<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                  FORM 10-QSB

     (Mark one)
           /X/  Quarterly Report Under Section 13 or 15(d) of the Securities
                Exchange Act of 1934

                            For Quarter Ended July 31, 1997
                                        or
           / /  Transition Report Under Section 13 or 15(d) of the Securities
                Exchange Act of 1934

                       Commission File Number:  33-23460-LA
 
                                AQUASEARCH, INC.
               (Exact name of Registrant as specified in its charter)

          COLORADO                                    33-0034535
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
 incorporation or organization

               73-4460 QUEEN KA'AHUMANU HIGHWAY, SUITE 110
                         KAILUA-KONA, HAWAII 96740
                 (Address of principal executive offices)
               
                              (808) 326-9301
               Registrant's telephone number, including area code
               
                              NOT APPLICABLE
                              --------------
                 Former Name, Former Address and Former Fiscal
                    Year, if Changes Since Last Report

Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter periods as the 
Registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.


                         YES   X       NO  
                             -----         -----


     The number of shares outstanding of Registrant's Common Stock, $0.0001 
par value at July 31, 1997 was 45,865,058 shares.



<PAGE>

                               AQUASEARCH, INC.

                             FORM 10-QSB FOR THE
                         QUARTER ENDED JULY 31, 1997

                                  CONTENTS

PART I - FINANCIAL INFORMATION

                                                                            Page
    ITEM 1:  FINANCIAL STATEMENTS

         BALANCE SHEETS                                                       3

         STATEMENTS OF LOSS AND ACCUMULATED DEFICIT                           4

         STATEMENTS OF CASH FLOWS                                             5

         NOTES TO FINANCIAL STATEMENTS                                        6


    ITEM 2:  MANAGEMENT'S PLAN OF OPERATION

         OVERVIEW                                                             7

         RESULTS OF OPERATIONS -- COMPARISON OF QUARTERS AND                 
           YEARS ENDED JULY 31, 1996 AND 1997                                10

         LIQUIDITY AND CAPITAL RESOURCES                                     10


PART II - OTHER INFORMATION

     ITEM 1:  LEGAL PROCEEDINGS                                              11

     ITEM 2:  CHANGES IN SECURITIES                                          11

     ITEM 3:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
              HOLDERS                                                        12

     ITEM 4:  OTHER INFORMATION                                              12

     ITEM 5:  EXHIBITS AND REPORTS ON FORM 8-K                               12

                                       -2-
<PAGE>

                             AQUASEARCH, INC.
                     (A DEVELOPMENT STAGE ENTERPRISE)

                              BALANCE SHEETS

<TABLE>
<CAPTION>

                                                  October 31,           July 31,
                                                     1996                1997
                                                  (Audited)          (Unaudited)
                                                --------------------------------
<S>                                             <C>                  <C>
ASSETS
  Current Assets
    Cash                                        $     187,166        $    77,506
    Cash in Escrow                                    460,980                  0
    Accounts receivable                                     0                419
    Accounts receivable - employees/affiliates          1,933              1,100
    Prepaid expenses                                    5,534             71,568
    Refundable deposits                                 3,145              4,070
                                                --------------------------------
  Total Current Assets                                658,758            154,663
                                                --------------------------------

  Plant and Equipment                            
    Plant                                             676,709            705,686
    Other equipment                                    68,349            138,100
    Less accumulated depreciation                     (35,876)           (77,933)
                                                --------------------------------
  Net Plant and Equipment                             709,182            765,853

Total Assets                                    $   1,367,940        $   920,516
                                                ---------------------------------
                                                ---------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
  Current Liabilities
    Accounts payable                            $     466,165        $   462,382
    Deposits Held for Common Stock                    460,980                  0
    10% Convertible Note Payable                            0            250,000
    Notes payable                                     150,000                  0
                                                ---------------------------------
  Total Current Liabilities                         1,077,145            712,382

  Stockholders' Equity
    Common stock ($0.0001 par value; 
     100,000,000 shares authorized; 
     40,829,331 and 45,865,058 shares 
     outstanding at Oct 31, 1996 and 
     Jul 31, 1997, respectively                         5,204              5,708
     (See Note 1)
    Additional paid-in capital                      3,234,309          4,342,287

    Deficit accumulated during the
     development stage                             (2,948,718)        (4,139,861)
                                                --------------------------------
  Total Stockholders' Equity                          290,795            208,134
                                                --------------------------------
Total Liabilities and Stockholders' Equity      $   1,367,940        $   920,516
                                                --------------------------------
                                                --------------------------------

</TABLE>

                                     -3-

<PAGE>

                                                 AQUASEARCH, INC.
                                         (A DEVELOPMENT STAGE ENTERPRISE)

                                    STATEMENTS OF LOSS AND ACCUMULATED DEFICIT


<TABLE>
<CAPTION>


                                                    For the period       For the three         For the nine        For the three
                                                   from inception to      months ended         months ended         months ended
                                                        July 31,            July 31,              July 31,             July 31,
                                                         1997                 1997                  1997                1996
                                                     (Unaudited)           (Unaudited)          (Unaudited)         (Unaudited)
                                                   ------------------------------------------------------------------------------
<S>                                                <C>                    <C>                  <C>                  <C>
OPERATIONS
    Sales                                          $          11,077     $         146        $       1,077         $          16
    Cost of sales                                            (21,226)                0                    0               (28,144)
    Research and development costs                        (1,644,309)         (152,717)            (551,543)             (184,973)
                                                   ------------------------------------------------------------------------------
 Gross Profit (loss)                                      (1,654,458)         (152,571)            (550,466)             (213,101)

   General and Administrative expenses                    (2,278,075)         (297,231)            (644,878)             (122,407)
                                                   -------------------------------------------------------------------------------
Earnings (loss) from operations                           (3,932,533)         (449,802)          (1,195,344)             (335,508)

OTHER INCOME (EXPENSE)
    Interest                                                  (5,199)              223                4,448                   673
    Other                                                     (5,799)              411                  217                     0
    Investment in joint venture                             (147,096)                0                    0                     0
                                                   -------------------------------------------------------------------------------
Total other income and (expense)                            (158,094)              634                4,665                   673
                                                   -------------------------------------------------------------------------------
Earnings (loss) before income taxes and 
  extraordinary item                                      (4,090,627)         (449,168)          (1,190,679)             (334,835)

Extraordinary item -- loss on write down 
  of assets to liquidation basis                             (14,966)             (464)                (464)                    0
                                                   -------------------------------------------------------------------------------
Earnings (loss) before income taxes                       (4,105,593)         (449,632)          (1,191,143)             (334,835)

Federal and State income taxes                                     0                 0                    0                  (213)
                                                   -------------------------------------------------------------------------------
Net income (loss)                                         (4,105,593)         (449,632)          (1,191,143)             (335,048)


ACCUMULATED DEFICIT 
Balance, beginning of period                                 (34,268)       (3,690,229)          (2,948,718)           (1,911,062)
                                                   -------------------------------------------------------------------------------
Balance, end of period                             $      (4,139,861)    $  (4,139,861)       $  (4,139,861)        $  (2,246,110)
                                                   -------------------------------------------------------------------------------
                                                   -------------------------------------------------------------------------------
Loss per share                                     $           (0.20)    $       (0.01)       $       (0.03)        $       (0.01)
                                                   -------------------------------------------------------------------------------
                                                   -------------------------------------------------------------------------------
Weighted average shares outstanding                       20,380,495        45,713,543           44,159,602            38,000,000
                                                   -------------------------------------------------------------------------------
                                                   -------------------------------------------------------------------------------

</TABLE>

                                               -4-


<PAGE>

                                    AQUASEARCH, INC.
                            (A DEVELOPMENT STAGE ENTERPRISE)


                               STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                   For the period           For the nine          For the nine 
                                                  from inception to         months ended          months ended 
                                                       July 31,                July 31,              July 31,  
                                                         1997                    1996                  1997    
                                                     (Unaudited)             (Unaudited)           (Unaudited) 
                                                  --------------------------------------------------------------
<S>                                               <C>                       <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net Loss                                        $  (4,105,593)             $  (793,324)          $  (1,191,143)
  Adjustments to reconcile net loss
   to net cash used in operating activities:

      Amortization                                        3,527                        -                       -
      Depreciation                                       83,640                   21,023                  42,057
      Expenses paid with stock                          444,165                        -                       -
      Loss on write down of assets to
       liquidation basis                                  5,392                        -                       -
      Changes in:
       Other current assets                             (75,437)                  (2,649)                (66,959)
       Accounts receivables                              (1,519)                       -                     414
       Accounts payable                                 378,669                   53,436                  (3,783)
       Deposits held                                    250,000                   35,000                (460,980)
                                                  --------------------------------------------------------------
Cash used in operating activities                    (3,017,156)                (686,514)             (1,430,394)

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of fixed assets                             (753,370)                (207,331)                (98,728)
                                                  --------------------------------------------------------------
Cash used in investing activities                      (753,370)                (207,331)                (98,728)

CASH FLOWS FROM FINANCING ACTIVITIES
  Cash (held in) released from escrow                         -                        -                 460,980
  Issuance of common stock                            4,080,888                  954,048               1,264,695
  Issuance of 10% Convertible Notes                     250,000                        -                 250,000
  Increase (decrease) in notes payable                   29,800                        -                (150,000)
  Offering costs                                       (262,710)                 (40,947)               (156,213)
                                                  --------------------------------------------------------------
Cash provided by financing activities                 3,847,978                  913,101               1,419,462
                                                  --------------------------------------------------------------
Net increase in cash                                     77,452                   19,256                (109,660)
Cash, beginning of the period                                54                   27,208                 187,166
                                                  --------------------------------------------------------------
Cash, end of the period                           $      77,506              $    46,464           $      77,506
                                                  --------------------------------------------------------------
                                                  --------------------------------------------------------------

</TABLE>

                                               -5-

<PAGE>

                                AQUASEARCH, INC.
                         (A DEVELOPMENT STAGE ENTERPRISE)
                         
                         NOTES TO FINANCIAL STATEMENTS
                                 JULY 31, 1997
                                  (UNAUDITED)
                         

1.   COMMON STOCK AND STOCK PURCHASE WARRANTS

     As of July 31, 1997, there were a total of 5,070,544 Common Stock 
Purchase Warrants (the "Warrants") issued and outstanding, of which 5,044,570 
Warrants had an exercise price of $1.00 per share and 25,974 Warrants had an 
exercise price of $0.21 per share. No Warrants were exercised during the 
three months ended July 31, 1997. 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 for 20 trading days out of 30 consecutive trading 
days ending on the third day prior to the date of the notice of redemption.

     An analysis of the changes in stockholders' equity is as follows:

<TABLE>
<CAPTION>
                                     SHARES OF     ADDITIONAL      COMMON                          TOTAL        
                                      COMMON        COMMON         PAID-IN       ACCUMULATED    STOCKHOLDERS'   
    DESCRIPTION                       STOCK         STOCK          CAPITAL         DEFICIT         EQUITY       
                                     ---------     ----------      -------       -----------    -------------   
<S>                                  <C>           <C>             <C>           <C>            <C>             
Balance  April 30, 1997...........   45,410,513    $5,663          $4,248,618    $(3,690,229)    $ 564,052 
                                                                                                           
Issuance of Common Stock                                                                                   
  ($0.21 per share)...............      454,545        45              99,955                      100,000 
Offering costs....................           --        --              (6,286)            --        (6,286)
                                                                                                           
Loss for the three months ended                                                                            
  July 31, 1997...................           --        --                  --       (449,632)     (449,632)
                                     ----------    ------          ----------    -----------     --------- 
                                                                                                           
Balance  July 31, 1997............   45,865,058    $5,708          $4,342,287    $(4,139,861)    $ 208,134 
                                     ----------    ------          ----------    -----------     --------- 
                                     ----------    ------          ----------    -----------     --------- 
</TABLE>


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 between 2,570,000 and 2,850,000 shares 
of Common Stock of the Company (the "C. Brewer Common Stock"). In addition, 
C. Brewer acquired a three-year warrant (the "C. Brewer Warrant") to purchase 
up to 500,000 shares of Common Stock at a purchase price of $1.25 per share. 
The stockholders' equity at July 31, 1997 does not reflect the issuance of 
the C. Brewer Common Stock or the C. Brewer Warrant because, as of July 31, 
1997, the 


                                      -6-


<PAGE>

parties had not finally selected the site to be exchanged, which remains 
contingent upon Aquasearch's analysis of water and other factors related to 
the sites. These analyses are expected to be complete during the third 
quarter.

2.  MANAGEMENT'S REPRESENTATIONS OF INTERIM FINANCIAL INFORMATION

    These financial statements reflect all adjustments which are, in the 
opinion of management, necessary to a fair statement of the results of 
operations for the interim period presented. These adjustments are of a 
normal and recurring nature.

ITEM 2.  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 
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, 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" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE 
FISCAL YEAR ENDED OCTOBER 31, 1996 (THE "1996 FORM 10-KSB"). 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 QUARTERLY 
REPORT ON FORM 10-QSB. 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 
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" IN THE 1996 FORM 10-KSB 
FOR A MORE DETAILED DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES.

OVERVIEW

    INCEPTION THROUGH JULY 31, 1996. Aquasearch, Inc. ("Aquasearch" or the 
"Company") 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 Ltd. 
("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 a Supply Agreement with Svenska Foder AB (the "Svenska Foder 
Supply Agreement"), 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 HOST Business Park at Keahole Point, Kailua-Kona, Hawaii.

                                       -7-


<PAGE>

    On May 14, 1996, the Company entered into a three-year Distribution and 
Development Agreement with Cultor (the "Cultor Distribution and Development 
Agreement"), which was approved by the shareholders of the Company 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 were initially 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); however, Cultor 
and the Company recently agreed to (i) extend the term of the Agreement one 
year, (ii) eliminate the September 24, 1997 production target and (iii) 
provide that the September 24, 1998 and 1999 production targets will be 40 
kilograms and 120 kilograms per month, respectively. In order to meet the 
revised 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 under the caption "Part I, Description of 
Business-Corporate Partner Relationships-Cultor" of the 1996 Form 10-KSB.

    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 the provisions of the Patent Cooperation Treaty, and 
the Company is in the process of pursuing international patents pursuant 
thereto.

    AUGUST 1, 1996 THROUGH JULY 31, 1997. The Company has experienced certain 
significant developments over the past twelve months.

    On September 24, 1996, the Company's shareholders approved: (i) the 
Cultor Distribution and Development Agreement; (ii) a Stock Subscription 
Agreement with Cultor pursuant to which Cultor agreed to purchase 400,000 
shares of the Company's Common Stock (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's consultants completed the initial phase of 
the design work for the Company's planned intermediate expansion from a 
one-acre facility to a four-acre facility. 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 the timely performance of a 
variety of contractors and sub-contractors, the availability of supplies and 
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 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

                                       -8-



<PAGE>

Stock Subscription Agreement.

     In December 1996, Cultor sold its majority stake in Svenska Foder and 
acquired all of Svenska Foder's rights under the Svenska Foder Supply 
Agreement.

     In February 1997, the Company completed a private placement of a total 
of 5,044,570 Units, consisting of one share of Common Stock and one Common 
Stock Purchase Warrant (the "Warrants"). The purchase price of the Units 
ranged from $0.21 per Unit to $0.43 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 upon 30 days' 
notice anytime that the closing bid price per share of the 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. 
The net proceeds from this offering, net of placement agent fees and 
commissions, was $1,105,421.

     In February 1997, the Company made an offer of employment to Earl S. 
Fusato to take the position of Chief Financial Officer. Mr. Fusato, a 
Certified Public Accountant, was formerly employed for thirteen years by the 
auditing firms of KPMG Peat Marwick and Ernst & Young. Mr. Fusato joined 
VeriFone Inc. as Vice-President, Finance, where he served in that position 
as well as other financial positions for eight years until 1992, and then 
became Chief Financial Officer of RESCO, Inc. Mr. Fusato's appointment as 
Chief Financial Officer of Aquasearch became effective April 22, 1997.

     In April 1997, Mr. Fusato purchased 1,000,000 shares of Common Stock for 
$210,000. In connection with this transaction, Mr. Fusato received a 
non-statutory stock option to purchase 1,000,000 shares of Common Stock at an 
exercise price of $1.00 per share.

     On June 25, 1997 the Company was awarded a European Patent number 
0494887 for the "Process and Apparatus for the Production of Photosynthetic 
Microbes" which claims certain processes that operate in the Company's 
proprietary, closed-system photobioreactor system, the Aquasearch Growth 
Module, and the means for automated process control. The patent was awarded 
by the European Patent Office, and applies in all member nations of the 
European Union.

     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 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 its 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 
to raise additional capital from the sale of equity and/or debt securities 
and to apply for state and federal research grants for which it may be 
eligible. Sources of financing for product development are subject to many 
significant risks and uncertainties, and no assurance can be made that such 
funds will be available on terms that are acceptable to the Company or that 
will not result in substantial dilution to existing investors.

     Aquasearch has incurred net losses in each year since its inception. At



                                     -9-



<PAGE>

July 31, 1997, the Company's accumulated deficit was approximately $4.1 
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 new markets.

    The Company is in the process of transitioning from a research and 
development company to 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 
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, or develop additional 
proprietary technology, or that any such relationships or patent applications 
will be successful.

RESULTS OF OPERATIONS - COMPARISON OF QUARTERS ENDED JULY 31, 1996 AND 1997

    Revenues for the quarter ended July 31, 1997 were $146 compared with 
revenues of $16 for the quarter ended July 31, 1996. The Company has 
continued to supply Cultor with sufficient astaxanthin product to conduct 
additional tests, trials and other analyses involved in product development 
under the Cultor Distribution and Development Agreement.

    The Company's 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 improve 
production. The Company plans to implement these recommendations as soon as 
resources allow.

    Consistent with the Company's efforts to implement improvements in its 
production system, research and development costs decreased by $32,363, or 
approximately 17%, during the quarter ended July 31, 1997 compared with the 
quarter ended July 31, 1996.

    General and administrative expenses increased by $174,824, or 
approximately 42% during the quarter ended July 31, 1997 compared with the 
quarter ended July 31, 1996. Approximately $135,000 of this represents an 
accrual for penalties incurred in connection with the failure to complete the 
registration of shares of Common Stock underlying the Units that were issued 
in the Company's private placement offering.

    The Company incurred a net loss of $449,525, or $0.01 per share, for the 
quarter ended July 31, 1997 compared with a net loss of $335,048, or $0.01 
per share, for the same period in 1996.

LIQUIDITY AND CAPITAL RESOURCES

    Cash decreased by $233,090 in the quarter ended July 31, 1997 from the


                                       -10-



<PAGE>


prior period, resulting in a cash balance of $77,506 at July 31, 1997. 
Purchases of fixed assets of $52,164 were made during the quarter, primarily 
for equipment, bringing the Company's net plant and equipment assets to 
$765,853 and total assets to $920,623, which represents increases of 
$163,906, or 27%, and decrease of $257,744, or 39%, at July 31, 1997 from July 
31, 1996.

     As of July 31, 1997, the Company projects that it will consume 
approximately $0.6 million of operating capital in the last quarter of 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 portion 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 $10 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 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 private offerings of equity securities, will be sufficient 
for continued operations through the third quarter of fiscal 1997. Aquasearch 
is presently pursuing additional sources of capital in order to maintain and 
expand its operations. These capital sources include government contracts and 
grants, product sales, license agreements and equity or debt financing. There 
can be no assurance 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.

                         PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None.

ITEM 2.  CHANGES IN SECURITIES

     During the quarter ended July 31, 1997, the Company issued one year 
Convertible Notes Payable amounting to $250,000. The holders of these notes 
have an option to convert to equity under a planned private placement that the


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<PAGE>

Company is planning in the next six months. The Convertible Notes carry an 
interest rate of 10 per cent and warrants.

ITEM 3.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.

ITEM 4.  OTHER INFORMATION

         None.

ITEM 5.  EXHIBITS AND REPORTS ON FORM 8-K

        4.1  Form of Convertible Note
        4.2  Form of Warrant
         27  Financial Data Schedule


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<PAGE>
                                   SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the 
Registrant has duly caused this Report to be signed on its behalf by the 
undersigned thereunto duly authorized.

                                     AQUASEARCH, INC.

Dated: September 15, 1997       By:  /s/ Mark E. Huntley
                                         --------------------------------------
                                         Mark E. Huntley, Ph.D.
                                         President and Chief Executive Officer



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