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                           COMMISSION FILE
ENDED OCTOBER 31, 2001                       NUMBER 33-23460-LA

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


              COLORADO                            33-0034535
      (STATE OR INCORPORATION)          (I.R.S. EMPLOYER IDENTIFICATION NO.)


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

         Registrant's revenues for its most recent fiscal year:  $ 1,032,644

         The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as reported on the NASD Electronic Bulletin
Board, as of January 30, 2002, was $ 4,360,000.

         The number of shares outstanding of common equity, as of October 31,
2001, was 122,134,419 shares of Common Stock, $0.0001 par value.

         Documents Incorporated by Reference:  None

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




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                                     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 "PART II, ITEM 6, MANAGEMENT'S PLAN OF
OPERATION - FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" 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 "PART II, ITEM 6, MANAGEMENT'S PLAN OF
OPERATION - FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" FOR A MORE
DETAILED DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES.


ITEM 1.  DESCRIPTION OF BUSINESS

SUMMARY OF REORGANIZATION PROCEEDINGS

On October 29, 2001 certain creditors of the Company filed an involuntary
petition, under Chapter 11 of the United States Bankruptcy Code, in United
States Bankruptcy Court, District of Hawaii (case 01-04260) against the
Aquasearch, Inc. On November 30, 2001, the company stipulated to the entry of an
Order for Relief, agreeing to the jurisdiction of the Bankruptcy Court for
purposes of resolving the petition that had been filed. On December 3, 2001, the
Company's motion to the Bankruptcy Court to incur indebtedness was granted, and
Aquasearch entered into a Debtor- in-Possession financing arrangement. Since
that date, Aquasearch has continued operations utilizing Debtor in Possession
financing provided by Chardan Ventures, a California venture group. Aquasearch
expects to submit for approval by the Bankruptcy Court and the Company's
creditors, a proposed Plan of Reorganization within the 120 day exclusivity
period allowed under the bankruptcy rules. In addition, each of the Company's
existing contractual relationships with third parties is subject to assumption
or rejection by the Company on petition to the Bankruptcy Court or in the Plan
of Reorganization. If a Plan of Reorganization is not confirmed by the
Bankruptcy Court the proceedings may be converted to a liquidation proceeding
under Chapter 7 of the Bankruptcy code, a trustee appointed and the assets of
the Company liquidated. Alternatively, the bankruptcy proceedings could be
dismissed and subsequent sale or other liquidation of the Company could occur.

OVERVIEW OF AQUASEARCH BUSINESS

Aquasearch develops and commercializes natural products from microalgae using
our proprietary photobioreactor technology known as the Aquasearch Growth
Module, or AGM.

Microalgae are a diverse group of over 30,000 species of microscopic plants that
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 high value commodities.

Microalgae represent a major fraction of the entire plant kingdom, yet fewer
than 10 species have ever been produced commercially. Microalgae are the fastest
growing plants on earth. Some species can produce 1,000 times their own mass in
a single day. The raw materials required for microalgae production - water,
light and nutrients - are plentiful and cheap. Once produced, microalgae are
easy to process using standard manufacturing equipment.



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Microalgae production technology has only recently been developed. The first
pure cultures of microalgae were cultivated in the early 1900s, but it was not
until the late 1930s that enough material of a single species was grown in the
laboratory to allow chemical analysis. Attempts at large scale cultivation began
in the 1950s, mostly in open ponds. The first commercial production of
microalgae did not begin until the mid-1970s, and then only for three species
that could be grown in open ponds. No new microalgae species has been grown
commercially in open ponds for the past 25 years. By the 1980s scientists began
to recognize the limitations of open pond technology - due principally to lack
of control over the conditions necessary for cultivation and exposure to
contamination. New efforts to grow microalgae in photobioreactors - closed
systems with the ability to provide controlled conditions - were begun in
response.

The major challenge with photobioreactor technology has been to develop
photobioreactors large enough to achieve commercial production levels at an
economic cost. By the mid-1990s, most photobioreactors were used exclusively for
research, and few exceeded more than 50 gallons (180 liters) in capacity. The
AGM, at more than 6,000 gallons (22,000 liters), is to our knowledge the largest
photobioreactor in existence - and the only photobioreactor used for commercial
production of microalgae. In addition, the AGM incorporates a very high level of
computerized process-control, allowing a higher degree of reproducible
performance at high efficiency levels. We believe it is the most advanced
technology of its kind.

The Company's strategy is to exploit its leading position in microalgae
cultivation technology, by expanding the sales of its ASTAFACTOR(TM) nutritional
supplement and introducing to the market place additional microalgae nutritional
products, and accelerating its activities to identify and develop prescription
pharmaceutical products for infectious and proliferative diseases, principally
from existing libraries and collections of aquatic micro-organisms. The Company
will seek to enter into strategic alliances with existing pharmaceutical and
manufacturing companies for the production of micro-algae products and the
development and commercialization of lead compounds identified and validated by
the Company's drug discovery efforts. Additionally, Aquasearch expects to
out-license to a worldwide partner the rights to AQUAXAN(TM), its natural
astaxanthin product used in animal feeds.

The Company currently manufactures its products at a five-acre research,
development and production facility in Kailua-Kona, Hawaii. We have enough
production capacity to carry out our strategic plan for the coming year.
Marketing and sales activities for AstaFactor(TM) currently include sales to
third party distributors and direct sales utilizing the Company's website and
toll-free ordering number.

Competition varies according to product area. In the drug-discovery market area,
many biopharmaceutical companies are involved in searching for sources of new
drugs; however, we believe that there are few companies or institutions
currently exploring microalgae as a drug-discovery source. In the nutraceutical
market, we face significant potential competition for THE ASTAFACTOR(TM), our
first product, which is derived from astaxanthin-rich microalgae, and expect
similar competition for other nutraceutical products that the Company may launch
in the future. In the market for animal feed supplements, our natural
AQUAXAN(TM) product faces competition from large global producers of synthetic
astaxanthin such as BASF and Hoffman-LaRoche and from several producers of
natural astaxanthin. More broadly, we do not believe any commercial entity has
developed a photobioreactor that matches the AGM's large size, 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 is likely to increase
significantly over time.

Aquasearch's patents and intellectual property include issued and pending
patents relating to the AGM and general processes for cultivating microalgae in
photobioreactors. The Company intends to continue to expand its portfolio of
patents and technical know-how and believes that intellectual property issues in
marine biotechnology will become much more prevalent, challenging and complex in
the future. We intend to develop and use intellectual property as a means of
maintaining an advantage relative to our competitors.


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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.

In addition to the bankruptcy proceedings mentioned above, litigation was filed
on October 11, 2001 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 a purchaser of ASTAFACTOR(TM) 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. Both of these lawsuits have been
stayed as to the Company by the pendency of the bankruptcy proceeding. Legal
proceedings by the Company against Cyanotech regarding our intellectual property
have been settled by agreement of the parties. Terms of the settlement agreement
may not be made public.

Our property at the Hawaii Ocean Science and Technology Business Park provides
an ideal location for the research and development and the commercial production
of microalgae. We have access to uniquely large volumes of deep ocean water in a
stable tropical climate, conditions that are well-suited for many of the
requirements for microalgae cultivation. Although Hawaii's distance from many
markets increases certain costs of operation, we believe that, on balance, there
are few locations equally favorable to our business.

Although the Company has significantly decreased it number of employees, its
remaining employees, key scientists and our Scientific Advisory Board continue
to encompass a broad array of expertise in critical areas of aquatic
microbiology and bioengineering, and a high degree of competence in operating
our research and commercial production systems. A significant amount of our
research is being conducted under contract with scientists at the University of
Hawaii. We are strongly dependent on our own personnel and affiliated scientists
for continued growth and development.

MICROALGAE PRODUCTION TECHNOLOGY

MICROALGAE AND OTHER PHOTOSYNTHETIC MICRO-ORGANISMS

BASIC CHARACTERISTICS. Microalgae are single-celled microscopic plants. They
range in size from approximately 1 micron (1/25,000 of an inch) to several
hundred microns. They are "eukaryotic" organisms, meaning that like animals, but
unlike bacteria, each cell has a nucleus that contains DNA. Like all other
plants, they grow by photosynthesis - the process of using water, nutrients and
carbon dioxide, combined with light, to produce oxygen and biomass made up
primarily of sugars, fats, and proteins.

DIVERSITY AND HABITAT. There are an estimated 30,000 species of microalgae, and
perhaps a few thousand other species of photosynthetic micro-organisms.
Microalgae live wherever there is water and light. You can find microalgae in
freshwater or seawater, in ice at the North and South Poles, high in the
mountains, in sub-freezing ocean water, in super-heated hot springs, in any body
of water from the surface to depths greater than 600 feet - and everywhere in
between.

REPRODUCTION. The most common way that microalgae reproduce is through division.
When the cell gets large enough it simply divides in two. When the two resulting
cells get large enough, they divide in two, and so on. For most microalgae, cell
division happens at least once a day. However, microalgae also have ways of
reproducing sexually. Typically, two cells fuse together, exchange genetic
material, and then divide into two or more cells.


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GROWTH RATES. Microalgae are the fastest growing plants on earth. Since they
divide about once a day, this means they double their mass at the same rate.
Some species of microalgae double about ten times a day, meaning that a single
cell can produce 1,024 cells in a day. No land-based plants are capable of
growing at the rates of microalgae. Sugar cane, which is the world's fastest
growing crop, doubles its mass about once a week. The fastest growing trees
double their mass about once every few months. On average, microalgae grow about
100 times faster than trees and ten times faster than any other plant.

UNIQUE CHEMISTRY. Microalgae produce all of the same types of molecules that are
found elsewhere in the plant kingdom - proteins, fats, sugars, and categories of
these, like enzymes, vitamins, and fatty acids. Each species of microalgae is
unique. Many species of microalgae produce unique and unusual molecules that
have not been found anywhere else.

The unique molecular makeup of microalgae provides a valuable source of
potential new discoveries in areas such as drugs and nutrition. To date,
researchers at University of Hawaii have found more than 170 bioactive molecules
among microalgae. Of those, only 7 molecules have turned out to be
"rediscoveries," or molecules that are already known to science. In other words,
more than 95% of the bioactive molecules discovered among the microalgae are new
to science. Research performed in the pharmaceutical industry on bacteria and
fungi - major sources of new drugs - has generated a "rediscovery rate" of
nearly 99%; that is, less than 2% of the bioactive substances discovered in
traditional sources such as terrestrial plants and microbes turn out to be
novel.

RATIONALE FOR COMMERCIAL PRODUCTION OF MICROALGAE

Microalgae represent approximately half of all plant species and have been
largely unexploited. Many characteristics of microalgae make them attractive for
commercial production.


         1)   UNTAPPED RESOURCE
               o   There are an estimated 30,000 species
               o   Fewer than 5,000 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)   SOURCE OF NEW SUBSTANCES
               o   Several hundred new bioactive substances have been discovered
                   in microalgae

         3)   SOURCE OF VALUABLE SUBSTANCES
               o   Types of molecules already known to be valuable: enzymes,
                   pigments, and vitamins
               o   Bioactive compounds that could be valuable as pharmaceuticals

         4)   EASE OF PROCESSING
               o   Absence of bark, stems or branches makes product extraction
                   easier than other plants
               o   Uniform cell structure simplifies mechanical processes
               o   Commercial equipment developed for bacteria and fungi can
                   easily be applied

         5)   RAPID GROWTH RATE
               o   Growth rate ranges from about 1 to 10 doublings per day
               o   Growth rates are faster than any other plants

         6)   LOW COST OF RAW MATERIALS
               o   Water, sunlight and carbon dioxide are plentiful and
                   economical
               o   By comparison, raw materials for bacteria or fungi include
                   expensive, complex organic substances



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         7)   CONTINUOUS GROWTH
               o   Unlike land plants, microalgae do not need to complete a
                   "life cycle" to reproduce
               o   Growth by cell division makes it possible for microalgae to
                   grow continuously

Although the rationale for commercial production of microalgae is compelling,
certain challenges must be overcome to successfully exploit this resource.

CHALLENGES TO COMMERCIAL MICROALGAE PRODUCTION

Commercial production of microalgae is very similar to large-scale cultivation
of any agricultural crop, with many of the same challenges. The main challenge
is to grow large quantities of a single species sustainably and continuously.

Each species of microalgae is different, just as each species of land plant is
different. Commercial production demands "monoculture" - growing a single
species at a time. No experienced farmer would attempt to grow corn and rice in
the same field. Their water requirements are different, their nutrient
requirements are different, and harvesting techniques are different. The same is
true of microalgae. For example, HAEMATOCOCCUS, which is rich in astaxanthin,
has very different water and nutrient requirements from DUNALIELLA, which is
rich in beta-carotene.

In nature, plants do not live together in large groups of a single species that
are convenient to harvest and produce commercially. Humans have achieved this
level of convenience through controlling the growing environment. Corn, for
example, does not naturally grow in rows that cover acre upon acre,
uncontaminated by pests or competing weeds. After more than 5,000 years of
agriculture, humans have devised ways to maximize the yield per acre.

Similarly, single species of microalgae do not naturally fill entire bodies of
water, uncontaminated by pests or competing weeds. For the past 50 years, humans
have attempted to devise ways to accomplish this.

The following problems must be solved for commercial agricultural production,
whether land or water based, to succeed:
               o   control of contaminating pests and weeds
               o   control of temperature
               o   control of nutrients
               o   control of light
               o   large enough harvests relative to growing costs to make
                   production economical

CONTROL OF CONTAMINATING PESTS AND WEEDS. Any body of water that is rich in
nutrients will eventually be populated by a large variety of micro-organisms
unless provisions are made to prevent contamination. Pests that prey on
microalgae include microscopic bacteria and fungi, which can rapidly destroy
them, and animals of all sizes, which can rapidly eat them. The weeds would
include any species of microalgae that the grower did not intend to grow.

CONTROL OF TEMPERATURE. Like any plant, each microalgae species grows best in a
certain temperature range. Just as palm trees grow best in the tropics and
spruce trees grow best in very cold climates, there are some microalgae that
grow best in hot springs while others that grow best in ice water. Within each
temperature range where growth is possible, there is a much smaller range where
growth is fastest. In general, growth rate increases with temperature.

CONTROL OF NUTRIENTS. Each species of microalgae - just like other plant species
- has unique nutrient requirements. All plants need nitrogen to make protein,
and phosphorous to make ATP (adenosine tri-phosphate), which is a main source of
energy. Nitrogen and phosphorous requirements vary from species to species. Then
there are the "micronutrients" - elements like iron, zinc, vitamins, or hormones
- for which species can have very different requirements, also.


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CONTROL OF LIGHT. Some plants prefer shade, while others prefer full sunlight.
Microalgae are no different. The intensity of light can dramatically affect
plant biochemistry. For example, moving a houseplant into the full sunlight may
cause the leaves to change color, which is a result of a change in the plant's
chemistry. Each species of microalgae grows best under certain light conditions.

ACHIEVING ECONOMY-OF-SCALE. Most commercial processes are very expensive at
small scale. Economics of the process improve when the scale of the enterprise
is large enough. Large-scale, robotic manufacturing of Ford and Toyota
automobiles is more economical than small-scale, handcrafted manufacturing of
Ferraris and Rolls-Royces. Large-scale agriculture of soybeans by a
highly-mechanized agri-business is more economical than small-scale agriculture
on a family farm.

The essence of a cost-effective commercial process is not dependent on the scale
alone. Success requires the ability to control the process at a large scale.
This principle applies as much to commercial production of microalgae as it does
to the commercial production of automobiles or soybeans.

OVERCOMING CHALLENGES TO COMMERCIAL MICROALGAE PRODUCTION

We believe that the two principal solutions to commercial microalgae production
are:

         1)   controlling the culture system; and
         2)   enlarging the scale, and therefore the efficiency, of the
              production process.

There have been numerous attempts to develop commercial photobioreactors. To the
best of our knowledge, the Aquasearch Growth Module is the first closed culture,
process-controlled photobioreactor ever to operate at commercial scale - greater
than 2,750 gallons (10,000 liters).

THE AQUASEARCH GROWTH MODULE (AGM)

The AGM technology has produced the first new commercial microalgae product
since 1975 that is produced by ANY type of photobioreactor outside the
laboratory. Open-pond technology, on the other hand, has not introduced a single
new species of microalgae to commerce in the past 25 years.

FEATURES OF AGM TECHNOLOGY. The key features of Aquasearch Growth Module
technology are sterility, size, and control. AGM technology enables:

         o    control of contaminants and pests;
         o    control of temperature, nutrients and light; and
         o    batch size sufficient for commercial production - more than 2,750
              gallons (10,000 liters).

This level of performance has been the goal of international research efforts
for the past several decades. The Company has managed to achieve that goal. At
7,000 gallons (25,000 liters), the Ultra-AGM is, to our knowledge, the largest
commercial-scale photobioreactor ever operated. It allows the control of the
growth environment to a far greater degree than the was possible in any system a
tenth or even one-hundredth that size.

Photobioreactor size is an extremely important factor in determining
cost-effectiveness of microalgae production. Most of the capital cost in
controlled, closed-system photobioreactors is not the containment vessel itself-
rather, it is in the cost of the control system. Thus, any increase in size
results in a lower cost per unit capacity. For example, a six-fold increase in
size of the AGM - to 7,000 gallons (25,000 liters) - resulted in lowering the
cost per unit capacity by a factor of three. Labor costs are related mostly to
the number of photobioreactors being operated, not to their l size. Thus, a
six-fold increase in size results in about a five-fold decrease in labor costs
per unit volume.


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PROCESS CONTROL - THE KEY TO REPRODUCIBLE PERFORMANCE. We have developed
computerized process control systems for the AGM over the past ten years. Our
current, proprietary process control system makes possible the following
operations:

         o    process monitoring of key production variables at intervals of
              greater than one minute;
         o    data archiving for comprehensive analysis of performance;
         o    automated control of all operations performed more than once a
              day;
         o    immediate alarm system for any system component not operating
              properly; and
         o    automated maintenance for hundreds of system components.

Our process control system has allowed us to improve system performance rapidly
and decrease labor requirements, all contributing greatly to enhanced
efficiency.

MICROALGAE AS "SOFTWARE" FOR AGM "HARDWARE." We view the AGM as platform
"hardware" technology. With our current process control system, we can specify
and maintain growing conditions of temperature, light, and nutrients in the AGM
within a narrow, favorable range. These are the main factors that control the
efficiency of producing microalgae. We view each species of microalgae as
"software," each requiring a unique set of growing conditions for optimal
results. The AGM "hardware" has the capability to operate many species of
microalgae "software," just as a PC can run hundreds of programs. We believe our
production of HAEMATOCOCCUS amply demonstrates this principle.

COMPETITIVE PRODUCTION SYSTEMS. We are not aware of any closed system
photobioreactor in existence that compares favorably with the AGM. Most of the
comparable technology is:

         o    operated or owned by universities or research laboratories;
         o    less than 55 gallons (200 liters) in capacity (100 times smaller
              than the Ultra-AGM), 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.

We are aware of only two closed system photobioreactors other than the AGM that
may potentially be used for commercial production of microalgae. Both are many
times smaller in size than the Ultra-AGM.

         1)   BIOCOIL. The "Biocoil" was developed by Biotechna Ltd. and is
              operated in Australia and the U.K. The Biocoil consists of tubes
              approximately one inch in diameter wrapped around a vertical
              tower. To approach the volume of the Ultra-AGM requires multiple
              Biocoils. We believe the Biocoil has two major disadvantages that
              will make it difficult to attain the same size as the Ultra-AGM.
              First, a Biocoil of comparable size would have a surface area more
              than 500 times the AGM's. This translates into 500 times greater
              capital cost, presuming that the same type of material is used for
              the containment vessel. Second, a Biocoil as large as the
              Ultra-AGM would require a tower capable of supporting 25 tons of
              water. This is an engineering requirement not faced by the AGM. We
              are not aware that Biocoils are being used for commercial
              production. We believe that the Biocoil does not include a
              process-control system that approaches the sophistication of ours.


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         2)   FLOATING TUBULAR REACTOR. This photobioreactor was developed by
              Heliosynthese of France (now Thallia Pharmaceuticals). Its
              distinguishing feature is the means by which temperature is
              controlled. The entire reactor vessel floats on a body of water.
              The tubular reactor consists of two chambers, one filled with
              microalgae culture medium and the second filled with air.
              Temperature control is accomplished by filling or deflating the
              air chamber, which causes the reactor to float higher or lower in
              the water bath. In our opinion, temperature control in this
              reactor system is very complicated and merely presents the
              possibility of numerous problems that are avoided in the AGM. To
              the best of our knowledge, Thallia is not operating any
              commercial-scale photobioreactors at present.

We believe the AGM offers significant technical and economic advantages compared
with other photobioreactors, including open pond systems. The advantages of the
AGM include size, cost-effectiveness, increased yields, and the ability to
cultivate hundreds of microalgal species at commercial scale that cannot be
produced by other means due to higher risks of contamination and lack of
control.

PRODUCTS FROM MICROALGAE

(1)  ASTAXANTHIN - OUR FIRST COMMERCIAL PRODUCT

DESCRIPTION AND PROPERTIES. Astaxanthin is a red-orange, carotenoid pigment.
Astaxanthin is closely related to other well-known carotenoids, such as
beta-carotene, lutein, or 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 at least 100 times more potent than vitamin E -
another well known antioxidant.

Astaxanthin is one of the main pigments in aquatic animals. But it is not just a
pigment. In animals, astaxanthin performs 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;
         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. We believe astaxanthin has very
promising possibilities for nutraceutical and pharmaceutical applications in
humans. Studies in humans and animal models suggest that astaxanthin may
substantially improve human health, by virtue of its antioxidant properties,
with regard to vision, neurodegenerative diseases, and certain cancers.

ASTAXANTHIN IN NATURE. You can find astaxanthin in many of your favorite
seafoods, such as salmon, trout, red sea bream, shrimp, lobster, and caviar, as
well as in many birds. These animals do not naturally produce astaxanthin.
Rather, they ingest astaxanthin as part of their diet. Some species, like
shrimp, can change closely related carotenoids into astaxanthin. However,
astaxanthin provides greater benefits to these species if it appears naturally
in their diet. Other species, like salmon, simply cannot convert other dietary
carotenoids into astaxanthin. Similarly, mammals cannot synthesize astaxanthin.


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Where does astaxanthin come from? The richest known sources are microorganisms,
the richest of which are species of HAEMATOCOCCUS, microalgae that occur
throughout the world. The apparent function of astaxanthin in these microalgae
is to protect them from adverse changes in their environment, such as increased
photo-oxidation caused by UV light, which can occur when water evaporates from
the pools in which they live. HAEMATOCOCCUS can accumulate as much as 100 g of
astaxanthin per kg of dry biomass. This level is 10,000-fold higher than in
salmon fillets.

NATURAL VS. SYNTHETIC ASTAXANTHIN. Astaxanthin can be compounded synthetically,
but natural astaxanthin has numerous benefits relative to the synthetic product.
One difference between natural and synthetic astaxanthin molecules is the
spatial orientation of the molecules. All astaxanthin molecules are made up of
the same atoms - carbon, hydrogen and oxygen - connected in the same sequence.
But in some places, these atoms can be connected to the molecule at a different
angle. Molecules with these different orientations are called "enantiomers." In
nature there are three main enantiomers of astaxanthin, called 3S-3'S, 3R-3'S,
and 3R-3'R.

The orientation of the molecules is significant. When molecules react with each
other, they have to fit together. If the molecules do not fit, they will not
react. Thus, one enantiomer might function in your body while another one is
completely useless.

Differences in spatial configuration are important. A recent study by the U.S.
FDA showed that farmed salmon could be easily distinguished from wild salmon,
because farmed salmon are fed synthetic astaxanthin. Synthetic astaxanthin
contains primarily the 3R-3'S enantiomer. Salmon are unable to convert this to
3S-3'S - the more common form in nature, and the same form found in
HAEMATOCOCCUS. In shrimp, the main form of astaxanthin is also the 3S-3'S
isomer. A recent study showed that the astaxanthin from HAEMATOCOCCUS had a
superior bio-efficacy over synthetic astaxanthin, resulting in higher survival
of shrimp larvae or juveniles.

Another difference between natural and synthetic astaxanthin is that esters do
not occur in synthetic astaxanthin. In nature most astaxanthin occurs as an
"ester." You can make an ester by attaching a fatty acid to either one or both
of the "OH" groups. You have probably heard of "essential" fatty acids as
important components of your diet. Synthetic astaxanthin has no fatty acids, so
it is "free." Scientists believe that one of the main advantages of astaxanthin
esters is that they can be stored in tissues for a long time without being
oxidized.

In salmon, astaxanthin esters predominate in the skin and eggs, while free
astaxanthin is the main form in the flesh and serum (blood). In shrimp,
astaxanthin esters also predominate, except in the ovaries and eggs. In red sea
bream, most astaxanthin esters are found in the skin. Unlike synthetic
astaxanthin, HAEMATOCOCCUS astaxanthin is extremely rich in esters - the most
common and stable form in nature.

THE ASTAFACTOR(TM) MARKET. We believe that a market is developing for
astaxanthin as a nutritional supplement, or nutraceutical. There is growing
evidence in the scientific and medical literature of the value of astaxanthin to
human wellness. Although we face competition in this market, we believe that the
combination of our product quality and production system provide us significant
advantages that will allow ASTAFACTOR(TM) to compete successfully in the market
for non-prescription nutritional supplements. We began sales of THE
ASTAFACTOR(TM), our nutraceutical astaxanthin product, on March 30, 2000. For
more information about THE ASTAFACTOR(TM), please see "Management's Plan of
Operation - (1) THE ASTAFACTOR(TM) - Nutraceutical Astaxanthin."

THE AQUAXAN(TM) MARKET. In 2002, the Company intends to out-license rights to
its AQUAXAN(TM) animal food supplement product to a worldwide partner, so that
Aquasearch can focus its efforts on the discovery, development and
commercialization of human nutraceutical and pharmaceutical products. We began
selling astaxanthin-rich microalgae meal under the trade name AQUAXAN(TM) in
July 1999. The primary market for astaxanthin in animal feeds is in salmon feed,
although feeds for trout, sea bream and poultry also include astaxanthin. The
global market for astaxanthin in salmon feeds in 1998 was estimated to be $185
million and the dominant competitor is Hoffman-LaRoche, which is estimated to
have more than 95% market share.


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<PAGE>


(2)  OTHER NUTRACEUTICAL PRODUCTS

The Company is currently evaluating several other micro-algae species for
development as nutraceutical products.

Currently, several nutraceutical products exist that are derived from
photosynthetic microalgae. These products, discussed below, sell in the range of
$100 to more than $1,000 per kilogram of dried algae.


         1)   CHLORELLA. The primary market for this product is in Japan and
              several other Asian countries. The production process, which
              currently relies to a great degree on open pond technology, was
              developed in the 1970s.

         2)   SPIRULINA. This product is sold primarily in Europe, Asia and
              North America. The production process, which currently relies
              primarily on open pond technology, was developed in the 1970s. We
              believe the major producers include Cyanotech, Earthrise Farms of
              California, and recent new enterprises in mainland China.

         3)   DUNALIELLA. This product is a rich source of natural
              beta-carotene. The current production process relies primarily on
              open pond technology developed in the 1970s. There are other
              sources of natural beta-carotene, and we have no estimates of the
              market share taken by DUNALIELLA.

         4)   "SUPER BLUE-GREEN ALGAE." The primary component of this product is
              the blue-green algae known as APHANIZOMENON FLOS-AQUAE that grows
              wild in Klamath Lake, Oregon. We know of only one supplier for
              this product, Cell Tech, which uses a multi-level marketing
              method.

         5)   HAEMATOCOCCUS. We believe the largest supplier of this
              astaxanthin-rich microalgae is AstaCarotene of Sweden. We are
              aware of one other company, Cyanotech, that has begun selling this
              nutraceutical.

We believe that many more nutraceutical products could be developed from
microalgae, provided that the microalgae can be produced in commercial
quantities. Known or potential nutritional supplements that have been identified
among the microalgae include omega-3 fatty acids, vitamins and anti-oxidants.

The production methods for cultivated microalgae nutraceuticals are based
entirely on open-pond technology developed in the 1970s. Despite numerous
attempts, no new microalgae products manufactured in open ponds have come to
market in the past 25 years. The only new microalgae products developed in this
market are either harvested from the wild (Super Blue-Green Algae) or produced
in closed-system photobioreactors (HAEMATOCOCCUS, which Cyanotech also produces
in an open-pond system).

Hundreds of microalgae species have been cultivated in laboratory
photobioreactors over the past 50 years. To our knowledge, the AGM has all the
features - and more - of laboratory photobioreactors currently in operation, but
at a commercial, not experimental, scale. We therefore believe that hundreds
species of microalgae may be cultivated for commercial purposes using our AGM
technology.

(3)  PHARMACEUTICAL DRUG DISCOVERY

More than 50% of all current prescription drugs are of biological origin. Most
of these products have been derived from land-based plants. Although the
bio-diversity of microalgae is comparable to that of land-based plants,
virtually none of these drugs comes from the more than 30,000 known species of
aquatic plants, not because they lack medical value, but because they could not
- prior to the Company's development of its AGM technology - be grown in
sufficient quantities with the necessary quality. There is abundant evidence
from recent research of the presence of bioactive substances among the
microalgae. Such bioactive compounds include drug candidates like CRYPTOPHYCIN
and LAULIMALIDE, which are currently in active development or lead optimization.


                                       11



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Our own effort in drug discovery is aimed at identifying and characterizing
bioactive compounds derived from microalgae that we cultivate. To the extent we
are successful in these efforts, we believe that many pharmaceutical and
biotechnology companies will be interested in collaborating with us. We believe
this interest will exist both because of our AGM technology, which we view as
uniquely capable of providing the large quantities of pure material required for
research, development and manufacture of drugs from microalgae, and the
Company's growing capabilities to identify and validate new drug targets and
unique, proprietary compounds.

Because Aquasearch does not have the expertise to clinically develop and
commercialize pharmaceutical products on our own, the Company will seek
collaborative research and development and sales, marketing and distribution
relationships with established pharmaceutical companies in order to develop and
commercialize potential microalgal pharmaceutical products. In June of 2000 we
created our first Microalgae Compound Library, in conjunction with EnzyMed
(recently acquired by Albany Molecular Research; NASDAQ:AMRI), for the purpose
of drug discovery via licensing to the biopharmaceutical industry. 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 and the Company's agreement with Albany Molecular Research is
subject to assumption or rejection by the Company in its reorganization
proceedings.

In January 2001 we executed an agreement to identify and develop new
pharmaceuticals from a collection of more than 2,000 strains of microalgae held
by University of Hawaii. The collection has already produced CRYPTOPHYCIN and
LAULIMALIDE, two anti-cancer drug candidates licensed to major pharmaceutical
companies and now in clinical trials. The collection contains 170 other new,
bioactive compounds that have never been tested against other diseases. We plan
to develop compound libraries from these molecules, and will apply our
proprietary cultivation technology to produce quantities sufficient for
pre-clinical trials. Under the agreement, University of Hawaii will receive
approximately $550,000 over the initial two-year term for maintenance and
research work on the collection and will also receive royalties from any new
drug candidates discovered by Aquasearch. The Company's agreement with the
University of Hawaii is subject to assumption or rejection by the Company in its
reorganization proceedings.

The company intends to pursue additional relationships with research groups at
other schools in the United States and abroad, in order to secure rights to
additional promising collections. Our development of pharmaceutical products
from microalgae involves many significant risks and uncertainties, however, and
our efforts in this area may be unsuccessful.


OUR STRATEGIES

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


                                       12



<PAGE>


1)       INCREASE SALES OF NUTRACEUTICAL PRODUCTS. The company intends to
         increase sales of its current product, ASTAFACTOR(TM), by expanding
         distribution into new regional markets, utilizing both direct marketing
         to the consumer and established third party distribution channels. In
         November 2001 Aquasearch began the introduction of ASTAFACTOR(TM) in
         certain metropolitan markets in Southern California and intends to
         launch the product in other regions in the Western U.S. during 2002.
         The Company also expects to enter into strategic third-party
         relationships to expand distribution of ASTAFACTOR(TM) into
         Asia-Pacific markets. Additionally, the Company expects to continue
         research activities to identify and optimize additional micro-algae
         nutraceutical products and to utilize its participation as a key
         subcontractor in a $2.4 million U.S. Department of Energy project to
         provide a valuable springboard for product development. The Company's
         subcontract from Physical Sciences, Inc. for participation in this
         project is subject to assumption or rejection by the Company in its
         reorganization proceedings.


2)       EXPAND DRUG DISCOVERY CAPABILITIES. A cornerstone of the Company's
         present drug discovery activities is our agreement with University of
         Hawaii, which gives Aquasearch exclusive rights to more than 100
         unique, bioactive compounds from microalgae, as well as an opportunity
         to access additional species in the University's microalgae collection.
         We plan to cultivate microalgae from the collection, purify the known
         bioactive compounds, and produce compound libraries to be screened for
         unique bio-active compounds. Promising new drug candidates identified
         in these screens will be optimized and developed in collaboration with
         strategic partners in the biopharmaceutical industry. The Company's
         agreement with the University of Hawaii is subject to assumption or
         rejection by the Company in its reorganization proceedings.

3)       LICENSE WORLDWIDE RIGHTS TO ASTAXANTHIN ANIMAL FEEDS. Because the
         market for animal feed supplements, including AQUAXAN(TM) , is
         extremely price competitive, Aquasearch has decided to license the
         marketing rights to a worldwide partner with low cost production
         capability and the Company is currently in preliminary discussions with
         a potential partner for this market.

4)       CONTINUALLY IMPROVE AND ENHANCE OUR CORE PLATFORM TECHNOLOGY. Our AGM
         technology has produced the first new commercial product in 25 years
         from the cultivation of photosynthetic microalgae. We believe that our
         proprietary technologies and processes provide us with a significant
         competitive advantage over other known microalgae cultivation
         technologies. We expect that further improvements in our automated
         process control systems will lead to even greater product quality,
         yield, and productivity per employee. This year we plan to expand
         applications of AGM and related technologies to other microalgae
         species for new commercial products.

5)       AGGRESSIVELY EXPAND STRATEGIC ALLIANCES. We intend to strengthen
         existing partnerships and develop new relationships to commercialize
         microalgae products. In particular, we are targeting potential
         biopharmaceutical industry partners 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 Aquasearch discoveries.

MANUFACTURING

ASTAXANTHIN.   Our current production process employs:

         o    AGM photobioreactors;
         o    "finishing" ponds;
         o    final processing; and
         o    automated process control throughout the production system.


                                       13


<PAGE>

The AGMs are harvested regularly into finishing ponds, where we cause the
microalgae to synthesize astaxanthin, i.e. turn red. Once optimal "reddening"
has occurred, the microalgae are de-watered and the ponds emptied. The resulting
product is then further processed and packaged using proprietary equipment and
processes. Because of the limited financial resources of the Company during its
reorganization proceeding, and the size of existing inventory of product in
various stages of production, Aquasearch is presently producing Astaxanthin only
at slightly more than 50% of capacity. 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
commercial production from a production partner outside of the U.S. that would
be granted limited rights to practice the Company's AGM technology.

OTHER MICROALGAE. All microalgae require controlled temperature, light,
nutrients, pH, and certain other parameters to grow optimally. Our proprietary
AGM process control software allows the operator to set desired limits on most
critical growth parameters within minutes. As a result, the AGM can be used to
cultivate a wide variety of microalgae.

To demonstrate the power of AGM technology, we have cultivated species of
microalgae with widely different growth requirements, including:

         o    CHLORELLA SOROKINIENSIS;
         o    LYNGBYA LAGERHEIMII; and
         o    HAEMATOCOCCUS LACUSTRIS.

To our knowledge, none of these species has ever been cultivated outside the
laboratory.

We have also cultivated SPIRULINA PLATENSIS in a direct, side-by-side comparison
to open ponds, the standard means of commercial production for this species. In
a four-week experiment, average productivity of the AGM was double the
productivity in open ponds.

The Company intends to identify and scale-up production for additional
nutraceutical products cultivated from other microalgae species that have never
been cultivated outside the laboratory.

The Company's current facility has sufficient capacity to grow up to five
different microalgae species simultaneously at pilot production scale, which for
each species allows us to:

         o    optimize productivity;
         o    formulate the finished product; and
         o    ascertain production economics based on careful measurements
              rather than assumptions.

The valuable information derived from this effort will be utilized by our
production affiliate to maximize the efficiency of our overall production
process.

MARKETING AND SALES

The Company's marketing strategy for its non-prescription nutraceutical products
may vary depending on the specific product and its target health 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. Aquasearch
              currently markets ASTAFACTOR(TM) to mass retail outlets in Hawaii
              and San Diego through distribution arrangements with established
              companies. During 2002, this approach will be used to launch the
              product in other West Coast metropolitan markets. The Company
              supports ASTAFACTOR(TM) sales in these markets by direct media
              advertising campaigns. both to ensure that the consumer receives
              current and accurate information regarding the product, and that
              we receive information enabling us to improve the product.



                                       14



<PAGE>

2)            SELL DIRECTLY TO THE CONSUMER. This approach allows us to maximize
              profit on a per unit basis and also to reach consumer segments
              which are not yet covered by our mass retail efforts. Web-based
              and specialty media promotion also reinforce our marketing efforts
              and product visibility to all consumers.

3)            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 substantially new source of potential pharmaceuticals.
              Unlike many biotechnology companies, we do not intend to develop
              the expertise necessary to carry any drug candidate through the
              entire process of regulatory approval. Instead, we prefer to focus
              on developing substances no further than the optimization of lead
              molecules for pre-clinical development, and to rely on strategic
              alliances with established industry partners to take drug
              candidates through pre-clinical development and human clinical
              trials, as well as to manage the regulatory process and
              commercialize successful products. The Company expects 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 Aqausearch to focus on its true competitive
              advantage, our expertise in microalgae cultivation and
              biochemistry, while conserving our own financial and management
              resources.

We produced our first Compound Library in June 2000. It is currently being
tested by the U.S. National Cancer Institute. We believe that a positive result
of these tests would validate our approach, and would facilitate marketing of
this and other Compound Libraries to biopharmaceutical companies.

STRATEGIC ALLIANCES AND PARTNER RELATIONSHIPS

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 certain 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 has demonstrated capability
in Combinatorial Biocatalysis. In 2001, EnzyMed was acquired by Albany Molecular
Research (NASDAQ: AMRI). Aquasearch and Albany completed the first Compound
Library in June 2000.

We have agreed with Albany to jointly market these libraries to biotechnology
and pharmaceutical companies that would screen the libraries for new drug
candidates. The Company's agreement with Albany Molecular Research is subject to
assumption or rejection by the Company in its reorganization proceedings.

CULTOR

In May 1996, we entered into a three-year exclusive Distribution and Development
Agreement with Cultor. We agreed to act as the exclusive worldwide supplier of
natural astaxanthin from microalgae to Cultor in the field of animal feed and
animal nutrition and Cultor agreed to act as the exclusive worldwide distributor




                                       15


<PAGE>


of our natural astaxanthin in the field of animal feed and animal nutrition. We
also entered into a Stock Subscription Agreement under which Cultor purchased
400,000 shares of our common stock at a purchase price of $0.50 per share. In
January 1998 we extended the Distribution and Development Agreement to four
years. In June 1999, we modified the agreement and extended it through June
2001. The Company has terminated its Agreement with Cultor and now intends to
license marketing rights to animal feed products to a third party on a worldwide
basis.

MARBEC

The Company has in place an Industrial Partnership relationship with MarBEC
which gives Aquasearch access to additional expertise that could prove helpful
to developing our product pipeline. MarBEC is a 5-year, $26 million Engineering
Research Center, or ERC, funded in 1998 by the U.S. National Science Foundation.
There are fewer than two dozen ERCs in the U.S. In 1998, more than 160
universities competed for only five ERCs awarded by the National Science
Foundation.

MarBEC combines the expertise of world-leading marine science and ocean
engineering programs at the School of Ocean and Earth Sciences and Technology at
University of Hawaii with the nationally-famous chemical engineering program at
the Department of Chemical Engineering at the University of California,
Berkeley.

MarBEC's main research focus is the discovery and development of new products
from microalgae. The Industrial Partnership, for which we have agreed to pay
$20,000 annually, provides the following specific benefits:

         o    new research results prior to public disclosure;
         o    preferential rights to intellectual property;
         o    privilege to sponsor focused research, resulting in exclusive
              intellectual property rights;
         o    preferred access to specialized and unique facilities and
              equipment;
         o    preferred access to microalgae culture collections;
         o    membership on the Industrial Advisory Board along with current
              members Cargill and Cyanotech;
         o    opportunity to influence specific research; and
         o    preferential access to student interns.

On average, ERCs have 35 industry partners. The prime benefits cited by industry
partners in other ERCs include networking with related companies, advance
awareness of new products and technology and the availability of graduates with
superior training and education as future employees. The Company's agreement
with MarBEC is subject to assumption or rejection by the Company in its
reorganization proceedings.

UNIVERSITY OF HAWAII AT MANOA

In January 2001 we executed an agreement to develop pharmaceuticals from a
unique collection of approximately 2,000 strains of microalgae held by the
University of Hawaii. The agreement gives Aquasearch exclusive rights to more
than 100 unique, bioactive compounds from microalgae contained in the
collection. Two of the compounds are now in Phase II clinical trials for
treatment of cancer. Most importantly, the bioactive compounds have never been
tested in any disease BUT cancer. It is possible that some of these compounds
will also prove active against other diseases. Under the agreement, the
University will receive approximately $550,000 over the initial two-year term
for maintenance and research work on the collection and royalties on any
revenues to Aquasearch that derive from the use of the collection. The Company's
agreement with The University of Hawaii is subject to assumption or rejection by
the Company in its reorganization proceedings.



                                       16



<PAGE>


ANCILE PHARMACEUTICALS, INC.

In July 2001, the Company entered into a non-binding Letter of Intent with
Ancile Pharmaceuticals, Inc. to form a strategic alliance around the development
of microalgae-based botanical drugs. 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. Such products have the
potential to address growing consumer and practitioner demand for safer and more
efficacious alternatives to synthetic new chemical entities ("NCEs"). Microalgae
are rich sources of bioactive components, and several microalgae-derived
products have a long history of safe use for their beneficial health properties.
The alliance would combine Aquasearch's pipeline of microalgae products and its
proprietary cGMP production potential with Ancile's drug development expertise
and technology platform, which consists of proprietary methods for
characterizing and standardizing botanical drug substances. Together, the
companies would pursue a new development pathway created by the FDA that should
enable New Drug Applications for botanical drugs to be submitted several years
more quickly than conventional drugs based on synthetic NCEs. Ancile
Pharmaceuticals is a privately held specialty pharmaceutical company focusing on
the development and commercialization of prescription botanical drugs for major
chronic disease conditions. Completion of the transaction is subject to the
preparation, execution and delivery of a definitive and binding Strategic
Alliance Agreement in form and content satisfactory to both parties.


COMPETITION

MICROALGAE CULTIVATION TECHNOLOGY

OPEN POND TECHNOLOGY. Open pond technology was developed in the 1950s and 1960s
and formed the basis of many commercial enterprises beginning in the 1970s. Many
companies throughout the world use open ponds to cultivate three species of
microalgae: SPIRULINA, DUNALIELLA and CHLORELLA. Despite numerous attempts to
cultivate other microalgae in open ponds, not a single new product has been
produced using this technology in the past 25 years. Our own research has
demonstrated that SPIRULINA production in AGMs is double that achieved in open
ponds. We do not intend to produce any microalgae in open ponds, except for the
"finishing ponds" used in the two-step process required for species such as
HAEMATOCOCCUS, where they reside for a relatively brief time. We do not believe
that open pond technology can match the production efficiencies achievable with
the AGMs.

FERMENTATION. 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. Fermentation must be carried out in the dark.
Very few species of microalgae can grow in the dark, because most microalgae -
like most other plants - depend upon light to perform photosynthesis.
Furthermore, standard fermentation vessels must be significantly modified for
cultivating marine organisms because the common vessel material, stainless
steel, is rapidly corroded by saltwater. Fermentation may prove effective for
cultivating certain microalgae, but we believe its application is severely
limited.

HARVESTING FROM THE WILD. We are aware of one company, Cell Tech of Oregon,
which harvests natural "blooms" of microalgae. A "bloom" is an unusually high
concentration of microalgae, generally dominated by a single species, which
usually occurs in spring or summer. We do not believe this process is
sufficiently dependable or controllable to represent significant competition.
First, microalgae blooms in nature are generally at least 10 times lower in
concentration than cultivated microalgae. Second, relatively few species of
microalgae actually create blooms. Third, the timing and intensity of blooms is
subject to local climate, water conditions, and other factors that are difficult
if not impossible to control or predict. Finally, many blooms may be dominated
by a single species of microalgae, but often include significant percentages of
other species ("weeds") that may not be desirable.


                                       17




<PAGE>


CLOSED SYSTEM PHOTOBIOREACTORS. We believe that AGM technology is 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 three companies in the world - Biotechna of Australia, MicroGaia of Hawaii
and Thallia Pharmaceuticals of France - that possess proprietary photobioreactor
technology. Compared to the AGM, we believe that both of these photobioreactors:

         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 the
Ultra-AGM, 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 AGM technology is now more advanced than any other
photobioreactor technology. For more information on the AGM technology, please
see "Description of Business - Microalgae Production Technology - The Aquasearch
Growth Module (AGM)."

AQUAXAN(TM)

Competitors in the market for astaxanthin used in animal feed include BASF,
Hoffman-LaRoche, Cyanotech, AstaCarotene and Igene. Of these, only Cyanotech and
AstaCarotene produce natural astaxanthin from Haematococcus. Cyanotech's current
product has significantly lower astaxanthin content than AQUAXAN(TM). We believe
that AstaCarotene's production capability in Sweden is much more
capital-intensive than ours. We believe that Igene's yeast product, the chemical
form of which is different from that found in nature, although possibly
successful in the Americas, may face problems with consumer-acceptance in
Europe. Currently, the synthetic astaxanthin manufactured by BASF and
Hoffman-LaRoche dominates the market. Both of these companies have significantly
greater research and development, technical, financial, management, marketing
and sales resources than does Aquasearch or its potential licensing partner.
However, synthetic astaxanthin can be differentiated from the natural
alternative, which we believe may provide certain marketing advantages. Although
BASF and Hoffman-LaRoche may continue to dominate the $185 million market for
astaxanthin, we believe that a significant niche exists for a high quality,
natural source of astaxanthin.

Hoffman-LaRoche had maintained the market price of synthetic astaxanthin at
approximately $2,500 per kilogram for more than a decade, when no viable
competitive product was available. However, that price has recently fallen to
$2000, and Hoffman-LaRoche could reduce the price of its synthetic astaxanthin
product further in response to the introduction of any competing natural
astaxanthin product. Although our licensing partner expects to achieve
substantial cost savings based on its location, any such pricing or other
competitive pressure could have a material adverse effect on our ability to
attract and retain a licensing partner for AQUAXAN(TM) or the opportunity to
receive royalty revenue from this market. Products of which we are not aware, or
products that may be developed in the future, may also adversely affect the
marketability of AQUAXAN(TM).

THE ASTAFACTOR(TM)

Many of the potential competitors for THE ASTAFACTOR(TM), our nutraceutical
astaxanthin product, are the same as for AQUAXAN(TM). However, to our knowledge
neither BASF nor Hoffman-LaRoche has indicated an interest in this market.

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Furthermore, we believe that consumers of nutraceuticals prefer products from
natural sources to synthetic ones, and will not pay premium prices for
synthetics, even if they are available. We are aware of many companies
interested in or actually marketing nutraceutical astaxanthin, but of these only
Cyanotech and AstaCarotene produce the product from HAEMATOCOCCUS. We believe
our production process has cost advantages over those of both companies - a
lower production cost than Cyanotech because our product is twice as
concentrated, and a lower capital cost than AstaCarotene because Sweden's
climate requires costly process modifications. The remaining known producers of
astaxanthin may face certain challenges that we do not. We believe that the
krill extract sold by Itano of Japan is much more expensive to produce than
HAEMATOCOCCUS. We believe that Igene's yeast product may not be as readily
accepted as our natural astaxanthin product by consumers of nutraceuticals.

DRUG DISCOVERY PROGRAMS

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 an aging baby-boomer
population is not succumbing to other previously fatal illnesses. . 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 by
companies worldwide.

We believe that Aquasearch's drug discovery programs can be a significant source
of these new drugs, because it offers the potential to screen almost half the
plant kingdom for the first time. We are not aware of any significant commercial
effort to screen microalgae. Biopharmaceutical companies are reluctant to screen
any natural substance that cannot be "re-grown" in quantities sufficient to
supply the requirements of clinical trials. Laboratory scale photobioreactors
cannot supply enough material for clinical trials. We believe this lack of
supply is the main reason that biopharmaceutical companies have not shown great
interest in screening microalgae.

Competition is not likely to come from companies that provide bacteria or fungi.
Soil bacteria and fungi have been so thoroughly screened for pharmaceuticals
that more than 99% of the so-called "active leads" identified in screening
programs prove to be rediscoveries of known compounds.

We believe that potential competitors in this market must have the demonstrated
ability to cultivate kilogram quantities of raw material under controlled
conditions that assure repeated quality. In our opinion, AGM technology makes
this possible. We are not aware of any competing technology that can meet the
requirements for repeated production of kilogram quantities of microalgae of
stable quality. We are not aware of any other microalgae company engaged or
interested in the possibility of pharmaceutical drug development that also has
the capability of large-volume, commercial scale cultivation represented by our
AGM technology.

COMPETITION IN GENERAL

We intend to identify, screen and in some cases optimize molecules from natural
products from microalgae that will compete with existing natural and synthetic
products. We anticipate that competition to develop additional microalgae
products will be intense. 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.


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<PAGE>

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.

PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY

We rely upon a combination of patents, copyright protection, 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.

We have been awarded a total of thirteen patents, relating to three inventions:

         o    the AGM apparatus (Europe, Australia, Norway, Hong Kong, South
              Korea);
         o    general processes for cultivating microalgae in photobioreactors
              (U.S., Europe, Australia); and
         o    processes for cultivating HAEMATOCOCCUS (U.S.).

We have additional patents pending internationally and in the United States. The
Company has recently determined that its patents and pending patent applications
for the cultivation of HAEMATOCOCCUS are not important to the Company's future
strategy and has decided not to continue maintenance of those patents and
prosecution of those applications.

The patent positions of biopharmaceutical and biotechnology companies, including
Aquasearch, are generally uncertain and involve complex legal and factual
questions. We cannot guarantee that any of our pending patent applications will
result in issued patents, nor can we assure that we will develop more
proprietary technologies that are patentable. Patents issued to our strategic
partners or us may not provide a basis for commercially viable products or may
not provide any competitive advantages. Third parties could challenge our
patents. The patents of others could limit our ability to use certain processes
or technologies. Any of these preceding situations could have a material adverse
effect on our ability to do business. Furthermore, patent law relating to the
scope of claims is still evolving in the technology fields in which we operate.
As a result, the degree of future protection for our proprietary rights is
uncertain. We cannot prevent others from independently developing similar or
alternative technologies, duplicating any of our technologies, or, if patents
are issued to us, designing around our patented technologies. We could incur
substantial costs in litigation if we are required to defend ourselves in patent
suits brought by third parties or if we initiate such suits.

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 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
the patents, licenses or other proprietary rights of third parties. We could in
the future receive notices claiming infringement from third parties as well as
invitations to take licenses under third party patents. Any legal action against


                                       20



<PAGE>


our strategic partners or us that claim damages and seek to enjoin commercial
activities relating to the affected products and processes could subject us to
potential liability for damages. Such legal actions could also require our
strategic partners or us to obtain a license in order to continue to manufacture
or market the affected products and processes. We cannot ensure that our
strategic partners or we would prevail in any such action. We cannot ensure that
any license, including licenses proposed by third parties, required under any
such a patent would be available on terms that are commercially acceptable, if
at all. 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. We believe there could be significant litigation in the industry
regarding patent and other intellectual property rights. If we become involved
in such litigation, it could consume a substantial portion of our managerial and
financial resources, which could have a material adverse effect on our business,
financial condition, results of operations, and relationships with corporate
partners. Please see "Legal Proceedings."

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.

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, the U.S.
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 GMP as suggested 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. Our current facilities and procedures do
not yet fully comply with GMP or ISO standards, but we have not found it
necessary to implement our plan for compliance. When the necessity arises, we
believe we are ready to respond accordingly. It may be possible in the very near
future to simultaneously qualify for both ISO 9000 and ISO 14000, and we may
prefer to do so because compliance procedures can be expensive.

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 working with distributors
and potential customers to achieve compliance with foreign laws, regulations and
policies pertaining to AQUAXAN(TM). We are also working with certain consultants


                                       21



<PAGE>

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.

Regulatory authorities may view AQUAXAN(TM) as a food additive. Nutraceutical
products we develop will be viewed as human dietary supplements. The FDA will
require pre-market clearance for both of these product types if they are
intended for ultimate human consumption in the United States. 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. Extensive
information is required on the toxicity of the additive, including
carcinogenicity studies and other animal testing. The FDA approved the
Hoffman-LaRoche synthetic astaxanthin product as a food additive in 1995, but
this does not guarantee that the FDA will grant similar approval for
AQUAXAN(TM). FDA clearance for dietary supplements can be obtained by notifying
the FDA in writing of our intention to market a certain product and, if we do
not receive any objection within a certain period of time, approval is implied.
Aquasearch received such FDA clearance for THE ASTAFACTOR(TM) in early 2000. We
cannot ensure that any of our future potential products will be cleared by the
FDA on a timely basis, if at all.

AQUAXAN(TM) and THE ASTAFACTOR(TM), our nutraceutical astaxanthin product, are
likely to be distributed in foreign countries, including the European Union,
Japan, Canada and Australia. Regulatory approvals in foreign markets vary by
country. AQUAXAN(TM) has been approved in Sweden for use in poultry feed and is
considered by the Swedish authorities as a feed ingredient rather than a food
additive. We believe the approval process for both AQUAXAN(TM) and THE
ASTAFACTOR(TM) in 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. AQUAXAN(TM) has not been submitted to the
European Union for approval, and we cannot guarantee that the determination by
Swedish authorities will have any influence on the determination to be made by
the European Union.

We are also subject to numerous environmental and safety laws and regulations,
including those governing the use and disposal of hazardous materials. 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 AND DIRECTORS

As of October 31, 2001, the Company had eighteen full-time employees, of whom
four have Ph.D.s. two are involved in the production and harvesting process,
eight are involved in research and development and eight are involved in
administration and support. Since October 31, the Company has further reduced
its staff by four employees, and, as of February 11, 2002, has sixteen full-time
employees. Of whom four are Ph.D.s and of which three are involved in
production/harvesting, seven in research and development, and six in
administration. We consider relations with our employees to be good. None of our
employees are covered by a collective bargaining agreement.

Certain management changes have occurred during the Company's reorganization
proceedings, including the appointment of Harry "Doc" Dougherty as Interim
President and CEO and the naming of Dr. Mark Huntley as Chief Technical Officer.
Dr. Michael Cushman, the Company's Vice President of Research and Development,
resigned effective November 15, 2001.

Effective October 15, 2001, the Company accepted the resignation for personal
reasons of two members of its Board of Directors, Pearn P. Niiler and Edward
David. Neither Director has been replaced. Dr. Huntley resigned as Chairman of
the Board of Directors in December 2001, but remains a member of the Board. Mr.
David Tarnas has been appointed as Chairman.


                                       22


<PAGE>


KEY SCIENTISTS

Our scientists, as a group, lead all aspects of product development, process
optimization and the research upon which our business is based.

DR. MARK E. HUNTLEY, CHIEF TECHNOLOGY OFFICER, received a B.Sc. degree (SUMMA
CUM LAUDE) in Biology from the University of Victoria, Canada in 1976 and earned
a Ph.D. in Biological Oceanography from Dalhousie University in Halifax, Canada
in 1980. Dr. Huntley also holds a faculty research appointment at the Hawaii
Natural Energy Institute, School of Ocean and Earth Sciences and Technology,
University of Hawaii at Manoa. He was a Research Biologist at Scripps
Institution of Oceanography, University of California, San Diego from 1980 to
1998. Dr. Huntley has won numerous awards and grants in his field, published
more than 75 articles and a book, and lectured throughout the world. He served
for 10 years on the Executive Committee of the Global Ocean Ecosystem Dynamics
program (1989-1999), a component of the U.S. Global Change Research Program, and
the only element of the International Geosphere-Biosphere Program that is
examining the impact of global climate change on marine ecosystems. He has
served as an advisor to numerous international, national, and state agencies,
including the United States Department of State, the United States Department of
Interior and the White House Office of Science and Technology Policy. Dr.
Huntley is one of our co-founders and a co-inventor of the Aquasearch Growth
Module.

DR. MAI D. G. LOPEZ received her B.S. (CUM LAUDE) in Biology from University of
the Philippines in 1975, her M.S., also in Biology from University of the
Philippines, in 1981, and earned her Ph.D. in Marine Biology from University of
California, San Diego in 1991. Dr. Lopez has been a leading contributor to
quality control and production practices since joining us in 1999. Her research
career has focused on the feeding ecology of various marine invertebrates, an
area in which she has published 24 scientific papers. She has held an academic
teaching and research position at University of the Philippines (1991-92), and
positions of Visiting Research Scientist at University of Hawaii (1992-94), and
Research Scientist at Scripps Institution of Oceanography (1994-98).

DR. MIGUEL OLAIZOLA 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 us 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. 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.

DR. MELANIE WEAVER is Director of Clinical Operations. She received her Ph.D. in
experimental psychology from the University of New Mexico in 1988. She carried
out postdoctoral research in psychopharmacology at Rutgers University (1988-89)
and in pharmacology and neuroscience at the University of Texas at Austin
(1989-93). Dr. Weaver has served as Director of Clinical Site Operations at
SCIREX Corporation from 1993 until October 2000, where she managed and directed
more than a hundred clinical studies. SCIREX is a clinical research organization
that provides integrated drug development services, focusing especially on CNS
studies.


                                       23


<PAGE>

SCIENTIFIC ADVISORY BOARD

The Aquasearch Scientific Advisory Board is composed of leading experts in
aquaculture, marine biology and fluid dynamics and the chemistry, photobiology,
genetics and mass culture of microalgae. The Scientific Advisory Board provides
us with guidance regarding the optimization of our production and processing
methods, and research and development pertaining to both existing and potential
microalgae products. The Scientific Advisory Board held its inaugural meeting in
May 1996 and was originally scheduled to meet approximately four times per year.
We have largely replaced such meetings with various forms of electronic
communication. We believe that the individual and collective knowledge and
experience of our Scientific Advisory Board provides us with an important
competitive advantage.

Current members of the Aquasearch Scientific Advisory Board are:

DR. FAROOQ AZAM received a B.Sc. in Chemistry and Physics in 1962, and M.SC. in
Chemistry and Biochemistry in 1964 from the University of Panjab, Lahore,
Pakistan; he received a Ph.D. in Microbiology, Czechoslovak Academy of Sciences,
Prague in 1968. Dr. Azam is a Professor of Biology at Scripps Institution of
Oceanography in La Jolla, California and one of the world's leading marine
microbiologists. Dr. Azam is noted for his discovery of the "microbial loop," a
pathway that diverts much of the ocean's productivity into bacteria and other
microbes. Before this pathway was discovered in the 1980s it was generally
believed that most of the ocean's productivity was passed up the food chain to
fishes and other predators. Dr. Azam's contributions changed the field of marine
biology.

DR. JOHN CULLEN received a B.Sc. (Honors in Biology) from University of
California, Santa Cruz in 1974 and a Ph.D. in Biological Oceanography from
Scripps Institution of Oceanography, University of California, San Diego, in
1980. Dr. Cullen has held faculty positions at the University of Texas, the
Bigelow Laboratory for Ocean Sciences and Dalhousie University in Halifax,
Canada, where he now holds the Chair of Environmental Observation Technology.
Dr. Cullen's research has focused in the area of microalgae growth rates,
productivity, nutrient requirements and bio-optics.

DR. WILLIAM FENICAL received a B.S. in Biochemistry from California State
Polytechnic University in 1963, an M.S. in Organic Chemistry from San Jose State
University in 1965 and a Ph.D. in Organic Chemistry from University of
California, Riverside in 1968. Dr. Fenical joined the faculty of Scripps
Institution of Oceanography, University of California, San Diego, in 1973, where
he has served as Director of the University of California-wide Institute of
Marine Resources (1988-1993) and Director of the Marine Research Division since
1989. Dr. Fenical is recognized as one of the world's authorities on the
chemistry of marine natural products, an area in which he has published more
than 250 scientific articles. Dr. Fenical has served as an advisor on marine
natural product chemistry to the National Institutes of Health, the National
Research Council, and numerous pharmaceutical companies, including Sterling
Winthrop, Ligand, Pharmagenesis and Bristol-Myers-Squibb. He serves on the
editorial boards of the JOURNAL OF NATURAL PRODUCTS, MOLECULAR MARINE BIOLOGY
AND BIOTECHNOLOGY, and the JOURNAL OF MARINE BIOTECHNOLOGY. He holds seven
patents for novel chemical compounds of a biomedical nature, including a wrinkle
reducing agent that is the active ingredient in a skin cream marketed by Estee
Lauder, which produces more than $1 million per year in royalties for the
University of California.

DR. MALCOLM GREGORY received a B.Sc. (HONOURS) in Applied Microbiology from the
Bath University of Technology, UK in 1981, and a Ph.D. in Algaculture from
King's College, University of London, in 1985, where he focused his research on
cultivation of microalgae in tubular reactors. Dr. Gregory has more than fifteen
years experience in bioprocess engineering, specializing in process control.
With Cyanamid of Great Britain, he implemented control systems for bulk
antibiotics production. At the Interdisciplinary Research Centre for Process
Systems Engineering at University College, London, a world-renowned center for
excellence in biochemical engineering, he developed novel process control
methods now adopted in industry. He is an expert in microbiological process
control.


                                       24


<PAGE>


DR. PEARN NIILER received his B.S. degree from Lehigh University in 1960, earned
honors as a Fulbright Scholar at Cambridge University, England in 1961, and was
awarded a Ph.D. as a Woodrow Wilson Fellow from Brown University in 1964. Dr.
Niiler has taught and conducted research at Harvard College, Nova University and
Oregon State University. He is currently a Professor of Oceanography at Scripps
Institution of Oceanography, University of California, San Diego, where he heads
one of the largest oceanographic research programs in the nation. Dr. Niiler has
published more than 125 scientific papers and has invented various oceanographic
instrumentation technologies that are now in commercial production with sales of
$6 million annually. Dr. Niiler is an expert in applied mathematics and fluid
mechanics and is a co-inventor of processes used in the Aquasearch Growth
Module.

DR. DONALD REDALJE received his B.S. in Environmental Biology from the
University of California, Santa Barbara in 1971 and his Ph.D. from University of
Hawaii in 1980. He has conducted research and taught at Scripps Institution of
Oceanography, University of California, San Diego, the Naval Postgraduate
School, Moss Landing Marine Laboratory, and the University of Southern
Mississippi, where he recently served as Director of the Center for Marine
Science. Dr. Redalje is internationally recognized for his development of a
method to measure the productivity of microalgae, and is an expert on the
biochemistry and physiology of marine plants. Dr. Redalje is one of our
co-founders and co-inventor of the Aquasearch Growth Module.

DR. ALADAR SZALAY received a M.Sc. in Biochemistry from the Martin Luther
University, Germany in 1966 and a Ph.D. in Biochemistry from the Martin Luther
University, Germany in 1972. He carried out post-doctoral research on plant
genetics at the California Institute of Technology. Dr. Szalay is founding
Director of the Center for Molecular Biology and Gene Therapy at the School of
Medicine of Loma Linda University in California. His career has been built on
the genetic engineering of plants, including microalgae, with nutritionally and
medically important traits. He is an expert on the genetics of microalgae. Dr.
Szalay holds numerous patents in the area of genetic engineering, including
transgenic patents and methods for preparing and using artificial chromosomes.
He has acted as an advisor to a variety of institutions and companies, including
Rockefeller Foundation, Allied Chemical, Siemens AG, and Boehringer Mannheim.

JOHN WESTERDAHL holds a B.S. in Foods and Nutritio, a Master's degree in Public
Health in nutrition and health education from Loma Linda University, and
additional degrees and certifications as a Master Herbalist, Registered
Dietitian, and Certified Nutrition Specialist. He is currently the Director of
Health Promotion and Nutritional Services at Castle Medical Center in Kailua,
Hawaii where he is responsible for programs and services in medical nutrition
therapy, preventive medicine and wellness. As Senior Nutritionist for six years
at Shaklee Corporation, a respected manufacturer of nutritional products, Mr.
Westerdahl was actively involved in corporate product development, research, and
technical support, including participation in human clinical trials. He is a
member of the American Dietetic Association, the American College of Nutrition,
the Association of Natural Medicine Pharmacists, and the American Society of
Pharmacognosy. Mr. Westerdahl has published extensively on the topic of human
nutrition, including recent publications in HANDBOOK OF PEDIATRIC NUTRITION and
MEDICINAL HERBS: A VITAL REFERENCE GUIDE.

We do not employ any members of the Scientific Advisory Board. Each member may
have commitments to other entities that could limit his availability to us.
There can be no assurance that we will be able to retain key Scientific Advisory
Board members.


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 AGMs, 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. We have
no production facilities or offices outside the State of Hawaii.


                                       25



<PAGE>

We believe the location of our business in Hawaii and, in particular, the
location of our facility in the HOST Business Park provide us with important
competitive advantages. A combination of several factors makes our facility at
the HOST Business Park a favorable location to produce various species of
microalgae:

         o    consistently warm temperatures;
         o    abundant sunlight;
         o    low rainfall;
         o    access to HOST Business Park scientific equipment, personnel and
              facilities;
         o    tax incentives; and
         o    the ready availability of cold, clean seawater.

We believe that microalgae production facilities located in areas that lack
these characteristics probably have much higher costs of production and fewer
production days per year than we do at our facility.

At the HOST Business Park, we have access to cold, clean deep seawater that is
pumped up from a depth of 2,000 feet. This seawater is used as a means of
controlling temperature of the AGM, and could also be used as a source of
nutrients for cultivating marine microalgae. We have access to a complete
industrial infrastructure in Kailua-Kona. We are located only 30 miles from a
deep water port and are immediately adjacent to an international airport.

We believe the HOST Business Park is an excellent location for our current
facility. The seawater utility at this location is unparalleled for very
large-scale commercial production of marine microalgae. To our knowledge,
nowhere else in the world is there a location with the volume, purity and low
cost of seawater we have available at the HOST Business Park. Large facilities
for producing freshwater microalgae will be more economical at locations other
than the HOST Business Park. The cost of site work in old lava at Kailua-Kona is
more expensive than in many Hawaii locations where soil prevails. Conditions for
very large-scale commercial production of microalgae are exceptional throughout
the Hawaiian Islands. Our location on the Hawaiian Islands provides us with
large tracts of available land with moderate temperatures, high sunlight, low
rainfall, easy access to fresh water, cooling seawater and power, a favorable
business environment and proximity to the renowned marine biotechnology
expertise at MarBEC and the University of Hawaii. We believe the Hawaiian
Islands provide one of the most advantageous and economical locations in the
world to cultivate microalgae on a commercial scale.

The concentration of our existing and planned research and development
facilities and production facilities in the HOST Business Park or elsewhere in
Hawaii involves various risks and uncertainties from potential natural disasters
such as volcanic eruptions, earthquakes, tidal waves, hurricanes and related
phenomena indigenous to Hawaii.

The Company is currently negotiating a 30-year lease of our current five-acre
parcel from the Natural Energy Laboratory of Hawaii Authority (NELHA), the state
entity that administers the HOST Business Park. Successful completion of the
lease arrangement will be subject to agreement on mutually acceptable terms, the
curing of current deficiencies under the Company's existing licensing
arrangement with NELHA and approval of the lease by the Bankruptcy court.


ITEM 3.  LEGAL PROCEEDINGS

On July 13, 1998, Cyanotech filed a complaint against us 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 our U.S.
Letters Patent No. 5,541,056; invalidity of the 5,541,056 Patent; and

                                       26



<PAGE>


non-misappropriation of our trade secrets relating to closed culture production
of astaxanthin. Cyanotech filed the complaint after we expressed to Cyanotech
our concern that Cyanotech infringed the 5,541,056 Patent and misappropriated
our trade secrets. On March 6, 2001, Aquasearch and Cyanotech announced that
they had settled the litigation without admission of liability by either party.
Specific terms of the agreement will remain confidential. Under the agreement,
Cyanotech agreed to an injunction that prevents it from using any tube system
for microalgal production that infringes Aquasearch's U.S. Patent No. 5,541,056
and Aquasearch has agreed that Cyanotech's current proprietary process for
producing microalgae, known as the PhytoDome, does not infringe that patent.
Cyanotech will pay undisclosed royalties to Aquasearch. The parties agreed to
dismiss with prejudice all claims that the parties asserted in the litigation.

On October 29, 2001 certain creditors of the Company filed an involuntary
petition, under Chapter 11 of the United States Bankruptcy Code, in United
States Bankruptcy Court, District of Hawaii (case 01-04260) against the
Aquasearch, Inc. On November 30, 2001, the company stipulated to the entry of an
Order for Relief, agreeing to the jurisdiction of the Bankruptcy Court for
purposes of resolving the petition that had been filed. On December 3, 2001, the
Company's motion to the Bankruptcy Court to incur indebtedness was granted, and
Aquasearch entered into a Debtor- in-Possession financing arrangement. Since
that date, Aquasearch has continued operations utilizing Debtor in Possession
financing provided by Chardan Ventures, a California venture group. Aquasearch
expects to submit for approval by the Bankruptcy Court and the Company's
creditors, a proposed Plan of Reorganization within the 120 day exclusivity
period allowed under the bankruptcy rules. In addition, each of the Company's
existing contractual relationships with third parties is subject to assumption
or rejection by the Company on petition to the Bankruptcy Court or in the Plan
of Reorganization. If a Plan of Reorganization is not confirmed by the
Bankruptcy Court the proceedings may be converted to a liquidation proceeding
under Chapter 7 of the Bankruptcy code, a trustee appointed and the assets of
the Company liquidated. Alternatively, the bankruptcy proceedings could be
dismissed and subsequent sale or other liquidation of the Company could occur.

In addition to the bankruptcy proceedings mentioned above, litigation was filed
on October 11, 2001 by Kenneth Crowder against the Company and certain unnamed
individuals in the Superior Court of the State of California, Orange County
(Case #01CC13035), 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(TM) product, in the Superior Court of California, San Bernadino
County (Case #RCV058442), 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. Both of these lawsuits have been stayed as to
the Company by the pendency of the bankruptcy proceeding.


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

A Special Meeting of Shareholders (the "Special Meeting") of Aquasearch was held
on September 14, 2001 at the offices of the Company in Kailua-Kona, Hawaii,
pursuant to a Proxy Statement which was mailed to shareholders on August 13,
2001, and which is incorporated herein by reference. All shareholders of record
as of the close of business on July 31, 2001 were entitled to notice of and to
vote at the Special Meeting. At that meeting, the shareholders of the Company
voted to approve the following proposals:

1. An amendment to the company's Articles of Incorporation to increase the
number of shares of authorized common stock of the Company by 50,000,000 shares,
from 150,000,000 shares to 200,000,000 shares. The proposal was approved by the
vote of 92,827,323 shares in favor, 2,310,243 shares opposed, and 775,666 shares
abstaining.

2. Change in the jurisdiction of the Company's place of incorporation from
Colorado to Delaware. The proposal was approved by the vote of 58,409,165 shares
in favor, 709,444 shares opposed, 635,813 shares abstaining and 36,158,810
broker non-voted shares.



                                       27



<PAGE>

3. The form of indemnification agreement to be entered into between Aquasearch
and its officer and directors upon reincorporation of the Company in Delaware.
The proposal was approved by the vote of 93,945,013 shares in favor, 1,141,570
shares opposed, and 826,649 shares abstaining.

4.  Election of the following individuals as Directors of the Company:

o        Mark E. Huntley, Ph.D. Elected by the vote of 95,686,695 shares in
         favor, 226,537 shares withheld.
o        Earl S. Fusato. Elected by the vote of 95,687,245 shares in favor,
         225,987 shares withheld.
o        Edward E. David, Ph.D. Elected by the vote of 95,679,395 shares in
         favor, 233,837 shares withheld.
o        Pearn P. Niiler, Ph.D. Elected by the vote of 95,659,195 shares in
         favor, 254,037 shares withheld.
o        David Tarnas. Elected by the vote of 95,688,395 shares in favor,
         224,837 shares withheld.
o        Richard L. Sherman. Elected by the vote of 95,688,395 shares in favor,
         224,837 shares withheld.

The company is currently in a Chapter 11 proceeding under the U.S. Bankruptcy
Code, therefore the Company has deferred any action on changing its
incorporation from Colorado to Delaware and to adopt the form of indemnification
upon reincorporation in Delaware.


                                     PART II


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

MARKET INFORMATION

Our common stock is traded on the OTC Bulletin Board (Symbol: AQSEQ:bb). The
following table shows for the periods indicated the high and low bid quotations
for our common stock for the three years ended October 31, 2001. 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.

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

FISCAL 2000
    First Quarter...........     $0.50                       $0.25
    Second Quarter..........     $2.25                       $0.54
    Third Quarter...........     $0.88                       $0.51
    Fourth Quarter..........     $0.73                       $0.29

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




                                       28



<PAGE>

As of the date of October 31, 2001, we had approximately 2,000 record holders of
our 122,134,419 shares of common stock.

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. We do not
anticipate paying any cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

During the quarter ended October 31, 2001, Gregory Kowal purchased 833,333
shares of our common stock at $0.15 per share. In connection with the purchase,
Mr. Kowal received warrants to purchase 125,000 shares of our common stock at
$0.40 per share with a term of three years.

Disclosure of sales of other unregistered securities have been made in Form
10Q-SB filings in the last two years.

These transactions were exempt from registration under the Securities Act of
1933 pursuant to Section 4(2). No underwriters were involved in these
transactions.


ITEM 6.  MANAGEMENT'S PLAN OF OPERATION

The following discussion of our management's plan of operation contains certain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, including statements, trend analysis and other
information relative to markets for our products and trends in revenues and
anticipated expense levels, as well as statements including words such as
"anticipate," "expect," "believe," "plan," "estimate" and "intend" and other
similar expressions. These statements involve known and unknown risks,
uncertainties and other factors that 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 "Factors That May Affect Future Operating Results"
and other risks detailed from time to time in our periodic reports and other
information filed with the Commission, including, without limitation, our
ability to successfully file and receive confirmation of a plan of
reorganization in the Company's reorganization proceeding; our ability to raise
or generate additional capital; our ability to cost-effectively manufacture our
products on a commercial scale; the concentration of our current customer base;
competition; our ability to comply with applicable regulatory requirements;
potential need for expansion of our production facility; the potential loss of a
strategic relationship; inability to attract and retain key personnel; a lack of
time commitment by our Scientific Advisory Board; management's ability to
effectively manage our growth; difficulties and resource constraints in
developing new products; protection and enforcement of our intellectual
property; compliance with environmental laws; climate uncertainty; currency
fluctuations; exposure to product liability lawsuits; and control of our
management and affairs by principal shareholders.

OVERVIEW

Aquasearch develops and commercializes natural products from microalgae using
our proprietary photobioreactor technology known as the Aquasearch Growth
Module, or AGM.

Microalgae are a diverse group of over 30,000 species of microscopic plants that
have a wide range of physiological and biochemical characteristics. Microalgae
produce many different and unusual fats, sugars, proteins, amino acids,
vitamins, enzymes, pigments and other bioactive compounds that have existing 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.


                                       29



<PAGE>

Although microalgae are believed to be a potential source for many valuable
commercial applications, less than 5,000 species of microalgae have ever been
isolated from nature, and fewer than 10 species of microalgae - less than
one-tenth of one percent of all such species - have ever been cultivated
commercially.

We believe that the development of a large biotechnology industry, based on
thousands of species of microalgae, has been impeded only by a lack of
technology. We anticipate that our commercial production technology will allow
us to create a market for new and valuable substances derived from microalgae.
Our company, since its inception, has been dedicated to this proposition.

Key achievements in fiscal 2000 included:

         o     Introduction and sales of our first  nutraceutical  product,  THE
               ASTAFACTOR(TM)
         o     Completion of our first Compound  Library in  collaboration  with
               Albany  Molecular  Research o Submission of our first library for
               screening by the U.S. National Cancer Institute
         o     Selection to participate in a $2.4 million contract from the U.S.
               Department of Energy
         o     Initiation  of  two  clinical   trials  on  the  effects  of  THE
               ASTAFACTOR(TM) on human health, and
         o     Execution  of a  strategic  drug  discovery  agreement  with  the
               University of Hawaii

Key achievements in fiscal 2001 included:

         o     Expansion  of THE  ASTAFACTOR(TM)  both  in  Hawaii  mass  retail
               outlets and direct marketing through the Aquasearch website
         o     Execution  of Letter of Intent  with Ancile  Pharmaceuticals  for
               collaborative development of pharmaceutical compounds
         o     Favorable   settlement  of  outstanding  patent  litigation  with
               Cyanotech
         o     Further   increases  in   efficiency   and  yield  of  microalgae
               production process
         o     Shareholder   approval   to   increase   authorized   shares  and
               reincorporate Company in Delaware
         o     Entering into research collaboration and license with University
               of Hawaii


MANAGEMENT'S PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS

During the next twelve months we will focus on sales and marketing, product
development, and drug discovery, specifically:

         o     expanding  sales  of  our  first   nutraceutical   product,   THE
               ASTAFACTOr(TM);
         o     developing compound libraries for drug discovery;
         o     formulating additional nutraceutical product candidates; and,
         o     Out-licensing rights to our animal feed supplements

(1) THE ASTAFACTOr(TM) - NUTRACEUTICAL ASTAXANTHIN

THE ASTAFACTOr(TM), our first major nutraceutical product, is a dietary
supplement rich in astaxanthin.
Astaxanthin is a powerful, bioactive anti-oxidant (approximately 100 times more
potent than Vitamin E), with anti-inflammatory properties. Astaxanthin has
demonstrated potential activity in animal or human models of:


                                       30


<PAGE>

         o     ALZHEIMER'S AND PARKINSON'S DISEASES
         o     MACULAR DEGENERATION
         o     CHOLESTEROL DISEASE
         o     STROKE
         o     CANCER

During the next twelve months, the company intends to pursue the design and
commencement of human clinical trials to provide additional data concerning the
possible positive effects of THE ASTAFACTOr(TM) for these and other medical
conditions.

In addition, the company plans to expand its current marketing efforts for THE
ASTAFACTOr(TM) to include product launches in additional regional U.S. markets
and to seek a marketing partner for THE ASTAFACTOr(TM) in certain non-U.S.
Pacific Rim markets.

(2) DRUG DISCOVERY PROGRAMS

During the next twelve months, the Company intends to accelerate its drug
discovery programs in the following areas:

         o     Review and refinement of our collaborative research programs with
               the University of Hawaii in order to identify and optimize
               additional drug candidates;
         o     Identification of additional research collections of marine
               microalgae and development of collaborative relationships with
               the institutions controlling such collections;
         o     Screening of Aquasearch identified compounds for activity against
               various human diseases;
         o     Continuation of its subcontracting activities with the Department
               of Energy, which enables us to increase the efficiency and yields
               of our production processes

We expect collaborations will expand to include other corporations and other
universities. However, we cannot be certain of maintaining existing partner
relationships, nor can we guarantee the ability to develop other successful
relationships.

(3)  INTELLECTUAL PROPERTY

The Company will continue to prosecute and maintain its patent portfolio and to
evaluate additional patenting opportunities, both for our production processes
and specific chemical compounds.

In addition, the company continues to develop trade secrets that we believe are
an important underlying reason for consistent improvements in production and
product quality. We place great value on our intellectual property.

(4)  PRODUCTION CAPACITY

During the next twelve months, the Company intends to identify and enter into
agreements with a production partner in the Pacific Rim. The Company is in
preliminary discussions with one such company. In the event of a successful
consummation of such a collaboration, the Company expects within a year to
dedicate its existing production capabilities principally to research and
development activities and to source its commercial production requirements from
its partner.


                                       31



<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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, we had an accumulated deficit of approximately $20.4
million. 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.

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 the Company filed a petition for
involuntary bankruptcy against Aquasearch. On December 3, 2001, the Company's
motion to the Bankruptcy Court to incur indebtedness was granted, and Aquasearch
entered into a Debtor in Possession financing arrangement. Since that date,
Aquasearch has continued operations utilizing Debtor in Possession financing
provided by Chardan Ventures, a California venture group. Aquasearch expects to
submit for approval by the Bankruptcy Court and the Company's creditors, a
proposed Plan of Reorganization within the 120 day exclusivity period allowed
under the bankruptcy rules. In addition, each of the Company's existing
contractual relationships with third parties are subject to assumption or
rejection by the Company on petition to the Bankruptcy Court or in the Plan of
Reorganization. If a Plan of Reorganization is not confirmed by the Bankruptcy
Court the proceedings may be converted to a liquidation proceeding under Chapter
7 of the Bankruptcy code, a trustee appointed and the assets of the Company
liquidated. Alternatively, the bankruptcy proceedings could be dismissed and
subsequent sale or other liquidation of the Company could result.

RESULTS OF OPERATIONS

REVENUES. During the years ended October 31, 2001 and 2000, we had revenues of
approximately $1,032,000 and $221,000, respectively. We began sales of THE
ASTAFACTOR(TM), our nutraceutical astaxanthin product, in March 2000 and
recognized approximately $63,000 of sales for fiscal 2000, and $480,000 in
fiscal 2001. Other revenues in fiscal 2001 were derived from our research
contract with the Department of Energy and royalties under a settlement
agreement with Cyanotech Corporation.

RESEARCH AND DEVELOPMENT COSTS. Research and development costs include salaries,
development materials, plant and equipment depreciation and costs associated
with operating our three-acre research and development/production facility, and
cost associated with our research agreement with the University of Hawaii.
Research and development costs were approximately $1.8 million for fiscal 2001
compared with approximately $2.4 million in fiscal 2000. The decrease reflects a
reduction of cost on AGM technology and cost being covered by the Department of
Energy research contract, compared to fiscal 2000 costs associated with
personnel additions, optimizing the very large Ultra-AGM, expanding production
capacity, developing THE ASTAFACTOR(TM) and our compound drug discovery library.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
principally of salaries and fees for professional services. General and
administrative expenses were approximately $2.6 million for fiscal 2001 compared
with approximately $1.9 million for fiscal 2000. The increase for the year ended
October 31, 2000 reflect costs associated with personnel additions, raising


                                       32



<PAGE>


capital, and our marketing efforts of THE ASTAFACTOR(TM) offset by an increase
in legal fees associated with our ongoing legal dispute with Cyanotech and
capital raising activities. Additionally in fiscal 2001, we increased our
investor relations program to support our capital raising activities. We
anticipate that general and administrative expenses will increase over time as
we expand production capacity, develop more new products, increase our
intellectual property protection, and raise additional capital.

INTEREST EXPENSE. Interest expense for fiscal 2001and 2000, included $154,000
and $382,000, respectively, for the discount resulting from the difference
between the conversion price and the fair value of the common stock underlying
the convertible notes issued during those years.
LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations until now through public and private sales of
debt and equity securities. During the years ended October 31, 2001, and 2000,
we raised approximately $2.8 million and $3.6 million, respectively, of net
proceeds from the sale of shares of common stock and/or the issuance of debt in
private placement transactions.

During fiscal 2001, cash used in operating activities was approximately $3.0
million compared with $3.3 million for fiscal 2000. Additionally, capital
expenditures for fiscal 2001 and 2000, were approximately $269,000 and $254,000,
respectively. Due to difficulties in raising capital since September 2000 and
involuntary bankruptcy proceedings, we have significantly reduced our headcount
and operating cost. We have entered into a Debtor in Possession financing
arrangement since year end and currently working on a reorganization plan to
submit to the bankruptcy court. Continued operation and additional financing
will depend on the outcome of the approval of the plan by the Court.


FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

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.

The company is currently in a Chapter 11 proceeding under the U.S. Bankruptcy
Code. Although the Company currently plans to propose a Plan of Reorganization
to the Court for confirmation, there is no assurance that the creditors of the
Company will approve such a plan, or that the Court will confirm it. If a Plan
of Reorganization is not confirmed by the Bankruptcy Court the proceedings may
be converted to a liquidation proceeding under Chapter 7 of the Bankruptcy code,
a trustee appointed and the assets of the Company liquidated. Alternatively, the
bankruptcy proceedings could be dismissed and subsequent sale or other
liquidation of the Company could result.

We have had quarterly and annual operating losses since our inception in 1988.
Our net loss in fiscal 2001 was approximately $4.1million and our accumulated
deficit at October 31, 2001 was approximately $20.4 million. 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.

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


                                       33



<PAGE>

o        our ability to successfully manage the Company as a research and
         development company and successfully conclude a relationship with a
         third party manufacturer to supply our commercial requirements;
o        our ability to successfully complete the commercialization and 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; and
o        the costs of commercializing and marketing our existing and potential
         products.

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
MANUFACTURE AND MARKET OUR PRODUCTS.

We will require substantial expenditures to support our research and development
activities and to manufacture and market our products. Many factors will
determine our future capital requirements, including:

o        our ability to cost-effectively manufacture our products in quantities
         needed to sustain growing sales of ASTAFACTOR(TM);
o        market acceptance of our products;
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 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; 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 funds from public or private equity, debt
financing and strategic partnerships. 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, or delay expansion plans.

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.


                                       34



<PAGE>

We have limited experience in manufacturing products derived from microalgae. To
be successful, we must produce products at acceptable costs and ensure that the
quantity and quality of our products comply with contractual requirements,
regulatory requirements and local health, safety and environmental regulations.
Many factors complicate the production of microalgal products and could at any
time limit our monthly production, including:

o        microbial contamination;
o        variability in production cycle times due to technical
         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 cannot increase production of our products, either
directly or through a strategic partner, we may be unable to satisfy our
obligations under any future agreements. Our inability to increase production
would limit our revenues, and could cause us to lose customers that demand more
product.

IF WE CHOOSE TO RETAIN SOME OF OUR PRODUCTION CAPACITY OF NATURAL ASTAXANTHIN SO
THAT WE CAN PRODUCE OTHER MICROALGAL PRODUCTS, WE MAY BE UNABLE TO MEET CUSTOMER
DEMAND FOR NATURAL ASTAXANTHIN.

We introduced our first retail nutraceutical product in March, 2000. We plan to
retain some of our production capacity of natural astaxanthin in order to meet
anticipated demand for this new product, at least until we have reached a
collaborative arrangement with a potential third-party supplier. By limiting the
production of natural astaxanthin for our wholesale customers, we risk being
unable to supply their requirements and we may lose customers. If we fail to
establish a market for our retail product, the retention of these wholesale
customers would be important to our success in increasing long-term revenues.

IF THE DEMAND FOR NATURAL ASTAXANTHIN REQUIRES US TO EXPAND OUR CURRENT
PRODUCTION FACILITY, WE MAY EXPERIENCE SIGNIFICANT FINANCIAL, TECHNICAL AND
BIOLOGICAL CHALLENGES.

We believe that we will have to produce, or have produced for us, natural
astaxanthin in ton quantities to satisfy market demand. In order to meet the
anticipated demand for natural astaxanthin, we will need to either expand our
production facility or enter into an arrangement with an acceptable third party
supplier using our technologies. Expanding our facility will require substantial
research and development, additional capital and significant design and
engineering costs.

We currently have only general plans for the size, location and production
capacity of a new or an expanded production facility. We do not have a
commitment to finance the construction of this facility. In the event that we
decide to build a new facility of our own, we plan to rely on a collaborative
arrangement with one or more parties to help us develop and build a new
facility. However, we may be unable to reach an agreement with any other entity
regarding the development, timing, location or financing of a new facility on
favorable terms, if at all. If we fail to either expand our current production
facility, develop a new production facility, or enter into an acceptable supply
arrangement with a third party, then we may lose the opportunity to increase our
revenues. We could also lose wholesale customers, both current and future, who
may rely on increasing product delivery.

OUR CUSTOMER BASE IS CONCENTRATED AMONG SEVERAL 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 and
California.. These companies currently purchase approximately 54% of the natural
astaxanthin products we produce. 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.



                                       35



<PAGE>

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. For example, in December 1998, we entered into a Compound
Library Agreement with EnzyMed to develop libraries of compounds to be jointly
marketed to biotechnology and pharmaceutical companies to screen the libraries
for new drug candidates.

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 our present or future corporate partners 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 strategic
         partner;
o        the failure of strategic partners 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 strategic partner.

We have complex agreements with our consultants and corporate partners that may
give rise to disputes regarding the rights and obligations of the parties. Any
dispute or disagreement could lead to delays in research, development or
commercialization of our products. Disputes could result in litigation or
arbitration, which could be time consuming and expensive. Any dispute could
limit our ability to generate revenue, and could also damage our relationships
with customers and other corporate partners.

We may be unable to maintain or expand our relationships with existing corporate
partners, or to replace existing corporate partners if our relationships with
existing partners terminate. If we are unable to establish appropriate strategic
relationships, we may need to raise additional capital to undertake these
activities at our own expense. If we cannot rely on corporate partners for
strategic assistance in their areas of expertise and instead have to develop our
own expertise in these areas, then we may experience delays in launching,
marketing, selling and distributing new 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 team. Upon confirmation of its Plan of Reorganization, the Company
will need to attract additional senior management to supplement the existing
management team.

We are also highly dependent on our ability to attract and retain key
scientific, technical, management and operating personnel, including consultants
and members of our Scientific Advisory Board. The number of qualified aquatic
microbiologists and bioengineers is limited, so competition for their services
is intense. In order to execute our business plan, we need to develop expertise
and add skilled employees or retain consultants in areas such as research and
development, clinical testing, government approvals, manufacturing and
marketing. We may be unable to attract and retain qualified personnel or develop
the expertise needed in these areas. We currently have a small research and
development and management group with limited operating experience. If we lose
or fail to attract key personnel, we may be unable to execute our business plan.


                                       36



<PAGE>


IF THE MEMBERS OF OUR SCIENTIFIC ADVISORY BOARD ARE UNABLE TO COMMIT SUFFICIENT
TIME TO OUR BUSINESS, WE MAY NOT BE ABLE TO DEVELOP NEW MICROALGAL PRODUCTS.

The members of the Scientific Advisory Board are not our employees and each
member has commitments to other entities that could limit their availability to
us. We depend on members of our Scientific Advisory Board to assist us in
optimizing production and processing methods. We also rely on them to formulate
research and development strategy for both existing and potential microalgal
products. Due to their limited availability, we cannot be sure that they will be
able to commit the time necessary to provide us with the guidance we need, nor
can we be certain that we will be able to retain key Scientific Advisory Board
members.

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

Until 2000, we focused almost exclusively on product research and technology
development. As we began full-scale commercial production of microalgal
products, we have had to create or expand many activities, including
outsourcing, customer relations, engineering, construction, recruiting, and
training. During this transition, we have experienced rapid growth, and we
sexpect this growth to continue. Over the next twelve months, we expect that we
will need to add several additional employees. In addition, our growth will
require significant improvement in our organization, planning and management and
we expect that we will need to either expand our production capabilities or
transfer some of our technology to a third party supplier in a strategic
alliance.

We expect significant demands on our financial and management control systems to
increase this year. 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 effectively manage our human and financial resources. Such
inefficiencies could make it difficult to retain or attract employees, and could
directly or indirectly create unnecessary expenses.

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

We are actively developing two product lines, nutraceuticals and compound
libraries for drug discovery. We believe 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. We expect the
success of our compound library products will 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 prospects for
nutraceutical astaxanthin will depend, in the short term, on product quality and
competitive pricing. Our ability to penetrate new markets for natural
astaxanthin products will, we believe, depend strongly on regulatory approval in
several major markets.

We cannot assure successful development of any existing or potential
microalgae-based product line, nor can we guarantee market acceptance of any of
our products. We do not have significant marketing experience in nutraceutical
or pharmaceutical markets. We have less than one year of experience in
electronic marketing or in direct retail sales. We are strongly dependent on the
marketing skills and efforts of our corporate partners, consultants and
contractors. We cannot assure you that our partners, consultants or contractors
will be successful in their marketing efforts, nor can we prevent them from
competing with us or assisting our competitors. If we are unable to successfully
develop or commercialize any of our product lines, then our revenues will fail
to grow.



                                       37




<PAGE>

WE MAY BE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, 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
as critical to our success. We rely on a combination of patent, copyright and
trade secret laws and contractual restrictions to protect our proprietary rights
and maintain our competitive position. Our future prospects depend in part on
our ability to protect our intellectual property while operating without
infringing the proprietary 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
proprietary technologies. We cannot be certain that any patents issued to us or
to our corporate partners will provide a basis for commercially viable products
or provide us with any competitive advantage. Third parties could challenge our
patents, or could obtain patents that have a material adverse effect on our
ability to do business.

The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal and
factual questions. Patent law is still evolving in the scope of claims in the
technology area in which we operate. The degree of future protection for our
proprietary rights, therefore, is uncertain. We cannot guarantee that others
will not independently develop similar or alternative technologies. Other
parties may duplicate our technologies, or, if patents are issued to us, they
may design around the patented technologies we developed. 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. We have in the past, and we may in the future, be required to
dedicate significant management time and incur significant legal fees and
expenses to continue pursuit and settlement of this action. In addition, a
finding of non-infringement or declaration of invalidity of our patent could
hurt the exclusivity of our proprietary technology. Present and potential future
corporate partners may not collaborate with us if our intellectual property
position is weakened. In addition, a finding of noninfringement or declaration
of invalidity of our patent could lead to difficulties in obtaining future
financing.

We believe 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.

Any future claims against third parties or patent prosecutions could be time
consuming, result in costly litigation and divert our technical and management
personnel. We may not prevail in the 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 hurt our ability to develop future products.

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


                                       38




<PAGE>

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 on property that is situated on a
200-year-old lava flow adjacent to a dormant volcano. 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, conditions such
as consistent sunlight, high temperatures and the provision of uncontaminated
seawater 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, 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.

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, and can create costs and
delays. For example, tariff regulations, governmental controls and regulations,
political and economic instability or other trade restrictions can all lead to
increased costs of operation and possible loss of revenues.

Fluctuations in currency exchange rates could make our products more expensive
in some countries, resulting in the loss of customers in foreign 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. We cannot
ensure that our current product liability insurance, together with
indemnification rights under our existing license agreements and other
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 insured amounts.

BECAUSE OUR PRINCIPAL SHAREHOLDERS 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, 2001, our directors and executive officers, as a group,
beneficially own approximately 20.6% of the 122,134,419 outstanding shares of
our common stock. As a result, our officers and directors may be able to
strongly influence the actions of the Board of Directors and other matters
requiring approval of our shareholders. This concentration of ownership could
delay or prevent a change in control and may adversely affect the voting and
other rights of our shareholders. Our principal shareholders may have interests
that differ from our other shareholders, particularly in the context of
potentially beneficial acquisitions of our company by others. For example, to
the extent that these shareholders are our employees, they may be less inclined
to vote for acquisition of our company by others if that acquisition would
terminate their employment, diminish their responsibilities, or reduce their
compensation.


                                       39



<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 market for nutraceutical products is intense. Factors
affecting competition include financial resources, research and development
capabilities, and manufacturing and market experience and resources.

Our nutraceutical astaxanthin product will compete directly with the products of
at least three companies that sell a similar nutraceutical product. Itano of
Japan, currently produces an extract from Antarctic krill that is rich in
astaxanthin. This product is distributed in the United States. The other two
companies have a product that, like ours, is based on HAEMATOCOCCUS PLUVIALIS.
AstaCarotene of Sweden has produced and sold its nutraceutical astaxanthin for
several years, and has established a market in Europe. Cyanotech Corporation,
based in Hawaii, sells a competing nutraceutical astaxanthin product. Each of
these three companies may have technical, financial, management, marketing, and
sales resources and experience that are greater than ours. We expect our
nutraceutical astaxanthin product will compete on the basis of product quality,
price, proprietary position, and 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.

Competition in the world market for animal feed applications of astaxanthin is
strong and is expected to increase significantly in the near future. Our natural
astaxanthin product, the production and distribution of which we expect to
license exclusively to a third party, will compete directly or indirectly with
the synthetic astaxanthin product developed and marketed worldwide by
Hoffman-LaRoche. Additional competition will likely come from BASF, a large
German chemical company that recently started producing synthetic astaxanthin.
Likewise, products incorporating our natural astaxanthin will compete directly
with products incorporating the synthetic astaxanthin product. Both
Hoffman-LaRoche and BASF have a worldwide reputation and significantly greater
research and development, technical, financial, management, marketing and sales
resources than we do. Additionally, Hoffman-LaRoche has a dominant market share.

We anticipate that competition to develop microalgal 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 SYNTHETIC AND
NATURAL ASTAXANTHIN.

Our natural astaxanthin product competes directly or indirectly with synthetic
astaxanthin products, at least in markets for animal feed applications.
Similarly, products incorporating our natural astaxanthin will compete directly
with products incorporating the synthetic astaxanthin product. 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 $2,500 per
kilogram for more than a decade.



                                       40



<PAGE>

We do not know Hoffman-LaRoche's cost of production for synthetic astaxanthin or
how Hoffman-LaRoche will respond to the introduction of a competitive product
based on natural astaxanthin. Hoffman-LaRoche has significantly greater research
and development, technical, financial, sales and marketing resources than we do,
and it holds a commanding market share. We cannot guarantee that the market
price for synthetic astaxanthin will remain at $2,500 after the commercial
introduction of products that incorporate natural astaxanthin. Any significant
decrease in the market price for synthetic astaxanthin will likely have an
adverse effect on the market price for products incorporating our natural
astaxanthin. A substantial decrease in market price could limit or eliminate our
profitability, and could effectively remove us from the market.

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. Each existing or potential
microalgal product that we develop, produce, market or license presents unique
regulatory problems and risks. The problems and risks depend on product type,
its uses, and method of manufacture. For products used in human nutrition,
pharmaceuticals, or cosmetics, we may be required to develop and adhere to Good
Manufacturing Practices as required by the FDA, ISO standards as required in
Europe, and any other applicable standards. We began in early 1999 to develop a
program that will assure compliance with both GMP and ISO standards. Our goal is
to be certified fully compliant within one year. However, we cannot guarantee
that we will meet GMP and ISO qualifications. If we are unable to comply with
these practices and procedures, we may be unable to produce our current or
future products.

We are also subject to other federal, state and foreign laws, regulations and
policies, including those concerning labeling products, importing organisms, and
occupational safety. We have worked on compliance with foreign laws, regulations
and policies pertaining to our natural astaxanthin product for use in animal
feed. We have also been working with various consultants on compliance with FDA
regulations regarding our nutraceutical product line. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. Some of these changes,
particularly with respect to the FDA or other regulatory bodies, could be
retroactive. Changes like these could impact our ability to continue producing
current or future products. We cannot guarantee that any of our potential
products will satisfy applicable regulatory requirements.

BECAUSE WE ARE A LIFE SCIENCES COMPANY, 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 patent, by
               us or our competitors;
         o     publicity  regarding  actual or  potential  benefits  relating to
               products under development by us or our competitors;
         o     conditions  or  trends  in the  life  sciences  or  nutraceutical
               market;
         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   with  corporate
               partners.




                                       41

<PAGE>

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 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.

SHAREHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM THE ISSUANCE OF
REORGANIZATION STOCK IN CONNECTION WITH THE COMPANY'S PLAN OF REORGANIZATION, TO
BE PROPOSED TO CREDITORS IN THE FIRST QUARTER OF 2002.

In connection with the proposal and confirmation of a Plan of Reorganization,
the company's shareholders can be expected to be substantially diluted by the
issuance of Reorganization Shares to creditors, Chardan Ventures and other third
parties.

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

As of October 31, 2001, we had 122,134,419 shares of common stock outstanding.
Of these shares 79,737,000 have either been registered under the Securities Act
or are freely tradable without volume limitations under Rule 144(k) of the
Securities Act.

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.

If we raise additional funds by selling equity securities, the share ownership
of our existing investors could be diluted or the new equity purchasers may
obtain terms that are better than those of our current investors. 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
shareholders.

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

Our Articles of Incorporation authorize the issuance of up to 5,000,000 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 shareholder 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
shareholders. We have no present plans to issue any shares of preferred stock,
but those plans could change.



                                       42



<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

Audited balance sheet as of October 31, 2001 and the related statements of
operations and accumulated deficit, cash flows and stockholders' equity
(deficit) for the years ended October 31, 2001and 2000 together with related
notes and the report of Buttke Bersch & Wanzek, PC, independent auditors, appear
on pages F-1 through F-17 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 2001 or 2000.


                                    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 directors and
executive officers as of October 31, 2001.

------------------------ ----- ------------------------------------------------
NAME                      AGE              POSITION
------------------------ ----- ------------------------------------------------

Mark E. Huntley, Ph.D...  51   President, Chief Executive Officer
                               and Chairman of the Board
Earl S. Fusato..........  54   Chief Financial Officer, Secretary and Director
Martin Guerin...........  40   Vice-President, Sales and Marketing
David Tarnas............  40   Director
Richard Sherman.........  54   Director

HARRY DOUGHERTY is serving as interim CEO and President since December 2001. Mr.
Dougherty has 25 years of management experience. He was President of a large
retail organization from 1982 to 1987. He led an expansion of this company such
that sales increased from $8 million annually to an excess of $50 million. Mr.
Dougherty was elected President and CEO of a large Pennsylvania organization in
1987 and subsequently became the largest shareholder of this company. The
company was in bankruptcy at that time and successfully navigated it to annual
sales of $20 million. In 1990, he founded a new retail organization in
Connecticut and took it from inception to $5 million in annual sales in 1994. He
relocated to Hawaii in 1995 and acquired a bankrupt retail company of which he
still controls a significant portion. This company is now very successful and
has annual sales approaching $5 million. Mr. Dougherty majored in Physics at
Villanova University and Chemistry at the University of Delaware.


                                       43


<PAGE>


MARK E. HUNTLEY, PH.D., is one of our co-founders, a co-inventor of the
Aquasearch Growth Module and has served as our President, Chief Executive
Officer and Chairman of the Board from 1992 through December 2001. He also
currently holds a faculty research appointment at the School of Ocean and Earth
Sciences, University of Hawaii at Manoa. Dr. Huntley was a Research Biologist at
Scripps Institution of Oceanography, University of California, San Diego from
1980 to 1998. He has won numerous awards and grants in his field, published more
than 75 articles and a book, and lectured throughout the world. He served for 10
years on the Executive Committee of the Global Ocean Ecosystem Dynamics program
(1989-1999), a component of the United States Global Change Research Program,
and the only element of the International Geosphere-Biosphere Program that is
examining the impact of global climate change on marine ecosystems. Dr. Huntley
has served as an advisor to numerous international, national and state agencies,
including the United States Department of State, the United States Department of
the Interior and the White House Office of Science and Technology Policy. Dr.
Huntley received a B.Sc. degree (SUMMA CUM LAUDE) in Biological Oceanography
from the University of Victoria, Canada 1976 and a Ph.D. in Biological
Oceanography from Dalhousie University in Halifax, Canada in 1980.

EARL S. FUSATO has served as our Chief Financial Officer since April 1997. Mr.
Fusato served as chief financial officer for Resco, Inc., a Hawaii based real
estate firm from 1992 to 1994, and as a sales representative and consultant in
the real estate industry from 1994 to April 1997. During the period from 1983 to
1992, Mr. Fusato served in various financial positions with VeriFone, Inc.,
including Vice President, Finance from 1983 to 1987 and Treasurer from 1987 to
1990. Prior to that, Mr. Fusato spent 13 years as an auditor at KPMG Peat
Marwick, LLP and Ernst & Young, LLP. Mr. Fusato is a Certified Public
Accountant.

MARTIN GUERIN became our Vice-President, Sales and Marketing in January 1999. He
has international management experience with world leading groups in feed
production, feed and food ingredients, and aquaculture, with responsibilities in
R&D, marketing and sales, business development and profit center management. He
led the development of Aquastar Ltd. to become the second largest supplier of
shrimp feeds in Thailand, growing in three years to more than 200 employees and
$20 million in sales before being acquired by BP Nutrition in 1992. As Senior
Sales Manager for Champagnes Cereales, France, he built sales of starch
derivatives, sweeteners and other food ingredients (1992-94). For EWOS, the
world's second largest manufacturer of fish feeds, he devised and implemented
business development strategy in the Asia-Pacific region (1994-96). As Marketing
and Development Manager for Finnfeeds International, a Cultor company, he
developed a new business area in aquaculture feed ingredients (1996-99). Mr.
Guerin received his Baccalaureat from the Ecole Saint-Louis Gonzague in Paris,
France in 1981, his M.Sc. in Agricultural Science from the Institut National
Agronomique in Paris in1984, his M.Sc. in Aquaculture from Auburn University in
1986, and his M.B.A. from the University of Paris in 1988.

DAVID A. TARNAS, M.M.A. has served as a director since January 1999. He has
devoted his career to creating and advising on public policy in relation to
marine and coastal resources. As elected State Representative for the district
of North Kona-South Kohala, Mr. Tarnas was Chairman of the House Committee on
Ocean Recreation and Marine Resources (1994-98). His knowledge and leadership
are respected throughout the State of Hawaii. Mr. Tarnas has served as a policy
advisor to the U.S. government, and to national and local governments in
Malaysia, Thailand, Morocco, the Federated States of Micronesia, and countries
in East Africa and the Middle East on matters of marine and coastal resource
development. Mr. Tarnas is a director with Five Moutains Hawaii, and works with
the Earl and Doris Bakken Foundation on numerous community health related
projects and efforts to establish health and wellness industries on Hawaii
Island. Mr. Tarnas is President of Marine and Coastal Solutions International,
Inc. providing project management, planning and policy analysis consulting
services to private, corporate and governmental clients worldwide. Mr. Tarnas is
also Chief Executive Officer and Chairman of the Board of Phase Inc., a private
company specializing in water and wastewater treatment technology development. .


                                       44



<PAGE>


Mr. Tarnas received his Diplome, 2eme degre in Etudes francaises (French
Studies) from the University of Strasbourg, France in 1981, his B.A. in
Political Science from Kalamazoo College, Michigan, in 1982, and earned his M.A.
in Marine Affairs at the Institute for Marine Studies, University of Washington
in 1985.

RICHARD L. SHERMAN has served as a director since April 2001. Mr. Sherman is
currently founder and managing officer of QED Technologies, a consulting firm.
Mr. Sherman has more than 25 years experience in the bio-pharmaceutical
industry. He is a former deputy general counsel to SmithKline Beecham
Corporation where for 14 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 advice and counsel 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. Mr. Sherman is a director of Biophage, a
Montreal, Canada, biotechnology firm, and board member of the Pennsylvania
Biotechnology Association. He has served as director of IBAH, Inc. (now Omnicare
Clinical Research), and Sparta Pharmaceuticals, which was acquired by SuperGen
Inc. 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.

BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION

All directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors. There are no
family relationships among our directors or officers.

The Board of Directors currently has an Audit Committee and a Compensation
Committee, currently existing of David Tarnas. The Audit Committee oversees the
actions taken by our independent auditors and reviews our internal financial and
accounting controls and policies. The Compensation Committee is responsible for
determining salaries, incentives and other forms of compensation for our
officers, employees and consultants and administers our incentive compensation
and benefit plans.

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 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.


ITEM 10.  EXECUTIVE COMPENSATION

SUMMARY 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, 2001.


                                       45



<PAGE>

<TABLE>
<CAPTION>

      NAME AND POSITION         YEAR ENDED        SALARY/OTHER      STOCK AWARDS  NO. OF SECURITIES
                                OCTOBER 31,       COMPENSATION                    UNDERLYING OPTIONS
      -----------------         ----------        ------------      ------------  -----------------

<S>                            <C>          <C>                   <C>                 <C>
Mark E. Huntley, Ph.D.,            2001         $      119,000        $  0                0
President and Chief
Executive Officer
                                   2000         $      115,000        $  0                0
                                   1999         $      115,000        $  0            2,000,000


Earl S. Fusato,                    2001         $     110,000         $  0                0
Chief Financial Officer            2000         $     110,000         $  0                0
                                   1999         $     110,000         $  0                0

</TABLE>

OPTION GRANTS IN FISCAL 2001

No stock options were granted to our executive officers during the fiscal year
ended October 31, 2001.

<TABLE>
<CAPTION>

STOCK OPTIONS EXERCISED DURING FISCAL 2001

                                                                                    EXERCISE
                                SHARES ACQUIRED ON                             ------------------  -----------------
      NAME AND POSITION              EXERCISE             VALUE REALIZED             PRICE          DATE EXERCISED
      -----------------              --------             --------------             -----          --------------

<S>                               <C>                    <C>                     <C>                   <C>
Earl S. Fusato,
Chief Financial Officer             75,000 (1)               $27,000                 $0.36             Dec 2000

<FN>
(1)      Shares were acquired in satisfaction of certain notes payable to officer and accrued interest.
</FN>
</TABLE>

FISCAL YEAR-END OPTION VALUES

The following table shows information regarding the value of unexercised options
held by executive officers as of October 31, 2001:

<TABLE>
<CAPTION>

                                    NUMBER OF SECURITIES UNDERLYING              VALUE OF UNEXERCISED IN-THE-MONEY
                                          UNEXERCISED OPTIONS                               OPTIONS (1)
                                -----------------------------------------     -----------------------------------------
      NAME AND POSITION             EXERCISABLE         UNEXERCISABLE             EXERCISABLE         UNEXERCISABLE
------------------------------- -------------------- --------------------
<S>                                <C>                   <C>                     <C>                     <C>
Mark E. Huntley, Ph.D.,
President and Chief                  3,298,583             366,667                    $ 0                  $ 0
Executive Officer
Earl S. Fusato,
Chief Financial Officer              1,000,000                0                       $ 0                  $ 0

<FN>
 (1)     Value of unexercised options is based on the closing bid price of our
         common stock on the Nasdaq Electronic Bulletin Board on October 31,
         2001 ($0.145) minus the exercise price.
</FN>
</TABLE>


                                       46

<PAGE>


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, 2001.

EMPLOYMENT CONTRACTS

We do not currently have any employment contracts or change-in-control
arrangements with any director or executive officer. The Company expects to
enter into an Employment contract with Dr. Huntley as he assumes his new
position as Chief Technical Officer of the Company.

EMPLOYEE BENEFIT PLANS

1996 STOCK OPTION PLAN. In March 1996, the Board of Directors adopted the 1996
Stock Option Plan. The 1996 Stock Option Plan provides 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
is administered by the Board of Directors, except that with respect to option
grants to executive officers, the 1996 Stock Option Plan is administered by the
Compensation Committee of the Board of Directors. Options and stock purchase
rights granted under the 1996 Stock Option Plan will vest as determined by the
relevant administrator, and may accelerate and become fully vested in the event
we are acquired if so determined by the relevant administrator. The exercise
price of options and stock purchase rights granted under the 1996 Stock Option
Plan will be as determined by the relevant administrator, provided the exercise
price of incentive stock options is at least equal to the fair market value of
our common stock on the date of grant. The Board of Directors may amend or
modify the 1996 Stock Option Plan at any time. The 1996 Stock Option Plan will
terminate in March 2006, unless terminated earlier by the Board of Directors.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

We have adopted provisions in our Restated Articles of Incorporation that
eliminate the personal liability of our directors for monetary damages arising
from a breach of their fiduciary duties in certain circumstances, to the fullest
extent permitted by law. These provisions authorize us to indemnify directors
and officers to the fullest extent permitted by law. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.

Our Restated Articles of Incorporation provide that we shall indemnify our
directors and officers to the fullest extent permitted by Colorado law,
including circumstances in which indemnification is otherwise discretionary
under Colorado law. We have entered into indemnification agreements with our
officers and directors that contain provisions which may be broader than the
specific indemnification provisions contained in the Colorado Corporations Code.
These indemnification agreements require us, among other things, to indemnify
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers, other than liabilities arising
from willful misconduct of a culpable nature. These same agreements require us
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.

At present, there is no pending material litigation or proceeding involving any
of our directors or officers where indemnification will be required or
permitted. We are not aware of any threatened material litigation or proceeding
which may result in a claim for such indemnification. . Dr. Huntley is a named
defendant in a litigation filed on October 16, 2001 by C&J Distribution, a
purchaser of ASTAFACTOR(TM) product, in the Superior Court of California, San
Bernadino County, against the Company, Dr. Huntley 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. This litigation is expected to result in a claim for
indemnification by Dr. Huntley.




                                       47



<PAGE>

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 October 31, 2001 for: (1) each entity or
group that is known by us to beneficially own five percent or more of our common
stock; (2) each of our executive officers; (3) each of our directors; and (4)
our directors and executive officers as a group. To the best of our knowledge,
each shareholder 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. (2)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway, Suite 110
Kailua-Kona, Hawaii 96740.............................          Direct             7,316,519             5.8%

Earl S. Fusato (3)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway, Suite 110
Kailua-Kona, Hawaii 96740.............................          Direct            17,597,246            14.2%

Martin Guerin (4)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway, Suite 110
Kailua-Kona, Hawaii 96740.............................          Direct               278,605              *

David Tarnas (5)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway, Suite 110
Kailua-Kona, Hawaii 96740.............................          Direct               150,000              *

Richard Sherman
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway, Suite 110

Kailua-Kona, Hawaii 96740.............................          Direct                  0

All directors and executive officers as a group
   (5 persons) (6)....................................                            25,342,370            20.6%

----------------------------------------------------------
5% SHAREHOLDERS

Gregory F. Kowal (7)
900 Fort Street, #950
Honolulu, Hawaii 96822................................          Direct            15,960,941            14.4%

<FN>
*        Less than one percent

(1)      Applicable percentage of beneficial ownership is based on 122,134,419
         shares outstanding as of October 31, 2001. 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 October
         31, 2001 are deemed outstanding, but are not deemed outstanding for
         computing the percentage of any other person.
(2)      Includes options to purchase 1,665,250 shares of common stock at an
         exercise price of $0.0625 per share, with a term of seven years,
         payable by a promissory note payable over 3 years with interest at 5%
         per annum that are exercisable within 60 days of October 31, 2000. Also
         includes options to purchase 1,633,333 shares at an exercise price of
         $0.50 per share that are exercisable within 60 days of October 31,
         2001.
(3)      Includes options to purchase 1,000,000 shares of common stock at an
         exercise price of $1.00 per share that are exercisable within 60 days
         of October 31, 2001 and warrants to acquire 667,000 shares of common
         stock at $0.50 per share that are immediately exercisable.


                                       48


<PAGE>

(4)      Includes warrants to acquire 15,000 shares of common stock at $0.50 per
         share that are immediately exercisable. Also includes options to
         purchase 100,000 and 52,667 shares at an exercise price of $0.22 and
         $0.33 per share, respectively, that are exercisable within 60 days of
         October 31, 2001.
(5)      Includes options to purchase 50,000 shares of common stock at an
         exercise price of $0.25 that are immediately exercisable.
(6)      See notes 2-5 above.
(7)      Includes warrants to acquire 150,000 and 1,850,000 shares of common
         stock at $0.50 and $0.40 per share, respectively, that
         are immediately exercisable.
</FN>
</TABLE>


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the two years ended October 31, 2001, Mr. Kowal, the beneficial owner of
over 5% of our common stock purchased 7,833,334 shares of our 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.

In July 1998, we entered into a three-year loan agreement with David Watumull,
our Executive Vice-President of Strategic Development and Corporate Finance.
Under the terms of the loan agreement and the related promissory note, we loaned
Mr. Watumull $50,000, plus $3,500 per month for the life of the loan. The
promissory note has an interest rate of nine percent per annum and is secured by
Mr. Watumull's common stock options. Mr. Watumull resigned from the Company in
December 2000. In accordance with the terms of the promissory note, upon Mr.
Watumull's resignation the loan and accrued interest became due and payable
within 30 days. The loan is still outstanding at October 31, 2001.


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

3.1*            Articles of Incorporation
3.2+            Articles of Amendment to Articles of Incorporation dated October
                4, 1996
3.3***          Articles of Amendment to Articles of Incorporation filed March
                30, 2000
3.3A            Articles of Amendment to Articles of Incorporation dated October
                5, 2001
3.4*            By-laws
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
10.1#           Distribution and Development Agreement between Cultor, Ltd. and
                Aquasearch, Inc. dated May 14, 1996
10.2#           Stock Subscription Agreement between Cultor, Ltd. and
                Aquasearch, Inc. dated May 14, 1996
10.3+           The Amended Keahole Point Facilities Use Agreement dated August
                22, 1996 by and between The Natural 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


                                       49



<PAGE>


*        Incorporated by reference to the exhibit filed with our Annual Report
         on Form 10-KSB for the fiscal year ended October 31, 1995.
#        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 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 SB-2 filed October 28, 1998.
$        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.
##       Incorporated by reference to the exhibit filed with Amendment No. 1 to
         our Registration Statement on Form SB-2 filed November 9, 1999.
***      Incorporated  by  reference  to the exhibit  filed with  Post-Effective
         Amendment No. 1 to our Registration  Statement on Form SB-2 filed April
         28, 2000.


REPORTS ON FORM 8-K

No reports were filed during the last quarter of the year ended October 31,
2001.







                                       50



<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.

                                   AQUASEARCH, INC.


                                   /S/ HARRY DOUGHERTY
                                   -------------------------------------
                                   Harry Dougherty.
                                   Interim President and Chief Executive Officer

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/ DAVID TARNAS                                          February 13, 2002
------------------------------------
David Tarnas
Director, Chairman of the Board of Directors

/S/ MARK E. HUNTLEY                                       February 13, 2002
--------------------------------------------
Mark E. Huntley, Ph.D.
Director, Chief Technical Officer

/S/ EARL S. FUSATO                                        February 13, 2002
--------------------------------------------
Earl S. Fusato
Director

/S/ RICHARD SHERMAN                                       February 13, 2002
--------------------------------------------
Richard Sherman
Director











                                       51
<PAGE>


                              FINANCIAL STATEMENTS

                                AQUASEARCH, INC.


                                    Contents


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


Audited Financial Statements:


Balance Sheet as of October 31, 2001...............................F-3

Statements of Operations for the
Years Ended October 31, 2001 and 2000............................. F-4

Statements of Cash Flows for the Years Ended
October 31, 2001 and 2000..........................................F-5

Statements of Stockholders' Equity (Deficit) for the
Years Ended October 31, 2001 and 2000..............................F-6

Notes to Financial Statements......................................F-7








                                       F-1

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS




The Board of Directors
Aquasearch, Inc.


We have audited the accompanying balance sheet of Aquasearch, Inc. as of October
31, 2001, and the related statements of operations, stockholder's equity and
cash flows for each of the years in the two-year period ended October 31, 2001.
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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aquasearch, Inc. as of October
31, 2001 and the results of their operations and their cash flows for each of
the years in the two-year period ended October 31, 2001 in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and working capital deficit at October 31, 2001 raise
substantial doubt about its ability to continue as a going concern. The October
31, 2001 financial statements do not include any adjustments that might result
from the outcome of this uncertainty.



                                               /s/ Buttke, Bersch & Wanzek, P.C.
                                               ---------------------------------


Lake Havasu City, AZ
February 8, 2002



                                       F-2



<PAGE>


<TABLE>
<CAPTION>

                                AQUASEARCH, INC.

                                  BALANCE SHEET

                                OCTOBER 31, 2001


Assets
Current assets:
<S>                                                                      <C>
   Cash                                                                    $     47,398
   Accounts receivable                                                          101,625
   Inventories                                                                  535,461
   Prepaid expenses and other                                                     4,326
                                                                           ------------
Total current assets                                                            688,810

Plant and equipment:
   Plant                                                                      3,280,475
   Equipment                                                                  1,097,952
   Less accumulated depreciation                                               (928,633)
                                                                           ------------
Net plant and equipment                                                       3,449,794
                                                                           ------------
Total assets                                                               $  4,138,604
                                                                           ============


Liabilities and stockholders' equity Current liabilities:
   Accounts payable                                                        $  1,940,189
   Due to officer                                                               297,000
   Notes payable (NOTE 4)                                                     1,405,000
   Notes payable to officer (NOTE 4)                                            954,362
                                                                           ------------
Total current liabilities                                                     4,596,551

Stockholders' equity:
   Preferred stock (5,000,000 shares authorized) (NOTE 1) - Common stock
   ($0.0001 par value, 200,000,000 shares authorized, 122,134,419
     shares issued and outstanding at October 31, 2001                           13,335
   Additional paid-in capital                                                19,976,153
   Accumulated deficit                                                      (20,447,435)
                                                                           ------------
Total stockholders' deficit                                                    (457,947)
                                                                           ------------
Total liabilities and stockholders' deficit                                $  4,138,604
                                                                           ============

</TABLE>

SEE ACCOMPANYING NOTES.




                                      F-3

<PAGE>


<TABLE>
<CAPTION>

                                AQUASEARCH, INC.

                            STATEMENTS OF OPERATIONS


                                                               For the years ended October 31,
                                                           ----------------------------------------
                                                                  2001                2000
                                                           ----------------------------------------
<S>                                                       <C>                <C>
       Revenues:
       Products                                              $       547,868    $             -
       Contract services                                             256,607                  -
       Royalties                                                     228,169                  -
                                                           ----------------------------------------
       Total revenues                                              1,032,644                  -

       Costs and expenses:
       Cost of products sold                                         265,316                  -
       Cost of contract services                                     239,155                  -
       Research and development costs                              1,759,619          2,440,631
       Selling, general and administrative expenses                2,559,565          1,917,600
                                                           ----------------------------------------
       Total costs and expenses                                    4,823,655         (4,358,231)

       Loss from operations                                       (3,791,011)        (4,358,231)

       Other income (expense):
       Interest                                                     (300,560)          (492,232)
       Other                                                               -            224,228
                                                           ----------------------------------------
       Total other income (expense)                                 (300,560)          (268,004)
                                                           ----------------------------------------
                                                           ----------------------------------------
       Net loss                                              $    (4,091,571)   $    (4,626,235)
                                                           ========================================

       Loss per share                                        $         (0.04)   $         (0.05)
                                                           ========================================
                                                           ========================================
       Weighted average shares outstanding                       113,475,945        100,662,175
                                                           ========================================

</TABLE>

SEE ACCOMPANYING NOTES.




                                      F-4
<PAGE>



<TABLE>
<CAPTION>

                                AQUASEARCH, INC.

                            STATEMENTS OF CASH FLOWS


                                                                           For the years ended October 31,
                                                                       ----------------------------------------
                                                                              2001                2000
                                                                       ----------------------------------------

<S>                                                                      <C>                <C>
       Cash flows used in operating activities:
       Net loss                                                          $    (4,091,571)   $    (4,626,235)
       Adjustments to reconcile net loss to net cash used in operating
          activities:
           Depreciation                                                          266,631            248,758
           Allowance on note receivable from officer                              50,000             42,000
           Expenses paid with common stock                                       430,466            267,321
           Discount on convertible notes payable                                 153,582            381,893
           Changes in:
              Other current assets                                                10,610               (376)
              Receivables                                                        (89,269)            11,944
              Inventories                                                       (535,461)                 -
              Accounts payable                                                   768,224            276,971
              Due to officer                                                           -             55,200
                                                                       ----------------------------------------
                                                                       ----------------------------------------
       Cash used in operating activities                                      (3,036,788)        (3,342,524)

       Cash flows used in investing activities:
       Purchases of fixed assets                                                (269,156)          (253,665)
                                                                       ----------------------------------------
       Cash used in investing activities                                        (269,156)          (253,665)

       Cash flows from financing activities:
       Decrease (increase) in notes receivable                                         -            (13,046)
       Proceeds from issuance of common stock                                  1,647,087            634,575
       Proceeds from short-term advances                                        (500,000)           500,000
       Proceeds from notes payable                                             1,807,087          3,194,063
       Repayment of notes payable                                                      -           (105,285)
       Offering costs                                                           (110,324)          (195,148)
                                                                       ----------------------------------------
       Cash provided by financing activities                                   2,843,850          4,015,159
                                                                       ----------------------------------------

       Net increase (decrease) in cash                                          (462,094)           418,970
       Cash, beginning of the period                                             509,492             90,522
                                                                       ----------------------------------------
       Cash, end of the period                                            $       47,398    $       509,492
                                                                       ========================================

       Supplemental non-cash information:
          Conversion of convertible notes payable to common stock
                                                                          $    1,112,087    $     3,209,063
          Increase (reduction) in notes payable to officer and related
            interest for exercise of stock options                               196,943           (513,000)

</TABLE>


SEE ACCOMPANYING NOTES


                                      F-5
<PAGE>



<TABLE>
<CAPTION>

                                AQUASEARCH, INC.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


                                                                             Common Stock
                                 ---------------------------------------------------------------------------------------------------
                                                                                                                         Total
                                                                      Additional                                      Stockholders'
                                  Number of Shares                     Paid-in           Notes        Accumulated   Equity (Deficit)
                                                        Amount         Capital        Receivable        Deficit
                                  --------------------------------------------------------------------------------------------------

<S>                                  <C>          <C>            <C>             <C>              <C>              <C>
Balance, October 31, 1999               87,060,501   $       9,829  $  12,262,839   $      (58,133)  $  (11,729,586)  $     484,949
Issuance of stock on conversion
   of convertible notes payable
   ($0.13 to $1.26 per share)
                                        14,062,275           1,403      3,149,291                -                -       3,150,694
Sales, grants, and issuance of
   stock upon exercise of stock
   options ($0.15 to $0.58 per
   share)                                3,939,300             394        913,520                -                -         913,914
Issuance of stock upon exercise
   of warrants ($0.50 per share)
                                           527,000              53        263,447               -                 -         263,500
Payment on notes receivable
   issued upon exercise of
   common stock options                          -               -              -          28,954                 -          28,954
Discount on convertible notes
   payable (NOTE 4)                              -               -        381,893                -                -         381,893
Loss for the year ended
   October 31, 2000                              -               -              -                -       (4,626,235)     (4,626,235)
                                  --------------------------------------------------------------------------------------------------

Balance, October 31, 2000              105,589,076   $      11,679  $  16,970,990   $      (29,179)  $  (16,355,821)  $     597,669
                                  --------------------------------------------------------------------------------------------------
                                  --------------------------------------------------------------------------------------------------
Issuance of stock on conversion
   of convertible notes payable
   ($0.14 to $0.44 per share)
                                         5,470,343             547      1,128,432                -                -       1,128,979
Sales, grants, and issuance of
   stock upon exercise of stock
   options ($0.10 to $0.36 per
   share)                               11,075,000           1,109      1,733,736                -                -       1,734,845
Payment on notes receivable
   issued upon exercise of
   common stock options                          -               -              -          29,179                 -          29,179
Discount on convertible notes
   payable (NOTE 4)                              -               -        142,995                -                -         142,995
Loss for the year ended
   October 31, 2001                              -               -              -                -       (4,091,571)     (4,091,571)
                                  --------------------------------------------------------------------------------------------------

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

</TABLE>

SEE ACCOMPANYING NOTES.



                                      F-6
<PAGE>


                                AQUASEARCH, INC.
                          NOTES TO FINANCIAL STATEMENTS

                            OCTOBER 31, 2001 AND 2000

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Aquasearch, Inc., a Colorado corporation founded in February 1988, develops and
commercializes natural products from microalgae using its proprietary,
large-scale photobioreactor technology known as the Aquasearch Growth Module.
The Company's operations are located in Kailua-Kona, Hawaii.

Microalgae are a diverse group of over 30,000 species of microscopic plants that
have a wide range of physiological and biochemical characteristics. Many of
these are known to contain valuable substances that have existing 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.

In June 1999, the Company completed the expansion of its research and
development facility to include a three-acre production and processing plant.
Aquasearch's first commercial product is 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. Beginning fiscal 2001, the Company is no longer in the development
stage.

BASIS OF PRESENTATION

On October 30, 2001, certain unsecured creditors of the Company filed a petition
for involuntary bankruptcy under chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of Hawaii. 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.
Aquasearch, Inc. expects to submit for approval by the Bankruptcy Court and the
Company's creditors, a proposed Plan of Reorganization within the 120 day
exclusivity period allowed under the bankruptcy rules.

The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 filing and circumstances relating to this event, such
realization of assets and liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter 11, the Company may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for amounts
other than those reflected in the financial statements. Further, a plan of
reorganization could materially change the amounts reported in the financial
statements, which do not give effect to all adjustments of the carrying value of
assets or liabilities that might be necessary as a consequence of a plan of
reorganization.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid debt securities purchased with original or remaining maturities of three
months or less to be cash equivalents.


                                      F-7
<PAGE>


                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market. The
Company intends to determine cost on a first-in, first-out basis. At October 31,
2001, inventories consisted of $522,000 of work in process and $13,000 of
finished goods and are stated at net realizable value.

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.

PREFERRED STOCK

The Company has authorized 5,000,000 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, 2001.

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.



                                      F-8



<PAGE>
                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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.

NET LOSS PER SHARE

Net loss per share was based on the weighted average common shares outstanding
during the period. Common shares issuable upon exercise of outstanding warrants,
options and convertible notes payable have not been included in the computation
of net loss per share as their effect would be anti-dilutive.

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.

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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform with the 2000
presentation.

2. COMMON STOCK AND COMMON STOCK WARRANTS

In June 2000, the Company entered into a common stock purchase agreement with
Alpha Venture Capital, Inc., a Cook Islands corporation, under which the Company
agreed to sell and Alpha Venture Capital agreed to purchase up to $10 million of
the Company's common stock. The agreement requires the Company to reserve a
total of 20 million shares of common stock for issuance pursuant to the purchase
agreement. The Company filed a registration statement on July 13, 2000 with the
SEC covering the resale of the common stock purchased by Alpha Venture Capital.
The agreement expires 18 months after the initial draw or the date at which an
aggregate of $10 million of common stock has been sold to Alpha Venture Capital.


                                      F-9
<PAGE>

                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3.  COMMON STOCK AND COMMON STOCK WARRANTS (CONTINUED)

The minimum amount of each draw under the equity line is $100,000. The maximum
amount that can be drawn is the lesser of 200% of the average trading volume of
the 20 consecutive trading days ending on the day before the closing date of the
draw or $1 million. The share purchase price for each draw is equal to 80% of
the lowest closing bid price during any of the five business days immediately
following the draw notification to Alpha Venture Capital. A commitment fee, in
the amount of 5% of the draws on the first $5 million and 3% of the draws on the
remaining $5 million, will be paid to Alpha Venture Capital.

The Company is under no obligation to use the equity line. During October 2000,
the Company received a total of $500,000 of short-term advances from Alpha
Venture Capital. The advances are unsecured, bear no interest, and will be
repaid from the initial draw under the equity line.

In January 2001, the Company entered into an agreement to modify certain terms
of the common stock purchase agreement with Alpha Venture Capital. The common
stock purchase agreement was amended to remove the exclusivity and penalty
provisions, release shares presently reserved for future issuance under the
equity line, and adjust the purchase price calculation of future draws. As part
of this modification a $560,000 draw was made under equity line resulting in
Alpha Venture Capital acquiring 3,500,000 shares of our common stock at $0.16
per share and issued warrants to purchase of 150,000 shares of common stock at
$0.48 per share and warrants to purchase 1,350,000 shares of common stock at
$0.54 per share. The warrants have a term of five years.

Shares of common stock issuable upon exercise of outstanding warrants, options
and convertible notes payable as of October 31, 2001 are as follows:


<TABLE>
<CAPTION>

    <S>                                                                           <C>
       Stock options granted to current and former directors, executive
         officers, employees and consultants (NOTE 3)                                 13,916,468
       Warrants outstanding by range of exercise price:
         $0.25 to $0.28                                                                1,680,000
         $0.38 to $0.40                                                                3,825,000
         $0.48 to $0.54                                                                4,722,591
         $0.75                                                                           627,475
          $1.00                                                                          509,394
         $1.50                                                                           134,454
       Shares issuable upon conversion of outstanding convertible
          notes payable                                                                1,555,094
       Warrants (@ $0.50) issuable upon conversion of outstanding convertible
         notes payable                                                                   383,476
                                                                               -------------------
                                                                                      27,353,952
                                                                               ===================

</TABLE>

                                      F-10

<PAGE>

                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. COMMON STOCK OPTIONS

In November 1999, the Company granted nonstatutory stock options to 18 employees
for a total of 779,772 shares of the Company's common stock at an exercise price
of $0.33 per share. The options vest over a period of five years and have a term
of ten years.

During the year ended October 31, 2000, the Company granted nonstatutory stock
options to four employees and two non-employees for a total of 575,000 shares of
the Company's common stock with exercise prices ranging from $0.25 to $0.83 per
share. The options vest over three to five years and have a term of seven years.

In October 2000, the Company granted a nonstatutory stock option to one of its
officers for 500,000 shares of the Company's common stock at an exercise price
of $0.34 per share. The option vests over a period of five years and has a term
of ten years.

From October 2000 through April 2001, an officer/director of the Company
exercised options for a total of 1,500,000 shares of common stock at an exercise
price of $0.36. The shares were acquired in satisfaction of certain notes
payable to officer and accrued interest.

During the year ended October 31, 2001, the Company granted nonstatutory stock
options to two employees and a corporation for a total of 1,600,000 shares of
the Company's common stock with exercise prices ranging from $0.28 to $0.75 per
share. The options vest at the time of grant to five years and have a term of
two to ten years.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION (Statement 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

Stock options issued to non-employees for services were at exercise prices at or
above market at the dates of grant and the Company believes the fair value of
these options were not material to the financial statements.

Pro forma information regarding net loss and net loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:


                                      F-11
<PAGE>
                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3. COMMON STOCK OPTIONS  (CONTINUED)

                                                 2001             2000
                                          ------------------------------------
      Risk-free interest rate                      6%                6%
      Expected dividend yield                      0%                0%
      Expected life                           5 years           5 years
      Expected volatility                        0.65              0.98

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The effect of applying
Statement 123 on pro forma net loss for the years ended October 31, 2001 and
2000 are not likely to be representative of the effects for future years since
the 2001 and 2000 pro forma net loss amounts reflect expense for only one year
of vesting. The Company's pro forma information follows:

                                          2001              2000
                                  ------------------ -----------------
       Net loss:
          As reported               $    4,091,571     $   4,626,235
          Pro forma                 $    4,280,303     $   4,929,396
       Loss per share:
          As reported               $        0.04      $       0.05
          Pro forma                 $        0.04      $       0.05

A summary of the Company's stock option activity, and related information for
the years ended October 31, 2001 and 2000 follows:

                                       2001                       2000
                            ----------------------------------------------------
                                          Wtd-Avg Ex                Wtd-Avg Ex
                              Options        Price       Options       Price
                            ----------------------------------------------------
  Outstanding,
    beginning of year        14,092,418     $  0.33     13,776,238    $  0.32
  Granted                     1,600,000        0.24      1,904,772       0.43
  Exercised                     (75,000)       0.36     (1,457,342)      0.36
                            ---------------
  Forfeited                  (1,700,950)       0.21       (131,250)      0.52
                            ---------------
                                                     ----------------
  Outstanding, end of year   13,916,468     $  0.33     14,092,418    $  0.33
                            ===============          ================

  Exercisable, end of year   10,400,670     $  0.32     10,199,435    $  0.31



                                      F-12
<PAGE>


                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3. COMMON STOCK OPTIONS  (CONTINUED)

Weighted-average exercise prices and fair values of options issued during the
years ended October 31, 2001 and 2000 with exercise prices which equaled or
exceeded the market prices of the Company's stock on the grant date follows:


<TABLE>
<CAPTION>

                                                     2001                              2000
                                  ------------------------------------  -----------------------------------
                                                     Weighted-Avg                        Weighted-Avg
                                                  --------------------               ----------------------
                                                     Ex.       Fair                     Ex.        Fair
                                      Options       Price     Value       Options      Price      Value
                                  ------------------------------------  -----------------------------------
<S>                                <C>         <C>        <C>         <C>         <C>          <C>
 Options whose exercise price
  equaled the market price of
  the stock on the grant date         1,400,000   $  0.28    $  0.17     1,829,772   $    0.43    $  0.32
Options whose exercise price
  exceeded the market price of
  the stock on the grant date         200,000        0.53       0.06        75,000         0.25      0.09
                                                                        -------------
                                  ----------------
Options issued during the year       1,600,000                           1,904,772
                                  ================                      =============
</TABLE>

The following summarizes information about the Company's stock options
outstanding at October 31, 2001:

<TABLE>
<CAPTION>

                         Options Outstanding Options Exercisable
                      -------------------------------------------------  -------------------------------------
                                           Wtd-Avg
                                          Remaining        Wtd-Avg                          Wtd-Avg Exercise
  Range of Exercise                      Contractual   Exercise Price                            Price
        Prices             Number           Life                              Number
 ----------------------------------------------------------------------  -------------------------------------

<S>                   <C>             <C>            <C>                <C>              <C>
 $0.06 to $0.22           5,209,824       1.3 years      $      0.08        5,044,834        $        0.07
 $0.25 to $0.40           3,508,986          8.2                0.29        1,130,860                 0.29
 $0.50 to $1.00           5,205,000          5.0                0.62        4,174,976                 0.63
                      -----------------                                  ------------------
                         13,923,810                                        10,350,670
                      =================                                  ==================

</TABLE>

4. NOTES PAYABLE

Notes payable consisted of the following at October 31, 2001:

                                                                        2001
                                                                     --------
  One-year convertible notes, unsecured, bearing interest at
    10% per annum payable at the earlier of conversion or maturity  $  355,000
  90 day short-term bridge financing notes, unsecured, bearing
    interest at 10% per annum.                                         350,000
  90 day short-term bridge financing notes, bearing interest
     at 12% per annum.                                                 400,000


                                      F-13
<PAGE>
                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


4. NOTES PAYABLE (CONTINUED)

  One-year bank loan, unsecured, bearing interest at 2.5% above
    the bank's prime rate (8.5% at October 31, 2001)                   100,000
  One-year bank loan, guaranteed by two of the Company's
     officers, bearing interest at 3% above the bank's prime rate
     (8.5% at October 31, 2001)                                        200,000
                                                                  -------------
  Total notes payable                                              $ 1,405,000
                                                                  =============

  90 and 180 day notes payable to an officer of the Company,           200,000
     unsecured, bearing interest at 10% per annum
  One-year notes payable to an officer of the Company, unsecured,
     bearing interest at 10% per annum                                 754,362
                                                                  -------------
  Total notes payable to officer                                   $   954,362
                                                                  =============

Under the $350,000 of 90-day short-term bridge financing, in the event of
default, the holder of the notes may elect to receive in lieu of the outstanding
principal and any unpaid accrued interest, shares of our common stock at $0.125
per share. In addition, upon the increase in the number of authorized shares of
our common stock from 150 million to 200 million, the note holder will receive a
warrant to purchase 300,000 shares of our common stock. The warrant will have an
exercise price of $0.375 per share and a term of three years.

Under the terms of the $100,000 of 90-day short-term bridge financing, in the
event of default, the holder of the note may elect to receive in lieu of the
outstanding principal and any unpaid accrued interest, shares of our common
stock at $0.147 per share. In addition, upon the increase in the number of
authorized shares of our common stock from 150 million to 200 million, the note
holder will receive a warrant to purchase 680,000 shares of our common stock.
The warrant will have an exercise price of $0.275 per share and a term of three
years.

Under the terms of the $200,000 of 90-day short-term bridge financing the note
is to be collateralized by our astaxanthin and THE ASTAFACTOR(TM) revenues and
inventory. In addition, upon the increase in the number of authorized shares of
our common stock from 150 million to 200 million, the note holder will receive a
warrant to purchase 1,000,000 shares of our common stock. The warrant will have
an exercise price of $0.254 per share and a term of three years.

Interest expense incurred on the above notes totaled approximately $148,000 and
$130,000 for the years ended October 31, 2001 and 2000, respectively. Since
inception, interest incurred has been settled through the issuance of common
stock.

During the two years ended October 31, 2001, the Company issued a total of
approximately $3.0 million in principal amount of convertible notes to
"accredited investors" in private placements. The principal and any accrued
interest are convertible for a period of six months from the date of the note
into shares of the Company's common stock at a 15% discount to the market price
of the stock on the issuance date of the

                                      F-14
<PAGE>

                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


4. NOTES PAYABLE (CONTINUED)

note. The convertible notes also provide for the holders to receive warrants to
purchase shares of common stock ranging from $0.375 to $2.00 per share in a
total amount equal to the dollar amount of the note upon conversion or 40% of
the dollar amount of the note if not converted. The warrants have a term of
three years.

The following summarizes convertible notes payable transactions during the two
years ended October 31, 2001:

<TABLE>
<CAPTION>

                                                     Principal                 Upon Conversion
                                                                    --------------------------------------
                                                  Amount of Notes    Number of Shares      Number of
                                                                          Issued            Warrants
                                                 ---------------------------------------------------------
<S>                                              <C>                  <C>                <C>
     Balance at October 31, 1999                   $     130,000
     Convertible notes sold                            2,164,063
     Notes converted                                  (2,204,063)          7,234,660          2,593,337
                                                 ------------------
     Balance at October 31, 2000                   $      90,000
     Convertible notes sold                              825,300
     Notes converted                                    (560,300)          2,923,203            560,300
                                                 ------------------
                                                 ------------------
     Balance at October 31, 2001                   $     355,000
                                                 ==================

</TABLE>

During 2000 convertible notes payable to officer amounting to $1,005,000 were
converted. As part of the conversion, 6,827,616 shares and 402,000 warrants were
issued. There were no similar transactions in 2001.

Interest expense for the years ended October 31, 2001 and 2000 includes
approximately $154,000 and $380,000, respectively, of discount on convertible
notes payable resulting from the difference between the conversion price and the
fair value of the common stock underlying the convertible notes on their
respective issuance dates.

5. RELATED PARTY TRANSACTIONS

During the two years ended October 31, 2001, Mr. Kowal, the beneficial owner of
over 5% of our common stock purchased 7,833,334 shares of our 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.

In July 1998, the Company entered into a loan agreement with one of its
officers. Under the terms of the agreement, the Company loaned the officer
$50,000 plus $3,500 per month for the life of the loan. The loan has an interest
rate of 9% per annum and a term of three years. The loan is secured by the
officer's common stock options. The officer resigned from the Company in
December 2000. In accordance with the terms of the promissory note, upon the
officer's resignation the loan and accrued interest became due and payable
within 30 days. The loan is still outstanding at October 31, 2001.

Due to officer represents unpaid compensation owed to an officer/director of the
company.


                                      F-15

<PAGE>

                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


6. INCOME TAXES

Since its formation the Company has incurred net operating losses. As of October
31, 2001, the Company had a net operating loss carryforward available to offset
future taxable income for federal and state income tax purposes of approximately
$17.3 million. The net operating loss carryforward for tax reporting purposes
expires in the years from 2001 to 2020. The Company also has a research credit
carryover approximating $300,000 which expires between the years 2003 and 2020.

Deferred income taxes are the result of provisions of the tax laws that either
require or permit certain items of income or expense to be reported for tax
purposes in different periods than they are reported for financial reporting
purposes. The primary component of the Company's deferred income taxes relate to
its net operating loss carryforward of approximately $17.3 million.

No deferred tax benefit or liability has been recorded for temporary differences
between book and tax reporting due to the uncertainty of any eventual recovery
or payment.

7.  CUSTOMER CONCENTRATION

Sales to major customers for the years ended October 31, 2001 for Customer A, B
and C amounted to 35%, 12% and 7% of product sales.

8. SETTLEMENT WITH CYANOTECH

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.

The Company on September 11, 1998, 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.

The Company on March 6, 2001, 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 microalgal
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-16


<PAGE>

                                AQUASEARCH, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


9.       LEGAL PROCEEDINGS

On October 29, 2001 certain creditors of the Company filed an involuntary
petition, under Chapter 11 of the United States Bankruptcy Code, in United
States Bankruptcy Court, District of Hawaii (case 01-04260) against the Company.
On November 30, 2001, the company stipulated to the entry of an Order for
Relief, agreeing to the jurisdiction of the Bankruptcy Court for purposes of
resolving the petition that had been filed. On December 3, 2001, the Company's
motion to the Bankruptcy Court to incur indebtedness was granted, and Aquasearch
entered into a Debtor-in-Possession financing arrangement. Since that date,
Aquasearch has continued operations utilizing Debtor-in-Possession financing
provided by Chardan Ventures, a California venture group. Aquasearch expects to
submit for approval by the Bankruptcy Court and the Company's creditors, a
proposed Plan of Reorganization within the 120 day exclusivity period allowed
under the bankruptcy rules. In addition, each of the Company's existing
contractual relationships with third parties is subject to assumption or
rejection by the Company on petition to the Bankruptcy Court or in the Plan of
Reorganization. If a Plan of Reorganization is not confirmed by the Bankruptcy
Court the proceedings may be converted to a liquidation proceeding under Chapter
7 of the Bankruptcy code, a trustee appointed and the assets of the Company
liquidated. Alternatively, the bankruptcy proceedings could be dismissed and
subsequent sale or other liquidation of the Company could occur.

In addition, a complaint was filed on October 11, 2001 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(TM) 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. Both of these lawsuits have been
stayed as to the Company by the pendancy of the bankruptcy proceeding.

10. COMMITMENTS

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 approximately $550,000 over the initial two-year term for maintenance
and research work on the collection. The license agreement provides for
royalties to be paid to the university on income from commercialization of
products developed from the collection.



                                      F-17