMENTS (CONT'D)

            In June 2002, the IP License Agreement was assigned in its entirety
by Aqua RM to Aqua Culture, Inc., an international business company which is
co-owned by an entity which Richard D. Propper, MD and Daniel P. Beharry,
officers and directors of the Company, are members, managers and officers of
("Aqua Culture, Inc."). In August 2002, the IP License Agreement was assigned by
Aqua Culture, Inc. to Hainan Sunshine Bioengineering, Ltd., a joint venture made
up of five separate companies, including Aqua Culture, Inc.

           In June 2002, the Company entered into a lease for an office in San
Diego, California. The lease ends on May 31, 2003. Rent expense for this
facility is $10,578 per month.

8. NOTES PAYABLE

           During the months of December 2001 through April 2002, the Company
received $500,000 in Debtor In Possession financing from Chardan Ventures, of
which Richard D. Propper, MD and Daniel P. Beharry, officers and directors of
the Company, are principals, in connection with the Company's Plan of
Reorganization. Interest accrued at 12% per annum. On July 23, 2002 the Debtor
in Possession obligation was repaid in full.

           During the months June through July 2002, the Company entered into
various promissory notes totaling $117,300 with: Richard D. Propper, MD, an
officer and director of the Company; Daniel P. Beharry, an officer and director
of the Company; and a limited liability company which Richard D. Propper, MD and
Daniel P. Beharry, officers and directors of the Company, are managers, officers
and members. Interest was accrued at 12% per annum. On July 23, 2002 such notes
were repaid in full.

           During the months of July through December 2002, the Company issued
various promissory notes totaling $2,750,000 to a limited liability company
managed by Richard D. Propper, MD and Daniel P. Beharry, both officers and
directors of the Company, for investment funds borrowed by the Company. Of such
promissory notes, $2,700,000 was issued prior to October 31, 2002. $2,076,000 of
such notes were repaid subsequent to October 31, 2002 and reinvested into the
Company. All three promissory notes were cancelled upon repayment and all
accrued interest on the notes was forgiven. A new promissory note was negotiated
by the parties and issued on December 31, 2002 by the Company for the remaining
balance of $674,000. This promissory note accrues interest at 6% per annum and
has a maturity date of December 31, 2003.

           The Company's total interest expense was $103,784 and $300,560 for
the years ended October 31, 2002 and 2001, respectively.

           Notes outstanding prior to the filing of the involuntary Bankruptcy
Petition on October 30, 2001 have been paid in the amounts provided for by the
Plan, and the remaining balances were discharged. These transactions have been
accounted for in conjunction with the Company's adoption of fresh start
accounting (see Note 3).






                                      F-17
<PAGE>



9. COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS

           Under the Plan, all common stock outstanding as of October 31, 2001
was converted, on a one-for-one basis, into common stock in the reorganized
Company. In addition, every five valid warrants to purchase stock in the Company
that were outstanding as of October 31, 2001 were converted into one share of
common stock in the Company. The conversions took place upon the fulfillment of
the Company's obligations under the Plan on September 16, 2002. The conversion
of warrants into common stock resulted in the issuance of an additional
2,661,332shares of the Company's common stock.

           Total shares of common stock of Mera Pharmaceuticals, Inc. issued and
outstanding upon the fulfillment of the of the Company's obligations under the
Plan was 124,811,271. Issuance of stock in these transactions is exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
1145 of the United States Bankruptcy Code. No underwriters were involved in
these transactions, and no commissions were paid to any party in connection with
them.

           In addition, under the Plan and as part of the merger with Aqua RM,
shareholders of Aqua RM were issued 100 shares of the Company's common stock for
each share of Aqua RM stock they held. A total of 263,992,029 shares of the
Company's common stock were issued to Aqua RM shareholders in consummation of
the Merger. The issuance took place upon the fulfillment of the Company's
obligations under the Plan on September 16, 2002. The total shares of the
Company's common stock issued and outstanding after the Aqua RM merger was
388,803,300.

           On June 6, 2002, the Company (as Aquasearch) issued 1,400,000 shares
of common stock to Western Financial Communications, Inc., a consultant, as
compensation for services. The value of the services received was accrued in the
fiscal year ended October 31, 2001 based on management's estimate of the fair
value of the shares issued, and a corresponding expense was recorded. As such,
the amount of shares has been included in the calculation of total shares
outstanding in financial statements starting with and subsequent to October 31,
2001, even though the issuance did not take place until June 2002. This
transaction was exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section 4(2). No underwriters were involved in this
transaction, and no commissions were paid to any party in connection with it.
The shares issued to Western Financial Communications, Inc. in this transaction
are among the shares converted into stock in the reorganized Company, as
described in the first paragraph under this item 10.

10. STOCK OPTION PLANS

           In March 1996, the Board of Directors adopted the 1996 Stock Option
Plan. The 1996 Stock Option Plan provided for the grant of incentive stock
options to employees, and for nonstatutory stock options and stock purchase
rights to employees and consultants. The 1996 Stock Option Plan was terminated
on June 17, 2002 upon confirmation of the Company's Plan of Reorganization (see
Note 3).

11. CUSTOMER CONCENTRATION

           Sales to the Company's major customers for the year ended October 31,
2002 for customers A, B, C and D amounted to 41%, 18%, 8% and 6%.



                                      F-18
<PAGE>


12. PROPERTY, PLANT AND EQUIIPMENT, NET
<TABLE>
<CAPTION>

--------------------------------------------- --------------------------------------------
                               Successor                    Predecessor
                            October 31, 2002   September 16, 2001        October 31, 2001
--------------------------------------------- --------------------------------------------
<S>                              <C>                <C>                      <C>
Plant                            2,616,604          3,280,474                3,280,475
Equipment                          609,961          1,105,584                1,097,952
---------------------------------------------  -------------------------------------------
                                 3,226,565          4,386,058                4,378,427
Accumulated depreciation            (20,797)      (1,160,269)                 (928,633)
--------------------------------------------- --------------------------------------------
                                 3,205,768          3,225,789                3,449,794
--------------------------------------------- --------------------------------------------
</TABLE>

13. DEFERRED REVENUE

           In May 2002, the Company recognized revenue in the amount of $100,000
as the result of a product sale. Pursuant to the Company's revenue recognition
policy, the sale was recognized upon shipment to the customer. In October 2002,
the product was returned from the customer and the revenue deferred. This sale
was made under contract and amounts received are not to be refunded. The
returned product will be reshipped at a later date.

14. LEGAL PROCEEDINGS

           On July 13, 1998, Cyanotech filed a complaint against the Company in
the United States District Court for the District of Hawaii (Case No.
CV98-00600ACK). In the complaint, Cyanotech sought declaratory judgment of
non-infringement of the Company's U.S. Letters Patent No. 5,541,056; invalidity
of the 5,541,056 Patent; and non-misappropriation of the Company's trade secrets
relating to closed culture production of astaxanthin. Cyanotech filed the
complaint after the Company expressed to Cyanotech its concern that Cyanotech
infringed the 5,541,056 Patent and misappropriated the Company's trade secrets.

           On September 11, 1998, the Company filed an answer denying all of
Cyanotech's allegations and a counter claim, alleging infringement of the
5,541,056 Patent; misappropriation of trade secrets; unfair competition; and
breach of contract relative to the parties' 1994 Dissolution Agreement.

           On December 30, 1999, the United States District Court for the
District of Hawaii granted summary judgment on the Company's motion that
Cyanotech infringed the Company's patent, misappropriated the Company's trade
secrets and breached the terms of the parties' 1994 Dissolution Agreement. In
its order, the Court found that the tube process used by Cyanotech for
cultivating microalgae infringed the 5,541,056 Patent. The Court further found
that Cyanotech violated the Uniform Trade Secrets Act and breached the 1994
Dissolution Agreement when it misappropriated trade secrets relating to the
Company's proprietary closed-system technology for cultivation of microalgae.

           On March 6, 2001, the Company settled the litigation with Cyanotech
without admission of liability by either party. Under the agreement, Cyanotech
agreed to an injunction that prevents it from using any tube system for
microalgae production that infringes our U.S. Patent No. 5,541,056. The Company
agreed that Cyanotech's current proprietary process for producing microalgae,
known as the Phytodome, does not infringe our U.S. Patent No. 5,541,056.
Cyanotech will also pay undisclosed royalties to Aquasearch. The Companies
agreed to dismiss all claims with prejudice that were asserted in the
litigation. The Court entered an order to that effect and that our U.S. Patent
No. 5,541,056 is valid and enforceable.



                                      F-19
<PAGE>

14. LEGAL PROCEEDINGS (CONT'D)

           Royalty income received in connection with the Cyanotech settlement
for the year ended October 31, 2002 totaled $60,517.

           On October 11, 2001 a complaint was filed by Kenneth Crowder against
the Company and certain unnamed individuals in the Superior Court of the State
of California, Orange County, alleging breach of contract in connection with
certain monies paid to the Company, and claiming damages in excess of
approximately $75,000. On October 16, 2001, an action was commenced by C&J
Distribution, a purchaser of ASTAFACTOR(R) product, in the Superior Court of
California, San Bernadino County, against the Company, one of its officers and
unnamed individuals, alleging fraud and breach of contract in connection with an
alleged oral distribution agreement between the Company and plaintiff and
claiming damages in the amount of $35,000. The plaintiff's have withdrawn this
suit, with prejudice, and the Company considers the matter resolved.

           The Company was the debtor in an involuntary Chapter 11 Bankruptcy
proceeding, commenced October 31, 2001, as described in Note 3, above.

15. SUBSEQUENT EVENTS

           During the month of November 2002, the Company entered into various
convertible promissory notes totaling $185,732 with Richard D. Propper, MD, an
officer and director of the Company. The terms of the notes include interest
accruing at 10% per annum and a maturity date of March 31, 2003. In addition,
these convertible promissory notes carry 5% warrant coverage and call for
issuance of common stock warrants to the lender equal to the face amount of the
promissory notes divided by $0.05, or warrants to purchase up to 3,440,000
shares of common stock. The exercise price of the warrants is $0.05 per share
and the warrants have 5 year terms. On January 10, 2003 a payment of $13,901 in
principal and accrued interest was made against this obligation.

           On December 2, 2002, the Company issued 80 shares of Series A
preferred stock at a price of $625.00 per share, for aggregate consideration of
$50,000, to an individual investor. Each share of Series A preferred stock is
convertible into 10,417 shares of common stock.

           On December 30, 2002, the Company issued 18,181,818 shares of common
stock at $0.11 per share, for an aggregate purchase price of $2,000,000, to a
Hawaiian limited liability company managed in part by Richard D. Propper, MD and
Daniel P. Beharry, both officers and directors of the Company. .

           On December 30, 2002, the Company issued 325 shares of Series B
preferred stock at $625.00 per share, for aggregate consideration of $203,000,
to a limited liability company managed by Richard D. Propper, MD and Daniel P.
Beharry, both officers and directors of the Company.

           On January 3, 2003, the Company entered into a Memorandum of
Understanding ("MOU") setting forth the principal terms of an agreement
governing the merger (the "Merger") between the Company and Ancile
Pharmaceuticals, Inc., a California corporation ("Ancile"). The Company expects
to consummate the Merger during the second quarter of fiscal year 2003.




                                      F-20
<PAGE>







                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this Annual Report on Form 10KSB to be signed on February 13, 2002,
on its behalf by the undersigned, thereunto duly authorized.

                                               MERA PHARMACEUTICALS, INC.

                                               /S/ RICHARD. D. PROPPER, MD
                                               ---------------------------------
                                               Richard D. Propper, MD
                                               Chief Executive Officer, Director
                                               and Chairman of the Board

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.


Signature                                                Date
-----------                                             ------

/S/RICHARD D. PROPPER, MD                           January 28, 2003
--------------------------------------------
Richard D. Propper, MD
Chief Executive Officer, Director and
Chairman of the Board

/S/GREGORY F. KOWAL                                 January 28, 2003
--------------------------------------------
Gregory F. Kowal
Director

/S/ RICHARD L. SHERMAN                              January 28, 2003
--------------------------------------------
Richard L. Sherman
Director

/S/ ANTHONY E. APPLEBAUM                            January 28, 2003
--------------------------------------------
Anthony E. Applebaum
Interim Controller





                                      -47-
<PAGE>


                                 CERTIFICATIONS


I, Richard D. Propper, MD, certify that:

1. I have reviewed this annual report on Form 10-KSB of Mera Pharmaceuticals,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed such disclosure controls and procedures to ensure that
          material information relating to the Company, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     b)   evaluated the effectiveness of the Company's disclosure controls and
          procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent functions):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the Company's ability to record,
          process, summarize and report financial data and have identified for
          the Company's auditors any material weaknesses in internal controls;
          and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the Company's internal
          controls; and

6. The Company's other certifying officers and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.


Date:  January 28, 2003

/s/ RICHARD D. PROPPER, MD
----------------------------------------
Richard D. Propper, MD
Chief Executive Officer, Director and Chairman of the
Board of Directors



                                      -48-
<PAGE>



                                 CERTIFICATIONS


I, Anthony E. Applebaum, certify that:

1. I have reviewed this annual report on Form 10-KSB of Mera Pharmaceuticals,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed such disclosure controls and procedures to ensure that
          material information relating to the Company, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     b)   evaluated the effectiveness of the Company's disclosure controls and
          procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent functions):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the Company's ability to record,
          process, summarize and report financial data and have identified for
          the Company's auditors any material weaknesses in internal controls;
          and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the Company's internal
          controls; and

6. The Company's other certifying officers and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date:  January 28, 2003

/s/ ANTHONY E. APPLEBAUM
-------------------------
Anthony E. Applebaum
Interim Controller




                                      -49-
<PAGE>