UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549FORM 10-QSB(Mark one)[X]  Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended April 30, 2001or[  ]  Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934Commission File Number:  33-23460-LAAQUASEARCH, INC.(Exact name of Registrant as specified in its charter)Colorado

33-0034535(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)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 changed 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[ 
]115,899,118 shares of $0.0001 par value common stock outstanding as of April 30, 2001.






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Aquasearch, Inc.

Form 10-QSB
For the Quarter Ended April 30, 2001

Contents

PagePart I - Financial InformationItem 1:  Financial StatementsCondensed Balance Sheets

3Condensed Statements of Operations

4,5Condensed Statements of Cash Flows

6Notes to Condensed Financial Statements

7Item 2:  Management's Plan of OperationManagement's Plan of Operation for the Next Twelve Months

10Management's Discussion and Analysis of Financial Conditionand Results of Operations

13Part II - Other InformationItem 1:  Legal Proceedings

15Item 2:  Changes In Securities

15Item 3.  Defaults Upon Senior Securities

16Item 4:  Submission of Matters to a Vote of Security Holders

16Item 5:  Other Information

16Item 6:  Exhibits and Reports on Form 8-K

16


2

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Aquasearch, Inc.
(A Development Stage Enterprise)

Condensed Balance Sheets

April 30,
2001(Unaudited)
October 31,
2000(Audited)AssetsCurrent assets:Cash

$   200,903
$   509,492Accounts receivable
49,549

12,356Inventories
447,395

-Prepaid expenses and other
25,666

14,936Total current assets
723,513

536,784Notes receivable
54,166

50,000Plant and equipment:Plant
3,279,520

3,015,319Equipment
1,096,177

1,093,952Less accumulated depreciation
(784,930)

(662,002)Net plant and equipment
3,590,767

3,447,269Total assets
$4,368,446

$4,034,053Liabilities and stockholders' equityCurrent liabilities:Accounts payable
$ 1,626,552

$ 1,171,965Due to officer
297,000

297,000Short-term advance
-

500,000Notes payable
1,272,087

710,000Notes payable to officer
854,362

757,419Total current liabilities
4,050,001

3,436,384Stockholders' equity:Preferred stock (5,000,000 shares authorized)
-

-Common stock ($0.0001 par value, 150,000,000shares authorized, 115,899,118 and 105,589,076shares issued and outstanding at April 30, 2001and October 31, 2000, respectively)
12,712

11,679Additional paid-in capital
18,712,054

16,970,990Notes receivable
-

(29,179)Deficit accumulated during the development stage
(18,406,321)

(16,355,821)Total stockholders' equity
318,445

597,669Total liabilities and stockholders' equity
$ 4,368,446

$ 4,034,053


See accompanying notes to condensed financial statements.

3

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Aquasearch, Inc.
(A Development Stage Enterprise)

Condensed Statements of Operations

For the Period
From Inception
to April 30,
2001(Unaudited)

For the Three
Months Ended
April 30,
2001(Unaudited)

For the Three
Months Ended
April 30,
2000(Unaudited)RevenuesProducts

$     188,266

$    79,471

$              -Contract services

84,190

54,137

-Royalties

207,338

207,338

-Total revenues

479,794

340,946

-Costs and expensesCost of products sold

110,036

45,397

-Cost of contract services

84,190

54,137

-Research and development costs

7,897,994

281,773

553,014Selling, general and administrativeexpenses

8,787,746

642,070

399,922Total costs and expenses

16,879,966

1,023,377

952,936Loss from operations

(16,400,172)

(682,431)

(952,936)Other income (expense)Interest

(2,113,609)

(144,484)

(234,201)Other

269,058

4,237

80,449Investment in joint venture

(147,096)

-

-Total other income (expense)

(1,991,647)

(140,247)

(153,752)Loss before extraordinary item

(18,391,819)

(822,678)

(1,106,688)Extraordinary item - loss on write downof assets to liquidation basis

(14,502)

-

-Net loss

$(18,406,321)

$(822,678)

$(1,106,688)Loss per share

$          (0.45)

$      (0.01)

$         (0.01)Weighted average shares outstanding

41,043,855

111,938,007

100,666,790


See accompanying notes to condensed financial statements.

4

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Aquasearch, Inc.
(A Development Stage Enterprise)

Condensed Statements of Operations

For the Period
From Inception
to April 30,
2001(Unaudited)

For the Six
Months Ended
April 30,
2001(Unaudited)

For the Six
Months Ended
April 30,
2000(Unaudited)RevenuesProducts

$      188,266

$      177,189

$                -Contract services

84,190

84,190

-Royalties

207,338

207,338

-Total revenues

479,794

468,717

-Costs and expensesCost of products sold

110,036

86,572

-Cost of contract services

84,190

84,190

-Research and development costs

7,897,994

674,345

1,110,824Selling, general and administrativeexpenses

8,787,746

1,428,151

797,021Total costs and expenses

16,879,966

2,273,258

1,907,845Loss from operations

(16,400,172)

(1,804,541)

(1,907,845)Other income (expense)Interest

(2,113,609)

(247,162)

(380,080)Other

269,058

1,203

133,981Investment in joint venture

(147,096)

-

-Total other income (expense)

(1,991,647)

(245,959)

(246,099)Loss before extraordinary item

(18,391,819)

(2,050,500)

(2,153,944)Extraordinary item - loss on write downof assets to liquidation basis

(14,502)

-

-Net loss

$(18,406,321)

$(2,050,500)

$(2,153,944)Loss per share

$          (0.45)

$         (0.02)

$         (0.02)Weighted average shares outstanding

41,043,855

109,131,854

97,136,766


See accompanying notes to condensed financial statements.

5

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Aquasearch, Inc.
(A Development Stage Enterprise)

Condensed Statements of Cash Flows

From
Inception to
April 30,
2001(Unaudited)

For the Six
Months Ended
April 30,
2001(Unaudited)

For the Six
Months Ended
April 30,
2000(Unaudited)Cash flows from operating activities:Net loss

$(18,406,321)

$(2,050,500)

$(2,153,944)Adjustments to reconcile net loss to netcash used in operating activities:Depreciation

784,930

122,928

122,982Allowance on note receivable

108,500

10,500

21,000Expenses paid with common stock

1,247,653

25,193

121,256Discount on convertible notes payable

1,599,558

134,171

295,412Changes in:Accounts receivable

(49,549)

(37,193)

(17,983)Inventories

(447,395)

(447,395)

-Prepaid expenses and othercurrent assets

(25,666)

(10,730)

(2,542)Accounts payable

1,626,552

454,586

(156,381)Due to officer

297,000

-

(55,200)Cash used in operating activities

(13,264,738)

(1,798,440)

(1,825,400)Cash flows from investing activities:Purchases of fixed assets

(4,375,696)

(266,425)

7,662(Increase) decrease in notes receivable

(102,970)

14,513

(21,000)Cash used in investing activities

(4,478,666)

(251,912)

(13,338)Cash flows from financing activities:Proceeds from issuance of common stock

7,336,033

1,260,000

613,500Repayment of short-term advance

-

(500,000)

-Proceeds from notes payable

11,290,950

1,092,087

1,634,000Repayment of notes payable

(105,285)

-

-Offering costs

(577,391)

(110,324)

-Cash provided by financing activities

17,944,307

1,741,763

2,247,500Net increase (decrease) in cash

200,903

(308,589)

408,762Cash, beginning of the period

-

509,492

90,522Cash, end of the period

$    200,903

$   200,903

$   499,284Supplemental non-cash information:Conversion of convertible notespayable to common stock

$ 8,643,863

$   430,000

$ 2,444,000Reduction in notes payable to officer andrelated interest for exercise of stockoptions

540,000

27,000

-


See accompanying notes to condensed financial statements.

6

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Aquasearch, Inc.
(A Development Stage Enterprise)

Notes To Condensed Financial Statements
April 30, 2001

1.  General

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB.  Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have
been included.

These financial statements should be read in conjunction with the financial statements in our Annual Report on Form 10-KSB for the year ended October 31, 2000.

2.  Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or market.  At April 30, 2001, inventories consisted of $365,730 of work in process and $81,665 of finished goods and are stated at net realizable value.

3. Revenue Recognition

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

4. Notes Payable

Notes payable consisted of the following:



April 30,
2001

October 31,
2000One-year convertible notes, unsecured, bearinginterest at 10% per annum payable at the earlierof conversion or maturity

$  420,300

$  90,00090 day short-term bridge financing notes, unsecured,bearing interest at 10% per annum

-

370,000One-year promissory note, unsecured, bearinginterest at 10% per annum

-

250,000Short-term bridge financing notes due June 30, 2001,unsecured, bearing interest at 10% per annum

551,787

-One-year bank loan, unsecured, bearing interestat 2.5% above the bank's prime rate (10% atApril 30, 2001)

100,000

-


7

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Aquasearch, Inc.
  (A Development Stage Enterprise)



Notes To Condensed Financial Statements
April 30, 2001



4. Notes Payable (continued)



April 30,
2001

October 31,
 2000One-year bank loan, guaranteed by two of theCompany's officers, bearing interest at 3% abovethe bank's prime rate (10.5% at April 30, 2001)

200,000

-Total notes payable

$1,272,087

$710,000Six-month note payable to an officer of the Company,unsecured, bearing interest at 10% per annum

$100,000

$100,000One-year notes payable to an officer of the Company,unsecured, bearing interest at 10% per annum

754,362

657,419Total notes payable to officer

$854,362

$757,419


5.  Common Stock and Common Stock Purchase Warrants

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

Shares of
Common
Stock

Common
Stock

Additional
Paid-In
Capital

Notes
Receivable

Accumulated
Deficit

Total
Stockholders'
Equity
(Deficit)Balance, January 31, 2001

106,457,451

$ 11,767

$17,154,448

$ (29,179)

$ (17,583,643)

$ (446,607)Issuance of stock uponconversion of convertiblenotes payable ($0.20 pershare)

1,250,000

125

249,875

-

-

250,000Sale of stock ($0.15 to$0.16 per share)

8,166,667

818

1,214,909

-

-

1,215,727Issuance of stock uponexercise of stock options($0.36 per share)

25,000

2

8,998

-

-

9,000Payment on notesreceivable issued uponexercise of common stockoptions

-

-

-

29,179

-

29,179Discount on convertiblenotes payable

-

-

83,824

-

-

83,824Loss for the three monthsended April 30, 2001

-

-

-

-

(822,678)

(822,678)Balance, April 30, 2001

115,899,118

$ 12,712

$18,712,054

$          -

$ (18,406,321)

$ 318,445


8

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Aquasearch, Inc.
(A Development Stage Enterprise)

Notes To Condensed Financial Statements
April 30, 2001(Unaudited)



5.  Common Stock and Common Stock Purchase Warrants (continued)

Discount on convertible notes payable of $83,824 results from the difference between the conversion price and the fair value of the common stock underlying the convertible notes on their respective issuance dates for convertible notes issued during
the quarter ended April 30, 2001.

The following is a summary of our common stock purchase warrant transactions for the quarter ended April 30, 2001:



Exercise
Price

Outstanding at
January 31, 2001

Issued

Exercised

Outstanding at
April 30, 2001$0.375

200,000

-

-

200,000$0.40

1,100,000

700,000

-

1,800,000$0.48

-

150,000

-

150,000$0.50

6,711,513

250,000

-

6,961,513$0.54

-

1,350,000

-

1,350,000$0.75

627,475

-

-

627,475$1.00

489,249

-

-

489,249$1.50

154,599

-

-

154,599$2.00

79,491

-

-

79,4919,362,327

2,450,000

-

11,812,327


At April 30, 2001, we had reserved a sufficient number of shares of our common stock for issuance upon exercise of the warrants.



ITEM 2.  MANAGEMENT'S PLAN OF OPERATION

This Report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including
statements that include the words "believes", "expects", "estimates", "anticipates" or similar expressions. These statements are denoted by an asterisk (*).  Such forward-looking statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements. Risk factors include, but are not limited to, our ability to raise or generate additional capital; our
ability to cost-effectively manufacture our products on a commercial scale; the concentration of our current customer base; competition; our ability to comply with applicable regulatory requirements; potential need for expansion of our production facility;
 the potential loss of a strategic relationship; inability to attract and retain key personnel; a lack of time commitment by our Scientific Advisory Board; management's ability to effectively manage our growth; difficulties and resource constraints in
developing new products; protection and enforcement of our intellectual property; compliance with environmental laws; climate uncertainty; currency fluctuations; exposure to product liability lawsuits; and control of our management and affairs by
principal shareholders.

9

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The reader should carefully consider, together with the other matters referred to herein, the information contained under the caption "Factors That May Affect Future Operating Results" in our Annual Report on Form 10-KSB for a more detailed
description of these significant risks and uncertainties.  We caution the reader, however, that these factors may not be exhaustive.

Management's Plan of Operation for the Next Twelve Months

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

·
 expanding sales of our first nutraceutical product, The AstaFactorTM;·
 developing compound libraries for drug discovery; and·
 formulating more nutraceutical products.*

(1)  The AstaFactorTM - Nutraceutical Astaxanthin

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

·
 Alzheimer's and Parkinson's Diseases: major neurodegenerative diseases·
 Macular degeneration: the leading cause of blindness in the U.S.·
 Cholesterol disease: ameliorates the effects of LDL (the "bad" cholesterol)·
 Stroke: repairs damage caused by lack of oxygen·
 Cancer: protects against several types of cancer

We believe a strong market could develop for The AstaFactorTMamong persons afflicted with these ailments because of:

·
 Large size of potential market: millions of Americans are affected·
 Poor prognosis: some of these diseases have ineffective or no approved treatments·
 Promising data: quality of data in relevant human and animal models is promising*

We believe our current production capacity would satisfy approximately 1% of the estimated U.S. market for persons affected by just one of the illnesses mentioned above.*  We estimate this would generate retail sales of more than $5 million per year.*
 We can expand most cost-effectively by adding only finishing ponds.  We estimate that this would allow a five-fold expansion of astaxanthin production at a cost of approximately $1.8 million.*

We believe there is a market for our natural astaxanthin at all levels in the value chain.*  We began selling The AstaFactorTMdirectly to consumers.  As demand in Hawaii increased we started selling to more than
40 retail outlets, and we are pursuing similar distribution channels on the U.S. mainland.

10

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(2)  Drug Development

The Drug Discovery Process.  The average cost of discovering one new drug and bringing it into the market now exceeds $320 million.  Surprisingly, half those costs are incurred in "discovery."  Pharmaceutical companies may spend more
than $150 million before the drug even goes into clinical trials.

The Discovery Process:  Most new drugs are based on substances discovered in nature.  The crude extract of a plant, for example, is shown to have antibacterial activity.  The extract is repeatedly purified and tested until the antibacterial
activity can be attributed to a single molecule.  After pre-clinical testing, this "bioactive" molecule may become a drug candidate for clinical trials.  The cost of discovering and identifying a bioactive molecule from natural sources is not large, by
itself.  The real cost of discovery lies in:

"Rediscovery":  For every 250 compounds taken to discovery - only 1 is patentable.  The remainder are "rediscoveries" - compounds that are already known, and therefore not patentable.  The cost of rediscovery can be significant.  Rediscoveries
are common because biopharmaceutical companies continue to mine the common natural sources - terrestrial plants and microbes.  The rediscovery rate among the microalgae is very low.  Among certain groups of microalgae, most of the bioactive compounds are new, and therefore patentable.  Why have biopharmaceutical companies not exploited this resource?  The answer lies in:

Cultivation of Sufficient Quantity:  Bioactive compounds from natural sources typically occur in very small amounts.  Laboratory cultivation might provide enough pure compound for identification.  But clinical trials must rely on large-scale
cultivation or chemical synthesis.  If cultivation cannot supply enough compound for pre-clinical trials, then the discovery process usually stops.  Synthesis is expensive and, in 1 out of 5 cases, either prohibitively expensive or impossible.

Aquasearch Photobioreactor Technology - its Role in Drug Development.  We believe that our photobioreactor technology, the Aquasearch Growth Module, (AGM), is a revolutionary achievement.*  First, it is 1,000 times larger than the
average laboratory cultivation system.  Second, the level of computerized process control is greater than traditional biotechnology manufacturing processes.  These two achievements allow large quantities of microalgae to be produced under highly
controlled conditions.  Solving these problems means that compounds long stalled in the discovery process may now be developed to yield viable drugs.

Aquasearch Compound Libraries - Magnifying Opportunities for Drug Discovery.  In August 2000, we made our first "compound library."  We began with pure astaxanthin - a known bioactive compound - and, in collaboration
with Albany Molecular Research (NASDAQ: AMRI), we created a number of closely related "derivative" compounds.  This collection of compounds is a compound library.  Many of our new compounds are patentable.

Compound libraries like ours are attracting growing interest in the pharmaceutical industry because they are based on bioactive natural compounds, modified by a biological (enzymatic) process.  The U.S. National Cancer Institute (NCI) recently
completed screening of our first compound library for activity against approximately 60 types of cancer cells.  In March 2001, NCI researchers confirmed anti-cancer activity in one of the library's compounds and have proceeded to a toxicity study for
potential adverse affects on laboratory animals.  Pending results of the study, the NCI plans to have the compound go on to pre-clinical trials in human cancer tumors.

Our Agreement with University of Hawaii - Accelerating Drug Discovery.  A significant part of our drug development program is our agreement with University of Hawaii (UH), entered into in January 2001.  This gives Aquasearch exclusive
rights to more than 100 unique, bioactive compounds from microalgae.  These compounds were derived from a remarkable collection of approximately 2,000 strains of microalgae.  One of the compounds is now in Phase II clinical trials for treatment of cancer.

Most importantly, the bioactive compounds have never been tested in any disease other than cancer.  Other compounds may prove active against other diseases.

11

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We believe our agreement with UH is a significant opportunity.*  We estimate that in order to isolate from nature 100 bioactive compounds from traditional sources, a biopharmaceutical company would have to isolate and identify approximately 25,000
compounds.*  We are starting with these compounds and have the technology to supply sufficient quantities for further testing and pre-clinical trials.

The compounds remaining in the collection may prove active against other diseases.  We plan to increase the probability of success by making compound libraries from selected bioactive molecules.*  This approach can create thousands of lead compounds
for pre-clinical screening.

Our Drug Development Business Plan.  Our business model is designed to reduce the risks inherent in drug development.  Our proprietary cultivation technology, coupled with exclusive access to dozens of unique
molecules in the UH collection, enables us to proceed rapidly to pre-clinical studies.  We expect to offer to larger biopharmaceutical companies a significant number of new, bioactive chemical structures for their pipelines.*

We plan to develop patentable molecules in the UH collection into compound libraries over the next several years.*  The molecules in these libraries would then be screened against numerous diseases in a variety of pre-clinical trials.  We believe that
compounds which survive the pre-clinical study process may have considerable value.*  Our strategy is to focus on strategic partnerships with biopharmaceutical companies that have an interest in acquiring new drug candidates.

We believe the potential sources of revenue from this approach may include the following:

1) Library Access Fee

·
 access time: limited to 3-12 months·
 application: limited to certain diseases or disease areas·
 multiple customers allowed

2) Licensing Fee

·
 $3 million to $15 million per compound per indication·
 activated by decision to begin clinical trials

3)	Milestone Payments

·
 $500,000 to $25 million per event·
 activated by the results of pre-clinical and clinical trials

4)	Royalties

·
	activated by FDA approval and full commercialization*

(3)  Expanding our Nutraceutical Product Pipeline

We have identified many potential nutraceutical products among the microalgae, mostly through the published scientific literature.  Our nutritional supplement pipeline has recently received a major boost from the federal government.  In October 2000
we began work on a $2.4 million project, with funding from the U.S. Department of Energy (DOE), to develop proprietary "high-value products from microalgae."  We expect to receive $1.2 million over three years pursuant to a subcontract with Physical
Sciences, Inc. for our work on the project.  To the DOE, these high-value products would cut the cost of removing carbon dioxide, a greenhouse gas, from Earth's atmosphere.  To Aquasearch, this contract dramatically cuts our cost of product development.
We expect our new nutritional supplement products to follow the process proven by The AstaFactorÔ
, nine to twelve months of product development, followed by human clinical safety trials, and FDA approval.*

12

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We are focused on markets for high-value products that, like those for natural astaxanthin, have potential sales of more than $100 million, and few or no known competitors.  At our research and development/production facility, we can directly measure
economic feasibility from data gathered during a six-month production run in our commercial-scale Ultra-AGM.

We are well aware that nutraceutical products, because they are not highly regulated, have caused concern among some consumers.  Our goal is to self-regulate at a higher standard than required by law.*  We are implementing a variety of testing
procedures designed to maximize product safety and product efficacy.

Our marketing approach may determine many aspects of product development.  We would prefer to sell products directly to the consumer.  However, if a strategic partner can contribute significantly to product development or marketing, then we will
consider an alliance that could accelerate or maximize the process.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Since inception, our primary operating activities have consisted of basic research and development and production process development; recruiting personnel; purchasing operating assets; and raising capital.  From inception through April 30, 2001, we
had an accumulated deficit of approximately $18.4 million.  Our losses to date have resulted primarily from costs incurred in research and development and from selling, general and administrative expenses associated with operations.  We expect to continue
to incur operating losses for at least the next year as we increase the expansion of our product pipeline.*  We expect to have quarter-to-quarter and year-to-year fluctuations in revenues, expenses and losses, some of which could be significant.*

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

We are in the process of transition to a full-scale commercial producer of microalgae products.  These changes in our business have placed and will continue to place significant demands on our management, working capital and financial and management
control systems.

Results of Operations

Revenues.  We began sales of The AstaFactorTM, our nutraceutical astaxanthin product, on March 30, 2000.  During the quarters ended April 30, 2001 and 2000 sales of The AstaFactor
TM totaled approximately $60,000 and $9,000, respectively.  During the six months ended April 30, 2001, sales of The AstaFactorTM totaled $144,000.  During the quarters ended April 30, 2001 and 2000, we had
revenues of approximately $19,000 and $70,000, respectively, from sales of our natural astaxanthin product, AquaxanTM.  During the six months ended April 30, 2001 and 2000, we had revenues of approximately $32,000 and $124,000, respectively, from sales of AquaxanTM.  The aforementioned amounts for the periods ended April
30, 2000 were classified as other income in the accompanying financial statements, since they were considered to be incidental to our ongoing research and development activities.  We have recognized approximately $30,000 and $54,000 of revenues for the
quarters ended January 31, and April 30, 2001, respectively, pursuant to our subcontract with Physical Sciences, Inc. for our work on the U.S. Department of Energy project.  Royalty revenues for the quarter ended April 30, 2001 included amounts received
pursuant to
a litigation settlement agreement.

13

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Cost of Products Sold.  Cost of products sold include manufacturing and production costs associated with The AstaFactorTM and AquaxanTM.  Cost of products sold were approximately
$45,000 and $87,000 for the three and six month periods ended April 30, 2001, respectively.  This resulted in gross margins of approximately $34,000 and $91,000, or 43% and 51%, for the three and six month periods ended April 30, 2001, respectively.

Research and Development Costs.  Research and development costs include salaries, research supplies and materials, and expenses related to product development and our compound drug discovery library.  Research and development costs
decreased by approximately $271,000 and $436,000, or 49% and 39%, during the quarter and six months ended April 30, 2001 compared to the respective periods one year ago.  The decreases reflect our transition from product development to production of our
nutraceutical astaxanthin product, The AstaFactorTM.  From inception through April 30, 2001, research and development costs have totaled approximately $7.9 million.  We expect to incur significant research and development costs in the future.*

Selling, General and Administrative Expenses.  Selling, general and administrative expenses consist principally of salaries, fees for professional services, and promotional and marketing expenses related toThe AstaFactor
TM.  Selling, general and administrative expenses increased by $242,000 and $631,000, or 61% and 79%, during the quarter and six months ended April 30, 2001 compared to the respective periods one year ago.  The increases were primarily
due to personnel additions, investor relations consulting costs, and sales and marketing efforts of The AstaFactorTM. From inception through April 30, 2001, selling, general and administrative expenses have totaled approximately $8.8 million.  We anticipate that selling, general and administrative expenses will
increase over time as we expand production capacity, develop more new products, increase our intellectual property protection, and raise additional capital.*

Interest Expense.  Interest expense for the quarters ended April 30, 2001 and 2000 included $83,824 and $202,765, respectively, for the discount resulting from the difference between the conversion price and the fair value of the common
stock underlying the convertible notes issued during those quarters.  Interest expense for the six months ended April 30, 2001 and 2000 included $134,171 and $295,412, respectively, for the discount resulting from the difference between the conversion
price and the fair value of the common stock underlying the convertible notes issued during those periods.

Liquidity and Capital Resources

We have financed our operations until now through public and private sales of debt and equity securities.  During the quarters ended January 31, and April 30, 2001, we raised approximately $661,000 and $1,581,000, respectively, of net proceeds from
the sale of shares of common stock and/or the issuance of debt in private placement transactions.  During the quarters ended January 31, and April 30, 2001 we received a total of $270,000 and $30,000 of one-year term loan financing from a bank.  From
inception through April 30, 2001, we raised total net proceeds of approximately $18 million through public and private sales of equity and debt securities.

During the quarters ended April 30, 2001 and 2000, cash used in operating activities totaled approximately $770,000 and $1.1 million, respectively.  During both of the six months ended April 30, 2001 and 2001, cash used in operating activities totaled
approximately $1.8 million.  From inception through April 30, 2001, cash used in operating activities have totaled approximately $13.3 million.

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Capital expenditures for the quarters ended January 31, and April 30, 2001 totaled approximately $224,000 and $42,000, respectively.  From inception through April 30, 2001, capital expenditures have totaled approximately $4.4 million.

As of April 30, 2001, we had approximately $200,000 in cash.

Subsequent to April 30, 2001, we obtained a total of $100,000 of debt financing from individuals.

We estimate a need for approximately $4 million in operating capital over the next twelve months.*  We anticipate that projected product sales will begin to pay some operating costs.*  In the near term, we believe that product sales and existing
capital resources including funds raised through public and/or private offerings of equity and/or debt securities and bank financing will be sufficient for continued operations through the next twelve months.*

We cannot guarantee success in raising the future capital necessary to sustain or expand our operations, nor are we certain that such capital will be available on terms that prevent substantial dilution to existing investors.  If we cannot raise
sufficient capital, then we might be forced to significantly curtail operations.*  Any reduction in operating activity could have a material adverse effect on our business, financial condition, results of operations, and relationships with corporate
partners.



PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS  -- None

ITEM 2.  CHANGES IN SECURITIES

On February 21, 2001, we made a $560,000 draw under our equity line with Alpha Venture Capital resulting in Alpha Venture Capital acquiring 3,500,000 shares of our common stock at $0.16 per share.  Pursuant to the terms of the common stock purchase
agreement, we also issued warrants to Alpha Venture Capital for the purchase of 150,000 shares of common stock at $0.48 per share and warrants to purchase 1,350,000 shares of common stock at $0.54 per share.  The warrants have a term of five years.

During the quarter ended April 30, 2001, we sold to an individual 4,666,667 shares of our common stock at $0.15 per share.  In connection with the purchase, the individual received warrants to purchase 700,000 shares of our common stock at $0.40 per
share with a term of three years.

During the quarter ended April 30, 2001, we issued $475,000 aggregate principal amount of one-year convertible notes bearing interest at 10% per annum.  The holders of the convertible notes have an option to convert their convertible notes into our
common stock.  The convertible notes provide that upon conversion, the holders would receive warrants to purchase shares of our common stock.  The warrants have an exercise price of $0.50 per share and a term of three years.  During the quarter ended
April 30, 2001, some of the holders of these convertibles notes and other outstanding convertible note holders (amounting to $250,000 aggregate principal amount) exercised their option to convert their convertible notes into shares of common stock.  Upon
conversion of the outstanding principal of, and interest on, the convertible notes, we issued 1,250,000 shares of common stock and also issued 250,000 warrants in connection thereof.

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

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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES  -- None

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  -- None

ITEM 5.  OTHER INFORMATION  -- None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS  -- None

(b)  REPORTS ON FORM 8-K  -- None



SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this Quarterly Report on Form 10-QSB to be signed on its behalf by the undersigned thereunto duly authorized.

AQUASEARCH, INC.Dated:  June 13, 2001
      
      By:  /s/ Mark E. HuntleyMark E. Huntley, Ph.D.President and Chief Executive OfficerBy:  /s/ Earl S. FusatoEarl S. FusatoChief Financial Officer








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