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

                                 FORM 10-KSB

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                    THE SECURITIES EXCHANGE ACT OF 1934

          FOR THE FISCAL YEAR                   COMMISSION FILE 
         ENDED OCTOBER 31, 1996                NUMBER: 33-23460-LA

                               AQUASEARCH, INC.
             (Exact name of Registrant as specified in its charter)

              COLORADO                             33-0034535
      (State of 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 under Section 12(b) of the Exchange Act:  None

     Securities registered under Section 12(g) of the Exchange Act:  None

     Check whether issuer (1) has filed all reports required to be filed by 
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 [ X ] Yes [   ] No.

     Check if there is no disclosure of delinquent filers in response 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: $10,000

     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 of a specified date within the 
past 60 days was $15,515,146 as of October 31, 1996.

     The number of shares outstanding of each of issuer's classes of common 
equity, as of October 31, 1996, was 40,829,331 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 (THE "ANNUAL REPORT") CONTAINS CERTAIN 
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE 
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, (THE "EXCHANGE ACT"), INCLUDING 
STATEMENTS THAT INDICATE WHAT THE COMPANY "BELIEVES", "EXPECTS" AND 
"ANTICIPATES" OR SIMILAR EXPRESSIONS.  THESE STATEMENTS INVOLVE KNOWN AND 
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL 
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY 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.  THE READER IS 
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, 
WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL 
REPORT.  THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS 
OF ANY REVISION OF THESE FORWARD-LOOKING STATEMENTS.  THE READER IS 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.

BACKGROUND

     Aquasearch, Inc. ("Aquasearch" or the "Company")  is a development stage 
company that is developing a proprietary, photosynthetic, closed-system known 
as the Aquasearch Growth Module (the "AGM") to cultivate microalgae.  The 
Company was founded in February 1988 as a Colorado corporation and acquired 
all the assets of Aquasearch, Inc., a California corporation, in May 1988 in 
a stock-for-stock exchange.  The Company commenced operations in Borrego 
Springs, California and developed its first prototype of the AGM in the 
summer of 1988.  During the period from the summer of 1988 until March 1993, 
the Company conducted additional research and development to refine its 
production technology.

     In March 1993, the Company formed a joint venture company with Cyanotech 
Corporation ("Cyanotech"), an unaffiliated producer of microalgae, to produce 
astaxanthin-rich microalgae.  Aquasearch contributed approximately $147,000 
in capital to the joint venture company and licensed its AGM technology to 
the joint venture company.  Cyanotech contributed approximately $15,000 in 
capital to the joint venture company and made available its facilities and 
personnel at the Hawaii Ocean Science and Technology ("HOST") Business Park 
at Keahole Point, Kailua-Kona, Hawaii.  AGMs were constructed in July 1993 
which demonstrated the economics of the production process and provided 
samples of astaxanthin-rich microalgae for analysis and trial applications.

     In the summer of 1994, Aquasearch initiated discussions with Cultor Ltd. 
("Cultor") regarding the purchase of astaxanthin-rich microalgae.  While 
awaiting a response from Cultor, Cyanotech elected to discontinue its 
participation in the joint venture company and the joint venture agreement 
was terminated by mutual

                                     -2-
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consent in November 1994.  The dissolution agreement provided that all 
intellectual property rights to the AGM technology reverted to Aquasearch.

     In December 1994, Cultor initiated a series of feeding trials with 
farmed salmon using astaxanthin-rich microalgae produced by the Company.

     In April 1995, the Company leased a half-acre site within the HOST 
Business Park and began construction of a small research and development 
facility capable of producing small amounts of microalgae containing 
astaxanthin for marketing purposes.  This half-acre facility, comprised of 
AGMs and an operating laboratory, was completed in June 1995.

     In July 1995, the Company entered into a Supply Agreement (the "Svenska 
Foder Supply Agreement") with Svenska Foder ("Svenska Foder"), then a 
subsidiary of Cultor, pursuant to which Svenska Foder agreed to act as the 
exclusive distributor of the Company's natural astaxanthin product for animal 
feed and animal nutrition applications in Sweden, Norway and Finland for 
poultry, pigs, cattle and horses.  In December 1996, Cultor sold its majority 
stake in Svenska Foder and acquired all of Svenska's Foder rights in the 
Svenska Foder Supply Agreement.

     In July 1995, the Company leased additional space in the HOST Business 
Park to expand its half-acre research and development facility to a one-acre 
research and development/production facility.  Construction of the one-acre 
research and development/production facility was completed in October 1995.

     In May 1996, the Company entered into a three-year Distribution and 
Development Agreement with Cultor (the "Cultor Distribution and Development 
Agreement") pursuant to which the Company will act as the exclusive worldwide 
supplier of natural astaxanthin derived from microalgae to Cultor in the 
field of animal feed and animal nutrition and Cultor will act as the 
exclusive worldwide distributor of Aquasearch's natural astaxanthin product 
in the field of animal feed and animal nutrition.  Under the Cultor 
Distribution and Development Agreement, Cultor and Aquasearch may, at 
Cultor's option, mutually develop a new joint venture company for the sole 
purpose of producing and selling natural astaxanthin derived from microalgae 
in the field of animal feed and animal nutrition.  The terms of the Cultor 
Distribution and Development Agreement are more fully described below under 
the caption "Corporate Partner Relationships - Cultor."

     The Company believes that strategic relationships and collaborations 
will continue to be an important part of its business strategy.  There can be 
no assurance that the Company will be able to maintain existing corporate 
partner relationships, enter into future relationships to develop additional 
applications for natural astaxanthin or to develop new microalgae products or 
that any such relationships will be successful.


                                     -3-
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SUMMARY DESCRIPTION OF BUSINESS

     Aquasearch develops and commercializes natural products from microalgae 
using its proprietary, photosynthetic, closed-system technology known as the 
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.

     Aquasearch believes that its AGM platform technology can be used to 
cultivate hundreds of species of microalgae.  The AGM utilizes 
computer-controlled equipment to monitor and adjust the turbulence rate, pH, 
gas exchange, temperature and nutrient levels within the AGM to optimize 
microalgae growth rates.  Aquasearch believes that the AGM offers significant 
technical and economic advantages compared with the open pond systems 
currently used by certain competitors, including increased yields and the 
ability to economically cultivate hundreds of microalgal species at 
commercial scale that cannot be produced in open pond systems due to 
substantially higher risks of contamination and lack of control.  Aquasearch 
also believes that the AGM compares favorably with other known closed systems 
with respect to both capital and operating costs.  Notwithstanding these 
perceived advantages of the Company's technology, the production of various 
species of microalgae on a commercial scale involves various risks and 
uncertainties.

     Aquasearch's first commercial product is astaxanthin, a naturally 
occurring red pigment derived from HAEMATOCOCCUS PLUVIALIS, a freshwater 
microalga.  The primary market for astaxanthin currently is aquaculture.  
According to the most recent published data available from the Food and 
Agricultural Organization of the United Nations (the "UN-FAO"), the global 
aquaculture market steadily doubled in value from $13 billion in 1985 to $26 
billion in 1990, and is projected to grow to more than $50 billion by the 
year 2000.  UN-FAO data also indicates that farmed salmon and shrimp (the 
fastest and fourth fastest growing aquaculture products) will account for 
more than half the total value of world aquaculture production by the year 
2000.  Free swimming salmon and shrimp acquire pink flesh from natural 
astaxanthin contained in microalgae and other species ingested in the wild.  
Farmed salmon and shrimp, however, currently acquire pink flesh only from the 
addition of synthetic astaxanthin (or a less effective substitute product) to 
their feed.  The world market for astaxanthin in aquaculture is estimated to 
be approximately $125 million in 1996, and continued growth is expected.

     Aquasearch believes it is the first company to develop technology to 
produce commercial quantities of natural astaxanthin from microalgae at 
economically viable production costs.  The world market for astaxanthin is 
currently dominated by a single producer, Hoffman-LaRoche, which has 
maintained the market price of its synthetic astaxanthin product (which is 
derived from petrochemicals) at approximately $2,500 per kilogram for more 
than a decade. Aquasearch's natural astaxanthin product will compete directly 
with Hoffman-LaRoche's synthetic astaxanthin product.  There can be no 
assurance 


                                     -4-
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that the market price of synthetic astaxanthin will be maintained at 
historical levels or what effect this may have on the market price of 
Aquasearch's natural astaxanthin product.

     In May 1996, the Company entered into a three-year Distribution and 
Development Agreement with Cultor pursuant to which the Company will act as 
the exclusive worldwide supplier of natural astaxanthin derived from 
microalgae to Cultor in the field of animal feed and animal nutrition and 
Cultor will act as the exclusive worldwide distributor of Aquasearch's 
natural astaxanthin product in the field of animal feed and animal nutrition. 
Under the Cultor Distribution and Development Agreement, Cultor and 
Aquasearch may, at Cultor's option, mutually develop a new joint venture 
company for the sole purpose of producing and selling natural astaxanthin 
derived from microalgae in the field of animal feed and animal nutrition.  
The terms of the Cultor Distribution and Development Agreement are more fully 
described below under the caption "Corporate Partner Relationships - Cultor."

INDUSTRY BACKGROUND

     Microalgae have the following properties that make their commercial 
production attractive: (i) microalgae grow ten times faster than sugar cane, 
the fastest growing land-based crop (which makes it possible to harvest new 
crops every two to three days utilizing optimal culture and processing 
technologies), (ii) microalgae have a uniform cell structure with no bark, 
stems, branches or leaves (which permits easier extraction of products and 
higher utilization of cells and makes it practical to manipulate and control 
growing conditions in order to optimize particular cell characteristics), 
(iii) microalgae naturally produce many different and unusual fats, sugars, 
proteins, amino acids, vitamins, enzymes, pigments and other bioactive 
compounds and (iv) the raw materials required for microalgae growth are 
abundant and include sunlight, carbon dioxide and nitrogen.

     Existing and potential commercial applications for microalgae include 
animal and human nutrition, natural food colorings, cosmetics ingredients and 
colorings, diagnostic products, pharmaceuticals, research grade chemicals and 
pigments and dyes.  The largest volume of microalgae products produced today 
are algae used as human food and nutritional supplements.  These include 
forms of SPIRULINA spp., CHLORELLA spp., lake grown blue green algae 
(APHANIZOMENON FLOS-AQUAE) and natural beta carotene from DUNALIELLA SALINA.  
These microalgae food supplements contain, in varying degrees, highly 
absorbable sources of phytonutrients including mixed carotenoids, B vitamins, 
GLA, protein and essential amino acids.  Emerging commercial applications for 
microalgae include products for drug design, pharmaceuticals and diagnostics. 
 One company has developed an infant formula ingredient from microbial oils 
enriched with microbial fatty acid components derived from microalgae and 
fungi that may be linked to the development and function of the human brain 
and retina.

      Although many potentially valuable compounds have been identified in 
microalgae, until recently there was no technology to provide for cost 
effective production of multiple species of microalgae in commercial 
quantities.  To the Company's knowledge, and with the exception of the infant 
formula product, substantially all other commercial quantities of microalgae 
products are currently produced in open pond environments with microalgae 
species that thrive in harsh environments which eliminate or neutralize 
competing species, predators and  contaminants.  These few species, such as 
SPIRULINA spp., 


                                     -5-
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CHLORELLA spp., and DUNALIELLA SALINA require a medium for growth 
characterized by either an extremely high salinity or pharmaceuticals or 
another chemistry that is hostile to most competing species, predators and  
contaminants.  Accordingly, the problem of contamination is drastically 
reduced in such abnormal environments, as is the number of microalgae species 
that can be produced.

     Commercial cultivation of the other three principal groups of microbes 
-- bacteria, yeasts and fungi -- is currently accomplished in closed, 
controlled bioreactors (fermentors), and provides the basis for multi-billion 
dollar industries (such as pharmaceuticals) based on natural products 
produced by these microbes.  The Company believes that microalgae are the 
only major group of microbes that are not currently widely cultivated in 
closed, controlled cultivation systems and that such closed systems are 
essential for commercial exploitation of the estimated 30,000 species of 
microalgae.

THE AQUASEARCH SOLUTION

     Aquasearch has designed, developed and implemented proprietary 
production technologies, systems and processes that provide a controlled 
environment for the principal conditions required to optimize and maintain 
microalgae growth. This technology includes the AGM, which is a 
closed-system, photosynthetic, bioreactor, that utilizes computer-controlled 
equipment to monitor and adjust the turbulence rate, pharmaceuticals, gas 
exchange, temperature and nutrient levels within the AGM to optimize 
microalgae growth rates.  To date, the AGM has produced at least a doubling 
of growth rate in tested species compared with conventional open pond 
technology.  Equally important, the AGM is a closed, sterile,  controlled, 
photosynthetic system that protects the cultured microalgal species from many 
bacteria and other microbial contaminants that frequently destroy them in 
conventional open pond systems.

     As a result, the AGM enables the continuous growth and harvesting of 
microalgae for periods of weeks or months without re-inoculation, thus 
enabling a semi-batch continuous production cycle.  The specific processes 
and controlled conditions are designed to meet the unique requirements of 
each microalgal species.  To date, Aquasearch has conducted experiments on 
five different microalgal species, each with significantly different optimal 
growth environments.  In each case, the AGM has provided a stable environment 
that fostered sustained continuous growth.  Based on these preliminary 
studies, the Company believes that the AGM can be used to cultivate hundreds 
of species of microalgae.

     The Company has also designed, developed and implemented proprietary 
harvesting technologies, systems and processes for the production of 
microalgae that it believes provide significant competitive advantages over 
traditional microalgae production techniques.

     Aquasearch believes that the capital costs of operating the AGM compares 
favorably with other known closed, cultivation systems, thus reducing the 
Company's costs of production and potentially expanding the number of 
microalgae species that can be commercially exploited.

     Notwithstanding these perceived advantages of the Company's technology, 
the production of certain species of microalgae on a commercial scale 
involves many significant risks and uncertainties.


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     The Company believes that the location of its research and development 
and production facility in the HOST Business Park at Keahole Point, 
Kailua-Kona, Hawaii is an important competitive advantage.  Aquasearch 
believes that the combination of consistent warm temperatures, abundant 
sunlight, low rainfall and the provision of cold, clean deep seawater at this 
facility makes this a favorable location to economically cultivate microalgae 
on a large scale year round.  The Company believes that, in contrast to its 
facility (and others in the HOST Business Park and elsewhere in Hawaii), 
other microalgae production facilities located in areas lacking these 
characteristics are likely to be subject to significantly higher costs of 
production and fewer production days per year.

     At the HOST Business Park, Aquasearch has 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 the temperature of the AGM and may be used by 
Aquasearch as a source of nutrients for culture of marine microalgae.  
Additionally, Aquasearch's facility has access to a complete industrial 
infrastructure and is located 30 miles from a deep water port and immediately 
adjacent to an international airport.

     The concentration of the Company's existing and planned production 
capacity in the HOST Business Park (as well as any other production sites on 
the Big Island of Hawaii) involves certain risks and uncertainties relating 
to potential natural disasters such as volcanic eruptions, earthquakes, tidal 
waves, hurricanes and related matters indigenous to Hawaii.

AQUASEARCH'S STRATEGY

     The Company's objective is to become the leader in cost effective
cultivation technology to produce natural products from microalgae. The
Company's strategies to achieve this goal may be summarized as follows:

     -    BUILD SIGNIFICANT MARKET SHARE IN THE ASTAXANTHIN MARKET.  
          Aquasearch intends to build upon its position as one of the first 
          producers of commercial quantities of natural astaxanthin from 
          microalgae.  Through its collaboration with Cultor, Aquasearch's 
          products will gain faster access to the world market than would
          have been possible if Aquasearch had attempted to build its own 
          marketing and distribution channel first.  The Company believes 
          that the combination of its microalgae cultivation technology and 
          expertise with Cultor's animal feed and animal nutrition research 
          and development capabilities and worldwide sales, marketing and 
          distribution network is an important competitive advantage. 
          Aquasearch plans to independently develop and/or collaborate with 
          Cultor and other corporate partners with respect to the development 
          of additional applications for its natural astaxanthin product.

     -    CONTINUALLY IMPROVE AND ENHANCE ITS CORE PLATFORM TECHNOLOGY.  
          Aquasearch has developed proprietary, microalgae cultivation and 
          harvesting technologies and processes that it believes provide it 
          with a significant competitive advantage over other known 
          cultivation technologies.  Aquasearch plans to continue to improve 
          upon its AGM technology and other technologies in order to improve
          yields of natural astaxanthin from HAEMATOCOCCUS PLUVIALIS and to 
          develop additional products from other microalgae species.


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     -    DEVELOP OTHER COMMERCIAL PIGMENTS.  Aquasearch plans to undertake 
          additional research and development of potential commercial pigments 
          from other species of microalgae.  In particular, Aquasearch plans 
          to determine whether canthaxanthin, another carotenoid pigment, can 
          be derived cost-effectively from microalgae in commercial quantities.
          Synthetic canthaxanthin is currently used in cakes, candy, soda and 
          processed meats.  The Company believes that the world market for
          synthetic canthaxanthin is currently approximately $200 million 
          per year.

     -    EXPAND STRATEGIC ALLIANCES.  Aquasearch intends to develop new, and 
          strengthen existing, relationships with companies interested in 
          commercializing microalgae products.  In particular, Aquasearch 
          is targeting potential partners, like Cultor, that have greater 
          research and development, scientific, technical, financial, 
          marketing,  sales and/or distribution resources than Aquasearch.  
          The Company's primary  objective in expanding relationships with 
          these companies is to gain visibility into their product 
          requirements in order further develop Aquasearch's technology and 
          expand the markets for its existing and potential products.

     -    DEVELOP PHARMACEUTICALS, COSMETICS AND OTHER APPLICATIONS.  
          Aquasearch currently plans to conduct research and development 
          of potential pharmaceutical, cosmetics and other applications 
          from microalgae.  Aquasearch intends to identify such potentially 
          marketable compounds through the efforts of its existing technical
          staff, its Scientific Advisory Board and existing academic 
          relationships with scientific institutes and universities such as 
          Scripps Institute of Oceanography, University of California, San 
          Diego; University of Hawaii at Manoa and the University of 
          Southern Mississippi.

PRODUCTS AND POTENTIAL PRODUCTS

     The following discussion describes the Company's existing natural
astaxanthin product and potential future products:

     EXISTING PRODUCT: ASTAXANTHIN

     Substantially all of Aquasearch's efforts to date have been focused on the
development of its AGM technology and the initial production of natural
astaxanthin derived from HAEMATOCOCCUS PLUVIALIS.  The two primary markets for
natural astaxanthin are currently aquaculture and poultry feed.

     AQUACULTURE.  Astaxanthin is the red pigment that occurs in the natural
diets of a number of marine species (including, but not limited to, salmon,
shrimp, carp, trout, red sea bream, ornamental fish, lobsters and crabs) which
provides the red coloring in their flesh or shells.  In nature, astaxanthin,
like other marine pigments, is produced only by microalgae and is then passed 
up the food chain.  Farmed salmon, trout and shrimp do not obtain astaxanthin 
in non-pigmented commercial fish feed.  The resulting salmon, trout and 
shrimp taste the same as pink salmon, trout and shrimp, but, due to consumer 
preference, fetch about half the price.  (Studies have demonstrated that 
color is the most significant factor influencing consumer salmon purchases.)  
For this reason, fish farmers have an important incentive to add astaxanthin 


                                     -8-
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(in synthetic or natural form) or an alternative product into their fish feed 
in order to increase the value of their produce.

      The aquaculture market for synthetic astaxanthin is currently estimated 
to be approximately $125 million per annum, and continued growth is expected. 
This market is currently dominated by a single producer, Hoffman-LaRoche, 
which has maintained the market price of synthetic astaxanthin at about 
$2,500 per kilogram for more than a decade. Aquasearch has entered into an 
exclusive distribution and development agreement with Cultor with respect to 
the production and distribution of Aquasearch's natural astaxanthin product 
derived from HAEMATOCOCCUS PLUVIALIS for use in animal feed and animal 
nutrition. Cultor owns Ewos, a Finnish company with production facilities 
worldwide, which Aquasearch believes currently sells approximately one-third 
of the world's salmon feed. Aquasearch's natural astaxanthin product has 
compared favorably with synthetic astaxanthin in tests conducted by Cultor. 
Aquasearch's natural astaxanthin product will compete directly with 
Hoffman-LaRoche's synthetic astaxanthin product in the aquaculture feed 
market. There can be no assurance that the market price of synthetic 
astaxanthin will be maintained at historical levels or what effect this may 
have on the market price of Aquasearch's natural astaxanthin product.

      POULTRY FEED.  The amount of natural pigments ingested in the diet 
determines the hue of the egg yolks produced by poultry.  For many years, 
poultry producers have added synthetic canthaxanthin -- a closely related 
pigment to astaxanthin -- and other natural pigments (such as marigolds) to 
livestock feeds in order to satisfy consumer preferences for various colored 
egg yolks.  Recent legislation in Sweden, however, requires that all 
colorants added to animal feeds be derived from natural sources.  This 
legislation prompted Svenska Foder, the largest poultry feed producer in 
Sweden (and, prior to December 1996, a subsidiary of Cultor), to seek out 
Aquasearch to provide natural astaxanthin as an alternative colorant for 
poultry feed.  Aquasearch's natural astaxanthin product has compared 
favorably with synthetic astaxanthin in tests performed by Svenska Foder.  In 
addition, recently published studies demonstrate that natural astaxanthin (as 
compared with synthetic astaxanthin) may have additional benefits with 
respect to fertility, weight gain, growth efficiency, survival and reduced 
susceptibility to disease in broiler chickens and layer hens.  In December 
1996, Cultor sold its majority interest in Svenska Foder to KKR, a Danish 
animal feeds company.  In connection with this sale, Cultor acquired all 
of Svenska Foder's rights under the Svenska Foder Supply Agreement.

     OTHER POTENTIAL APPLICATIONS.  Aquasearch intends to explore, 
independently and jointly with its corporate partners, additional 
applications of natural astaxanthin in the field of animal feed and animal 
nutrition and in other fields, such as human nutrition and food coloring.  
The Company believes that the potential market for astaxanthin in human 
health and nutrition is large.  No assurance can be given that Aquasearch or 
any of its corporate partners will be successful in developing additional 
commercial applications for the Company's natural astaxanthin product.  

     POTENTIAL PRODUCTS

     OTHER PIGMENTS FROM MICROALGAE.  Using its AGM technology, Aquasearch 
has the capability of cultivating additional microalgal species rich in 
pigments. Microalgae contain the entire spectrum of colors found in aquatic 
environments, including more than 1,000 specific pigments.  These pigments 
may 


                                     -9-
<PAGE>

be useful in other feeds for the aquaculture and animal feed markets.  In 
addition, the Company believes that natural pigments found in microalgae can 
be substituted for synthetic pigments currently used in the food processing 
industry.  For example, canthaxanthin is used widely in the food industry 
today for colorings in cakes, candy, soda and processed meats.  The Company 
believes that the worldwide market for synthetic canthaxanthin is currently 
in excess of $200 million. Aquasearch is aware of a number of microalgal 
species which contain a high percentage of canthaxanthin.  Similarly, there 
is a growing demand for natural pigments in cosmetics, skin and hair care 
products that could be derived from microalgal species.  Aquasearch believes 
it has the technical expertise to identify microalgal species that produce 
pigments that could be useful in the food processing, cosmetics and consumer 
products industries, among others.  The Company believes that the combined 
worldwide market for canthaxanthin and several other pigments currently being 
evaluated by the Company is in excess of $1 billion.  The Company's 
development of additional microalgal pigmentation products involves many 
significant risks and uncertainties.

     AQUACULTURE FEEDS.  Microalgae are the primary source of food for most 
aquatic species in their larval stages.  According to the UN-FAO, the 
aquaculture market currently produces approximately 18% of the world's 
fisheries consumption based on 1994 figures (which are the most recent data 
available) and was estimated to be a $35 billion  market in 1996.  
Aquaculture feeds typically represent the highest cost of production for the 
aquaculture farmer and many are required to grow or purchase microalgae or 
microalgae sources for their hatcheries.  Problems of contamination are a 
significant business risk and some farmers are currently purchasing prepared 
larval feeds.  One of the significant obstacles to the development of 
aquaculture has been the difficulty of feeding the larvae.  Aquasearch 
believes that the AGM can provide a cost effective technology for growing 
feed for the aquaculture industry, both for existing species and future 
aquaculture species.  The Company's development of microalgal aquaculture 
feed products involves many significant risks and uncertainties.

     COSMETICS.  Aquasearch believes that microalgae contain several 
significant features of importance to the cosmetics industry.  First, the 
natural colors that occur in microalgae can be used directly as coloring 
agents in cosmetics. Second, many species of microalgae possess light 
blocking compounds that regulate the amount of ultraviolet and other 
wavelengths they absorb and have potential applications in sunscreens and 
other products containing sun blocking agents.  Last, bioactive agents 
derived from microalgae may be useful as cosmetics themselves.  For example, 
Aquasearch is aware that an extract from a marine organism is an active 
ingredient in a wrinkle-reducing skin cream marketed by Estee Lauder.  This 
product currently generates more than a million dollars a year in royalties 
to its developer.  Aquasearch believes that the market for cosmetics derived 
from microalgae is a potentially large market. Aquasearch does not currently 
have the expertise to develop and commercialize cosmetics products on its 
own.  Aquasearch's strategy will be to establish the AGM as a core technology 
for the cultivation of commercial quantities of microalgae and to seek 
collaborative research and development and marketing, sales and distribution 
relationships with established cosmetics and consumer goods companies in 
order to develop and commercialize potential microalgal cosmetics products.  
The Company's development of microalgal cosmetics products involves many 
significant risks and uncertainties.


                                     -10-
<PAGE>

     PHARMACEUTICALS.  Most pharmaceutical products developed to date have 
been derived from land-based plants, and the biodiversity of microalgae is 
comparable to that of land-based plants.  Aquasearch is aware of at least one 
company, Martek Biosciences Corporation, that is collaborating with Merck & 
Co. and others to develop pharmaceuticals from microalgae.  Aquasearch is 
also aware that in clinical trials certain compounds derived from microalgae 
enhanced the production of an anti-cancer drug.  In connection with this 
project, Aquasearch was awarded a Master Agreement from the U.S. National 
Cancer Institute for large scale production of biomass for isolation of 
agents from natural sources, although no contracts have yet been issued.  
Aquasearch believes that the market for pharmaceuticals derived from 
microalgae is potentially a large market. Aquasearch does not currently have 
the expertise to develop and commercialize pharmaceutical products on its 
own.  Aquasearch's strategy will be to establish the AGM as a core technology 
for the cultivation of commercial quantities of microalgae and to 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.  The 
Company's development of pharmaceutical products from microalgae involves 
many significant risks and uncertainties

MANUFACTURING

     ASTAXANTHIN

     Aquasearch began culturing HAEMATOCOCCUS PLUVIALIS at its current 
facility in the HOST Business Park in November 1995.  HAEMATOCOCCUS PLUVIALIS 
is cultured using a series of photobioreactors of varying sizes to achieve 
culturing consistency before entering the AGM.  The AGM is a large 
photobioreactor that utilizes computer-controlled equipment to monitor and 
adjust the turbulence rate, pH, gas exchange, temperature and nutrient levels 
within the AGM to optimize microalgal growth rates.

     The AGMs are harvested regularly and the extracted amount is pumped from 
the AGM into open ponds where, using proprietary processes, the microalgae is 
caused to turn red (biosynthesis of astaxanthin).  Once the optimal reddening 
has occurred, the microalgae are drained from the ponds and dewatered.  The 
microalgae slurry is then further processed, dried and packaged using 
proprietary equipment and processes.

     Over the past twelve months, Aquasearch has been producing natural 
astaxanthin at varying rates of between one and eight kilograms per month at 
its HOST Business Park production facility.  In order to meet the Cultor 
Distribution and Development Agreement production targets of 40 and 120 
kilograms of natural astaxanthin per month by September 1997 and September 
1998, respectively, the Company will have to significantly increase its plant 
and production capacity in the near future.  Aquasearch plans to accomplish 
this expansion in two steps: first, the existing one-acre facility will be 
expanded to four acres and second, a separate, stand-alone facility of 
approximately ten acres will be constructed. The ten-acre site will be 
designed and developed as a dedicated facility solely for the production of 
natural astaxanthin to meet the production targets under the Cultor 
Distribution and Development Agreement. After construction of the ten-acre 
site is completed, the remaining four-acre facility will be used primarily 
for the research and development of new microalgal products and the 
enhancement of the AGM technology.  This expansion and improvement will place 

                                     -11-
<PAGE>

significant additional responsibilities on management; require massive 
scale-up of the Company's existing manufacturing facility and techniques; 
require significant additional capital; and require additional scientific, 
technical and manufacturing expertise.  Although there can be no assurances 
that Aquasearch will be successful in meeting these challenges, management is 
in the process of securing the necessary expertise and resources to 
accomplish them.

     OTHER MICROALGAL SPECIES

     In addition to HAEMATOCOCCUS PLUVIALIS, the Company has used its AGM 
technology to successfully culture the following species of microalgae: 
CHLORELLA SOROKINIENSIS, LYNGBYA LAGERHEIMII, SPIRULINA PLATENSIS and 
HAEMATOCOCCUS LACUSTRIS.  Commercial production of additional species of 
microalgae will require the development of custom processes to create optimal 
conditions for the cultivation and harvesting of each species.  Based on 
preliminary studies, Aquasearch believes that the fundamental aspects of the 
technology used to produce HAEMATOCOCCUS PLUVIALIS will be directly 
applicable to the production of hundreds other species of microalgae and that 
principal variations are likely to occur in the modification of harvesting 
processes rather than adaptation of the AGM.

MARKETING AND SALES

     Aquasearch's primary business strategy is to continue development of its 
platform technology and to establish its expertise and reputation as a cost 
effective developer and manufacturer of microalgal products.  The Company 
presently plans to develop strategic research and development, sales and 
marketing and distribution arrangements with established companies that have 
significant market shares in the fields in which Aquasearch intends to 
develop and sell products.  The Company believes that this approach reduces 
the time to market for its products and increases the likelihood of market 
acceptance for its products.  Alternatively, Aquasearch does not believe that 
acquiring or developing the legal, regulatory, sales and marketing expertise 
necessary to compete with established vertically integrated companies with 
significant market shares is likely to yield the best return on investment 
for the Company or its shareholders.  In general, Aquasearch intends to 
follow substantially the same strategy with respect to the development, 
marketing and sale of future products that it followed in connection with the 
development, marketing and sale of its natural astaxanthin product; namely, 
to identify potential corporate partners already familiar with the potential 
product and markets as part of their own research and development efforts and 
to enter into strategic development agreements to manufacture value-added 
products to the specifications of these corporate partners.  Once new 
products are in production, the Company may create one or more separate 
operating companies with licenses to use the technology solely for the 
specific microalgal species and end use.

CORPORATE PARTNER RELATIONSHIPS

     SVENSKA FODER

     In July 1995, Aquasearch signed the Svenska Foder Supply Agreement with 
Svenska Foder, pursuant to which Svenska Foder agreed to act as the exclusive 
distributor of Aquasearch's natural 


                                     -12-
<PAGE>

astaxanthin for animal feed and animal nutrition applications in Sweden, 
Denmark, Norway and Finland for poultry, pigs, cattle and horses.  The 
Svenska Foder Supply Agreement had a term of three years and required 
Aquasearch to deliver five kilograms of natural astaxanthin per month.  
Svenska Foder used the natural astaxanthin in place of synthetic astaxanthin 
in chicken feed to increase the reddish hue in egg yolks.  Recently published 
studies demonstrate that natural astaxanthin (as compared with synthetic 
astaxanthin) may have additional benefits with respect to fertility, weight 
gain, growth efficiency, survival and reduced susceptibility to disease in 
broiler chickens and layer hens.  Development of additional commercial 
applications for the Company's natural astaxanthin product involves many 
significant risks and uncertainties.

     CULTOR

     In May 1996, Aquasearch entered into a three-year exclusive Distribution 
and Development Agreement with Cultor pursuant to which Aquasearch will act 
as the exclusive worldwide supplier of natural astaxanthin from microalgae to 
Cultor in the field of animal feed and animal nutrition and Cultor will act 
as the exclusive worldwide distributor of Aquasearch's natural astaxanthin in 
the field of animal feed and animal nutrition.  The following description of 
certain terms and conditions of the Cultor Distribution and Development 
Agreement does not purport to be complete and is qualified in its entirety by 
reference to the definitive Agreement.

     The Cultor Distribution and Development Agreement provides that from and 
after September 24, 1997 the target production requirement for the Company 
and the target purchase requirement for Cultor is 40 kilograms of natural 
astaxanthin per month.  The target production requirement for the Company and 
the target purchase requirement for Cultor from and after September 24, 1998 
is 120 kilograms of natural astaxanthin per month.  Cultor has the obligation 
to obtain all governmental approvals for, promote and distribute the product, 
at its own expense, in each country in which it proposes to sell the product. 
During the term of the Cultor Distribution and Development Agreement, the 
Company and Cultor will share equally in the margin (the "Transfer Price") 
between the production costs of Aquasearch (the "Aquasearch Production 
Costs") and the net sales price (which is equal to the gross sales price to 
the end user less volume bonuses, freight and agent's commissions).

     The Cultor Distribution and Development Agreement provides that Cultor 
and Aquasearch may, at Cultor's option, mutually develop a new joint venture 
company for the sole purpose of producing and selling natural astaxanthin in 
the field of animal feed and animal nutrition.  Pursuant to this arrangement, 
Aquasearch would contribute a ten-acre natural astaxanthin production 
facility to be constructed in 1997 in return for its 50% stake in the new 
company and Cultor would contribute cash equal to the appraised replacement 
value of the ten-acre production facility in return for its 50% stake.  Under 
the Cultor Distribution and Development Agreement, Cultor also has the option 
to increase its stake in the new company by purchasing from Aquasearch a 
further 25% of the new company (thus increasing Cultor's stake to 75%) for 
cash based on a formula.  The formula provides that the purchase price for 
the additional shares to be acquired by Cultor from Aquasearch will equal the 
greater of (i) $1 million, (ii) half of the current replacement value of the 
astaxanthin production facilities initially contributed by Aquasearch or 
(iii) an amount equal to X multiplied by Y; where "X" equals the difference 
between the Transfer Price and the 

                                     -13-
<PAGE>

Aquasearch Production Costs for the six-month period commencing on November 
1, 1998 and ending on April 30, 1999 and "Y" equals six (or, in other words, 
an amount equal to twelve times annualized operating profit in the last six 
months of the third year of the contract).

     Under the Cultor Distribution and Development Agreement, Aquasearch will 
license certain technology to the new company to make, use and sell natural 
astaxanthin within the field of animal feed and animal nutrition only and 
will retain the right (i) to make, use and sell natural astaxanthin in all 
fields other than animal feed and nutrition and (ii) to make, use and sell 
any microalgal products other than natural astaxanthin in all fields, 
including the field of animal feed and animal nutrition.  The Cultor 
Distribution and Development Agreement contains detailed provisions regarding 
the financing and management of the new company, procedures for resolving 
deadlocks between the parties, mechanisms governing the buy-out of one party 
by the other, covenants mandating the distribution of 40% of the annual 
profits of the new company to its shareholders and establishing royalty rates 
under a marketing agreement that may be entered into between the new company 
and Cultor, provisions restricting the transfer of ownership interests by 
Aquasearch and Cultor and providing for rights of first refusal and 
registration rights, termination provisions and detailed provisions governing 
the allocation of intellectual property rights upon termination.

     In connection with the execution of the Cultor Distribution and 
Development Agreement, Cultor and Aquasearch also entered into a Stock 
Subscription Agreement (the "Cultor Stock Subscription Agreement") pursuant 
to which Cultor purchased 400,000 shares of Aquasearch Common Stock at a 
purchase price of $0.50 per share.

     The Company believes that the Cultor Distribution and Development 
Agreement is beneficial to the Company for the following reasons.  First, the 
arrangement will substantially reduce the time to market for the Company's 
natural astaxanthin product because Cultor, at its own expense, will be 
responsible for obtaining all regulatory approvals and promoting and selling 
the product. Second, by establishing an exclusive arrangement with Cultor 
(along with its affiliated entities, the second largest consumer of synthetic 
astaxanthin in the world), the Company believes it has established an 
additional barrier to entry to potential competitors.  Third, the Company 
retains all of its intellectual property rights to develop applications for 
astaxanthin outside the field of animal feed and animal nutrition and will 
obtain an exclusive license to use all microalgae technology developed by the 
new company, if any.  Fourth, the Company believes that the collaboration 
with Cultor to develop the market for astaxanthin in animal feed and 
nutrition will enhance the Company's reputation in the industry and stimulate 
additional research and development with respect to microalgal products other 
than astaxanthin.  The Company's obligations and performance under the Cultor 
Distribution and Development Agreement and the potential formation of a new 
joint venture company with Cultor involve many significant risks and 
uncertainties.  In addition, in order to meet the production targets under 
the Cultor Distribution and Development Agreement, Aquasearch must 
significantly expand and improve its production facilities and processes, 
which will involve many significant risks and uncertainties.

     Notwithstanding the foregoing, if the Company is unable to develop any 
commercial uses for natural astaxanthin outside of the field of animal feed 
and animal nutrition and if the Company is unable 


                                     -14-
<PAGE>

to develop, cultivate and sell microalgal products other than astaxanthin, 
then the Company and its shareholders will have sold the Company's sole 
product and source of revenues to Cultor for the purchase price and royalties 
set forth in the Cultor Distribution and Development Agreement.  The Company 
believes that its ability to develop additional uses for astaxanthin outside 
of the field of animal feed and nutrition and its ability to develop 
microalgal products other than astaxanthin will be significantly enhanced by 
its collaboration with Cultor in developing the astaxanthin market for animal 
feed and animal nutrition.

COMPETITION

     The Company's natural astaxanthin product will compete directly with the 
synthetic astaxanthin product developed and marketed worldwide by 
Hoffman-LaRoche.  Hoffman-LaRoche has significantly greater research and 
development, technical, financial, management, marketing and sales resources 
than Aquasearch as well as a worldwide reputation and a dominant market 
share.  In addition, at least three companies, Astacarotene, Heliosynthese 
and Cyanotech, have either announced plans to produce natural astaxanthin 
from microalgae or are producing small quantities for test and commercial 
purposes.  Moreover, Cyanotech has recently announced plans to enter into 
large scale commercial production of natural astaxanthin during the next six 
months.  Aquasearch believes that competition in the astaxanthin market will 
intensify significantly in the near future.  Alternative sources of 
pigmentation that have been tested include astaxanthin from shrimp shells, 
paprika and a yeast strain PFAFFIA RHODOZYMA. Aquasearch believes that only 
PFAFFIA RHODOZYMA continues to be evaluated as a potential alternative to 
synthetic or natural astaxanthin.  Aquasearch's natural astaxanthin product 
is expected to compete with synthetic astaxanthin (and any other alternative 
products) primarily on the basis of product performance, price and 
proprietary position.  In this regard, although Hoffman-LaRoche maintained 
the market price of synthetic astaxanthin at approximately $2,500 per 
kilogram for more than a decade when there was no viable competitive product 
available, there can be no assurance that Hoffman-LaRoche will not cut the 
price of its synthetic astaxanthin product significantly in response to the 
introduction of a competitive natural astaxanthin product.  Any such pricing 
or other competitive pressure could have a material adverse effect on 
Aquasearch's business, financial condition, results of operations and 
relationships with corporate partners.  The existence of products of which 
Aquasearch is not aware, or products that may be developed in the future, may 
also adversely affect the marketability of Aquasearch's natural astaxanthin 
product.

     Aquasearch intends to develop other natural products from microalgae 
that will compete with existing natural and synthetic products.  Aquasearch 
anticipates that competition to develop additional microalgal products will 
be intense.  Aquasearch's future competitors are expected to include major 
pharmaceutical, food processing, chemical and specialized biotechnology 
companies, many of which will have financial, technical and marketing 
resources significantly greater than those of Aquasearch.  In addition, 
specialized biotechnology companies may form collaborations with large 
established companies to support research, development and commercialization 
of products that may be competitive with future products of Aquasearch.  
Also, academic institutions, governmental agencies and other public and 
private research organizations are conducting research activities and seeking 
patent protection and may commercialize products competitive with those of 
Aquasearch on their own or through joint ventures.  


                                    -15-
<PAGE>

The existence of products of which Aquasearch is not aware, or products that 
may be developed in the future, may adversely affect the marketability of 
additional products developed by Aquasearch.

     Aquasearch believes that its AGM and related microalgal cultivation and 
harvesting technologies currently offer significant technical and economic 
advantages compared with the open pond systems currently used by certain 
competitors, including increased yields and the ability to cultivate hundreds 
of microalgal species that cannot be produced in open pond systems due to 
substantially higher risks of contamination and lack of control.  Aquasearch 
also believes that its AGM and related microalgal cultivation and harvesting 
technologies compare favorably with other known closed systems with respect 
to capital and operating costs.  However, the existence of technology of 
which Aquasearch is not aware, or technology that may be developed in the 
future, may adversely affect the technical and competitive advantages that 
Aquasearch currently believes it holds compared with competing open pond and 
known closed system microalgal cultivation technologies.

     Aquasearch's competitive position will also depend on its ability to 
attract and retain qualified scientific and other personnel, develop 
effective proprietary products, successfully perform under the Cultor 
Distribution and Development Agreement, implement research and development 
and production plans, obtain patent protection and secure adequate capital 
sources. 

PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY

     Aquasearch relies upon a combination of patents, copyright protection, 
trade secrets, know-how, continuing technological innovation and licensing 
opportunities to develop and maintain its competitive position.  The 
Company's future prospects depend in part on its ability to obtain patent 
protection for its products and processes, to preserve its copyright and 
trade secrets and to operate without infringing the proprietary rights of 
third parties.  Aquasearch has been awarded one patent in the United States 
for its closed system microalgal cultivation process and one patent in 
Australia for both its process and its closed system cultivation apparatus.  
The Company has additional patents pending internationally and in the United 
States.

     The patent positions of pharmaceutical, biopharmaceutical and 
biotechnology companies, which are analogous to the Company, are generally 
uncertain and involve complex legal and factual questions.  There can be no 
assurance that any of the Company's pending patent applications will result 
in issued patents, that the Company will develop additional proprietary 
technologies that are patentable, that any patents issued to the Company or 
its strategic partners will provide a basis for commercially viable products 
or will provide the Company with any competitive advantages or will not be 
challenged by third parties, or that the patents of others will not have a 
material adverse effect on the ability of the Company to do business.  In 
addition, patent law relating to the scope of claims in the technology fields 
in which the Company operates is still evolving.  The degree of future 
protection for the Company's proprietary rights, therefore, is uncertain.  
Furthermore, there can be no assurance that others will not independently 
develop similar or alternative technologies, duplicate any of the Company's 
technologies, or, if patents are issued to the Company, design around the 
patented technologies developed by the Company.  In


                                     -16-
<PAGE>

addition, the Company could incur substantial costs in litigation if it is 
required to defend itself in patent suits brought by third parties or if it 
initiates such suits.

     Others may have filed and in the future are likely to file patent 
applications that are similar or identical to those of the Company.  To 
determine the priority of inventions, the Company may have to participate in 
interference proceedings declared by the United States Patent and Trademark 
Office that could result in substantial cost to the Company.  No assurance 
can be given that any such patent application will not have priority over 
patent applications filed by the Company.  In addition, the laws of certain 
foreign countries may not protect the Company's patent and other intellectual 
property rights to the same extent as the laws of the United States.

     The Company's future prospects also depend in part on the Company 
neither infringing patents or proprietary rights of third parties nor 
breaching any licenses that may relate to the Company's technologies and 
products.  There can be no assurance that the Company will not infringe the 
patents, licenses or other proprietary rights of third parties.  In addition, 
the Company may 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 the Company or its strategic partners 
claiming damages and seeking to enjoin commercial activities relating the 
affected products and processes could, in addition to subjecting the Company 
to potential liability for damages, require the Company or its strategic 
partners to obtain a license in order to continue to manufacture or market 
the affected products and processes.  There can be no assurance that the 
Company or its strategic partners would prevail in any such action or that 
any license (including licenses proposed by third parties) required under any 
such patent would be made available on commercially acceptable terms, if at 
all.  The Company has not conducted an exhaustive patent search and no 
assurance can be given that patents do not exist or could not be filed that 
would have a material adverse effect on the Company's ability to develop and 
market its products.  There are a significant number of United States and 
foreign patents and patent applications in the Company's area of interest, 
and the Company believes that there may be significant litigation in the 
industry regarding patent and other intellectual property rights.  If the 
Company becomes involved in such litigation, it could consume a substantial 
portion of the Company's managerial and financial resources, which could have 
a material adverse effect on the Company's business, financial condition, 
results of operations and relationships with corporate partners.

     The enactment of legislation implementing the General Agreement on Trade
and Tariffs has resulted in certain changes in United States patent laws that
became effective on June 8, 1995.  Most notably, the term of patent protection
for patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant.  The new term of United States patents
will commence on the date of issuance and terminate twenty years after the
effective date of filing may result in a substantially shortened term of the
Company's patent protection which may adversely affect the Company's patent
position.

     While the disclosure and use of the Company's proprietary technology, 
know-how and trade secrets are generally controlled under agreements with the 
parties involved, there can be no assurance that all confidentiality 
agreements will be honored, that others will not independently develop 
similar or 


                                     -17-
<PAGE>

superior technology, that disputes will not arise concerning  the ownership 
of intellectual property, or that dissemination of the Company's proprietary 
technology, know-how and trade secrets will not occur.

GOVERNMENT REGULATION AND PRODUCT TESTING

     Aquasearch's natural astaxanthin product, potential products and its 
manufacturing and research activities are or may become subject to varying 
degrees of regulation by a number of government authorities in the United 
States and other countries, including the United States Food and Drug 
Administration ("FDA") pursuant to the Federal Food, Drug and Cosmetic Act.  
Each existing or potential microalgal product that is developed or marketed 
by Aquasearch, its licensees or its strategic partners for use by humans may 
present unique regulatory problems and risks, depending on the product type, 
uses and method of manufacture.  The FDA regulates, in varying degrees and in 
different ways, dietary supplements, other food products, medical  devices 
and pharmaceutical products, including their manufacture, testing, 
exportation, labeling, and, in some cases, advertising.  Generally, 
prescription pharmaceuticals and certain types of medical devices are 
regulated more vigorously than foods, such as dietary supplements.  As of the 
date hereof, the Company has not applied for FDA clearance for the Company's 
natural astaxanthin product as a food additive. The FDA approval process is a 
lengthy and expensive process and there can be no assurance that such FDA 
approval will be obtained.  The inability to obtain, or delays in obtaining, 
such approval would adversely affect the Company's ability to commence 
marketing any of its existing or future products for human consumption.

     Any future products developed by Aquasearch for use in human nutrition, 
pharmaceuticals or cosmetics, will require Aquasearch to develop and adhere 
to Good Manufacturing Practices ("GMP") as required by the FDA, ISO standards 
as required in Europe, and any other applicable standards mandated by 
federal, state, local or foreign laws, regulations and policies.  Currently, 
the Company's production facilities do not comply with GMP or ISO standards 
and significant capital expenditures and compliance procedures would have to 
be made and implemented before the Company's production facilities could meet 
GMP and ISO qualifications.

     The Company is or may become subject to other federal, state and foreign 
laws, regulations and policies with respect to labeling of its 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.  The 
Company is working with Cultor with respect to compliance with foreign laws, 
regulations and policies pertaining to use of its natural astaxanthin product 
in the field of animal feed and animal nutrition.  There can be no assurance 
that any changes with respect to federal, state and foreign laws, regulations 
and policies, and, particularly with respect to the FDA or other such 
regulatory bodies, with possible retroactive effect, will not have a material 
adverse effect on the Company's business, financial condition, results of 
operations and relationships with corporate partners.  There can be no 
assurance that any of the Company's potential products will satisfy 
applicable regulatory requirements.

     The Company's natural astaxanthin product is viewed as a food ingredient 
by regulatory authorities in Sweden.  Regulatory authorities in other 
jurisdictions may view the Company's natural 


                                     -18-
<PAGE>

astaxanthin product as a food additive.  All new color additives for ultimate 
human consumption in the United States require premarket clearances from the 
FDA.  Therefore, Aquasearch's natural astaxanthin product and any additional 
food color products for use in the United States will require FDA clearance, 
unless they meet the requirements of current color additive regulations.  The 
process of obtaining clearances for a new color additive is expensive and 
time consuming.  Extensive information is required on the toxicity of the 
additive, including carcinogenicity studies and other animal testing.  No 
assurances can be given that any potential Aquasearch food color product will 
be cleared by the FDA on a timely basis, if at all.

     Although the FDA approved the Hoffman-LaRoche synthetic astaxanthin 
product as a feed ingredient in 1995, there can be no assurances that the FDA 
will grant similar approval for Aquasearch's natural astaxanthin product.

     Regulatory approvals in other markets in which Aquasearch's natural 
astaxanthin product is likely to be distributed, including in particular, the 
EEC, Japan, Canada and Australia, vary by market.  Currently, the Aquasearch 
natural astaxanthin product 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.  The Company believes that the approval process in 
Australia, Japan and certain other Asian countries will come under their 
"natural" status and be approved within a short time frame; however, there 
can be no assurances in this regard.  The Aquasearch natural astaxanthin 
product has not yet been submitted for approval by the EEC, and there can be 
no assurance that the determination by Swedish authorities will have any 
influence on the determination to be made by the EEC.

     Under the terms of the Cultor Distribution and Development Agreement, 
Cultor has the responsibility to obtain any FDA and other approvals necessary 
in each country in which Cultor determines to distribute the product.

     The Company is 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 the Company's business, 
financial condition, results of operations and relationships with corporate 
partners.

EMPLOYEES

     As of October 31, 1996, Aquasearch had fourteen full-time employees, of 
whom three have Ph.D.s, nine are involved in research and development and 
production and harvesting and two are involved in administration and support. 
The Company considers relations with its employees to be good.  None of the 
Company's employees is covered by a collective bargaining agreement. 

SCIENTIFIC ADVISORY BOARD

     The Aquasearch Scientific Advisory Board is composed of leading experts 
in aquaculture, marine biology and fluid dynamics and the chemistry, 
photobiology and mass culture of microalgae.  The 


                                     -19-
<PAGE>

Scientific Advisory Board provides guidance to the Company regarding the 
optimization of its production and processing methods and research and 
development pertaining to both existing and potential microalgal products.  
The Scientific Advisory Board held its inaugural meeting in May 1996 and is 
scheduled to meet approximately four times per year.  Between meetings, 
individual Scientific Advisory Board members consult with the Company on an 
as-needed basis.  Aquasearch believes that the individual and collective 
knowledge and experience of its Scientific Advisory Board provides the 
Company with an important competitive advantage.  The current members of the 
Aquasearch Scientific Advisory Board are as follows:

     JOHN BARDACH, Ph.D. received a B.Sc. in Zoology from Queen's University, 
Canada in 1946 and a Ph.D. in Zoology from University of Wisconsin in 1949.  
Dr. Bardach has served as Director of the Bermuda Biological Station, the 
Hawaii Institute of Marine Biology and the East-West Center, as well as 
Professor at the University of Hawaii. Dr. Bardach's numerous international 
appointments have included Chairmanship of the U.S. National Academy of 
Sciences Panel on Aquatic Food Sources, the World Bank-FAO Panel on 
Aquaculture Research Needs of Developing Countries, and the State of Hawaii 
Aquaculture Advisory Council.  Two of his books, HARVEST OF THE SEA and 
AQUACULTURE (now in its 25th printing), establish him as one of the fathers 
of modern aquaculture.

     ROBERT R. BIDIGARE, Ph.D. received a B.S. (SUMMA CUM LAUDE) in Aquatic 
Biology from Eastern Michigan University in 1977 and a Ph.D. in Biological 
Oceanography from Texas A&M University in 1981.  Dr. Bidigare currently is 
Associate Professor of Oceanography at University of Hawaii.  Dr. Bidigare 
serves on the Advisory Board for the National Center for the Culture of 
Marine Phytoplankton, is a member of the NASA SeaWIFS Science Working Team 
and an observer on the International Oceanographic Commission Group of 
Experts on Standards and Reference Materials.  Dr. Bidigare has authored more 
than 75 scientific papers, and is a recognized expert on plant pigment 
chemistry, bio-optics and biochemistry of microalgae.

     JOHN CULLEN, Ph.D. 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.

     WILLIAM FENICAL, Ph.D. 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 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 


                                     -20-
<PAGE>

Sterling Winthrop, Ligand, Pharmagenesis and Bristol-Myers.  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.

     MARK E. HUNTLEY, Ph.D. 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 is a research biologist at Scripps Institution of Oceanography, 
University of California, San Diego, and President, Chief Executive Officer 
and Chairman of the Board of Directors of Aquasearch.  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 serves on the Executive 
Committee of the Global Ocean Ecosystem Dynamics program, 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 State Department, the United States Department of Interior and the 
White House Office of Science and Technology Policy.  Dr. Huntley is a 
co-founder of Aquasearch and a co-inventor of the Aquasearch Growth Module.

     EDWARD A. LAWS, Ph.D. received an A.B. (MAGNA CUM LAUDE) in Chemistry 
from Harvard College in 1967 and a Ph.D. in Chemical Physics from Harvard 
College in 1971.  He was an instructor in Oceanography at Florida State 
University from 1971 through 1974, and then joined the faculty at the 
University of Hawaii, where he is now a Professor of Oceanography.  Dr. Laws 
has served as Chairman of the Oceanography Department, School of Ocean and 
Earth Science and Technology at the University of Hawaii, which was ranked by 
the National Academy of Sciences in 1995 as the fifth best program of its 
kind in the nation.  Dr. Laws recently was appointed Assistant Vice 
President, Graduate Research and Education, of the University of Hawaii.  Dr. 
Laws is an expert on the large-scale cultivation of microalgae, an area in 
which he has focused his research and has graduated a number of Ph.D.s.

     PETER P. NIILER, Ph.D. received his B.S. in Mechanical Engineering from 
Lehigh University in 1960, earned honors as a Fulbright Scholar at Cambridge 
University, England in 1961, and was awarded a Ph.D. in Applied Mathematics 
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 was a co-inventor of processes 
used in the Aquasearch Growth Module.

     DONALD REDALJE, Ph.D. received his B.S. in Environmental Biology from 
the University of California, Santa Barbara in 1971 and his Ph.D. in 
Biological Oceanography from University of Hawaii 


                                     -21-
<PAGE>

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 a co-founder of 
Aquasearch and co-inventor of the Aquasearch Growth Module.

     Most members of the Scientific Advisory Board are not employed by the
Company and each of these members may have commitments to other entities that
could limit their availability to the Company.  There can be no assurance that
the Company will be able to retain its key Scientific Advisory Board members.

ITEM 2.  DESCRIPTION OF PROPERTY.

     The Company's principal executive office and its production facility are 
located at 73-4460 Queen Ka'ahumanu Highway, Suite 110,Kailua-Kona, Hawaii 
96740, which is part of the HOST business park at Keahole Point, Kailua-Kona, 
Hawaii.  The facility consists of approximately one acre containing AGMs, 
reddening ponds, a processing facility, a laboratory, administrative offices 
and additional space for production and research and development.  All of 
the Company's research and development activities and production are being 
conducted at this facility.  The property is currently leased from the State 
of Hawaii under a one-year lease expiring in March 31, 1997.  This lease is 
renewable on an annual basis and the Company is currently negotiating for a 
longer-term lease.  Aquasearch has no production facilities or offices 
outside the State of Hawaii.

     The Company has initiated the application process for a thirty-year 
lease of its current five acre parcel from the Natural Energy Laboratory of 
Hawaii Authority ("NELHA"), the state entity which administers the HOST 
Business Park. The government-administered process to award a thirty-year 
lease has usually taken less than two years.  More than half of the 800-acre 
HOST Business Park facility is currently undeveloped and the Company believes 
that, as one of the fastest growing and largest employers in HOST Business 
Park, its lease application is likely to be considered favorably, although 
there can be no assurances in this regard.

     Construction to expand the Company's existing one-acre research and 
development/production facility to a four-acre facility is scheduled to begin 
in the third quarter of fiscal 1997.  The design and engineering process for 
this expansion was initiated in April 1996 when Aquasearch solicited bids 
from various engineering firms.  As a result of the bidding process, 
Aquasearch retained Harris Group, Inc. of Seattle, an engineering firm with 
extensive experience in the design of biotech, microbe-based production 
plants, to design the build-out of the facility.  The initial phase of the 
engineering process for this expansion was completed in September 1996.

     On November 13, 1996, Aquasearch announced that it would acquire between 
80 and 90 acres of property in the Ka'u region on the Big Island of Hawaii 
valued at between $900,000 and $1,000,000 (the "C. Brewer Transaction") from 
C. Brewer and Company, Limited ("C. Brewer"), a privately-held 


                                     -22-
<PAGE>

$230 million diversified agribusiness concern, in exchange for C. Brewer's 
acquisition of approximately 6% of the outstanding Common Stock of the 
Company.  In connection with this transaction, C. Brewer also acquired a 
warrant to purchase up to 500,000 shares of Aquasearch Common Stock at an 
exercise price of $1.25 per share.  Aquasearch and C. Brewer are still 
involved in the process of site selection regarding this property.

     During the last three years, the Company has also paid rent for the use 
of office space at Dr. Huntley's residence located at 3222 Diamond Head Road, 
Honolulu, Hawaii 96815.

ITEM 3.  LEGAL PROCEEDINGS.

     Aquasearch is not currently a party to any legal proceedings.

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

     At a Special Meeting of Shareholders held on September 24, 1996, the 
Company's shareholders (i) approved the Cultor Distribution and Development 
Agreement and the Cultor Stock Subscription Agreement, (ii) approved 
amendments to the Company's Articles of Incorporation to increase the number 
of shares of Common Stock that the Company is authorized to issue from 
50,000,000 to 100,000,000 shares and authorized the creation and issuance 
from time to time of up to 5,000,000 shares of Preferred Stock in one or more 
series with such designations, rights, preferences, privileges and 
restrictions as the Board of Directors may determine and (iii) ratified and 
approved indemnification agreements with directors, officers, employees and 
agents.

     The number of votes cast for, against or withheld, as well as the number 
of abstentions and broker non-votes with respect to each matter were as 
follows:

1.   Proposal to approve the Cultor Distribution and Development Agreement and
     the Cultor Stock Subscription Agreement:

     Votes cast for:           19,635,030
     Votes cast against:        1,335,093
     Absentions:                    6,000
     Broker non-votes           6,034,470

2.   Proposal to amend Articles of Incorporation to increase the authorized
     number of shares of Common Stock from 50,000,000 shares to 100,000,000
     shares and to authorize the creation and issuance from time to time of up
     to 5,000,000 shares of Preferred Stock in one or more series with such
     designations, rights, preferences, privileges and restrictions as the 
     Board of Directors may determine:

     Votes cast for:           19,126,740
     Votes cast against:        1,767,978


                                     -23-
<PAGE>

     Absentions:                  161,405
     Broker non-votes           6,034,470

3.   Proposal to ratify and approve indemnification agreements with directors
     and officers: 

     Votes cast for:           25,156,325
     Votes cast against:        1,515,443
     Absentions:                  418,825
     Broker non-votes                None


                               PART II

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

MARKET INFORMATION

     The Company's Common Stock is currently traded in the "pink sheets" (OTC 
Bulletin Board Symbol: AQSE).  The following table sets forth for the periods 
indicated the high and low closing bid quotations for the Company's Common 
Stock as reported by M.H. Myerson & Company, one of the Company's market 
makers. 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.

                                            LOW BID        HIGH BID

     FISCAL 1996:
     First Quarter                           $0.21          $0.74
     Second Quarter                          $0.50          $0.75
     Third Quarter                           $0.53          $0.97
     Fourth Quarter                          $0.52          $0.92


     FISCAL 1995:
     First Quarter                           $0.10          $0.20
     Second Quarter                          $0.10          $0.25
     Third Quarter                           $0.125         $0.25
     Fourth Quarter                          $0.125         $0.36

     As of October 31, 1996, the Company had approximately 2,000 record holders
of its 40,829,331 shares of Common Stock.


                                     -24-
<PAGE>

     The Company has never paid cash dividends on its Common Stock and has no
present plan to do so.  The Company expects to retain future earnings, if any,
to fund research and development activities and future expansion.

RECENT SALES OF UNREGISTERED SECURITIES

     In October 1996, the Company sold an aggregate of 1,008,843 Units, 
consisting of one share of Common Stock and one Common Stock Purchase Warrant 
(the "Warrants"), to 26 individuals in a private placement under Section 4(2) 
of the Securities Act of 1933, as amended.  The purchase price of the Units 
ranged from $0.21 per Unit to $0.23 per Unit.  The Warrants have a term of 
three years and are exercisable at $1.00 per share, subject to adjustment.  
The Warrants are redeemable by the Company at $.01 per Warrant during their 
three-year exercise period upon 30 days' notice anytime that the closing bid 
price per share of the Common Stock exceeds $1.50 per share (subject to 
adjustment) for 20 trading days out of 30 consecutive trading days ending on 
the third day prior to the date of the notice of redemption.  The gross 
proceeds from this offering through October 31, 1996 were $215,000.  The 
Placement Agent for this offering, First Honolulu Securities, Inc., received 
total commissions of $12,900 (equal to 6% of the gross proceeds from the sale 
of the Units) and 60,531 Common Stock Purchase Warrants (equal to 6% of the 
number of Units sold) through October 31, 1996. The terms of the Warrants 
issued to First Honolulu Securities, Inc. are identical to the terms of the 
Warrants issued to the purchasers in the offering.

     In October 1996, the Company sold 400,000 shares of Common Stock at $0.50
per share to Cultor pursuant to the Cultor Stock Subscription Agreement.  The
total proceeds to the Company from this transaction were $200,000.  No
underwriters were used.  This offering was made in reliance on the exemption
provided under Section 4(2) of the Securities Act.

     In February 1996, the Company issued 40,000 shares of Common Stock at 
$0.62 per share, to Seth Huntley, one of the Company's production 
technicians, for services rendered during the period from August 1995 through 
January 1996.  No underwriter was used.  This offering was made to Mr. 
Huntley without registration pursuant to the exemption provided under Section 
4(2) of the Securities Act.

     In January 1996, the Company sold 4,000,000 shares of Common Stock at 
$0.15 per share to 15 individuals in a private placement under Section 4(2) 
of the Securities Act.  The total proceeds to the Company from this 
transaction were $600,000.  No underwriters were used.

     In January 1996, the Company sold 2,492,800 shares of Common Stock at 
$0.125 per share to one non-U.S. purchaser under Regulation S under the 
Securities Act. The total proceeds to the Company from this transaction were 
$311,600.  No underwriters were used.

     In December 1995, the Company issued 40,000 shares of Common Stock at 
$0.125 per share to John J. Emerick, the Company's Vice President of 
Operations, for services rendered during the period from July 1995 through 
December 1995.  No underwriter was used.  This offering was made to Mr. 
Emerick without registration pursuant to the exemption provided under Section 
4(2) of the Securities Act.


                                      -25-
<PAGE>

     In November 1995, the Company issued an aggregate of 264,000 shares of 
Common Stock at $0.125 per share to nine persons as partial payment for their 
services in constructing the Company's  research and development facility at 
Keahole Point.  No underwriters were used.  This offering was made in 
reliance on the exemption provided under Section 4(2) of the Securities Act.

     In October 1995, the Company issued 127,875 shares at $0.0625 to 8 
individuals for prior services rendered to the Company. No underwriters were 
used.  This offering was made under Section 4(2) of the Securities Act.

     In September 1995, the Company sold 2,712,500 shares of Common Stock at 
$0.08 per share to 15 individuals in a private placement under Section 4(2) 
of the Securities Act. No underwriters were used.

     In August 1995, the Company returned to Mark E. Huntley, Ph.D., the 
Company's President and Chief Executive Officer, 1,320,000 shares of Common 
Stock out of the 4,635,575 shares of Common Stock gifted to the Company by 
Dr. Huntley in 1989.  The closing bid price of the Company's Common Stock on 
the date the 1,320,000 shares were returned to Dr. Huntley was $0.15 per 
share. No underwriters were used.   This offering was made to Dr. Huntley 
under Section 4(2) of the Securities Act.

     In July 1995, the Company sold 3,200,000 shares of Common Stock at 
$0.0625 per share to one non-U.S. purchaser under Regulation S under the 
Securities Act. The total proceeds to the Company from this transaction were 
$200,000.  No underwriters were used.

     In June 1995, the Company issued 50,000 shares of Common Stock at $0.10 
per share to Robert Bidigare, Ph.D., for services rendered in connection with 
the analysis of scientific data from feed trials with Cultor.  No 
underwriters were used.  These shares were issued to Dr. Bidigare without 
registration pursuant to the exemption provided under Section 4(2) of the 
Securities Act.

     In March 1995, the Company sold 1,710,000 shares of Common Stock at 
$0.10 per share to 33 individuals in a private placement under Section 4(2) 
of the Securities Act.  No underwriters were used.  The total proceeds to the 
Company were $171,000.

     In June 1994, the Company issued 250,000 shares of Common Stock at $0.08 
per share to 3 individuals for prior services rendered to the Company.  No 
underwriters were used.  This offering was made under Section 4(2) of the 
Securities Act.

     In May 1994, the Company issued 775,000 shares of Common Stock at $0.08 
per share to 3 individuals for prior services rendered to the Company.  No 
underwriters were used.  This offering was made under Section 4(2) of the 
Securities Act.

     In January 1994, the Company sold 250,000 shares of Common Stock at 
$0.03 per share to one individual in a private placement under Section 4(2) 
of the Securities Act.  No underwriters were used.  The total proceeds to the 
Company were $7,500.


                                     -26-
<PAGE>

ITEM 6.  MANAGEMENT'S PLAN OF OPERATION.

THE FOLLOWING DISCUSSION OF MANAGEMENT'S PLAN OF OPERATION CONTAINS CERTAIN 
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE 
ACT, INCLUDING STATEMENTS THAT INDICATE WHAT THE COMPANY "BELIEVES", 
"EXPECTS" AND "ANTICIPATES" OR SIMILAR EXPRESSIONS.  THESE STATEMENTS INVOLVE 
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE 
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY 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 
ELSEWHERE IN THIS ANNUAL REPORT.  READERS ARE CAUTIONED NOT TO PLACE UNDUE 
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S 
ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL REPORT.  THE COMPANY UNDERTAKES 
NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION OF THESE 
FORWARD-LOOKING STATEMENTS.  THE FOLLOWING DESCRIPTION OF MANAGEMENT'S PLAN 
OF OPERATION CONTAINS MANY REFERENCES TO THE SIGNIFICANT RISKS AND 
UNCERTAINTIES RELATING TO THE COMPANY'S BUSINESS AND PROSPECTS.  THE READER 
IS STRONGLY URGED TO READ THE INFORMATION SET FORTH UNDER THE CAPTION 
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" FOR A MORE DETAILED 
DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES.

OVERVIEW

     Aquasearch has been engaged, since its inception in 1989, in the 
development of proprietary photobioreactor technology for commercial 
cultivation of microalgae.  In 1994, the Company initiated discussions with 
Cultor, a Helsinki-based foods conglomerate that is the second largest 
producer of salmon and trout feed in the world, regarding the purchase of 
microalgae rich in astaxanthin - the primary pigment used in salmon and trout 
feed.  In early 1995, Cultor completed a series of feeding trials with farmed 
salmon, using the Company's microalgae product.  In July 1995, the Company 
entered into the Svenska Foder Supply Agreement with Svenska Foder, then a 
subsidiary of Cultor, pursuant to which Svenska Foder agreed to act as 
exclusive distributor of the Company's natural astaxanthin product for animal 
feed and animal nutrition applications in Sweden, Norway and Finland for 
poultry, pigs, cattle and horses. The Svenska Foder Supply Agreement had a 
term of three years, and target production of five kilograms of natural 
astaxanthin per month.  In October 1995, the Company completed construction 
of a one-acre research and development/production facility.  In the second 
quarter of fiscal 1996, the Company realized its first revenue from the sale 
of its natural astaxanthin product to Svenska Foder.

     In the fiscal year ended October 31, 1996, the Company experienced 
several significant developments.

     On May 14, 1996, the Company entered into the Cultor Distribution and 
Development Agreement, which was approved by the Company's shareholders on 
September 24, 1996, pursuant to which the Company will act as the exclusive 
worldwide supplier of natural astaxanthin derived from microalgae to Cultor 
in the field of animal feed and animal nutrition and Cultor will act as the 
exclusive worldwide distributor of Aquasearch's natural astaxanthin product 
in the field of animal feed and animal nutrition.  Production targets under 
the Cultor Distribution and Development Agreement are 40 kilograms per month 
at the end of the first year (September 24, 1997) and 120 kilograms per month 
at the end of the second year (September 24, 1998).  In order to meet the 
agreed


                                     -27-
<PAGE>

production targets, the Company must significantly expand and improve its 
production facilities, which will involve many significant risks and 
uncertainties.  Under the Cultor Distribution and Development Agreement, 
Cultor and Aquasearch may, at Cultor's option, mutually develop a new joint 
venture company for the sole purpose of producing and selling natural 
astaxanthin derived from microalgae in the field of animal feed and animal 
nutrition.  The terms of the Cultor Distribution and Development Agreement 
are more fully described above under the caption "Part I, Description of 
Business-Corporate Partner Relationships-Cultor." 

     On July 30, 1996, the Company was awarded U.S. Patent Number 5,541,056 
for a "Method of Control of Microorganism Growth Process," which claims 
certain processes that operate in the Company's proprietary, closed-system 
photobioreactor system, the Aquasearch Growth Module.  The Company's U.S. 
filing was made under provisions of the Patent Cooperation Treaty, and the 
Company is in the process of pursuing international patents pursuant thereto.

     On September 24, 1996, the Company's shareholders approved (i) the 
Cultor Distribution and Development Agreement, (ii) the Cultor Stock 
Subscription Agreement and (iii) an amendment to the Company's Articles of 
Incorporation to increase the number of shares of Common Stock that the 
Company is authorized to issue from 50,000,000 shares to 100,000,000 shares 
and authorized the creation and issuance from time to time of up to 5,000,000 
shares of Preferred Stock in one or more series with such designations, 
rights, preferences, privileges and restrictions as the Board of Directors 
may determine.

     In October 1996, the Company commenced a private placement of units,
consisting of one share of Common Stock and one Common Stock Purchase Warrant,
to accredited investors.  As of October 31, 1996, the gross proceeds from this
offering were $215,000.

     On October 22, 1996, Cultor acquired 400,000 shares of the Company's 
Common Stock at a purchase price of $0.50 per share pursuant to the terms of 
the Cultor Stock Subscription Agreement.

     As a result of a nationwide bidding process, Aquasearch has retained the 
engineering firm, Harris Group, of Seattle, Washington to design and engineer 
its expanded production facilities.  At October 31, 1996, Harris Group had 
completed the initial phase of its design work for the Company's planned 
intermediate expansion from one acre to four acres.  Construction of expanded 
production facilities is anticipated to begin in late 1997 or early 1998 and 
is expected to take approximately four to six months.  The construction of 
these expanded facilities is dependent upon a broad variety of contractors 
and subcontractors, availability of supplies, equipment, and the availability 
of requisite capital. While the Company has certain plans to address all 
these requirements, there can be no assurance that the Company will be able 
to complete its expansion in a timely manner.

     On November 14, 1996, the Company executed a Letter of Intent with 
C. Brewer and Company, Limited ("C. Brewer") with respect to the acquisition 
by the Company of between 80 and 90 acres of property in the Ka'u region of 
the Big Island of Hawaii valued at between $900,000 and $1,000,000 in 
exchange for C. Brewer's acquisition of approximately 6% of the outstanding 
Common Stock of the Company. In addition, C. Brewer acquired a three-year 
warrant to purchase up to 500,000 shares of Aquasearch Common Stock at a 
purchase price of $1.25 per share.

     Aquasearch intends, during the coming year, to focus its research and 
development activities not only in the area of working jointly with Cultor to 
further develop its natural astaxanthin production processes and products  
with the 


                                     -28-
<PAGE>

goal of demonstrating its superiority over competitive products but also to 
initiate the development of new products from microalgae, particularly 
natural pigments.  The Company believes it has identified several markets in 
which additional pigments from microalgae might be sold, and, based on 
industry sources, estimates the value of these markets to be in excess of $1 
billion.  To finance new product development, the Company intends not to only 
rely on whatever internal resources may be at its disposal but also to 
compete for state and federal grants under such programs for which it may be 
eligible.  Sources of financing for product development are subject to many 
significant risks and uncertainties, and no assurances can be made that such 
funds will become available nor that their application will necessarily 
result in new products with accessible markets.

     Following the execution of the Svenska Foder Supply Agreement, the 
Cultor Distribution and Development Agreement, and the issuance of its first 
U.S. patent, the Company believes it has commenced the transition toward 
becoming a full-scale commercial producer of microalgae products.  These 
changes in its business have placed and will continue to place significant 
demands on the Company's management, working capital and financial management 
control systems.

     The Company believes that strategic alliances, patent applications and 
licenses for the use of those patents are important parts of its business 
strategy.  There can be no assurance that the Company will be able to 
maintain existing corporate partner relationships, enter into future 
relationships, or develop additional proprietary technology, or that any such 
relationships or patent applications will be successful.

     Aquasearch has incurred net losses in each year since its inception.  At 
October 31, 1996, the Company's accumulated deficit was approximately $2.9 
million.  Aquasearch expects its annual losses to increase for the next two 
years as it expands and develops the physical plant facilities required to 
increase its production capacity for microalgae rich in astaxanthin and 
continues its research and development activities to develop additional 
commercial products from microalgae.  In addition, the Company anticipates 
quarter-to-quarter and year-to-year fluctuations in revenues, expenses and 
losses, some of which could be significant.  The timing and extent of such 
fluctuations will depend, in part, on the timing and receipt of 
astaxanthin-related revenues, the costs of developing additional products 
from microalgae, and the time required for the introduction of any new 
products to certain markets.

RESULTS OF OPERATIONS

     Revenues for the year ended October 31, 1996 were $10,000 compared with 
$0 for the prior year.  The increase was due to the Company's first shipment 
of product to Svenska Foder under the Svenska Foder Supply Agreement.  No 
revenues were generated in subsequent quarters due to significant 
fluctuations in the Company's production process that prohibited it from 
consistently meeting the production targets under the Svenska Foder Supply 
Agreement.  Initial trials conducted by Cultor have demonstrated that the 
Company's product was equivalent in efficacy to competing sources of 
astaxanthin.  The mutual objective of Cultor and Aquasearch in the ongoing 
trials is to develop a product that is superior to competing products, 
although there can be no assurances that the Company and Cultor will be 
successful in this regard.  The Aquasearch Scientific Advisory Board convened 
in late May and again 


                                     -29-
<PAGE>

in late July to review the Company's production procedures and to recommend 
actions that would improve productivity. The Scientific Advisory Board, in 
conjunction with the Company's engineers and representatives from Cultor, 
have recommended certain improvements in hardware and procedures that are 
designed to effect such increases in production.  The Company plans to 
implement these recommendations as soon as financial resources permit.

     Although the Company incurred obstacles in the scale-up of its 
production during fiscal 1996, the Company believes that its AGM technology 
is capable of meeting the 1997 and 1998 production targets under the Cultor 
Distribution and Development Agreement.  At the same time, Aquasearch 
believes that substantial increases in productivity are not likely to occur 
within the first six months of this period due to anticipated interruptions 
caused by construction of the expanded facility and the retro-fitting and 
upgrading of certain parts of its current production system.

     Consistent with the Company's efforts to implement improvements in its 
production system, research and development costs increased by $559,337, or 
more than 600%, during fiscal 1996 compared with fiscal 1995.

     General and administrative expenses increased $247,531, or 63%, during 
fiscal 1996 compared with fiscal 1995. This increase was primarily due to the 
fact that, prior to mid-1995, the Company had not begun construction of its 
HOST Business Park research and development/production facility, had not 
hired any full time administrative personnel, had only nominal administrative 
expenses and relatively small legal and filing fees related to its domestic 
and international patent filings.  Additional expenses were incurred in 
fiscal 1996 compared with fiscal 1995 with respect to the hiring of 
additional administrative personnel (including an Acting Chief Financial 
Officer and an investor relations specialist), the formation and convening of 
the Company's Scientific Advisory Board, the retention of the engineering 
firm of Harris Group to design and engineer the Company's expansion plant, 
and other corporate overhead costs.  

     Total other income and expense increased to $2,597 in fiscal 1996 from a 
net expense of $4,378 in fiscal 1995, due primarily to an increase in 
interest income.

     The net loss for fiscal 1996 was $1,297,932, or $0.03 per share, 
compared with a net loss of $486,813 or $0.02 per share in fiscal 1995.  This 
larger loss in fiscal 1996 resulted primarily from the  increased research 
and development and general and administrative costs incurred as a result of 
the Company's significantly expanded operations.

LIQUIDITY AND CAPITAL RESOURCES

     At October 31, 1996, the Company had a cash balance of $187,166 compared 
with $27,208 at October 31, 1995.  Purchases of fixed assets of $289,026 were 
made in the fourth quarter, primarily to upgrade certain aspects of the 
Company's equipment and production systems, bringing the Company's net plant 
and equipment assets to $709,182, and total assets to $1,367,940, which 
represents an increase in total assets of $878,381, or 179%, during fiscal 
1996.


                                     -30-
<PAGE>

     As of October 31, 1996, the Company projects that it will consume 
between $1.2 million and $1.5 million of operating capital in fiscal 1997 
prior to any planned capital expenditures.  Aquasearch expects to incur 
significant additional capital expenditures as a result of its plans to 
expand and upgrade its present production facility from a one-acre to a 
four-acre production facility.  Furthermore, the Company expects to incur 
significant additional expenditures as a result of its plans to undertake 
research and development of new pigment products from microalgae.  Aquasearch 
anticipates that the largest fraction of its future capital needs will be 
dedicated to expanding production capability in order to meet the production 
targets under the Cultor Distribution and Development Agreement.  To complete 
this expansion, the Company must raise between $5 and $15 million of 
additional capital, the exact amount of which will depend upon a variety of 
factors that may include: the further optimization of production processes; 
the time and costs related to construction of its expanded production 
facilities, the availability of materials, supplies, equipment and 
contractors with appropriate expertise; the costs involved in research and 
development of additional products; the costs required for filing, protecting 
and enforcing patents and other intellectual property rights; the costs of 
commercializing its products; the time and costs associated with the pursuit 
of state and federal research and development grants; and the extent to which 
the Company is successful in forming other strategic alliances, joint 
ventures or partnerships for the sale and distribution of its products.  The 
Company anticipates additional modifications to its production hardware and 
processes both before and during any expansion, some of which may be 
significant.

     The Company believes that its existing capital resources, and funds 
raised through its current private placement offering, are sufficient for 
continued operations through the first quarter of fiscal 1997.  Aquasearch is 
presently pursuing additional sources of capital in order to maintain and 
expand its operations in fiscal 1997.  These capital sources include 
government contracts and grants, product sales, license agreements and equity 
or debt financing. There can be no assurances that the Company will be 
successful in raising the additional capital necessary to sustain or expand 
its operations, or that such capital will be available on terms that would 
not result in substantial dilution to existing investors.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES.  The Company was 
founded in 1988 and has experienced quarterly and annual operating losses 
since its inception.  The Company's net loss in fiscal 1996 was approximately 
$1.3 million and the Company's accumulated deficit at October 31, 1996 was 
approximately $2.9 million.  The Company's losses to date have resulted 
primarily from costs incurred in research and development and from general 
and administrative costs associated with the Company's operations.  The 
Company expects to continue to incur operating losses for the next two years 
as it expands its production facilities to meet the production targets under 
the Cultor Distribution and Development Agreement and increases its research 
and development efforts.  The Company expects to have quarter-to-quarter and 
year-to-year fluctuations in revenues, expenses and losses, some of which 
could be significant.  Future financial results will be affected by, among 
other things, the following factors: the Company's ability to successfully 
manage the transition from a research and development company to a 
commercial-scale enterprise, the Company's ability to complete successfully 
the commercialization and cost optimization of its natural astaxanthin 
product; manufacturing costs and yield issues associated with the scale-up of 
production of its natural astaxanthin product; the progress of the 


                                     -31-
<PAGE>

Company's research and development programs with respect to the development 
of additional microalgal products; the time and costs of obtaining regulatory 
approvals for those products subject to such approval; the Company's ability 
to protect its proprietary rights; the costs of filing, protecting and 
enforcing the Company's patent claims; competing technological and market 
developments and the costs of commercializing and marketing the Company's 
existing and potential products.  There can be no assurance that the Company 
will ever be able to achieve or sustain profitability in the future.

     RISKS INHERENT IN COMMERCIAL PRODUCTION OF MICROALGAE.  The development 
of technology to cultivate and harvest a wide variety of microalgae species 
is a lengthy and technically challenging process.  The Company has faced a 
number of significant technical problems in the development of its AGM 
technology and in its initial production of natural astaxanthin derived from 
HAEMATOCOCCUS PLUVIALIS, including various forms of microbial contamination, 
variability in production cycle times due to technical and biological 
factors, and proportional losses of final product due to processing 
inefficiencies.  As a result of these factors and, to a lesser extent, 
ongoing experimentation with processes and methods and limited capacity, the 
Company's production has fluctuated between one and eight kilograms per month 
during the past twelve months.

     The Company expects to encounter additional technical problems in 
connection with the scale-up in production of HAEMATOCOCCUS PLUVIALIS (and 
any other potential microalgae products).  Some of these problems may be 
presently unknown, may never have been faced, and may have the effect of 
lowering production yields.  There can be no assurance that the Company will 
be successful in correcting these technical problems.  The Company's failure 
to satisfy its production targets under the Cultor Distribution and 
Development Agreement for an extended period could have a material adverse 
effect on the Company's business, financial condition, results of operations 
and its relationships with its corporate partners.

     LIMITED MANUFACTURING EXPERIENCE.  To be successful, the Company must be 
able to produce its products at acceptable costs in compliance with 
contractual requirements, regulatory requirements and local health, safety 
and environmental regulations.  The Company is at an early stage of 
development and has only limited experience producing products derived from 
microalgae.  To date, the Company's only shipments of its first product, 
natural astaxanthin derived from microalgae, have been made to Cultor 
pursuant to the Svenska Foder Supply Agreement and/or pursuant to the Cultor 
Distribution and Development Agreement. In connection with the sale of 
Svenska Foder to KKR, a Danish animal feeds company, in December 1996, Cultor 
acquired all of Svenska Foder's rights under the Svenska Foder Supply 
Agreement.  The Company has not been able consistently to meet the five 
kilograms of natural astaxanthin production targets initially set forth in 
the Svenska Foder Supply Agreement.  The Company may continue to experience 
lower than anticipated production yields or production constraints from time 
to time that may adversely affect its ability to satisfy customer orders, 
including, in particular, the production requirements under the Cultor 
Distribution and Development Agreement.  While the Company's inability to 
satisfy its production targets to date has not disrupted relations with its 
corporate partners, continued inability to satisfy demand may have a material 
adverse effect on the Company's business, financial condition, results of 
operations and its relationships with its corporate partners.


                                     -32-
<PAGE>

     RISKS ASSOCIATED WITH SCALE-UP OF PRODUCTION FACILITIES.  To date, the 
Company has not produced large quantities of natural astaxanthin.  The 
Company has experienced significant delays in product development and 
cultivation and harvesting process development from time to time and its 
product development and cultivation and harvesting processes will require 
additional research and development as well as substantial additional capital 
and other resources prior to full scale commercialization.  The Company 
estimates that it will require approximately $5 million in financing during 
fiscal 1997 to complete the expansion of its existing research and 
development/production facility from a one-acre facility to a four-acre 
facility and an additional $10 million over the subsequent eighteen months to 
complete the construction and commence operation of a ten-acre production 
facility dedicated solely to the production of natural astaxanthin derived 
from microalgae and to fund research and development of new microalgae 
products.  Construction and facility scale-up costs as well as research and 
development and production costs could substantially exceed budgeted amounts 
and estimated time frames may require significant extension. Any such 
additional costs or delays could have a material adverse effect on the 
Company's business, financial condition, results of operations and 
relationships with its corporate partners.

     The Company believes that its existing one-acre research and 
development/production facility is not sufficient to meet the September 1997 
40 kilogram per month production target under the Cultor Distribution and 
Development Agreement.  After completion of the expansion of the existing 
one-acre research and development/production facility to a four-acre 
facility, the Company believes that it will have sufficient production 
capacity, based on existing technology and processes, to meet the September 
1997 40 kilogram per month production target under the Cultor Distribution 
and Development Agreement, but not the September 1998 120 kilogram per month 
production target.  In order to meet the September 1998 120 kilogram per 
month production target under the Cultor Distribution and Development 
Agreement, the Company must complete construction and scale-up of the new 
ten-acre production facility.

     In order to meet the September 1997 40 kilogram per month production 
target and the September 1998 120 kilogram per month production target under 
the Cultor Distribution and Development Agreement, the Company will be 
required to significantly increase its current production capacity.  This 
scale-up of the Company's current production technology poses a number of 
significant risks that presently cannot be quantified or fully assessed.  For 
example, the Company's production process is critically dependent upon 
supplies of freshwater, cold seawater and utilities provided by the Natural 
Energy Laboratory of Hawaii Authority, and any interruption in these supplies 
could have a material adverse effect on the Company's production capability.  
Furthermore, microbial contamination of the Company's water supplies also 
poses significant risks to productivity that may override the Company's 
existing efforts and capability to maintain the sterility of its water 
supply.  The success of the Company's proposed expansion plans will be 
dependent upon the timely performance of a large number of contractors, 
sub-contractors, suppliers and various agencies of the State of Hawaii that 
regulate and license construction, each of which is beyond the control of the 
Company.  Any failure by these contractors, suppliers or state agencies to 
perform in a timely manner could cause delays, cost overruns or changes in 
the Company's construction and expansion plans, which could have a material 
adverse effect on the Company's business, financial condition, results of 
operations and relationships with its corporate partners.


                                     -33-
<PAGE>

     The Company has projected a cost of manufacture for natural astaxanthin 
that assumes that its current manufacturing processes can be scaled to larger 
AGMs.  To date, the Company has not demonstrated that it can culture and 
harvest HAEMATOCOCCUS PLUVIALIS using such larger AGMs.  If the Company's 
current AGM design and processes are not readily scalable to larger sizes, 
then the Company may have to expend substantial additional research effort 
and capital resources to scale its technology in order to increase yields.  
Difficulty in scaling the Company's current processes may translate into 
higher than projected product costs or entail significant reengineering 
efforts in order to meet commercially viable cost targets, which could have a 
material adverse effect on the Company's business, financial condition, 
results of operations and relationships with its corporate partners.

     There can be no assurance that the Company will be successful in 
resolving known or unknown biological and engineering development problems, 
that the Company will be able to develop its products within the estimated 
time schedule, or in accordance with present cost projections, or that the 
products developed by the Company will be commercially viable or widely 
accepted.

     SUBSTANTIAL NEAR-TERM CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; 
DILUTION.  The Company  currently projects that it will require between $1.2 
million and $1.5 in operating capital in 1997 before any planned capital 
expenditures.  In addition, the Company will require approximately $5 million 
in funding during fiscal 1997 and an additional $10 million over the 
subsequent eighteen months in order to further commercialize its natural 
astaxanthin product and scale-up its production facilities to satisfy the 
1998 production targets under the Cultor Distribution and Development 
Agreement and to fund research and development into new microalgae products.  
The Company expects to obtain this funding primarily from sales of equity 
and/or convertible debt securities in the private and/or public markets.  The 
Company's capital requirements will depend on many factors including, but not 
limited to, the timing of development of the Company's products, the timing 
of the scale-up of the existing one-acre research and development/production 
facility to a four-acre facility, the timing of the construction and scale-up 
of the new ten-acre natural astaxanthin production facility, market 
acceptance of the Company's natural astaxanthin product, and the response of 
competitors to the Company's natural astaxanthin product and technology.  If 
additional funds are raised through the issuance of equity securities, the 
percentage ownership of the current shareholders of the Company will be 
reduced and such equity securities may have rights, preferences, and 
privileges senior to those of the holders of the Units offered in the October 
1996 private placement.  There can be no assurance that additional capital 
will be available on terms favorable to the Company or its shareholders, if 
at all.  Moreover, the Company's cash requirements may vary materially due to 
production yield problems, research and development results, product testing 
results, changing relationships with its corporate partners, changes in the 
focus and direction of the Company's research and development programs, 
competitive and technological advances, litigation and other factors.  If 
adequate funds are not available, the Company may be required to curtail 
operations significantly or to obtain funds through entering into 
collaboration agreements on unattractive terms that may require the Company 
to relinquish certain technology or product rights, including patent and 
other intellectual property rights.  The Company's inability to raise capital 
would have a material adverse effect on the Company's business, financial 
condition, results of operations and relationships with its corporate 
partners.


                                     -34-
<PAGE>

     SUBSTANTIAL LONG-TERM CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; 
DILUTION.  Substantial expenditures will be required to enable the Company to 
continue its research and development activities and to manufacture and 
market its products.  The level of expenditures required for these activities 
will depend in part on whether the Company develops, manufactures and markets 
its products independently or with other companies through collaborative 
arrangements.  The Company's future capital requirements will also depend on 
one or more of the following factors: the Company's ability to scale-up and 
manufacture its natural astaxanthin product in cost-effective commercial 
quantities; market acceptance of the Company's natural astaxanthin product; 
the extent and progress of its research and development programs; the time 
and costs of obtaining regulatory clearances (for those products subject to 
such clearance); the progress of preclinical and clinical studies (where 
applicable); the costs involved in filing, protecting and enforcing patent 
claims; competing technological and market developments; the cost of 
developing and/or operating production facilities for its existing product 
and potential products (depending on which products the Company decides to 
produce itself); and the costs of commercializing the Company's products.  
There can be no assurance that funding to carry on these activities will be 
available at all or on favorable terms to permit successful commercialization 
of the Company's products.  In addition, the Company has no credit facility 
or other committed sources of capital, and there can be no assurance that it 
will be able to establish such arrangements on satisfactory terms, if at all. 
 To the extent that capital resources are insufficient to meet future capital 
requirements, the Company will have to raise additional funds to continue 
development of its technologies and products. There can be no assurance that 
such funds will be available on favorable terms, or at all.  To the extent 
that additional capital is raised through the sale of equity and/or 
convertible debt securities, the issuance of such securities could result in 
dilution to the Company's shareholders.  If adequate funds are not available, 
the Company may be required to curtail operations significantly or to obtain 
funds through entering into collaboration agreements on unattractive terms 
that may require the Company to relinquish certain technology or product 
rights, including patent and other intellectual property rights.  The 
Company's inability to raise capital would have a material adverse effect on 
the Company's business, financial condition, results of operations and 
relationships with its corporate partners.

     EFFECT OF INCREASED COMPETITION ON MARKET PRICE OF SYNTHETIC AND NATURAL 
ASTAXANTHIN.  The primary competition for the Company's natural astaxanthin 
product is currently synthetic astaxanthin.  The synthetic astaxanthin market 
is currently dominated by a single producer, Hoffman-LaRoche, which has 
maintained the market price of its synthetic astaxanthin (derived from 
petrochemicals) at approximately $2,500 per kilogram for more than a decade.  
The Company does not know Hoffman-LaRoche's cost of production for synthetic 
astaxanthin or its probable response to the introduction of the Company's 
competitive product. Hoffman-LaRoche has significantly greater research and 
development, technical, financial, sales and marketing resources than the 
Company and holds a commanding market share.  There can be no assurance that 
the market price for synthetic astaxanthin will remain at $2,500 after 
commercial introduction of a competitive natural astaxanthin product.  Any 
significant decrease in the market price for synthetic astaxanthin is likely 
to have an adverse effect on the market price for the Company's natural 
astaxanthin product, which could have a material adverse effect on the 
Company's business, financial condition, results of operations and 
relationships with its corporate partners.


                                     -35-
<PAGE>

     RISKS ASSOCIATED WITH POTENTIAL JOINT VENTURE.  Pursuant to the Cultor 
Distribution and Development Agreement, Cultor and Aquasearch may, at 
Cultor's option, mutually develop a new joint venture company for the sole 
purpose of producing and selling natural astaxanthin in the field of animal 
feed and animal nutrition.  Pursuant to this arrangement, Aquasearch would 
contribute the ten-acre natural astaxanthin production facility in return for 
its 50% stake in the new company and Cultor would contribute cash equal to 
the appraised replacement value of this production facility in return for its 
50% stake.  Under the Cultor Distribution and Development Agreement, Cultor 
also has the option to acquire a further 25% stake in the new company (thus 
increasing Cultor's stake to 75%) for cash based on a formula.  The formula 
provides that the purchase price for the additional shares to be acquired by 
Cultor from Aquasearch will equal the greater of (i) $1 million, (ii) half of 
the current replacement value of the astaxanthin production facility 
initially contributed by Aquasearch or (iii) an amount equal to X multiplied 
by Y; where "X" equals the difference between the Transfer Price (as defined) 
and the Aquasearch Production Costs (as defined) for the six-month period 
commencing on November 1, 1998 and ending on April 30, 1999 and "Y" equals 
six (or, in other words, an amount equal to twelve times annualized operating 
profit in the last six months of the third year of the contract).

     The decision to form, and the timing of the decision to form, the new 
joint venture company is solely within the discretion of Cultor and may occur 
at any time prior to September 24, 1999.  Similarly, the decision to 
exercise, and the timing of the decision to exercise, the option to purchase 
from Aquasearch a further 25% stake in the new joint venture company (thus 
increasing Cultor's stake to 75%) is solely within the discretion of Cultor 
and may occur at any time prior to September 24, 1999.  There can be no 
assurance that the Company will have developed markets for its natural 
astaxanthin product other than animal feed and animal nutrition at the time, 
if any, that Cultor exercises its option to form the joint venture company.  
Similarly, there can be no assurance that the Company will have developed 
microalgal products other than natural astaxanthin at the time, if any, that 
Cultor exercises its option to form the joint venture company.

     CUSTOMER CONCENTRATION.  The Company has entered into a three-year 
exclusive Distribution and Development Agreement with Cultor with respect to 
the production, sale and use of natural astaxanthin in the field of animal 
feed and animal nutrition worldwide.  The failure of the Company to gain 
additional customers for its natural astaxanthin product in other 
applications and customers for its other potential products, the loss of 
Cultor  or any potential corporate partner as a customer, or a significant 
reduction in the level of sales to Cultor or any potential corporate partner 
could have a material adverse effect on the Company's business, financial 
condition, results of operations and relationships with its corporate 
partners.

     RELIANCE ON CORPORATE PARTNER RELATIONSHIPS.  An important element of 
the Company's business strategy involves developing strategic relationships 
with companies that have established research and development, sales, 
marketing and distribution capabilities for the microalgal products that the 
Company intends to develop.  In May 1996, the Company executed the three-year 
exclusive Cultor Distribution and Development Agreement with Cultor covering 
the production and distribution of the Company's natural astaxanthin product 
worldwide in the field of animal feed and animal nutrition.


                                     -36-
<PAGE>

     The Company intends to enter into strategic relationships with other 
companies to apply its technology, fund development, commercialize future 
products, and assist in obtaining regulatory approvals.  There can be no 
assurance that any of the Company's present or future corporate partners will 
perform their obligations as expected or devote sufficient resources to the 
development, testing or marketing of the Company's potential products 
developed under such arrangements.  Any parallel development by a strategic 
partner of alternative technologies or products, preclusion of the Company 
from entering into competitive arrangements, failure to obtain timely 
regulatory approvals, premature termination of an agreement, or failure by a 
strategic partner to devote sufficient resources to the development and 
commercialization of the Company's products could have a material adverse 
effect on the Company's business, financial condition, results of operations 
and relationships with its corporate partners.

     The Company's agreements with its consultants and corporate partners are 
complex.  There may be provisions within such agreements that give rise to 
disputes regarding the rights and obligations of the parties.  These and 
other possible disagreements could lead to delays in research, development or 
commercialization of certain products, or could result in litigation or 
arbitration, which could be time-consuming and expensive, and could have a 
material adverse effect on the Company's business, financial condition, 
results of operations and relationships with its corporate partners.

     There can be no assurance that the Company will be able to maintain or 
expand its relationships with its existing corporate partners or to replace 
its existing corporate partners in the event any such relationship were 
terminated. In the event of the termination of the Cultor Distribution and 
Development Agreement, the Company's ability to distribute its natural 
astaxanthin product in the field of animal feed and animal nutrition would be 
materially adversely affected, which would have a material adverse effect on 
the Company's business, financial condition and results of operations. 

     The Company's primary strategy for the development, regulatory approval, 
production and commercialization of certain of its products is to enter into 
collaborations with various corporate partners, licensors, licensees and 
others. There can be no assurance that the Company will be able to negotiate 
collaborative arrangements in the future on acceptable terms, if at all, or 
that such collaborative arrangements will be beneficial to the Company.  To 
the extent that the Company is not able to establish such arrangements, it 
would face increased capital requirements to undertake such activities at its 
own expense and might encounter significant delays in introducing its 
products into certain markets or find that the development, manufacture or 
sale of its products in such markets is adversely affected.

     COMPETITION.  Competition in the world market for astaxanthin is intense 
and is expected to increase significantly in the near future.  The Company's 
natural astaxanthin product will compete directly with the synthetic 
astaxanthin product developed and marketed worldwide by Hoffman-LaRoche.  
Hoffman-LaRoche has significantly greater research and development, 
technical, financial, management, marketing and sales resources than the 
Company as well as a worldwide reputation and dominant market share.  In 
addition, at least three companies, Astacarotene, Heliosynthese and 
Cyanotech, have either announced plans to produce natural astaxanthin from 
microalgae or have produced small quantities for 


                                     -37-
<PAGE>

test and commercial purposes.  Moreover, Cyanotech has recently announced 
plans to enter into large scale commercial production of natural astaxanthin 
during the next six months.

     The Company's natural astaxanthin product is expected to compete with 
synthetic astaxanthin (and any other alternative products) primarily on the 
basis of product performance, price and proprietary position.  Although 
Hoffman-LaRoche has maintained the market price of synthetic astaxanthin at 
approximately $2,500 per kilogram for more than a decade, there can be no 
assurance that Hoffman-LaRoche will maintain the price of its synthetic 
astaxanthin product in response to the introduction of any competing natural 
astaxanthin product.  Any such pricing or other competitive pressure could 
have a material adverse effect on the Company's business, financial 
condition, results of operations and relationships with its corporate 
partners.  The existence of products of which the Company is not aware, or 
products that may be developed in the future, may also adversely affect the 
marketability of the Company's natural astaxanthin product.

     Aquasearch anticipates that competition to develop microalgal products 
other than natural astaxanthin will also be intense.  The Company's 
competitors for these potential products are expected to include major 
pharmaceutical, food processing, chemical and specialized biotechnology 
companies, many of which will have financial, technical and marketing 
resources significantly greater than those of Aquasearch.  In addition, other 
emerging marine bioscience companies, similar to Aquasearch, may form 
collaborations with large established companies to support research, 
development and commercialization of products that may be competitive with 
future products of Aquasearch.  Also, academic institutions, governmental 
agencies and other public and private research organizations are conducting 
research activities and seeking patent protection and may commercialize 
products competitive with those of Aquasearch on their own or through joint 
ventures.  The existence of products of which Aquasearch is not aware, or 
products that may be developed in the future, may adversely affect the 
marketability of additional products developed by Aquasearch.

     Aquasearch believes that its AGM and related microalgae cultivation 
technologies currently offer significant technical and economic advantages 
compared with the open pond systems currently used by certain competitors, 
including increased yields and the ability to cultivate hundreds of 
microalgal species at commercial scale that cannot be produced in open pond 
systems due to substantially higher risks of contamination and lack of 
control.  Aquasearch also believes that its AGM and related microalgae 
cultivation technologies compare favorably with other known closed systems 
with respect to capital and operating costs.  However, the existence of 
technology of which Aquasearch is not aware, or technology that may be 
developed in the future, may adversely affect the technical and competitive 
advantages that Aquasearch currently believes it holds compared with 
competing open pond and known closed system microalgae cultivation 
technologies.

     Aquasearch's competitive position will also depend on its ability to 
attract and retain qualified scientific and other personnel, develop 
effective proprietary products, successfully perform its collaboration 
agreements with its corporate partners, implement research and development 
and production plans, obtain patent protection and secure adequate capital 
sources.


                                     -38-
<PAGE>

     DEPENDENCE ON KEY PERSONNEL.  The Company's prospects depend to a 
significant extent upon certain members of senior management, including, in 
particular, Mark E. Huntley, Ph.D., the Company's Chairman, President and 
Chief Executive Officer.  The Company does not maintain key man life 
insurance on Dr. Huntley and has no employment agreement with Dr. Huntley or 
any other senior executives.  The loss of any senior executive or other key 
employee could have a material adverse effect on the Company's business, 
financial condition, results of operations and relationships with its 
corporate partners.

     The Company is highly dependent on its ability to attract and retain key 
scientific, technical, management and operating personnel, including 
consultants and members of its Scientific Advisory Board.  As the number of 
qualified marine and aquatic microbiologists is limited, competition for such 
personnel is intense.  The Company will need to develop expertise and add 
skilled employees or retain consultants in such areas as research and 
development, clinical testing, government approvals, manufacturing and 
marketing in the future.  There can be no assurance that the Company will be 
able to attract and retain the qualified personnel or develop the expertise 
needed in these areas.  The Company currently has a small research and 
management group with limited operating experience.  The loss of the services 
of one or more members of the research or management group or the inability 
to hire additional personnel and develop expertise as needed would have a 
material adverse effect on the Company's business, financial condition, 
results of operations and relationships with its corporate partners.

      Members of the Company's Scientific Advisory Board assist the Company 
in optimizing its production and processing methods and formulating research 
and development strategy pertaining to both existing and potential microalgal 
products.  Most members of the Scientific Advisory Board are not employed by 
the Company and each of these members may have commitments to other entities 
that could limit their availability to the Company.  There can be no 
assurance that the Company will be able to retain its key Scientific Advisory 
Board members.

     RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH.  To date, the Company has 
been engaged almost exclusively in research and development activities.  The 
Company is in the process of transitioning toward becoming a full-scale 
commercial producer of microalgae products.  These changes in its business 
have placed and will continue to place significant demands on the Company's 
management, working capital and financial and management control systems.  
Failure to upgrade the Company's operating, management and financial control 
systems or difficulties encountered during such upgrades could adversely 
affect the Company's business, financial condition, results of operations and 
relationships with its corporate partners.  Although the Company believes 
that its systems and controls are adequate to address its current needs, 
there can be no assurance that such systems will be adequate to address 
future expansion of the Company's business. The Company's results of 
operations will be adversely affected if revenues do not increase 
sufficiently to compensate for the increase in operating expenses resulting 
from any expansion and there can be no assurance that any expansion will be 
profitable or that it will not adversely affect the Company's results of 
operations.  In addition, the success of any future expansion plans will 
depend in part upon the Company's ability to continue to improve and expand 
its management and financial control systems, to attract, retain and motivate 
key personnel, and to raise additional required capital.  There can be no 
assurance that the Company will be successful in these efforts.


                                     -39-
<PAGE>

     RISKS ASSOCIATED WITH EXPANSION INTO ADDITIONAL MARKETS AND PRODUCT 
DEVELOPMENT.  Other than its natural astaxanthin product, the Company 
currently has no products actively under development.  The Company believes 
that its near-term prospects are substantially dependent on the expansion of 
the worldwide market for natural astaxanthin and the Company's ability to 
successfully develop and commercialize new products and penetrate new 
markets.  There can be no assurance that the Company can successfully develop 
its natural astaxanthin or any other potential microalgae products, that any 
such products will be capable of being produced in commercial quantities at 
reasonable cost, or that any such products will achieve market acceptance.  
The Company has no experience marketing its products directly and is 
presently entirely dependent on the marketing skills and efforts of its 
corporate partners.  There can be no assurance that the marketing efforts of 
such corporate partners will be successful or whether such corporate partners 
will eventually compete with the Company or assist the Company's competitors. 
Many other companies have significantly greater marketing and product 
development experience and resources to devote to marketing and product 
development than the Company.  The Company has entered into, and expects to 
enter into additional, selected strategic alliances with third parties for 
product development, marketing and sales. There can be no assurances 
regarding the performance of such third parties, or the overall success, if 
any, of such strategic alliances.  The inability of the Company to 
successfully develop or commercialize its natural astaxanthin or any 
potential microalgae products would have a material adverse effect on the 
Company's business, financial condition, results of operations and its 
relationships with its corporate partners.

     DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF 
INTELLECTUAL PROPERTY PROTECTION.  Aquasearch relies upon a combination of 
patents, copyright protection, trade secrets, know-how, continuing 
technological innovation and licensing opportunities to develop and maintain 
its competitive position.  The Company's future prospects depend in part on 
its ability to obtain patent protection for its products and processes, to 
preserve its copyright and trade secrets and to operate without infringing 
the proprietary rights of third parties.  For further information regarding 
the risks associated with intellectual property matters, see "Part I, Item 1, 
Description of Business - Patents, Licenses and Proprietary Technology."

     UNCERTAINTY REGARDING OBTAINING AND MAINTAINING GOVERNMENT APPROVALS. 
Aquasearch's natural astaxanthin product, potential products and its research 
and production activities are or may become subject to varying degrees of 
regulation by a number of government authorities in the United States and 
other countries, including the FDA.  For further information regarding the 
risks associated with obtaining and maintaining government approvals, see 
"Part I, Item 1, Description of Business - Government Regulation."

     CONCENTRATION OF PRODUCTION CAPACITY; RELIANCE ON CLIMATIC CONDITIONS.  
All of the Company's production capacity is currently located at its 
Kailua-Kona, Hawaii facility, on property leased from the State of Hawaii and 
situated on a 200-year-old lava flow adjacent to a dormant volcano.  The 
Company maintains minimal finished goods inventory.  In the event that 
production at, or transportation from, such facility (or any other facility 
that the Company might construct in the Ka'u Region of the Big Island of 
Hawaii pursuant to the C. Brewer Transaction) were interrupted by fire, 
volcanic eruption, earthquake, tidal wave, hurricane, or other natural 
disaster, work stoppage, termination or suspension of the 


                                     -40-
<PAGE>

Company's facility lease at the Host Park by the State of Hawaii for public 
use or similar purposes, other regulatory actions or any other cause, the 
Company would be unable to continue to produce its products at such facility. 
Such an interruption would have a material adverse effect on the Company's 
business, financial condition, results of operations and relationships with 
its corporate partners.

     Due to the importance of sunlight and a consistent warm temperature for 
microalgae growth, the Company's production may be significantly affected by 
weather patterns.  Any unseasonably cool or cloudy weather would adversely 
impact the Company's production and could have a material adverse effect on 
the Company's business, financial condition, results of operations and 
relationships with its corporate partners.

     RISKS ASSOCIATED WITH INTERNATIONAL SALES.  The Company currently has a 
distribution arrangement with Cultor, a Finnish company.  The Company expects 
that international sales will represent a significant portion of its revenue 
for the foreseeable future because aquaculture production, the primary market 
for natural astaxanthin today, is more highly developed in Europe and Asia 
than in the United States.  The Company's business, financial condition and 
results of operations may be materially and adversely affected by any 
difficulties associated with managing accounts receivable from international 
customers, tariff regulations, imposition of governmental controls, political 
and economic instability or other trade restrictions.  Although the Cultor 
Distribution and Development Agreement provides that sales will be 
denominated in United States dollars, fluctuations in currency exchange rates 
could cause the Company's products to become relatively more expensive to 
customers in the affected country, leading to a reduction in sales in that 
country.

     PRODUCT LIABILITY.  The Company faces an inherent business risk of 
exposure to product liability claims alleging that the use of its technology 
or products resulted in adverse effects.  There can be no assurance that the 
Company's current level of product liability insurance together with 
indemnification rights under its existing license agreements and other 
collaborative arrangements will be adequate to protect the Company.  It is 
uncertain whether the Company will be able to obtain increased levels of 
insurance as the Company grows, that any level of insurance would be 
economically practical or that it would be able to renew its current or 
future policies.  A product liability claim or recall in excess of insured 
amounts or amounts recoverable under applicable contractual arrangements 
could have a material adverse effect on the Company's business, financial 
condition, results of operations and relationships with its corporate 
partners.

     CONCENTRATION OF STOCK OWNERSHIP.  Based upon shares of Common Stock 
that will be outstanding as of the date hereof, the Company's directors and 
executive officers, as a group, beneficially own approximately 22.55% of the 
Company's outstanding Common Stock.  As a result, these stockholders will 
have the ability to strongly influence the actions of the Board of Directors 
and the outcome of actions that are brought before the stockholders for 
approval.  Such a high level of ownership may have the effect of delaying or 
preventing a change in control of the Company and may adversely affect the 
voting and other rights of the holders of Common Stock.


                                     -41-
<PAGE>

     POSSIBLE VOLATILITY OF STOCK PRICE; LIMITED LIQUIDITY; ABSENCE OF 
DIVIDENDS.  The market price of the Common Stock has historically experienced 
a high level of volatility and may continue to experience high volatility in 
the foreseeable future.  Announcements of technological innovations or new 
commercial products by the Company or its competitors, developments or 
disputes concerning patent or proprietary rights, publicity regarding actual 
or potential benefits relating to products under development by the Company 
or its competitors, general regulatory developments affecting the Company's 
products in both the United States and foreign countries, market conditions 
for life sciences companies in general and economic and other internal and 
external factors, as well as period-to-period fluctuations in financial 
results, may have a significant impact on the Company's business or the 
future market price of the Common Stock.  Since the Company's initial public 
offering of Common Stock in January 1989, the average daily trading volume in 
the Common Stock as reported on the Nasdaq Electronic Bulletin Board has been 
relatively low.  See "Price Range of Common Stock."  There can be no 
assurance that a more active public trading market will develop for the 
Common Stock in the near future.  The Company has never declared or paid any 
cash dividends on its Common Stock and does not intend to do so for the 
foreseeable future.

     RISKS ASSOCIATED WITH LOW-PRICED "OVER-THE-COUNTER" SECURITIES.  The 
Company's Common Stock is currently traded in the "over-the-counter market" 
in the "Electronic Bulletin Board" of the National Association of Securities 
Dealers, Inc. (the "NASD").  See "Price Range of Common Stock."  Securities 
of companies traded on the NASD Electronic Bulletin Board are generally more 
difficult to dispose of and to obtain accurate quotations as to price than 
securities of companies that are traded on the Nasdaq National Market, the 
Nasdaq SmallCap Market or the major stock exchanges.

     The Securities Enforcement and Penny Stock Reform Act of 1990 requires 
additional disclosure relating to the market for penny stocks in connection 
with trades in any stock defined as a penny stock.  The rules and regulations 
of the Securities and Exchange Commission (the "Commission") generally define 
a penny stock to be an equity security that has a market price of less than 
$5.00 per share, subject to certain exceptions.  Such exceptions include any 
equity security listed on Nasdaq or a national securities exchange and any 
equity security issued by an issuer that has (i) net tangible assets of at 
least $2,000,000, if such issuer has been in continuous operation for three 
years, (ii) net tangible assets of at least $5,000,000, if such issuer has 
been in continuous operation for less than three years, or (iii) average 
annual revenue of at least $6,000,000, if such issuer has been in continuous 
operation for less than three years.  Unless an exception is available, the 
regulations require the delivery, prior to any transaction involving a penny 
stock, of a disclosure schedule explaining the penny stock market and the 
risks associated therewith.

     In addition, trading in the Company's securities is currently subject to 
Rule 15g-9 promulgated under the Exchange Act for non-Nasdaq and non-exchange 
listed securities.  Pursuant to Rule 15g-9, broker/dealers who recommend the 
Company's securities to persons other than established customers and 
accredited investors must make a special written suitability determination 
for the purchaser and receive the purchaser's written agreement to a 
transaction prior to sale.  Securities are exempt from this rule if their 
market price is at least $5.00 per share.


                                     -42-
<PAGE>

     The impact of the regulations applicable to penny stocks on the 
Company's securities is to reduce the market liquidity of the Company's 
securities by limiting the ability of broker/dealers to trade the Company's 
securities and the ability of purchasers of the Company's securities to sell 
their securities in the secondary market.  The low price of the Company's 
Common Stock also has a negative effect on the amount and percentage of 
transaction costs paid by individual shareholders and the potential ability 
of the Company to raise additional capital by issuing additional shares.  The 
primary reasons for these effects include the internal policies of certain 
institutional investors that prohibit the purchase of low-priced stocks, the 
fact that many brokerage houses do not permit low-priced stocks to be used as 
collateral for margin accounts or to be purchased on margin and certain 
brokerage house policies and practices that tend to discourage individual 
brokers from dealing in low-priced stocks. In addition, since broker's 
commissions on low-priced stocks represent a higher percentage of the stock 
price than commissions on higher priced stocks, the current low share price 
of the Common Stock results in individual shareholders paying transaction 
costs that are a higher percentage of their total share value than would be 
the case if the Company's share price were substantially higher.

     The Company intends to apply for listing on the Nasdaq SmallCap Market 
as soon as it meets the eligibility requirements.  Under existing Nasdaq 
rules, in order to be eligible for listing on the Nasdaq SmallCap Market, the 
Company's Common Stock must maintain a minimum bid price of $3.00, the 
Company must have a minimum shareholders' equity of $2 million, total assets 
of at least $4 million and at least two market makers.  Nasdaq has recently 
proposed more stringent financial requirements for listing on the Nasdaq 
SmallCap Market that would require that (i) the Common Stock have a minimum 
bid price of $4.00, (ii) the Company have minimum tangible net assets (total 
assets less total liabilities and goodwill) of $4 million or a market 
capitalization of at least $50 million or net income of at least $750,000 in 
two of the three prior years, (iii) the Company have a public float of at 
least one million shares with a market value of at least $5 million and (iv) 
the Common Stock have at least three market makers and be held of record by 
at least 300 shareholders.  The Company's Board of Directors believes that it 
is in the best interests of the Company and its shareholders for the 
Company's Common Stock to be included for trading on the Nasdaq SmallCap 
Market.  If and when the Company were to meet all of the requirements to be 
listed on the Nasdaq SmallCap Market other than the minimum trading price 
requirement, the Company's Board of Directors would probably recommend that 
the Company effect a reverse stock split in order to meet the minimum trading 
price listing requirement.  Any such reverse stock split would require 
shareholder approval.  There can be no assurance that the Company will attain 
the listing requirements for the Nasdaq SmallCap Market or that any proposed 
reverse stock split will be approved by the shareholders or successfully 
implemented following such approval.

     POTENTIAL ADVERSE EFFECT OF EXERCISE OF WARRANTS AND SALES OF WARRANT 
COMMON STOCK.  As of October 31, 1996, the Company had outstanding 1,008,950 
Common Stock Purchase Warrants (the "Warrants") that have an exercise price 
of $1.00 per share and 25,974 Common Stock Purchase Warrants that have an 
exercise price of $0.21 per share.  The exercise of the outstanding Warrants 
will dilute the percentage ownership of the holders of the Common Stock, and 
any sales in the public market of Common Stock issuable upon the exercise of 
the Warrants (the "Warrant Common Stock") may adversely affect prevailing 
market prices for the Common Stock.  Moreover, the terms upon which the 
Company will be able to obtain additional equity capital may be adversely 
affected since the holders of such Warrants can be expected to exercise them 
at a time when the Company would, in all likelihood, 

                                     -43-
<PAGE>

be able to obtain any needed capital on terms more favorable to the Company 
than those provided in the outstanding Warrants.

     POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS.  The Warrants are 
subject to redemption by the Company at a price of $.01 each, commencing on 
February 1, 1997, on at least 30 days' prior written notice, if the average 
closing bid price of the Common Stock as reported on The Nasdaq SmallCap 
Market, if traded thereon, or, if not traded thereon, the average closing 
sale price if listed on a national securities exchange (or other reporting 
system that provides last sale prices), or, if not traded thereon, the 
average of the closing bid prices on the NASD Electronic Bulletin Board, 
equals or exceeds $1.50 per share (subject to adjustment for stock splits, 
stock dividends and similar events) for a period of 20 trading days during 
any 30 consecutive trading days ending on the third day prior to the date on 
which the Company gives notice of redemption.  Upon the giving of such notice 
of redemption, holders of the Warrants will lose their right to exercise the 
Warrants, except during such 30-day notice of redemption period.  Upon the 
receipt of a notice of redemption of the Warrants, the holders thereof would 
be required to (i) exercise the Warrants and pay the exercise price at a time 
when it may be disadvantageous for them to do so; (ii) sell the Warrants at 
the then market price, if any, when they might otherwise wish to hold the 
Warrants; or (iii) accept the redemption price which is likely to be 
substantially less than the market value of the Warrants at the time of 
redemption.

     POTENTIAL ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK.  The Company's 
Articles of Incorporation authorize the issuance of up to 5,000,000 shares of 
"blank check" Preferred Stock, with such designations, rights, preferences, 
privileges and restrictions as determined by the Board of Directors from time 
to time.  As a result, the Board of Directors is empowered, without further 
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 the Common Stock.  In the event of 
issuance, the Preferred Stock could be used, under certain circumstances, as 
a method of discouraging, delaying or preventing a change in control of the 
Company. Although the Company has no present plans to issue any shares of 
Preferred Stock, there can be no assurance that the Company will not issue 
Preferred Stock at some time in the future.

     SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS.  As of October 31, 
1996, the Company had 40,829,331 shares of Common Stock outstanding, of which 
31,996,488 are freely tradeable under the Securities Act.  The 8,832,843 
shares are "restricted securities," as that term is defined under Rule 144 
promulgated under the Securities Act and may be sold pursuant to Rule 144 
during certain periods noted below.  All of such 8,832,843 securities will 
become eligible for resale without registration under the Securities Act of 
1933 after April 29, 1997.  No prediction can be made as to the effect, if 
any, that sales of shares of Common Stock or the availability of such shares 
for sale will have on the market prices prevailing from time to time.  The 
possibility exists, however, that substantial amounts of Common Stock may be 
sold in the public market which may adversely affect prevailing market prices 
for the Common Stock and could impair the Company's ability to raise capital 
through the sale of its equity securities.

                                     -44-
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS.

     Audited balance sheets as of October 31, 1996, 1995 and 1994 and the 
related statements of loss and accumulated deficit, cash flows and 
Stockholders' equity for the years ended October 31, 1996, 1995 and 1994 (and 
from inception to October 31, 1996) together with related notes and the 
reports of Ernst & Young LLP and Johnson, Holscher & Co., independent 
auditors, appear on pages F-1 through F-19 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 1996.

     In connection with the preparation of the audited financial statements 
for fiscal 1996, the Company determined that it would be in the best 
interests of the Company and its stockholders to retain the national 
accounting firm of Ernst & Young LLP to serve as its independent auditors.
This change was more time consuming than the Company initially anticipated
and was not completed until February 7, 1997.  On February 9, 1997, the 
Company filed a Current Report on Form 8-K with the Commission to announce 
the change in auditors, as is required by the rules and regulations of the 
Commission.  Set forth below is the text of that Form 8-K:

"ITEM 4.  CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT

          Johnson, Holscher & Company, P.C. ("Johnson Holscher") was 
previously the principal accountants for Aquasearch, Inc. (the "Company").  
On February 9, 1997, that firm's appointment as principal accountants was 
terminated by dismissal and Ernst & Young LLP was engaged as principal 
accountants.  The decision to change accountants was approved by the Audit 
Committee of the Board of Directors.

     In connection with the audits of the two fiscal years ended October 31, 
1994 and 1995 and the subsequent interim period through February 9, 1997, 
there were no disagreements between Johnson Holscher and the Company with 
respect to any matter of accounting principles or practices, financial 
statement disclosure, or auditing scope or procedures, which disagreements if 
not resolved to Johnson Holscher's satisfaction would have caused them to 
make reference in connection with their opinion to the subject matter of the 
disagreement.

     The audit reports of Johnson Holscher on the financial statements of the 
Company as of and for the years ended October 31, 1995 and 1994, did not 
contain any adverse opinion or disclaimer of opinion, nor were they qualified 
or modified as to uncertainty, audit scope, or accounting principles, except 
as follows with respect to the 1994 audit report:


                                     -45-
<PAGE>

     As shown in the financial statements, the Company incurred a net loss of
     $240,090 for the year ended October 31 1994, and has incurred substantial
     net losses for each of the past five years.  These factors, and others
     discussed in Note 6, indicate that there is substantial doubt about the
     Company being able to continue in existence.  Accordingly, the assets and
     the liabilities of the Company have been written down to liquidation
     basis."


                                     PART III

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

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

     The Company has a total of three (3) directors, constituting the entire
Board of Directors.  The Company's Bylaws provide that the directors shall hold
office for one-year terms and thereafter until their successors shall have been
elected and qualified.  The executive officers serve at the pleasure of the
Board of Directors.  The names, ages, positions and terms of office of the
executive officers and directors of the Company are:

<TABLE>
<S>                <C>
Name and Age:      Dr. Mark E. Huntley (46)
Address:           73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740
Office:            Director; President, Chief Executive Officer & Chairman of the Board
Since:             1988

Name and Age:      Dr. Pearn P. Niiler (59)
Address:           73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740 
Office:            Director
Since:             1988

Name and Age:      Mr. Michael C.B. Smith (41)
Address:           73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740
Office:            Director
Since:             1996

The names, ages, positions and duration of employment of other key employees are:

Name and Age:      John J. Emerick, Jr.; (32)
Address:           73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740
Position:          Vice President of Operations
Since:             1996
</TABLE>


                                     -46-
<PAGE>

<TABLE>
<S>                 <C>
Name and Age:       Alexander B. Leonard, Ph.D.; (34)
Address:            73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740
Position:           Vice President of Manufacturing
Since:              1996
</TABLE>

BUSINESS EXPERIENCE

     MARK E. HUNTLEY, Ph.D., is a co-founder of Aquasearch, a co-inventor of 
the Aquasearch Growth Module and has served as the President, Chief Executive 
Officer and Chairman of the Board since inception.  Dr. Huntley has served as 
a research biologist at Scripps Institution of Oceanography, University of 
California, San Diego since 1980.  Dr. Huntley has won numerous awards and 
grants in his field, published more than 75 articles and a book, and lectured 
throughout the world.  Dr. Huntley serves on the Executive Committee of the 
Global Ocean Ecosystem Dynamics program, 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 State Department, 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.

     PEARN P. NIILER, Ph.D., has been a consultant to the Company since 1990 
and has served as a director of the Company since 1991.  Dr. Niiler is an 
expert in applied mathematics and fluid dynamics and was a co-inventor of 
various processes used in the Aquasearch Growth Module.  Dr. Niiler is 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 taught and conducted 
research at Harvard College, Nova University and Oregon State University and 
has published more than 125 scientific papers.  Dr. Niiler received his B.S. 
in Mechanics Engineering from Lehigh University, earned honors as a Fulbright 
Scholar at Cambridge University, England, and was awarded a Ph.D. in Applied 
Mathematics as a Woodrow Wilson Fellow from Brown University.  Dr. Niiler has 
invented certain oceanographic instrumentation technologies that are now in 
commercial production with sales of $6 million annually.

     MICHAEL C.B. SMITH has been a consultant to the Company since 1993 and 
has served as a director of the Company since March 1996.  Mr. Smith was 
primarily responsible for structuring and negotiating the terms of the 
Company's strategic relationships with Svenska Foder and Cultor.  Mr. Smith 
spent ten years as a senior executive with Whitbread Plc of England (one of 
Britain's largest leisure retailers and brewers).  With Whitbread he held 
positions of President and CEO of Keg Restaurants Ltd (a $200 
million-turnover company operating in Canada, USA and Australia); CEO of a 
franchised fast food chain based in Britain; and VP Marketing for Whitbread's 
most profitable retail concept.  Mr. Smith received his MBA from Cranfield 
Institute of Technology.


                                     -47-
<PAGE>

     JOHN J. EMERICK has served as the Company's Business Manager since July 
1995 and its Vice President of Operations since August 1996.  Prior to 
joining Aquasearch, Mr. Emerick served as Team Manager in a Florida pulp mill 
for Proctor & Gamble, where he was engaged in production management and 
engineering development during the period from June 1985 to June 1987.  From 
June 1987 to March 1992, Mr. Emerick served in various positions, including 
Top Engineering Executive, for Tetra-Pak Materials, Inc., an international 
packaging conglomerate, in which he was responsible for all engineering 
processes in the plant, including research, implementation and training.  
During the period from July 1992 to February 1995, Mr. Emerick served as 
General Manager of Advanced Neuro Dynamics of Honolulu, the largest NLP 
seminar and training company in the world.  Mr. Emerick received his B.A. in 
Mechanical Engineering (HIGH HONORS) from Georgia Tech University in 1985.

     ALEXANDER B. LEONARD, Ph.D., has served as the Company's Director of 
Manufacturing since August 1995 and as Vice President of Manufacturing since 
March 1996.  Prior to joining Aquasearch, Dr. Leonard served as Project 
Manager and Principal Scientist for CalBioMarine Technologies, Inc., a 
research-stage marine biotechnology company, from October 1992 to July 1995.  
At CalBioMarine Technologies, Inc., Dr. Leonard designed and operated 
cultivation systems for marine microalgae and invertebrates on projects 
funded by the National Science Foundation and the National Institutes of 
Health.  Dr. Leonard received a B.A. in Zoology (SUMMA CUM LAUDE) from 
Trinity College, Dublin in 1984 and a Ph.D. in Marine Biology from Scripps 
Institution of Oceanography, University of California, San Diego in 1992.

OTHER DIRECTORSHIPS

     No directors held directorships in any other reporting companies.

FAMILY RELATIONSHIPS

     There are no family relationships among directors, executive officers or
persons nominated or chosen by the Company to become directors or executive
officers.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

      No director, executive officer, or control person of the Company has 
been involved in any of the following legal proceedings: (1) any bankruptcy 
petition filed by or against any business of which such person was a general 
partner or executive officer either at the time of the bankruptcy or within 
two years prior at that time; (2) any conviction in a criminal proceeding or 
being subject to a pending criminal proceeding (excluding traffic violations 
and other minor offenses); (3) being subject to any order, judgment, or 
decree, not subsequently reversed, suspended or vacated, of any court of 
competent jurisdiction, permanently or temporarily enjoining, barring, 
suspending or otherwise limiting his involvement in any type of business, 
securities or banking activities; and (4) being found by a court of competent 
jurisdiction (in a civil action), the Commission or the Commodity Future 
Trading Commission to have violated a federal or state securities or 
commodities law, and the judgment has not been reversed, suspended, or 
vacated.


                                     -48-
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

     The following table sets forth the information, on an accrual basis, with
respect to the compensation of Mark E. Huntley, Ph.D., the Chief Executive
Officer of the Company, for the three fiscal years ended October 31, 1996.

<TABLE>
<CAPTION>
                             YEAR ENDED     SALARY/OTHER       STOCK         NO. OF SECURITIES
NAME AND POSITION            OCTOBER 31,    COMPENSATION      AWARDS(1)      UNDERLYING OPTIONS
--------------------------   -----------    ------------      -----------    ------------------
<S>                           <C>             <C>               <C>              <C>
Mark E. Huntley,Ph.D.,          1996         $      0(2)             $0               0
President and Chief             1995         $      0(2)       $198,000(3)        1,665,250(4)
Executive Officer               1994         $      0(2)       $ 60,000(5)            0
</TABLE>

(1)  The dollar value of each of the restricted stock awards in the table above
     was determined by multiplying the closing bid price of the Company's 
     Common Stock on the date of grant of the stock award by the number of 
     shares awarded.

(2)  Dr. Huntley has at all times during 1994, 1995 and 1996 served as a
     consultant to the Company while continuing his employment as a research
     biologist at Scripps Institute of Oceanography, University of California,
     San Diego.  Pursuant to the rules and regulations of the Commission,
     however, Dr. Huntley's position as President and Chief Executive Officer 
     of the Company qualifies him as an employee of the Company.  
     Notwithstanding this, all compensation paid to Dr. Huntley to date has 
     been as though he was an independent consultant to the Company.

(3)  On August 24, 1995, the Company returned to Dr. Huntley 1,320,000 shares of
     Common Stock from the 4,635,575 shares of Common Stock that Dr. Huntley had
     gifted to the Company in 1989.  Although the Company had intended this
     transaction to qualify as a return of capital to Dr. Huntley without any
     tax or other consequences to the Company or Dr. Huntley, under the rules
     and regulations of the Commission, this transaction qualifies as a stock
     grant in return for prior services.  The closing bid price of the Common
     Stock on the date of grant was $0.15 per share.

(4)  On August 1, 1995, the Board of Directors granted a stock option to Dr.
     Huntley, with a term of seven years, payable, if exercised, by a 
     promissory note payable over 3 years with interest at 5% per annum, to 
     purchase up to 1,665,250 shares of Common Stock at an exercise price of 
     $0.0625 per share.

(5)  On May 2, 1994, the Board of Directors authorized and approved the 
     issuance of 400,000 shares of Common Stock to Dr. Huntley for past 
     services.  The closing bid price of the Company's Common Stock on May 2, 
     1994 was at $0.08 per share.

     The total annual salary and bonus for any other executive officer did not
exceed $100,000 for the fiscal year ended October 31, 1996.

STOCK OPTION GRANTS

     There were no individual grants of stock options made to any executive
officers or directors during the fiscal year ended October 31, 1996.  The
following table sets forth information concerning individual grants of stock
options made to all employees of the Company during the fiscal year ended
October 31, 1996:


                                     -49-
<PAGE>

<TABLE>
<CAPTION>
                                 NUMBER OF        % OF TOTAL
                                 SECURITIES     OPTIONS GRANTED     EXERCISE
                                 UNDERLYING     TO EMPLOYEES IN     OR BASE         EXPIRATION
NAME AND POSITION                 OPTIONS         FISCAL YEAR      PRICE ($/SH)        DATE
--------------------------       ----------     ---------------    ------------     -----------
<S>                              <C>                 <C>           <C>               <C>
John J. Emerick, Vice            100,000(1)          55.6%         $0.61/share       8/l/2002
President of Operations

Alexander B. Leonard, Ph.D.,      50,000(2)          27.8%         $0.61/share       8/l/2002
Vice President of Manufacturing

Georgia Malan                     30,000(3)          16.6%         $0.61/share       8/1/2002
</TABLE>

(1)     On August 1, 1995, the Company granted a stock option to Mr. Emerick
        to purchase 100,000 shares that would vest on July 25, 1996 at an
        exercise price equal to the closing bid price of the Common Stock on
        July 25, 1996.  The closing bid price of the Common Stock on July 25,
        1996 was $0.61 per share.

(2)     On August 1, 1995, the Company granted a stock option to Dr. Leonard
        to purchase 50,000 shares that would vest on July 25, 1996 at an
        exercise price equal to the closing bid price of the Common Stock on
        July 25, 1996.  The closing bid price of the Common Stock on July 25,
        1996 was $0.61 per share.

(3)     On August 1, 1995, the Company granted a stock option to Ms. Malan to
        purchase 30,000 shares that would vest on July 25, 1996 at an exercise
        price equal to the closing bid price of the Common Stock on July 25,
        1996.  The closing bid price of the Common Stock on July 25, 1996 was
        $0.61 per share.

STOCK OPTIONS EXERCISED DURING FISCAL YEAR

     No stock options or stock appreciation rights were exercised by any
executive officers or directors of the Company during the fiscal year ending
October 31, 1996.

OPTION VALUES

     The following table sets forth information with respect to the value of
unexercised options held by executive officers as of October 31, 1996:

                         FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                        NUMBER OF SECURITIES
                                       UNDERLYING UNEXERCISED                VALUE OF UNEXERCISED
                                             OPTIONS AT                      IN-THE-MONEY OPTIONS AT
                                           FISCAL YEAR END                      FISCAL YEAR END(1)
                                    ------------------------------       -------------------------------
NAME                                EXERCISABLE      UNEXERCISABLE       EXERCISABLE       UNEXERCISABLE
--------------------------------    -----------      -------------       -----------       -------------
<S>                                  <C>                <C>               <C>                   <C>
Mark E. Huntley, Ph.D. . . . . .     1,665,250           -0-              $528,717               -0-

</TABLE>

--------------
(1)  Value of unexercised options is based on the closing bid price of the
     Company's Common Stock on the Nasdaq Electronic Bulletin Board on 
     October 31, 1996 ($0.38) minus the exercise price.


                                     -50-
<PAGE>

LTIP AWARDS DURING FISCAL YEAR

     No long term incentive plan awards were made to any executive officers or
directors of the Company during the fiscal year ending October 31, 1996.

COMPENSATION OF DIRECTORS

     As of October 31, 1996, no director had received any compensation for any
service provided to the Company as a director.

EMPLOYMENT CONTRACTS

     There are currently no employment contracts or change-in-control
arrangements between the Company and any director or executive officer.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     Mark E. Huntley, Ph.D. is the only person who owns of record or is known 
to the Company to own beneficially more than five percent (5%) of the shares of
Common Stock of the Company as of October 31, 1996.  The following table sets
forth information regarding the security ownership of the Company's directors
and officers.

<TABLE>
<CAPTION>
   TITLE                NAME AND ADDRESS                NATURE OF                          PERCENT
  OF CLASS             OF BENEFICIAL OWNER         BENEFICIAL OWNERSHIP    NO. OF SHARES   OF CLASS(2)
------------     --------------------------------  --------------------    --------------  -----------
<S>              <C>                                      <C>               <C>               <C>
  Common             Mark E. Huntley, Ph.D.               Direct            5,683,186(1)      13.92%
                 73-4460 Queen Ka'ahumanu Highway
                           Suite 110
                    Kailua-Kona, Hawaii 96740
</TABLE>

(1)  Includes stock options to purchase an aggregate of 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.
(2)  The percent of class is calculated on the basis of the amount of
     outstanding securities as of October 31, 1996.

SECURITY OWNERSHIP OF MANAGEMENT

     Certain information with respect to the holdings of Common Stock of the
directors and executive officers of the Company as of October 31, 1996 is set
forth in the table below.


                                     -51-
<PAGE>

<TABLE>
<CAPTION>
  TITLE               NAME AND ADDRESS                       NATURE OF              NO. OF           PERCENT
 OF CLASS            OF BENEFICIAL OWNER                BENEFICIAL OWNERSHIP       SHARES(1)        OF CLASS
----------    ------------------------------------      --------------------     --------------    ----------
<S>             <C>                                           <C>                  <C>               <C>
Common               Mark E. Huntley, Ph.D.                   Direct               5,683,186(2)      13.92%
                    73-4460 Queen Ka'ahumanu 
                Highway, Suite 110, Kailua-Kona, 
                          Hawaii 96740

Common                Pearn P. Niiler, Ph.D.                  Direct               1,918,402(3)       4.70%
                    73-4460 Queen Ka'ahumanu 
                Highway, Suite 110, Kailua-Kona, 
                          Hawaii 96740

Common                  Michael C.B Smith                     Direct               1,961,050(4)       4.80%
                    73-4460 Queen Ka'ahumanu 
                Highway, Suite 110, Kailua-Kona, 
                          Hawaii 96740

                   All Executive Officers and                 Direct               9,562,638(5)      23.42%
                     directors as a group
                        (3 in number)

</TABLE>
(1)  Applicable percentage ownership is based on 40,829,331 shares of Common
     Stock outstanding as of October 31, 1996 together with applicable options
     for such stockholder.  Beneficial ownership is determined in accordance
     with the rules of the Commission, and includes voting and investment power
     with respect to the shares.  Shares of Common Stock subject to options
     currently exercisable or within 60 days after October 31, 1996 are deemed
     outstanding for purposes of computing the percentage ownership of the
     persons holding such options, but are not deemed outstanding for computing
     the percentage of any other stockholder.
(2)  Includes 1,655,250 shares subject to options that are exercisable within 
     60 days after October 31, 1996.
(3)  Includes 1,291,050 shares subject to options that are exercisable within 
     60 days after October 31, 1996.
(4)  Includes 1,741,050 shares subject to options that are exercisable within 
     60 days after October 31, 1996.
(5)  Includes a total of 4,847,350 shares subject to options that are
     exercisable within 60 days after October 31, 1996.

CHANGES IN CONTROL

     The Company is not aware of any arrangements which may result in a change
in control of the Company.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During the last two years, the Company has not been a party to any 
transaction or series of similar transactions exceeding $60,000 in which any 
of the following persons had a direct or indirect material interest: (1) any 
director or executive officer of the Company; (2) any nominee for election as 
a director; (3) any person who owns of record or is known to the Company to 
own beneficially more than 5 % of 


                                     -52-

<PAGE>

the shares of common stock of the Company; or (4) any member of the immediate 
family of any of the foregoing persons.

ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

EXHIBITS

     3.1  Articles of Incorporation of the Registrant.  (Previously filed as an
          exhibit to the Registrant's Annual Report on Form 10-KSB for the year
          ended October 31, 1995).

     3.2  Articles of Amendment to Articles of Incorporation, filed October 4,
          1996. (Filed herewith).

     3.3  Bylaws.  (Previously filed as an exhibit to the Registrant's Annual
          Report on Form 10-KSB for the fiscal year ended October 31, 1995).

     4.1  Form of 1996 Bridge Note (Filed herewith).

     4.2  Form of Private Placement Warrant (Filed herewith).

    10.1  Distribution and Development Agreement, dated May 14, 1996, between
          the Company and Cultor.  (Previously filed as an exhibit to the
          Registrant's Current Report on Form 8-K dated May 14, 1996.)

    10.2  Stock Subscription Agreement, dated May 14, 1996, between the Company
          and Cultor.  (Previously filed as an exhibit to the Registrant's
          Current Report on Form 8-K dated May 14, 1996.)

    10.3  Amended Keahole Point Facilities Use Agreement dated August 22, 1996,
          by and between The Natural Energy Laboratory of Hawaii Authority and
          the Company. (Filed herewith).

     27   Financial Data Schedule.  (Filed herewith).

REPORTS ON FORM 8-K

     On September 12, 1996, the Company filed a Current Report on Form 8-K
including the text of Cultor Distribution and Development Agreement 
and the Cultor Stock Subscription Agreement.

                                     -53-
<PAGE>

                                     SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on April 21, 1997, on its behalf by the
undersigned, thereunto duly authorized.

                                          AQUASEARCH, INC.


                                          By  /s/ Mark E. Huntley
                                             -------------------------------
                                                  Mark E. Huntley
                                                  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/ Mark E. Huntley                     April 21, 1997
---------------------------
Mark E. Huntley
Director, President, CEO & Chairman
of the Board of Directors



/s/ Pearn P. Niiler                     April 21, 1997
--------------------------
Pearn P. Niiler
Director



/s/ Michael C.B. Smith                  April 21, 1997
--------------------------
Michael C.B. Smith
Director


                                     -54-

<PAGE>

                                Aquasearch, Inc.
                        (A Development Stage Enterprise)

                              Financial Statements


                   Years ended October 31, 1996, 1995 and 1994



                                    CONTENTS

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . F-2
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . F-3


Financial Statements

Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Loss and Accumulated Deficit . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Statements of Stockholders' Equity (Deficit) . . . . . . . . . . . . . . . . F-7
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .F-13




                                      F-1
<PAGE>

                         Report of Independent Auditors


The Board of Directors
Aquasearch, Inc.

We have audited the accompanying balance sheet of Aquasearch, Inc. (a 
development stage enterprise) as of October 31, 1996, and the related 
statements of loss and accumulated deficit, cash flows, and stockholders' 
equity (deficit) for the year then ended and for the period from inception to 
October 31, 1996. 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 audit.  The financial statements as of 
October 31, 1995 and 1994, and for the period from inception to October 31, 
1995, were audited by other auditors whose report dated December 2, 1995 except 
for Note 5 dated January 26, 1996, and Note 8 dated April 6, 1997, expressed an 
unqualified opinion on those statements.  The financial statements for the 
period from inception to October 31, 1995 include no revenues and a net loss of 
$1,616,518.  Our opinion on the statements of loss and accumulated deficit, 
cash flows, and stockholders' equity (deficit) for the period from inception to 
October 31, 1996, insofar as it relates to amounts for prior periods through 
October 31, 1995, is based solely on the report of the other auditors.

We conducted our audit in accordance with generally accepted auditing 
standards. 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 audit and the report of other 
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of other auditors, the 
financial statements referred to above present fairly, in all material 
respects, the financial position of Aquasearch, Inc. (a development stage 
enterprise) as of October 31, 1996, and the results of its operations and its 
cash flows for the year then ended and the period from inception to October 31, 
1996, in conformity with generally accepted accounting principles.

As discussed in Note 1 to the financial statements, the Company's recurring 
losses from operations and working capital deficit at October 31, 1996 raise 
substantial doubt about its ability to continue as a going concern.  The 
October 31, 1996 financial statements do not include any adjustments that might 
result from the outcome of this uncertainty.


                                                                    SIGNATURE


March 11, 1997
Honolulu, Hawaii



                                     F-2

<PAGE>

                                 [LETTERHEAD]


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors
Aquasearch, Inc.
San Diego, California


We have audited the accompanying balance sheets of Aquasearch, Inc. (a 
development stage enterprise) (a Colorado corporation) as of October 31, 
1995, 1994 and 1993, and the related statements of loss and accumulated 
deficit, cash flows, and stockholders' equity for the years then ended and 
for the period from inception to October 31, 1995. 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 audit.

We conducted our audit in accordance with generally accepted auditing 
standards. 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 audit provides 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. (a 
development stage enterprise) as of October 31, 1995, 1994 and 1993, and the 
results of its operations, cash flows, and changes in stockholders' equity 
for the years then ended and for the period from inception to October 31, 
1995, in conformity with generally accepted accounting principles.

Englewood, Colorado
December 2, 1995 except
Note 5 dated January 26, 1996
and Note 8 dated April 6, 1997                    /s/ Johnson, Holscher & Co.
                                                    PROFESSIONAL CORPORATION


                                     F-3
<PAGE>

                                 AQUASEARCH, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                               OCTOBER 31
                                                                                                  1995
                                                                                              (AS RESTATED)
                                                                                    1994         (NOTE 8)         1996
                                                                                 ---------    --------------  ----------
<S>                                                                              <C>          <C>             <C>
ASSETS              
Current assets:               
   Cash  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $    1,213     $   27,208     $  187,166
   Cash in escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . .          85,000             --        460,980
   Accounts receivable - employees/affiliates. . . . . . . . . . . . . . .              --             --          1,933
   Stock subscriptions receivable. . . . . . . . . . . . . . . . . . . . .              --         35,000             --
   Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . .              --          9,177          5,534
   Refundable deposits . . . . . . . . . . . . . . . . . . . . . . . . . .           1,207          2,535          3,145
                                                                                ----------     ----------     ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .          87,420         73,920        658,758
                                                                                ----------     ----------     ----------

Plant and equipment - at cost: . . . . . . . . . . . . . . . . . . . . . .                               
   Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              --        408,219        676,709
   Other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .              --          7,740         68,349
   Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . .              --           (320)       (35,876)
                                                                                ----------     ----------     ----------
Net plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . .              --        415,639        709,182
                                                                                ----------     ----------     ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $   87,420     $  489,559     $1,367,940
                                                                                ----------     ----------     ----------
                                                                                ----------     ----------     ----------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . .      $   21,866     $  233,181     $  466,165
   Deposits held . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          85,000             --        460,980
   Notes payable (NOTE 2). . . . . . . . . . . . . . . . . . . . . . . . .              --             --        150,000
                                                                                ----------     ----------     ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . .         106,866        233,181      1,077,145
                                                                                ----------     ----------     ----------

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock ($0.0001 par value, 100,000,000 shares authorized, 
   40,829,331 shares outstanding). . . . . . . . . . . . . . . . . . . . .           3,467          4,379          5,204
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . .       1,141,060      1,902,785      3,234,309
Deficit accumulated during the development stage . . . . . . . . . . . . .      (1,163,973)    (1,650,786)    (2,948,718)
                                                                                ----------     ----------     ----------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . . . .         (19,446)       256,378        290,795
                                                                                ----------     ----------     ----------
Total liabilities and stockholders' equity (deficit) . . . . . . . . . . .      $   87,420     $  489,559     $1,367,940
                                                                                ----------     ----------     ----------
                                                                                ----------     ----------     ----------
</TABLE>

                              SEE ACCOMPANYING NOTES.


                                       F-4
<PAGE>


                                AQUASEARCH, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                  STATEMENTS OF LOSS AND ACCUMULATED DEFICIT

<TABLE>
<CAPTION>
                                                                                                 FOR THE YEARS ENDED OCTOBER 31
                                                                          FROM INCEPTION                      1995
                                                                          TO OCTOBER 31,                 (AS RESTATED)
                                                                              1996            1994          (NOTE 8)         1996
                                                                          ------------   -------------   -------------  -----------
<S>                                                                       <C>            <C>             <C>            <C>
OPERATIONS
Sales  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    10,000    $        --     $        --    $    10,000
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . .         21,226             --              --         21,226
Research and development costs . . . . . . . . . . . . . . . . . . . .      1,092,766         27,063          89,264        648,601
                                                                          ------------   ------------    ------------   ------------
Gross profit (loss). . . . . . . . . . . . . . . . . . . . . . . . . .     (1,103,992)       (27,063)        (89,264)      (659,827)

General and administrative expenses. . . . . . . . . . . . . . . . . .      1,633,197        115,131         393,171        640,702
                                                                          ------------   ------------    ------------   ------------



Earnings (loss) from operations. . . . . . . . . . . . . . . . . . . .     (2,737,189)      (142,194)       (482,435)    (1,300,529)

OTHER INCOME (EXPENSE)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (9,647)            --          (1,762)         2,597
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (6,016)          (800)         (2,616)            --
Investment in joint venture. . . . . . . . . . . . . . . . . . . . . .       (147,096)       (97,096)             --             --
                                                                          ------------   ------------    ------------   ------------

Total other income and (expense) . . . . . . . . . . . . . . . . . . .       (162,759)       (97,896)         (4,378)         2,597
                                                                          ------------   ------------    ------------   ------------

Earnings (loss) before income taxes and extraordinary item . . . . . .     (2,899,948)      (240,090)       (486,813)    (1,297,932)

Extraordinary item - loss on write down of assets 
   to liquidation basis. . . . . . . . . . . . . . . . . . . . . . . .        (14,502)            --              --             --
                                                                          ------------   ------------    ------------   ------------

Earnings (loss) before income taxes. . . . . . . . . . . . . . . . . .     (2,914,450)      (240,090)       (486,813)    (1,297,932)

Federal and State income taxes . . . . . . . . . . . . . . . . . . . .             --             --              --             --
                                                                          ------------   ------------    ------------   ------------

Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . .     (2,914,450)      (240,090)       (486,813)    (1,297,932)

ACCUMULATED DEFICIT
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . .        (34,268)      (923,883)     (1,163,973)    (1,650,786)
                                                                          ------------   ------------    ------------   ------------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . .    $(2,948,718)   $(1,163,973)    $(1,650,786)   $(2,948,718)
                                                                          ------------   ------------    ------------   ------------
                                                                          ------------   ------------    ------------   ------------

Loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $     (0.14)   $     (0.01)    $     (0.02)   $     (0.03)
                                                                          ------------   -------------   -------------  -----------
                                                                          ------------   -------------   -------------  -----------

Weighted average shares outstanding. . . . . . . . . . . . . . . . . .      20,380,495     22,782,063     25,541,021     37,679,955
                                                                          ------------   -------------   -------------  -----------
                                                                          ------------   -------------   -------------  -----------
</TABLE>

                                 SEE ACCOMPANYING NOTES.

                                            F-5

<PAGE>

                                     AQUASEARCH, INC.
                            (A DEVELOPMENT STAGE ENTERPRISE)

                                STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                FOR THE YEARS ENDED OCTOBER 31
                                                                         FROM INCEPTION                     1995
                                                                         TO OCTOBER 31,                (AS RESTATED)
                                                                             1996            1994         (NOTE 8)         1996
                                                                         ------------   -------------  -------------  ------------
<S>                                                                      <C>            <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $(2,914,450)     $(240,090)     $(486,813)   $(1,297,932)
Adjustments to reconcile net loss to net cash used 
  in operating activities:
   Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . .         3,527             --             --             --
   Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . .        41,583             --            320         35,556
   Expenses paid with common stock . . . . . . . . . . . . . . . . . .       444,165         82,000        210,998         62,800
   Loss on write down of assets to liquidation basis . . . . . . . . .         5,392             --             --             --
   Changes in:
      Other current assets . . . . . . . . . . . . . . . . . . . . . .        (8,478)        (1,207)       (10,505)         3,033
      Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . .        (1,933)            --        (35,000)        33,067
      Accounts payable . . . . . . . . . . . . . . . . . . . . . . . .       382,452          6,425        110,536        232,968
      Deposits held. . . . . . . . . . . . . . . . . . . . . . . . . .       460,980         85,000        (85,000)       460,980
                                                                         ------------     ----------     ----------   ------------
Cash used in operating activities. . . . . . . . . . . . . . . . . . .    (1,586,762)       (67,872)      (295,464)      (469,528)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets . . . . . . . . . . . . . . . . . . . . . . .      (654,642)            --       (315,180)      (329,099)
                                                                         ------------     ----------     ----------   ------------
Cash used in investing activities. . . . . . . . . . . . . . . . . . .      (654,642)            --       (315,180)      (329,099)

CASH FLOWS FROM FINANCING ACTIVITIES
Cash (held in) released from escrow. . . . . . . . . . . . . . . . . .      (460,980)       (85,000)        85,000       (460,980)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . .     2,816,193          7,500        571,580      1,326,600
Increase in notes payable. . . . . . . . . . . . . . . . . . . . . . .       179,800             --             --        150,000
Offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (106,497)            --        (19,941)       (57,035)
                                                                         ------------     ----------     ----------   ------------
Cash provided by financing activities. . . . . . . . . . . . . . . . .     2,428,516        (77,500)       636,639        958,585
                                                                         ------------     ----------     ----------   ------------

Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . .       187,112       (145,372)        25,995        159,958
Cash, beginning of the period. . . . . . . . . . . . . . . . . . . . .            54        146,585          1,213         27,208
                                                                         ------------     ----------     ----------   ------------
Cash, end of the period. . . . . . . . . . . . . . . . . . . . . . . .   $   187,166      $   1,213      $  27,208    $  187,166
                                                                         ------------     ----------     ----------   ------------
                                                                         ------------     ----------     ----------   ------------
</TABLE>

                          SEE ACCOMPANYING NOTES.


                                    F-6

<PAGE>


                             AQUASEARCH, INC.
                   (A DEVELOPMENT STAGE ENTERPRISE)

              STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                   FROM INCEPTION TO OCTOBER 31, 1996


<TABLE>
<CAPTION>
                                                          COMMON STOCK
                                                   ---------------------------      ADDITIONAL                        TOTAL
                                                    NUMBER OF                         PAID-IN      ACCUMULATED     STOCKHOLDERS'
                                                      SHARES           AMOUNT         CAPITAL        DEFICIT      EQUITY (DEFICIT)
                                                   -----------       ---------      ----------     -----------    ----------------
<S>                                                <C>               <C>            <C>            <C>            <C>
Balance, October 31, 1988. . . . . . . .            20,000,000         $2,000         $ 72,730      $(101,984)        $(27,254)

Issuance of stock for cash 
   ($0.05 per share) 
   January 12, 1989. . . . . . . . . . .             4,000,000            400          165,291             --          165,691

Treasury shares acquired at 
   no cost, January 1989 . . . . . . . .            (1,207,972)            --               --             --               --

Exercise of A warrants for cash 
   ($0.12 per share) 
   March 3, 1989 . . . . . . . . . . . .                55,000              5            6,595             --            6,600

Exercise of A warrants for 
   cash ($0.12 per share) 
   April 21, 1989. . . . . . . . . . . .                95,000             10           11,390             --           11,400

Exercise of A warrants for 
   cash ($0.12 per share) 
   June 5, 1989. . . . . . . . . . . . .                20,000              2            2,398             --            2,400

Treasury shares acquired at 
   no cost, June 1989. . . . . . . . . .              (601,912)            --               --             --               --

Exercise of A warrants for 
   cash ($0.12 per share) 
   September 1989. . . . . . . . . . . .               177,500             19           21,281             --           21,300

Exercise of A warrants for 
   cash ($0.12 per share) 
   August 28, 1989 . . . . . . . . . . .               145,000             14           17,386             --           17,400

Exercise of A warrants for 
   cash ($0.12 per share) 
   October 30, 1989. . . . . . . . . . .                63,500              6            7,614             --            7,620

Treasury shares acquired at 
   no cost, October 1989 . . . . . . . .            (9,388,954)            --               --             --               --

</TABLE>

                           SEE ACCOMPANYING NOTES.


                                     F-7

<PAGE>


                             AQUASEARCH, INC.
                   (A DEVELOPMENT STAGE ENTERPRISE)

              STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                (CONTINUED)


<TABLE>
<CAPTION>
                                                          COMMON STOCK
                                                   ---------------------------      ADDITIONAL                        TOTAL
                                                    NUMBER OF                         PAID-IN      ACCUMULATED     STOCKHOLDERS'
                                                      SHARES           AMOUNT         CAPITAL        DEFICIT      EQUITY (DEFICIT)
                                                   -----------       ---------      ----------     -----------    ----------------
<S>                                                <C>               <C>            <C>            <C>            <C>
Rent provided at no charge . . . . . . .                    --         $   --         $  1,000      $      --         $   1,000

Loss for the year ended 
   October 31, 1989. . . . . . . . . . .                    --             --               --       (183,333)        (183,333)
                                                    ----------        -------       ----------     -----------       ----------
                       
Balance, October 31, 1989. . . . . . . .            13,357,162          2,456          305,685       (285,317)          22,824

Exercise of A warrants for 
   cash ($0.12 per share) 
   December 1989 . . . . . . . . . . . .               390,000             39           41,440             --           41,479

Exercise of A warrants for 
   cash ($0.12 per share) 
   January 1990. . . . . . . . . . . . .               224,000             23           26,857             --           26,880

Exercise of A warrants for 
   cash ($0.12 per share) 
   February 9, 1990. . . . . . . . . . .                80,000              8            9,592             --            9,600

Exercise of A warrants for 
   cash ($0.12 per share) 
   April 25, 1990. . . . . . . . . . . .                30,000              3            3,597             --            3,600

Exercise of A warrants for 
   cash ($0.12 per share) 
   May 14, 1990. . . . . . . . . . . . .                30,000              3            3,597             --            3,600

Issuance of stock for services 
   ($0.05 per share) May 31, 1990. . . .               300,000             30           12,778             --           12,808

Exercise of A warrants for cash 
   ($0.12 per share) June 28, 1990 . . .                15,000              1            1,789             --            1,790

Issuance of restricted stock for 
   cash ($0.07 per share) 
   August 8, 1990. . . . . . . . . . . .               140,000             14            9,786             --            9,800

Exercise of A warrants for 
   cash ($0.12 per share) 
   August 1990 . . . . . . . . . . . . .               110,000             11           13,169             --           13,180

</TABLE>

                            SEE ACCOMPANYING NOTES.

                                     F-8


<PAGE>


                             AQUASEARCH, INC.
                   (A DEVELOPMENT STAGE ENTERPRISE)

              STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                (CONTINUED)


<TABLE>
<CAPTION>
                                                          COMMON STOCK
                                                   ---------------------------      ADDITIONAL                        TOTAL
                                                    NUMBER OF                         PAID-IN      ACCUMULATED     STOCKHOLDERS'
                                                      SHARES           AMOUNT         CAPITAL        DEFICIT      EQUITY (DEFICIT)
                                                   -----------       ---------      ----------     -----------    ----------------
<S>                                                <C>               <C>            <C>            <C>            <C>
Services provided at no 
   charge, August 27, 1990 . . . . . . .                    --             --             (263)            --             (263)

Exercise of A warrants for 
   cash ($0.12 per share) 
   September 5, 1990 . . . . . . . . . .               160,000         $   16         $ 19,114      $      --        $  19,130

Exercise of A warrants for 
   cash ($0.12 per share) 
   October 1990. . . . . . . . . . . . .             1,753,000            175          209,385             --          209,560

Rent provided at no charge . . . . . . .                    --             --            1,000             --            1,000

Loss for the year ended 
   October 31, 1990. . . . . . . . . . .                    --             --               --       (163,839)        (163,839)
                                                    ----------        -------       ----------     -----------       ----------

Balance, October 31, 1990. . . . . . . .            16,589,162          2,779          657,526       (449,156)         211,149

Issue stock in consideration for 
   loans ($0.04 per share) 
   September 1991. . . . . . . . . . . .               290,000             29           11,571             --           11,600

Sale of restricted stock for 
   cash ($0.04 per share) 
   October 1991. . . . . . . . . . . . .               125,000             13            4,988             --            5,000

Rent provided without charge . . . . . .                    --             --            1,000             --            1,000

Loss for the year. . . . . . . . . . . .                    --             --               --       (251,401)        (251,401)
                                                    ----------        -------       ----------     -----------       ----------

Balance, October 31, 1991. . . . . . . .            17,004,162          2,821          675,085       (700,557)         (22,652)

Restricted stock for past 
   services ($0.04 per share) 
   November 1991 . . . . . . . . . . . .                34,000              3            1,357             --            1,360

Restricted stock for 
   services ($0.01 per share) 
   February 1992 . . . . . . . . . . . .               247,500             25            2,900             --            2,925

Restricted stock for 
   services ($0.04 per share) 
   February 1992 . . . . . . . . . . . .                12,000              1              479             --              480

</TABLE>

                             SEE ACCOMPANYING NOTES.

                                      F-9

<PAGE>


                             AQUASEARCH, INC.
                   (A DEVELOPMENT STAGE ENTERPRISE)

              STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                (CONTINUED)


<TABLE>
<CAPTION>
                                                          COMMON STOCK
                                                   ---------------------------      ADDITIONAL                        TOTAL
                                                    NUMBER OF                         PAID-IN      ACCUMULATED     STOCKHOLDERS'
                                                      SHARES           AMOUNT         CAPITAL        DEFICIT      EQUITY (DEFICIT)
                                                   -----------       ---------      ----------     -----------    ----------------
<S>                                                <C>               <C>            <C>            <C>            <C>
Restricted stock for 
   cash ($0.15 per share) 
   February 1992 . . . . . . . . . . . .                20,000              2            2,998             --            3,000

Restricted stock for 
   services ($0.04 per share) 
   May 1992. . . . . . . . . . . . . . .                10,000         $    1       $      398      $      --         $    399

Restricted stock for services 
   ($0.0001 per share) 
   August 1992 . . . . . . . . . . . . .               150,000             15               --             --               15

Rent provided without charge 
   during the year . . . . . . . . . . .                    --             --            1,000             --            1,000

Loss during the year . . . . . . . . . .                    --             --               --        (81,128)         (81,128)
                                                    ----------        -------       ----------     -----------       ----------
                       
Balance, October 31, 1992. . . . . . . .            17,477,662          2,868          684,217       (781,685)         (94,601)

Sale of stock ($0.08 per 
   share) February 1993. . . . . . . . .               975,000             98           73,367             --          (21,136)

Sale of stock ($0.08 per 
   share) April 1993 . . . . . . . . . .             2,200,000            220          170,704             --          149,788

Stock issued for services 
   ($0.08 per share)
   May 1993. . . . . . . . . . . . . . .               673,751             68           53,833             --          203,689

Conversion of notes and 
   advances for stock ($0.08 
   per share) May 1993 . . . . . . . . .               861,900             87           69,315             --          273,091

Rent provided at no charge . . . . . . .                    --             --              250             --          273,341

Loss for the period. . . . . . . . . . .                    --             --               --       (142,197)         131,144
                                                    ----------        -------       ----------     -----------       ----------

Balance, October 31, 1993. . . . . . . .            22,188,313          3,341        1,051,686       (923,883)         131,144

</TABLE>

                          SEE ACCOMPANYING NOTES.

                                     F-10

<PAGE>

                             AQUASEARCH, INC.
                   (A DEVELOPMENT STAGE ENTERPRISE)

              STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                (CONTINUED)


<TABLE>
<CAPTION>
                                                          COMMON STOCK
                                                   ---------------------------      ADDITIONAL                        TOTAL
                                                    NUMBER OF                         PAID-IN      ACCUMULATED     STOCKHOLDERS'
                                                      SHARES           AMOUNT         CAPITAL        DEFICIT      EQUITY (DEFICIT)
                                                   -----------       ---------      ----------     -----------    ----------------
<S>                                                <C>               <C>            <C>            <C>            <C>
Stock issued ($0.03 per 
   share) January 1994 . . . . . . . . .               250,000         $    25      $    7,475     $        --        $   7,500

Stock issued for services 
   ($0.08 per share) 
   May 1994. . . . . . . . . . . . . . .               775,000              76          61,924              --           62,000

Stock issued for services 
   ($0.08 per share) 
   June 1994 . . . . . . . . . . . . . .               250,000              25          19,975              --           20,000

Loss for the year ended 
   October 31, 1994. . . . . . . . . . .                    --              --              --        (240,090)        (240,090)
                                                    ----------         -------       ---------      -----------       ----------
                       
Balance, October 31, 1994. . . . . . . .            23,463,313           3,467       1,141,060      (1,163,973)         (19,446)

Stock issued for cash 
   ($0.10 per share) 
   March 1995. . . . . . . . . . . . . .             1,710,000             171         166,408              --          166,579

Stock issued for services 
   ($0.10 per share) 
   June 1995 . . . . . . . . . . . . . .                50,000               5           4,995              --            5,000

Stock subscribed for cash 
   ($0.0625 per share) 
   July 1995 . . . . . . . . . . . . . .             3,200,000             320         199,680              --          200,000

Reissue stock previously 
   canceled at no cost 
   August 1995 . . . . . . . . . . . . .             1,320,000             132            (132)             --               --

Stock issued for cash 
   ($0.08 per share), 
   September 1995. . . . . . . . . . . .             2,712,500             271         184,795              --          185,066

Stock issued for services 
   (valued at $0.0625 per 
   share) October 1995 . . . . . . . . .               127,875              13           7,979              --            7,992

</TABLE>

                            SEE ACCOMPANYING NOTES.

                                    F-11

<PAGE>

                             AQUASEARCH, INC.
                   (A DEVELOPMENT STAGE ENTERPRISE)

              STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                (CONTINUED)


<TABLE>
<CAPTION>
                                                          COMMON STOCK
                                                   ---------------------------      ADDITIONAL                        TOTAL
                                                    NUMBER OF                         PAID-IN      ACCUMULATED     STOCKHOLDERS'
                                                      SHARES           AMOUNT         CAPITAL        DEFICIT      EQUITY (DEFICIT)
                                                   -----------       ---------      ----------     -----------    ----------------
<S>                                                <C>               <C>            <C>            <C>            <C>
Loss for the year ended October 31, 1995                    --        $    --       $       --     $  (288,813)      $ (288,813)
                                                    ----------        -------       ----------     ------------      -----------

Balance, October 31, 1995, as 
   previously reported . . . . . . . . .            32,583,688          4,379        1,704,785      (1,452,786)         256,378

Correction of reissuance of
   stock previously canceled,
   October 1995 (NOTE 8) . . . . . . . .                    --             --          198,000        (198,000)              --
                                                    ----------        -------       ----------     ------------      -----------

Balance, October 31, 1995, as
   restated. . . . . . . . . . . . . . .            32,583,688          4,379        1,902,785      (1,650,786)         256,378

Stock issued for services 
   ($0.125 per share) 
   November 1995 . . . . . . . . . . . .               264,000             26           32,974              --           33,000

Stock issued for services 
   ($0.125 per share) 
   December 1995 . . . . . . . . . . . .                40,000              4            4,996              --            5,000

Stock issued for cash 
   ($0.15 per share) 
   January 1996. . . . . . . . . . . . .             4,000,000            400          570,534              --          570,934

Stock issued for cash 
   ($0.125 per share) 
   January 1996. . . . . . . . . . . . .             2,492,800            249          296,266              --          296,515

Stock issued for services 
   ($0.62 per share) 
   February 1996 . . . . . . . . . . . .                40,000              4           24,796              --           24,800

Stock issued for cash 
   ($0.50 per share) 
   October 1996. . . . . . . . . . . . .               400,000             40          199,960              --          200,000

Stock issued for cash 
   ($0.21 to $0.23 per share) 
   October 1996. . . . . . . . . . . . .             1,008,843            102          201,998              --          202,100

Loss for the year ended 
   October 31, 1996. . . . . . . . . . .                    --             --               --      (1,297,932)      (1,297,932)
                                                    ----------        -------       ----------     ------------      -----------

Balance, October 31, 1996. . . . . . . .            40,829,331        $ 5,204       $3,234,309     $(2,948,718)      $  290,795
                                                    ----------        -------       ----------     ------------      -----------
                                                    ----------        -------       ----------     ------------      -----------

</TABLE>

                          SEE ACCOMPANYING NOTES.

                                    F-12

<PAGE>


                             AQUASEARCH, INC.
                    (A DEVELOPMENT STAGE ENTERPRISE)

                     NOTES TO FINANCIAL STATEMENTS 

                   October 31, 1996, 1995 and 1994


1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Aquasearch, Inc. (Aquasearch) was founded in February 1988 as a Colorado 
corporation which designs and markets aquaculture technology.  The Company 
has been engaged, since its inception, in the development of proprietary 
photobioreactor technology for commercial cultivation of microalgae.  The 
Company's principal operations are located in Kailua-Kona, Hawaii.

Substantially all of Aquasearch's efforts to date have been focused on the 
development of the Aquasearch Growth Module and the initial production of 
natural astaxanthin, a naturally occurring red pigment derived from a 
freshwater microalgae.  The two primary markets for natural astaxanthin are 
currently aquaculture and poultry feed.

In July 1995, the Company entered into a three-year supply agreement with 
Svenska Foder AB, a subsidiary of Cultor, Ltd., a European producer of animal 
feed.  The contract requires Aquasearch to deliver five kilograms of natural 
astaxanthin per month.  During the year ended October 31, 1996, the Company 
made its first shipment of product to Svenska Foder AB under the supply 
agreement resulting in revenues of $10,000.  Because no significant sales 
have occurred and because the Company has devoted most of its efforts to 
research and development, the Company is considered to be in the development 
stage.

BASIS OF PRESENTATION

The Company's financial statements have been presented on the basis that it 
is able to continue as a going concern, which contemplates the realization of 
assets and the satisfaction of liabilities in the normal course of business. 
The Company has incurred operating losses since inception totaling 
approximately $3 million.  At October 31, 1996 the Company had a working 
capital deficit of approximately  $420,000.  During December 1996 and January 
1997, the Company sold additional shares of  stock through a private 
placement which were sufficient to fund its immediate operating financial 
needs.

In May 1996, the Company entered into a three-year Distribution and 
Development Agreement with Cultor, Ltd. (the Cultor Agreement) pursuant to 
which the Company will act as the exclusive worldwide supplier and Cultor, 
Ltd. will act as the exclusive worldwide distributor of Aquasearch's natural 
astaxanthin in the field of animal feed and animal nutrition.  The terms of 
the Cultor Agreement require that from September 1997 the Company is to 
provide Cultor, Ltd. with 40 kilograms of natural astaxanthin per month 
increasing to 120 kilograms per month beginning in September 1998.  The 
Cultor  Agreement provides that Aquasearch and Cultor, Ltd. share equally in 
the gross margin of the product shipped.



                                    F-13

<PAGE>

                             AQUASEARCH, INC.
                    (A DEVELOPMENT STAGE ENTERPRISE)

                NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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

The Cultor Agreement also provides that Cultor, Ltd. and Aquasearch may, at 
Cultor, Ltd.'s option, mutually develop a new joint venture company for the 
sole purpose of producing and selling natural  astaxanthin in the field of 
animal feed and animal nutrition.  Pursuant to this arrangement, Aquasearch 
would contribute a ten-acre natural astaxanthin production facility to be 
constructed in 1997 in return for its 50% stake in the new company and 
Cultor, Ltd. would contribute cash equal to the appraised value of the 
facility for its 50% stake.

In connection with the execution of the Cultor Agreement, Cultor, Ltd. 
purchased 400,000 shares of the Company's common stock at a purchase price of 
$0.50 per share.

The Company currently has begun planning for the expansion of its present 
one-acre research and development facility to a four-acre production facility 
that will allow it to meet its September 1997 40 kilogram per month target 
production requirement under the Cultor Agreement. To complete the expansion, 
the Company estimates that it must obtain between $5 and $10 million of 
additional capital. In order to meet the September 1998 120 kilogram per 
month target, the Company anticipates that it must construct a ten-acre 
production facility.

The Company currently projects that it will require between $1.2 and $1.5 
million in operating capital in 1997, before any planned capital expenditures 
related to the construction of its new production facility.  The Company is 
presently pursuing additional sources of capital in order to maintain and 
expand its operations in fiscal 1997.  These capital sources include 
government contracts and grants, product sales, license agreements and equity 
and debt financing.

The Company's continued existence is dependent upon its ability to obtain 
working capital and long-term financing to meet its obligations on a timely 
basis and to fund expansion of its production facilities and continued 
research and development of new microalgae products.  The Company is 
presently unable to reasonably determine the likelihood of obtaining such 
financing.  In addition, the failure of the Company to gain additional 
customers for its natural astaxanthin product in other applications and 
customers for its other potential products, the loss of Cultor, Ltd. or any 
potential corporate partner as a customer, or a significant reduction in the 
level of sales to Cultor, Ltd. or any potential corporate partner could have 
a material adverse effect on the Company's business, financial condition and 
results of operations. 

The accompanying financial statements do not include any adjustments, 
including those related to the classification of recorded asset amounts or 
classification of liabilities, that might result from the outcome of the 
aforementioned uncertainties.


                                    F-14

<PAGE>

                             AQUASEARCH, INC.
                    (A DEVELOPMENT STAGE ENTERPRISE)

                NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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

CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all 
highly liquid investments purchased with an original maturity of three months 
or less to be cash equivalents.

PLANT AND EQUIPMENT

Plant and equipment is stated at cost.  Depreciation is provided on the 
straight-line method over ten years for plant and five years for equipment.

STOCK ISSUED FOR SERVICES

Stock issued for services is based on management's estimate of the fair value 
of the Company's restricted stock at the date of issue.

INCOME TAXES

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

Since its inception, the Company has incurred net operating losses. 
Accordingly, no provision has been made for income taxes.

LOSS PER SHARE

Loss per share was based on the average common shares outstanding during the 
period.  Average common share equivalents have not been included in the 
computation of 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, 
cash in escrow, accounts payable, deposits held and notes payable are deemed 
to approximate fair value due to their short-term nature.


                                    F-15

<PAGE>

                             AQUASEARCH, INC.
                    (A DEVELOPMENT STAGE ENTERPRISE)

                NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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

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.

RECLASSIFICATIONS

Certain prior years' balances have been reclassified to be comparable to the 
current year presentation.

2.  COMMON STOCK WARRANTS

On January 12, 1989, the Company sold to the public 4,000,000 shares of its 
$0.0001 par value common stock.  The shares were sold as part of a unit for 
$0.05 per unit. Each unit consisted of one share of common stock and one 
common stock purchase warrant ("A" warrant).  The "A" warrant entitled the 
holder thereof to purchase one additional share of common stock and one 
common stock purchase warrant ("B" warrant) for $0.12 per share.  The "B" 
warrant entitles the holder to purchase one additional share of common stock 
for $ 1.00.  The warrants may be redeemed by the Company at $0.0001 per 
warrant.  The offering netted $165,691 to the Company on the date of closing.

During the years ended October 31, 1989 and 1990, 3,348,000 "A" warrants were 
exercised at $0.12 per share which netted the Company $393,523 (after issue 
costs).  All remaining "A" warrants have been canceled.  The 3,348,000 "B" 
warrants expired on September 15, 1996.

During the year ended October 31, 1996, the Company sold to the public 
1,008,843 shares of its $0.0001 par value common stock.  The shares were sold 
under a 12,000,000 unit private placement offering, each unit consisting of 
one share of common stock and one common stock purchase warrant.  The 
warrants have a term of three years and are exercisable at $1.00 per share.  
The warrants may be redeemed by the Company at $0.01 per warrant upon 30 
days' notice anytime that the closing price per share of the Company's common 
stock exceeds $1.50 per share for 20 trading days out of 30 consecutive 
trading days ending on the third day prior to the date of the notice of 
redemption.  Pursuant to the private placement offering, the placement agent 
received 60,531 warrants as of October 31, 1996.


                                    F-16

<PAGE>

                             AQUASEARCH, INC.
                    (A DEVELOPMENT STAGE ENTERPRISE)

                NOTES TO FINANCIAL STATEMENTS (CONTINUED)


2.  COMMON STOCK WARRANTS (CONTINUED)

In August and September 1996 the Company obtained approximately $150,000 of 
short-term bridge financing from four individual investors pursuant to a note 
and warrant purchase agreement dated August  1, 1996.  The notes bear 
interest at 6.25% and matured on September 30, 1996.  No interest payments 
were made on the notes as of October 31, 1996.  As of January 31, 1997, 
$135,000 of the notes payable was paid.

In conjunction with the execution of the notes the investors received a total 
of 25,974 warrants entitling the holder to purchase one share of common stock 
at an exercise price of $0.21 per share.  The warrants expire on December 31, 
1999.

No warrants were exercised during the year ended October 31, 1996.  At 
October 31, 1996, the Company had reserved a sufficient number of shares of 
its common stock for issuance pursuant to the exercise of the warrants.

3.   COMMON STOCK OPTIONS

In August 1995, the Company granted stock options, exercisable immediately, 
to seven individuals to purchase a total of 5,732,462 shares of the Company's 
common stock at an exercise price of $0.0625 per share.  In addition, the 
Company also granted stock options to three individuals which became 
exercisable in July 1996 to purchase a total of 180,000 shares of the 
Company's common stock at an exercise price of $0.61 per share.

In July 1996, the Company granted stock options to an individual to purchase 
a total of 400,000 shares of the Company's common stock at an exercise price 
of $0.56 per share.  The options were immediately exercisable with respect to 
200,000 shares.  The remaining options become exercisable in January 1997 for 
100,000 shares and July 1997 for 100,00 shares.

No common stock options have been exercised as of October 31, 1996.

4.   RELATED PARTY TRANSACTIONS

During the year ended October 31, 1991, the Company borrowed $29,000 from 
stockholders.  The four separate notes were unsecured, carried an interest of 
12% and were due in August 1992.  As an inducement for the loans, the Company 
issued a total of 290,000 shares of restricted stock to the lenders.  For 
purposes of the financial statements, this stock was valued at $0.04 per 
share based on recent sales of restricted stock.  Loan issue costs of $5,322 
were charged to interest expense in 1991 and unamortized 



                                    F-17

<PAGE>

                             AQUASEARCH, INC.
                    (A DEVELOPMENT STAGE ENTERPRISE)

                NOTES TO FINANCIAL STATEMENTS (CONTINUED)


4.   RELATED PARTY TRANSACTIONS (CONTINUED)

loan issue costs of $6,693 were written off.  During the year ended October 
31, 1993, these loans were converted to 430,650 shares of common stock.

During the year ended October 31, 1995, the Company reissued 1,320,000 shares 
of common stock to its president and chief executive officer.  These were 
shares which had been previously returned to the Company.

The Company has also issued restricted stock for services to various officers 
as follows:

                                 Number of
                                   Shares           Value
                                 ---------       ----------
          YEAR      
          1996                      40,000        $  5,000
          1995                     177,875          12,992
          1994                   1,025,000          82,000
          1993                     650,938          52,075
          1992                     300,000              30

5. INCOME TAXES

Since its formation the Company has incurred net operating losses.  As of 
October 31, 1996, the Company had a net operating loss carryforward available 
to offset future taxable income for federal and state income tax purposes of 
approximately $2.5 million.  The net operating loss carryforward for tax 
reporting purposes expires in the years from 1999 to 2011. The Company also 
has a research credit carryover approximating $40,000 which expires between 
the years 2003 and 2011.

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.

6. INVESTMENT IN OCEANCOLOR

In March 1993, the Company invested $50,000 in a joint venture (OceanColor, 
Inc.) with Cyanotech Corporation.  The Company and Cyanotech each owned 50% 
of OceanColor.  During the year ended October 31, 1994, the Company invested 
an additional $97,100 in this joint venture.  In November 1994, the joint 
venture was dissolved with the licensing rights to its proprietary technology 
reverting entirely to the Company.  At the time of dissolution, there was 
approximately $7,500 of equipment in the joint venture which was distributed 
to the Company.


                                    F-18

<PAGE>

                             AQUASEARCH, INC.
                    (A DEVELOPMENT STAGE ENTERPRISE)

                NOTES TO FINANCIAL STATEMENTS (CONTINUED)


7.  SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES

During the year ended October 31, 1995, the Company constructed its plant 
facility at a cost of  $408,219.  At October 31, 1995, there remained in 
accounts payable approximately $100,800 of this cost.  Accordingly, the 
amount which remained in accounts payable was removed from cash paid for the 
purchase of fixed assets in the statement of cash flows for the year ended 
October 31, 1995.

8.  CORRECTION OF ACCOUNTING FOR REISSUANCE OF STOCK PREVIOUSLY CANCELED

During the year ended October 31, 1995, the Company reisssued 1,320,000 
shares of restricted stock to its president and chief executive officer.  
These were shares which had been previously returned to the Company by the 
president and chief executive officer at no cost to the Company.  The 
reissuance was recorded at par value in the financial statements for the year 
ended October 31, 1995 with no effect on net loss for that year.  The Company 
has subsequently valued the reissued stock at $0.15 per share based on the 
quoted market price of the restricted stock at the date of reissuance.  As a 
result, the Company's financial statements for the year ended October 31, 
1995 have been restated as follows:

                                                    AS ORIGINALLY
                                                      REPORTED      AS RESTATED
                                                    -------------   -----------
Balance sheet:      
   Additional paid-in capital                         $1,704,785     $1,902,785
   Deficit accumulated during the development stage   (1,452,786)    (1,650,786)

Statement of loss and accumulated deficit:                                     
   General and administrative expenses                   195,171        393,171
   Net income (loss)                                    (288,813)      (486,813)
   Loss per share                                          (0.01)         (0.02)

Statement of cash flows:                                                       
   Expenses paid with common stock                        12,998        210,998

9. SUBSEQUENT EVENT

In November 1996, the Company announced that it would acquire between 80 and 
90 acres of property on the Big Island of Hawaii valued at between $900,000 
and $1,000,000 from C. Brewer and Company, Limited in exchange for C. Brewer 
and Company, Limited's acquisition of approximately 6% of the outstanding 
common stock of the Company.  In connection with this transaction, C. Brewer 
also acquired a warrant to purchase up to 500,000 shares of the Company's 
common stock at an exercise price of $1.25 per share.


                                     F-19