<PAGE>


                       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 January 31, 2000
                                       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 January 31, 2000 was 97,244,310 shares.

<PAGE>



                                AQUASEARCH, INC.

                               FORM 10-QSB FOR THE
                         QUARTER ENDED JANUARY 31, 2000

                                    CONTENTS
<TABLE>
<CAPTION>

PART I - FINANCIAL INFORMATION
                                                                                                                Page
     ITEM 1:  FINANCIAL STATEMENTS
<S>                                                                                                            <C>

         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

         MANAGEMENT'S PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS                                              17

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS                                                                              25


PART II - OTHER INFORMATION

         ITEM 1:  LEGAL PROCEEDINGS                                                                             27

         ITEM 2:  CHANGES IN SECURITIES                                                                         28

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                               28

         ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                           28

         ITEM 5:  OTHER INFORMATION                                                                             28

         ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K                                                              28

         SIGNATURES                                                                                             29

</TABLE>

                                       2

<PAGE>




                                Aquasearch, Inc.
                        (A Development Stage Enterprise)

                                 Balance Sheets

<TABLE>
<CAPTION>

                                                                    January 31,         October 31,
                                                                       2000                1999
                                                                    (Unaudited)          (Audited)
                                                               -----------------------------------------
<S>                                                            <C>                  <C>

   Assets
   Current assets:
      Cash                                                       $     107,708        $      90,522
      Accounts receivable                                               42,321               24,300
      Prepaid expenses                                                  11,157               11,507
      Refundable deposits                                                3,053                3,053
                                                               -----------------------------------------
   Total current assets                                                164,239              129,382
                                                               -----------------------------------------

   Notes receivable from officer                                        50,000               50,000
   Plant and equipment:
      Plant                                                          2,800,856            2,795,258
      Equipment                                                      1,036,562            1,060,348
      Less accumulated depreciation                                   (474,931)            (413,244)
                                                               -----------------------------------------
   Net plant and equipment                                           3,362,487            3,442,362
                                                               -----------------------------------------
   Total assets                                                  $   3,576,726        $   3,621,744
                                                               =========================================

   Liabilities and Stockholders' Equity
   Current liabilities:
      Accounts payable                                           $   1,191,786        $   1,136,795
      Notes payable                                                    315,000              170,000
      Notes payable to officer                                         825,000            1,830,000
                                                               -----------------------------------------
   Total current liabilities                                         2,331,786            3,136,795
                                                               -----------------------------------------

   Stockholders' Equity
      Preferred stock (5,000,000 shares authorized)                          -                    -
      Common stock ($0.0001 par value, 150,000,000 shares
        authorized, 97,244,310 and 87,060,501 shares
        outstanding at January 31, 2000 and October 31, 1999,
        respectively)                                                   10,846                9,829
      Additional paid-in capital                                    14,069,069           12,262,839
      Notes receivable                                                 (58,133)             (58,133)
      Deficit accumulated during the development stage             (12,776,842)         (11,729,586)
                                                               -----------------------------------------
   Total stockholders' equity                                        1,244,940              484,949
                                                               -----------------------------------------
   Total liabilities and stockholders' equity                    $   3,576,726        $   3,621,744
                                                               =========================================


</TABLE>



                                       3

<PAGE>



                                Aquasearch, Inc.
                        (A Development Stage Enterprise)

                   Statements of Loss and Accumulated Deficit

<TABLE>
<CAPTION>
                                                                                        For the Three
                                                                     For the Three      Months Ended
                                                 From Inception      Months Ended        January 31,
                                                 to January 31,       January 31,           1999
                                                      2000               2000           (as restated)
                                                  (Unaudited)         (Unaudited)        (Unaudited)
                                              -----------------------------------------------------------
<S>                                           <C>                 <C>                <C>

  Sales                                         $       11,077      $            -     $            -
  Cost of sales                                         23,464                   -                  -
                                              -----------------------------------------------------------
  Gross profit (loss)                                  (12,387)                  -                  -

  Research and development costs                     5,340,828             557,810            326,095
  General and administrative expenses                5,839,093             397,098            403,678
                                              -----------------------------------------------------------

  Loss from operations                             (11,192,308)           (954,908)          (729,773)

  Other Income (Expense)
  Interest                                          (1,520,095)           (145,880)          (295,831)
  Other                                                 97,159              53,532               (247)
  Investment in joint venture                         (147,096)                  -                  -
                                              -----------------------------------------------------------
  Total other income (expense)                      (1,570,032)            (92,348)          (296,078)
                                              -----------------------------------------------------------
  Loss before income taxes and extraordinary
     item                                          (12,762,340)         (1,047,256)        (1,025,851)

  Extraordinary item - loss on write down of
     assets to liquidation basis                       (14,502)                  -                  -
                                              -----------------------------------------------------------
  Loss before income taxes                         (12,776,842)         (1,047,256)        (1,025,851)

  Federal and State income taxes                             -                   -                  -
                                              -----------------------------------------------------------
  Net loss                                         (12,776,842)         (1,047,256)        (1,025,851)

  Accumulated Deficit
  Balance, beginning of period                               -         (11,729,586)        (7,659,020)
                                              -----------------------------------------------------------
  Balance, end of period                        $  (12,776,842)     $  (12,776,842)    $   (8,684,871)
                                              ===========================================================

  Loss per share                                $        (0.43)     $        (0.01)    $        (0.02)
                                              ===========================================================

  Weighted average shares outstanding               29,987,669          80,870,601         57,888,524
                                              ===========================================================

</TABLE>


                                       4

<PAGE>



                                Aquasearch, Inc.
                        (A Development Stage Enterprise)

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                          For the Three
                                                                         For the Three     Months Ended
                                                   From Inception to     Months Ended      January 31,
                                                      January 31,         January 31,          1999
                                                          2000               2000         (as restated)
                                                      (Unaudited)         (Unaudited)      (Unaudited)
                                                   --------------------------------------------------------
<S>                                               <C>                  <C>              <C>

   Cash Flows from Operating Activities:
   Net loss                                         $    (12,776,842)    $  (1,047,256)   $  (1,025,851)
   Adjustments to reconcile net loss to net cash
      used in operating activities:
        Depreciation                                         474,931            61,687           24,995
        Expenses paid with common stock                    1,074,739           119,600                -
        Discount on convertible notes payable              1,176,141            92,647          264,671
        Changes in:
          Receivables                                        (42,321)          (18,021)               -
          Other current assets                               (14,210)              350            2,905
          Accounts payable                                 1,191,786            54,991          131,515
                                                   --------------------------------------------------------
   Cash used in operating activities                      (8,915,776)         (736,002)        (601,765)

   Cash Flows from Investing Activities:
   Purchases of fixed assets                              (3,837,418)           18,188         (933,788)
                                                   --------------------------------------------------------
   Cash used in investing activities                      (3,837,418)           18,188         (933,788)

   Cash Flows from Financing Activities:
   Increase in notes receivable                              (48,437)                -                -
   Proceeds from issuance of common stock                  5,691,458           250,000          398,569
   Proceeds from notes payable                             7,489,800           485,000        1,100,000
   Offering costs                                           (271,919)                -                -
                                                   --------------------------------------------------------
   Cash provided by financing activities                  12,860,902           735,000        1,498,569
                                                   --------------------------------------------------------

   Net increase (decrease) in cash                           107,708            17,186          (36,984)
   Cash, beginning of the period                                   -            90,522          151,473
                                                   --------------------------------------------------------
   Cash, end of the period                           $       107,708     $     107,708    $     114,489
                                                   ========================================================

   Supplemental disclosure of cash flow
      information:
      Non-cash financing transactions:
      Conversion of convertible notes payable to
        common stock                                 $     6,349,800     $   1,345,000    $     193,800


</TABLE>


                                       5

<PAGE>



                                Aquasearch, Inc.
                        (A Development Stage Enterprise)

                          NOTES TO FINANCIAL STATEMENTS
                                January 31, 2000
                                   (Unaudited)


1.  COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS

As of January 31, 2000, there were a total of 7,414,487 Common Stock Purchase
Warrants (the "Warrants") issued and outstanding, of which 25,974 Warrants
had an exercise price of $0.21 per share, 1,000,000 Warrants had an exercise
price of $0.40 per share and 6,388,513 Warrants had an exercise price of
$0.50 per share. No Warrants were exercised during the three months ended
January 31, 2000. At January 31, 2000, the Company had reserved a sufficient
number of shares of its Common Stock for issuance upon exercise of the
Warrants.

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

<TABLE>
<CAPTION>

                                  Shares of                 Additional                                        Total
                                   Common        Common       Paid-In         Notes        Accumulated    Stockholders'
                                    Stock        Stock        Capital       Receivable       Deficit          Equity
                                ----------------------------------------------------------------------------------------
<S>                              <C>         <C>          <C>            <C>           <C>                 <C>
Balance, October 31, 1999          87,060,501  $   9,829    $12,262,839    $  (58,133)   $  (11,729,586)     $  484,949
Issuance of stock on
  conversion of convertible
  notes payable ($0.13 to
  $0.37 per share)                  8,517,142        851      1,463,749             -                 -       1,464,600
Sale of stock ($0.15 per
  share)                            1,666,667        166        249,834             -                 -         250,000
Discount on convertible notes
  payable                                   -          -         92,647             -                 -          92,647
Loss for the three months
  ended January 31, 2000                    -          -              -             -        (1,047,256)     (1,047,256)
                                ----------------------------------------------------------------------------------------
Balance, January 31, 2000          97,244,310  $  10,846    $14,069,069    $  (58,133)   $  (12,776,842)     $1,244,940
                                ========================================================================================
</TABLE>

2.  QUARTER ENDED JANUARY 31, 1999 RESTATEMENT

The financial statements for the three months ended January 31, 1999 have
been restated to recognize the discount and related expense resulting from
the difference between the conversion price and the fair value of the common
stock underlying the convertible notes on their respective issuance dates for
convertible notes issued during that period. The impact of the aforementioned
on the financial statements for the three months ended January 31, 1999 was
as follows:

<TABLE>
<CAPTION>
                                                          As originally
                                                             reported        As restated
                                                       ------------------ -----------------
<S>                                                     <C>               <C>

   Statement of loss and accumulated deficit:
      Interest expense                                    $    (31,160)     $    (295,831)
      Net loss                                                (761,180)        (1,025,851)
      Accumulated deficit, beginning of period              (7,064,314)        (7,659,020)

</TABLE>

                                       6

<PAGE>


<TABLE>
<S>                                                     <C>               <C>
      Accumulated deficit, end of period                    (7,825,494)        (8,684,871)
      Loss per share                                             (0.01)             (0.02)

</TABLE>


3.  MANAGEMENT'S REPRESENTATIONS OF INTERIM FINANCIAL INFORMATION

These financial statements reflect all adjustments that 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, 1999 (the "1999 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. We undertake no obligation to publicly release the
results of any revision of these forward-looking statements. You are strongly
urged to read the information set forth under the caption "Factors That May
Affect Future Operating Results" in the 1999 Form 10-KSB for a more detailed
description of these significant risks and uncertainties.

OVERVIEW

We are a development stage company that develops and commercializes natural
products from microalgae using our proprietary photobioreactor technology
known as the Aquasearch Growth Module, or AGM.

Microalgae are a diverse group of over 30,000 species of microscopic plants
that have a wide range of physiological and biochemical characteristics.
Microalgae produce many different and unusual fats, sugars, proteins, amino
acids, vitamins, enzymes, pigments and other bioactive compounds that have
existing and potential commercial applications in such fields as animal and
human nutrition, food colorings, cosmetics, diagnostic products,
pharmaceuticals, research grade chemicals, pigments and dyes. Microalgae grow
ten times faster than the fastest growing land-based crops and represent a
largely unexploited and renewable natural resource with a biodiversity
comparable to that of land-based plants.

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

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

                                       7


<PAGE>


Our key achievements in the past year include major advances in our platform
technology, the AGM.  In the past 12 months, we have:

         -    created the new "Ultra-AGM," which has six-fold greater capacity
              than the previous AGM model - an increase from 1,060 to 6,600
              gallons;
         -    tripled the capacity-per-unit-cost of the AGM;
         -    tripled the productivity-per-unit-capacity of HAEMATOCOCCUS - our
              astaxanthin-rich microalgae; and
         -    doubled the astaxanthin content of HAEMATOCOCCUS - from 1.5% to
              3.0%.

During the same time period, we have:

         -    tripled the size of our production facility;
         -    quadrupled our patents - from three to twelve;
         -    tripled our total production capacity;
         -    initiated sales of our products;
         -    expanded our product pipeline to include nutraceuticals and
              pharmaceuticals;
         -    strengthened our management team in areas of strategic
              development and marketing; and
         -    augmented our research team in natural products chemistry
              and drug development.

In the past year we focused primarily on technology and infrastructure. This
year we are focused on marketing, sales, and further expanding our product
pipeline.

HISTORY: KEY EVENTS

1984
         AQUASEARCH FOUNDED.  Scientists from Scripps Institution of
         Oceanography in La Jolla, California founded Aquasearch, Inc. as a
         California corporation.

1988
         FEB:     We incorporated Aquasearch, Inc. in Colorado.

         MAY:     Aquasearch (Colorado) acquired all the assets of Aquasearch
                  (California) in a stock-for-stock exchange.

         JUN:     OPERATIONS BEGIN in Borrego Springs, California.

1988-1993
         RESEARCH AND DEVELOPMENT. We developed our first prototype of the
         AGM. Over the next few years we refined certain details of
         engineering in the AGM. At the same time, we cultivated microalgal
         species of markedly different varieties.

1993
         MAR:     AQUASEARCH-CYANOTECH JOINT VENTURE FORMED. We formed a
                  joint venture company with Cyanotech, an unaffiliated
                  producer of microalgae. Our goal was to develop commercial
                  systems for producing astaxanthin-rich microalgae. We
                  contributed approximately $147,000 in capital and licensed
                  our AGM technology to the joint venture. Cyanotech
                  contributed approximately $15,000 in capital to the joint
                  venture and made available its


                                       8

<PAGE>

                  facilities and personnel at the Hawaii Ocean Science and
                  Technology ("HOST") Business Park at Keahole Point,
                  Kailua-Kona, Hawaii.

1994
         JUN:     CULTOR NEGOTIATION BEGINS.  We began discussions with
                  Cultor regarding the purchase of astaxanthin-rich
                  microalgae.

         JUL:     FIRST ASTAXANTHIN PRODUCED.  We constructed AGMs that
                  demonstrated the economics of the production process.  We
                  also produced samples of astaxanthin-rich microalgae for
                  analysis and trial applications.  Samples were sent to
                  Cultor for testing.

         NOV:     AQUASEARCH-CYANOTECH JOINT VENTURE TERMINATED.  We decided
                  to discontinue the joint venture with Cyanotech. Under our
                  dissolution agreement, all intellectual property rights to
                  AGM technology reverted to us.

         DEC:     CULTOR STARTS FEEDING TRIALS on farmed salmon using the
                  astaxanthin-rich microalgae we produced.

1995
         APR:     CONSTRUCTION BEGINS on our own half-acre facility in
                  Hawaii, leased from the HOST Business Park.  We designed
                  the facility for research and development, and for
                  production of small amounts of astaxanthin-rich microalgae
                  for marketing.

         JUN:     CONSTRUCTION COMPLETED.  Our first facility was comprised
                  of AGMs and an operating laboratory.

         JUL:     SVENSKA FODER CONTRACT. We entered into a three-year Supply
                  Agreement with Svenska Foder, then a subsidiary of Cultor.
                  Svenska Foder agreed to act as the exclusive distributor of
                  our natural astaxanthin product for animal feed
                  applications in Sweden, Norway and Finland. In December
                  1996, Cultor sold Svenska Foder to KKR, a Danish animal
                  feeds company, and assumed all of Svenska Foder's rights
                  and obligations under the Supply Agreement.

                  FACILITY EXPANSION BEGINS. We leased additional space in
                  the HOST Business Park to expand our half-acre research and
                  development facility to one acre.

         OCT:     ONE-ACRE EXPANSION COMPLETED.  We expanded the facility to
                  include finishing ponds (the second stage of our production
                  process), and additional laboratory space.

1996
         MAY:     CULTOR AGREEMENT. We entered into a three-year Distribution
                  and Development Agreement with Cultor (recently extended to
                  four years). We agreed to act as the exclusive worldwide
                  supplier to Cultor of natural astaxanthin derived from
                  microalgae for animal feed applications. Cultor agreed to
                  act as the exclusive worldwide distributor of our natural
                  astaxanthin product for animal feed applications.

                  SCIENTIFIC ADVISORY BOARD FORMED. We created an active
                  Scientific Advisory Board consisting of Ph.D.s with
                  expertise in the fields of aquaculture; marine biology;
                  fluid dynamics; and the chemistry, photobiology,
                  physiology, genetics and mass culture of microalgae.


                                      9

<PAGE>



         JUL:     PROCESS PATENT IN THE U.S.  We were awarded U.S. Patent
                  Number 5,541,056 for a "Method of Control of Microorganism
                  Growth Process."  This patent claims certain processes that
                  operate in our proprietary, closed-system photobioreactor,
                  the AGM.  Our U.S. filing was made under the Patent
                  Cooperation Treaty.  We began to pursue international
                  patents in certain treaty-member nations.

         OCT:     CULTOR ACQUIRES AQUASEARCH STOCK.  Cultor acquired 400,000
                  shares of our common stock at a purchase price of $0.50 per
                  share.

         NOV:     C. BREWER AGREEMENT.  We executed a Letter of Intent with
                  C. Brewer and Company, Limited ("C. Brewer").  Under the
                  proposed agreement we would acquire between 80 and 90 acres
                  of C. Brewer property in the Ka'u region of the Big Island
                  of Hawaii, valued at between $900,000 and $1,000,000.  In
                  return, C. Brewer would acquire approximately 4% of our
                  outstanding common stock and a three-year warrant to
                  purchase up to 500,000 shares of Aquasearch common stock at
                  $1.25 per share.  To date, we have not consummated the
                  transaction with C. Brewer because production at our
                  current facility has increased beyond expectation.

1997

         APR:     EARL FUSATO NAMED CHIEF FINANCIAL OFFICER, JOINS BOARD. Mr.
                  Fusato brought considerable experience to our management
                  team. At VeriFone, Inc., a global leader in the transaction
                  automation industry, he served as VP Finance (1983-87),
                  Treasurer (1987-90) and Director of Internal Audit and
                  Manager of Transaction Automation (1990-92). He served as
                  CFO of RESCO Inc., a residential real estate brokerage
                  company (1992-94). He also served in various key positions
                  at Ernst and Young (1978-83) and KPMG Peat Marwick
                  (1971-77).

         JUN:     APPARATUS PATENT IN EUROPE. We were awarded European Patent
                  Number 0494887 for a "Process and Apparatus for the
                  Production of Photosynthetic Microbes." This patent not
                  only claims certain processes, but also certain features of
                  our core technology, the Aquasearch Growth Module. The
                  European patent complements, but does not supplant claims
                  made in the U.S. Patent awarded in 1996. Our European
                  filing was made under the Patent Cooperation Treaty. We are
                  pursuing additional patents in certain treaty-member
                  nations.

         SEP:     DR. EDWARD DAVID JOINS BOARD.  Dr. David has a long history
                  of management experience in the fields of science and
                  technology. During his career he has served as President
                  of Exxon Research and Engineering, Science Advisor to the
                  President of the United States, Executive Director of the
                  Communications Systems Division at Bell Laboratories, and
                  Director of the White House Office of Science and
                  Technology Policy.

1998
         APR:     EXPANSION BEGINS TO TRIPLE OUR PRODUCTION FACILITY.  We
                  began construction to expand our production facility in
                  Kona, Hawaii from one acre to three acres.  At the same
                  time, we began upgrading every component of our production
                  system hardware.

         JUN:     WE QUESTION CYANOTECH REGARDING INTELLECTUAL PROPERTY.  We
                  formally notified Cyanotech of our concern that their use
                  of photobioreactor technology may violate one of our
                  patents (U.S. patent No. 5,541,056) relating to processes
                  for controlling microalgae


                                       10

<PAGE>

                  growth. We also expressed concern regarding possible trade
                  secret misappropriation.

         JUL:     DAVID WATUMULL NAMED EXECUTIVE VP, CORPORATE FINANCE AND
                  STRATEGIC DEVELOPMENT.  Mr. Watumull brought more strength
                  to our management team.  He has been a respected
                  biotechnology industry analyst, investment banker and money
                  manager for more than 15 years, serving at both Paine
                  Webber and First Honolulu Securities.

                  WE TEST A NEW PHOTOBIOREACTOR - THE ULTRA-AGM. In previous
                  months we designed and engineered the Ultra-AGM. The
                  Ultra-AGM is more than six times larger than any standard
                  production growth module we have used. To our knowledge,
                  the Ultra-AGM is larger than any closed-system
                  photobioreactor ever operated. A six-month testing period
                  begins.

                  CYANOTECH FILES LAWSUIT. Our former joint venture partner
                  filed a complaint in the United States District Court for
                  the District of Hawaii (Case No. CV98-00600ACK) against us.
                  Cyanotech sought a declaratory judgment of:

                      -    invalidity of our U.S. patent for a method to grow
                           microalgae;
                      -    non-infringement by Cyanotech of the U.S. patent;
                           and
                      -    non-misappropriation of our trade secrets regarding
                           the Aquasearch Growth Module.

         SEP:     WE COUNTER-SUE CYANOTECH. We asserted the validity of our
                  U.S. patent.  We also alleged that Cyanotech:

                      -    infringed our U.S. patent;
                      -    misappropriated trade secrets related to our AGM
                           technology;
                      -    breached our joint venture dissolution agreement;
                           and
                      -    engaged in unfair competition.

                  We requested damages, injunctive relief and attorney's fees
                  on each count.

                  APPARATUS PATENT IN HONG KONG. We were awarded patent
                  number HK1001232 for the "Process and Apparatus for the
                  Production of Photosynthetic Microbes." This patent was
                  awarded under the Patent Cooperation Treaty, based on the
                  original filing approved by the European Patent Office in
                  1997.

         NOV:     CHARTER MEMBERSHIP IN MarBEC. The Marine Bioproducts
                  Engineering Center ("MarBEC") is a 5-year, $26 million
                  Engineering Research Center, funded by the U.S. National
                  Science Foundation. MarBEC is focused on developing new
                  enzymes, pigments and pharmaceuticals, primarily from
                  microalgae. It is based at the University of Hawaii and the
                  University of California, Berkeley. We are among the charter
                  industry members of MarBEC, which also include Monsanto and
                  Eastman Chemical. As a charter member, we have certain
                  preferential rights to new products developed by MarBEC. We
                  are the only member of MarBEC that has developed
                  photobioreactor technology, which we believe is likely to be
                  required for the commercial exploitation of any new product
                  from microalgae.



                                       11

<PAGE>


         DEC:     ENZYMED AGREEMENT.  We entered into a Compound Library
                  Agreement with EnzyMed, Inc., a privately-held
                  biotechnology company recently acquired by Albany Molecular
                  Research, Inc. ("EnzyMed").  Under the agreement, we will
                  provide extracts of microalgae that contain unexplored or
                  unexploited substances with biomedical value. EnzyMed will
                  use these extracts to generate compounds using their method
                  of "combinatorial biocatalysis."  This method generally
                  produces several hundred compounds from a single extract.
                  We expect some of these compounds to be novel and
                  proprietary.  Both companies intend to commercialize the
                  resulting compound "libraries."  Compound libraries are
                  typically screened for possible medical applications by the
                  pharmaceutical industry.  The pharmaceutical company
                  typically pays an "access fee" for the right to screen the
                  library for a limited time and for limited applications.
                  We will share the revenues generated from the libraries
                  with EnzyMed.

1999
         JAN:     MARTIN GUERIN NAMED VP, SALES AND MARKETING.  Mr. Guerin
                  has international experience with world-leading groups in
                  food and feed industries.  He held top management positions
                  for marketing and business development with Finfeeds
                  International (1996-98) and EWOS (1994-96), both Cultor
                  companies.  His previous experience includes management
                  positions with BP Nutrition (now Nutreco) and Champagnes
                  Cereales.

                  NEW EQUIPMENT INSTALLATION BEGINS. With construction nearly
                  complete on our expanded three-acre facility, we began to
                  install new equipment for process control and for final
                  processing of raw products.

                  THE ULTRA-AGM GOES INTO OPERATION. After a successful
                  six-month testing period, we installed and began to operate
                  the new Ultra-AGM. This new photobioreactor is much larger,
                  more efficient, and less costly than any previous AGM. It
                  also requires 75% less manpower to operate.

         FEB:     CONSTRUCTION COMPLETED ON THREE-ACRE PHYSICAL PLANT. We
                  completed all new structures at our production facility. We
                  tripled the area for both AGMs and finishing ponds. We
                  quadrupled the area under roof to more than 8,000 square
                  feet. We added a multi-purpose building for product
                  processing, packaging and storage that can also accommodate
                  further increases in production at our current site. We
                  laid the foundation for a 10,000 square-foot laboratory
                  that will accommodate expansion of our drug discovery
                  program.

                  NEW PLANT BEGINS PRODUCTION AT FULL CAPACITY. While
                  installing our final processing equipment, we increased our
                  production of raw product to full capacity. We began to
                  store raw product. Final processing of the product will be
                  done once equipment installation is complete.

                  DAVID TARNAS JOINS BOARD.  Mr. Tarnas brings political
                  experience to our Board of Directors. As a Hawaii State
                  Representative and Chairman of the House Committee on Ocean
                  Recreation and Marine Resources, he led many important
                  policy initiatives in Hawaii until 1998.

                  PROCESS PATENT IN EUROPE. We were awarded European Patent
                  Number 0772676 for a "Method of Control of Microorganism
                  Growth Process." This patent, originally granted


                                       12
<PAGE>

                  in the U.S., was awarded in Europe under the Patent
                  Cooperation Treaty. It claims certain processes that
                  operate in our Aquasearch Growth Module.

         MAR:     PROCESS PATENT IN U.S. We received U.S. Patent Number
                  5,882,849 for a "Method of Control of HAEMATOCOCCUS Species
                  Growth Process." This patent applies to proprietary
                  techniques we use to grow HAEMATOCOCCUS, our principal
                  source of astaxanthin. We are pursuing international
                  patents in certain member nations that are signatories of
                  the Patent Cooperation Treaty.

         APR:     APPARATUS PATENT IN NORWAY. We were awarded Norwegian
                  Patent Number 304556 for a "Process and Apparatus for the
                  Production of Photosynthetic Microbes." This patent not
                  only claims certain processes, but also certain features of
                  our core technology, the Aquasearch Growth Module.
                  Originally granted in Europe, this patent was awarded in
                  Norway under the Patent Cooperation Treaty.

                  PRODUCT FORMULATION BEGINS ON OUR FIRST NUTRACEUTICAL
                  PRODUCT.  A large U.S. chemical company began collaborating
                  with us - under a confidentiality agreement - to formulate
                  an astaxanthin-rich nutraceutical product.

         MAY:     PROCESS PATENT IN AUSTRALIA. We were awarded Australian
                  Patent Number 698772 for a "Method of Control of
                  Microorganism Growth Process." This patent, originally
                  granted in the U.S., was awarded in Australia under the
                  Patent Cooperation Treaty.

                  APPARATUS PATENT IN SOUTH KOREA. We received South Korea
                  Patent Number 700834 for a "Process and Apparatus for the
                  Production of Photosynthetic Microbes." Originally granted
                  in Europe, this patent was awarded in South Korea under the
                  Patent Cooperation Treaty.

                  MICROALGAE FOR OUR SECOND NUTRACEUTICAL PRODUCT APPROVED.
                  The State of Hawaii Department of Agriculture approved our
                  permit application to import a new microalgae species. This
                  species is the basis for our second nutraceutical product,
                  planned for product launch in 2000.

         JUN:     PROCESSING EQUIPMENT INSTALLED.  Our manufacturing process
                  became fully operational as final processing equipment came
                  on line.

                  RECORD ASTAXANTHIN LEVELS ACHIEVED. We achieved an
                  astaxanthin content of more than 3% in our final processed
                  product -sustained over the previous three months. This
                  content is at least double the amount claimed by any other
                  known producer of natural astaxanthin. Some of our
                  production runs approached 4% content, and we achieved 6%
                  content at smaller scales.

         JUL:     WE BEGIN SHIPPING NATURAL ASTAXANTHIN to a European life
                  sciences company.

         SEP:     WE BEGIN SHIPPING NATURAL ASTAXANTHIN to a Japanese life
                  sciences company.

         DEC:     THE U.S. DISTRICT COURT FOR THE DISTRICT OF HAWAII GRANTS
                  MOTION FOR SUMMARY JUDGMENT IN OUR FAVOR. The Court rules
                  that Cyanotech infringed our patent, misappropriated our
                  trade secrets, and breached our joint venture dissolution
                  agreement. In addition, the Court denied Cyanotech's motion
                  for partial summary judgment of non-infringement and


                                       13

<PAGE>


                  patent invalidity.

2000
         JAN:     CYANOTECH FILES MOTION FOR RECONSIDERATION on the Court's
                  summary judgment order.

         MAR:     THE U.S. DISTRICT COURT FOR THE DISTRICT OF HAWAII DENIES
                  CYANOTECH'S MOTION FOR RECONSIDERATION.  The Court upholds
                  its summary judgment ruling and denies all reconsideration
                  requests made by Cyanotech.

THE MARINE BIOTECHNOLOGY INDUSTRY

There are 30,000 species of microalgae. Many of these are known to contain
valuable substances, including pharmaceuticals, nutraceuticals, and certain
commodities. Fewer than one-tenth of one percent of these 30,000 species have
been produced commercially.

The total market for only three species of microalgae that are now produced
commercially (SPIRULINA, CHLORELLA and HAEMATOCOCCUS) is estimated to be in
the range of $200-300 million per year. We believe the potential market for
products derived from microalgae could range into the billions of dollars,
provided that: (1) the products are unique, valuable, and numerous; and (2)
production technology is reliable and cost-effective.

Scientific literature demonstrates that:

         -    microalgae contain unique substances;
         -    these unique substances are potentially valuable as
              pharmaceuticals and nutraceuticals; and
         -    these unique substances are numerous among the microalgae.

Until recently, however, there was no technology to provide for the
cost-effective production of microalgae in commercial quantities. We believe
that our AGM provides reliable and cost-effective production technology that
will contribute to the development of a multi-billion dollar marine
biotechnology industry. However, there can be no assurance that such an
industry will develop.

OUR KEY ACHIEVEMENTS

(1)  RELIABLE AND COST EFFECTIVE PRODUCTION TECHNOLOGY

The Aquasearch Growth Module is a novel, reliable and cost-effective
production technology. We have proven the efficacy of the AGM through a
10-year process of engineering, development, and demonstration.

We continue to achieve targeted improvements in AGM technology and
performance, as this table shows:

<TABLE>
<CAPTION>
-------------------------------------------- ---------------------------------- ----------------------------------
                IMPROVEMENT                           PLANNED IN THE                     ACHIEVED IN THE
                                                         PAST YEAR                          PAST YEAR
-------------------------------------------- ---------------------------------- ----------------------------------
<S>                                                       <C>                          <C>

             Increase AGM size                              6X                           Greater than 6X

           Decrease capital cost                            2X                                 3X

</TABLE>


                                       14

<PAGE>

<TABLE>
<S>                                               <C>                          <C>
           (per gallon capacity)

       Increase AGM production cycle                      30 days                            60 days

       HAEMATOCOCCUS production rate                    Increase 3X                      Greater than 3X

      Astaxanthin content of product                2.0% of dry weight           Greater than 3.0% of dry weight
-------------------------------------------- ---------------------------------- ----------------------------------
</TABLE>

These improvements to the AGM have reduced costs and increased productivity.
We believe the AGM is the largest commercial photobioreactor in operation. To
our knowledge, our current HAEMATOCOCCUS production rate is higher than any
reported in the scientific literature.

(2)  INTELLECTUAL PROPERTY

We now have patents relating to:

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

Additional patents are pending.

We continue to develop trade secrets. We believe that our trade secrets are
the underlying reason for consistent improvements in production and product
quality. We place great value on our intellectual property.

(3)  PRODUCTION CAPACITY

In the past year we expanded our physical plant by a factor of three. We now
have a completely new manufacturing plant. The plant includes new processing
equipment and an upgraded process-control system.

Our HAEMATOCOCCUS cultivation process is done in two steps. We use two types
of large-scale production systems: (1) Aquasearch Growth Modules, and (2)
"finishing" ponds. The following table shows the key features of these two
production systems:

<TABLE>
<CAPTION>
------------------------ --------------------------------------------- ---------------------------------------------
        FEATURE                    AQUASEARCH GROWTH MODULE                           FINISHING POND
------------------------ --------------------------------------------- ---------------------------------------------
<S>                           <C>                                           <C>
       Function                 Produce HAEMATOCOCCUS biomass                 Convert biomass to astaxanthin

      Technology                         Proprietary                                  Public domain

   Utilized capacity                         20%                                           100%
------------------------ --------------------------------------------- ---------------------------------------------
</TABLE>

We have achieved much greater improvements in AGM performance than
anticipated. As a result, we are now using only 20% of our AGM production
capacity. If the market demands, we could increase


                                       15

<PAGE>

total production by 5 times by increasing our finishing pond capacity.
Relative to AGMs, finishing ponds are less costly to construct.

(4)  SALES

We completed construction of the expanded facility in February 1999. New
processing equipment was installed in June 1999. Sales began immediately.

(5)  PRODUCT PIPELINE

Prior to this year, our pipeline consisted of a single product: natural
astaxanthin for use in animal nutrition.  We have now expanded our pipeline
to include:

         1)   Nutraceuticals
              -   Natural astaxanthin
              -   A second microalgae-based product

         2)   Drug discovery
              -   Compound libraries

These products are all in active development. The State of Hawaii Department
of Agriculture has just approved our import permit for a new species of
microalgae that is the basis of our second nutraceutical product. EnzyMed has
received our first microalgae extracts, and has begun work to produce our
first compound library.

(6)  OUR TEAM

NEW MANAGEMENT. We believe our team is stronger than ever - at all levels. We
have added important experience and expertise at the management level,
including David Watumull, Martin Guerin and David Tarnas. Together, these
individuals bring us new experience and expertise in:

         -    international marketing and sales in food and feed industries;
         -    strategic development in biotechnology and pharmaceutical
              industries;
         -    public/private sector collaboration; and
         -    fund raising.

NEW RESEARCH SCIENTISTS.  Dr. Walter Nordhausen, Dr. Mai Lopez, and Dr. Mia
Unson have joined our research team in the past year. Together, they more
than double our research effort, and bring us proven experience in:

         -    biopharmaceutical product development;
         -    marine biology and biochemistry;
         -    natural products chemistry; and
         -    research program management.

EMPLOYEES. We believe our employees are strongly motivated for success. In
1998 we introduced a pay-for-performance compensation plan that includes both
stock options and cash bonus programs. We structured the compensation plan to
reward both teamwork and individual excellence. Rewards are generated by
performance on quarterly targets. We believe that our employees are directly
responsible


                                       16
<PAGE>

for our recent achievements.

(7)  RECENT FINANCING ACTIVITY

During the period from June 1997 to January 31, 2000, we sold an aggregate of
$6,624,800 aggregate principal amount of 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. As part of this transaction, an
officer/director purchased $2,030,000 of convertible notes.

Through January 31, 2000, some of the holders of the convertibles notes
(amounting to $6,349,800 aggregate principal amount) exercised their option
to convert their convertible notes into shares of common stock. Upon
conversion of the outstanding principal and interest on the convertible
notes, we issued 38,884,150 shares of common stock and also issued 5,746,800
warrants in connection thereto. As part of this transaction, an
officer/director converted $2,030,000 aggregate principal amount of
convertible notes and received 13,286,154 shares of common stock and
1,427,000 warrants.

MANAGEMENT'S PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS

Last year we focused on technology and infrastructure. We strengthened our
intellectual property, expanded our physical plant, and augmented production
capacity.

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

         -    initiating sales of our first nutraceutical product, natural
              astaxanthin;
         -    formulating our second nutraceutical product;
         -    growing sales of AQUAXAN-TM-;
         -    marketing and selling compound libraries for drug discovery;
              and
         -    expanding our product pipeline.

(1)  NUTRACEUTICAL ASTAXANTHIN

THE PRODUCT. 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). 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

THE MARKET. We believe a strong market could develop for our nutraceutical
astaxanthin product among 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


                                      17

<PAGE>

         -    PROMISING DATA: quality of data in relevant human and animal
              models is promising

Our analysis of reasonable dosage and customary pricing in the nutraceutical
industry suggests that nutraceutical astaxanthin will retail for more than
$50,000 per kilogram. If this estimate proves to be accurate, then we
estimate the potential U.S. market may exceed $500 million per year. This
estimate is based on just one of the six diseases described above, and is
derived from the number of persons affected by the condition, as estimated by
physicians who provide treatment for the disease, and the conventional price
of an appropriate daily dosage. Certain consumers may be highly motivated to
use nutraceutical astaxanthin because:

         -    treatment alternatives do not exist for some ailments; and
         -    sufferers have used nutraceuticals with less demonstrated
              efficacy than astaxanthin.

PRODUCTION CAPACITY. 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 on adjacent property. We do have space
available for expansion. We estimate this space would allow a 5-fold
expansion of astaxanthin production at a cost of approximately $1.8 million.

PRODUCT FORMULATION. We are collaborating in product formulation with a large
U.S. chemical company that has significant experience in nutraceutical
products. Our collaboration is being carried out under a confidentiality
agreement. However, we cannot guarantee that our collaboration will extend
beyond product formulation.

MARKETING STRATEGY. We intend to sell this product directly to consumers.
However, several wholesale purchasers of nutraceutical products have also
contacted us regarding our product. We may or may not enter into supply
agreements with one or more wholesalers.

REGULATORY ISSUES. The U.S. Food and Drug Administration ("FDA") has primary
regulatory responsibility in nutraceutical markets. Many regulations apply.
The DSHEA Act of 1994 governs certain conditions of sale of all nutraceutical
products or dietary supplements in the U.S. We submitted a new dietary
supplement application to the FDA in December 1999. According to the DSHEA
Act of 1994, the FDA has 75 days from the date of a new dietary supplement
pre-marketing application to object to its sale. If no such objection is made
within that time, the applicant is free to begin marketing.

COMPETITION. AstaCarotene AB of Sweden produces and sells an astaxanthin-rich
nutraceutical product in Europe that, like ours, is based on HAEMATOCOCCUS
microalgae. AstaCarotene must produce their product in a controlled climate,
rather than in Sweden's natural climate. We believe their cost of production
is significantly higher than ours.

Cyanotech recently began sales of a HAEMATOCOCCUS-based nutraceutical.
Cyanotech advertises its natural astaxanthin product to contain 1.5%
astaxanthin. Our product contains 3%. To produce the same amount of
astaxanthin, therefore, Aquasearch requires only half the HAEMATOCOCCUS
production capacity. We therefore believe our cost of production may be less
than Cyanotech's. We also believe that customers may perceive our 3% product
as superior to a 1.5% product, which could confer a competitive advantage
over Cyanotech's product.

Igene Biotechnology, Inc. produces astaxanthin from yeast. The chemical form
of astaxanthin in HAEMATOCOCCUS is the one that prevails in nature, and is
different from that in yeast. We believe the nutraceutical market will view
the prevailing natural form of astaxanthin - from HAEMATOCOCCUS - as superior
as its astaxanthin content is 10 times more than that of yeast.

Itano of Japan produces an astaxanthin extract from Antarctic krill, a marine
microcrustacean. The


                                       18

<PAGE>

product is distributed in the U.S. in very small amounts and at very high
prices (greater than $650,000 per kilogram). Krill fishing in Antarctica is
very expensive and highly regulated. Krill fishing vessels must travel for
more than two weeks, at a cost of approximately $50,000 per day simply to
complete the voyage between Japan and the Southern Ocean. Suitably equipped
vessels cost approximately $30 million and typically have a lifetime of only
20 years. The krill fishery is regulated by the Committee for Conservation of
Antarctic Living Resources, an international body comprised of scientists
from Antarctic Treaty member nations. The krill fishery reached its peak in
the mid-1980s and has since declined.

BASF and Hoffman-LaRoche both produce synthetic astaxanthin from
petrochemicals. Their compound is chemically different than natural
astaxanthin. The effect of the difference has not been studied. However, the
natural form of a closely related antioxidant, Vitamin E, was found by its
manufacturer (Eastman Chemical) to be four times more potent than the
synthetic form. We believe the nutraceutical market shows less interest in
synthetic products than in natural products, and will pay a premium for a
natural product.

TIMING OF PRODUCT RELEASE. Subject to the necessary regulatory review, we
plan to release our nutraceutical astaxanthin product in the first half of
2000.

(2)  OUR SECOND NUTRACEUTICAL PRODUCT

THE PRODUCT. Our second nutraceutical product is a dietary supplement rich in
a certain carotenoid pro-vitamin. The pro-vitamin is known to perform certain
vital functions in human physiology. Like astaxanthin, it is a potent
anti-oxidant. Like astaxanthin, which has very similar molecular properties,
it is present in trace quantities in certain common foods. Also like
astaxanthin, it is overproduced in certain microalgae.

THE MARKET. We believe the market for this product is similar to that for
nutraceutical astaxanthin. Animal and human models have demonstrated the
efficacy of this product in its effect on certain common illnesses. We
believe the potential market for this product will exceed $100 million per
year.

PRODUCTION CAPACITY. In mid-1999 we received approval from the State of
Hawaii Department of Agriculture to import the microalgae that is the basis
of our second nutraceutical product. We began cultivation at AGM (commercial)
scale in October of 1999. We intend to devote approximately six months to
optimizing production in AGMs. Based on our knowledge and observations of
this microalgae, we believe we have enough production capacity to sustain
product introduction. After approximately one year of production, we project
that initial sales would support the cost of expanding our physical plant.

PRODUCT FORMULATION. The pro-vitamin in this product has chemical properties
that are similar to astaxanthin, and therefore we believe the product
formulation would also be very similar. We have not yet conducted any studies
on product formulation.

MARKETING STRATEGY. We intend to market this product directly to consumers,
building on the experience we will have developed with nutraceutical
astaxanthin. We may also sell limited amounts to wholesalers.

REGULATORY ISSUES.  We expect this product to be subject to the same
regulatory issues that govern nutraceutical astaxanthin.

COMPETITION.  We know of no competition for this product.


                                       19

<PAGE>

TIMING OF PRODUCT RELEASE.  We plan to release this product within the next
12 months.

(3)  AQUAXAN-TM- - NATURAL ASTAXANTHIN FOR ANIMAL FEED

THE PRODUCT. We have spent several years developing astaxanthin-rich
AQUAXAN-TM-. Astaxanthin is proven to be a vital dietary component in salmon,
trout, red sea bream, and several other species of cultivated seafood
products. In salmon, the primary market, astaxanthin is important as the main
source of their pink flesh color. Recent studies have also demonstrated the
importance of astaxanthin in enhancing the growth rate, vision, and fertility
of salmon. Astaxanthin is routinely used as a feed additive in poultry feeds,
for the purpose of improving the coloration of eggs and reducing the
incidence of infections. Astaxanthin in the diet of swine has been shown to
increase fertility. Several feeding studies with our astaxanthin-rich
microalgae in fish diets have produced the desired results.

THE MARKET. The market for astaxanthin in aquaculture has grown at about 10%
per year over the past 15 years. The markets for astaxanthin in feeds for
poultry, swine, and other domestic animals are not yet well developed, and
are much smaller. The 1998 global market for astaxanthin was estimated at
approximately $185 million. The sales price for astaxanthin has remained at
about $2,500 per kilogram for the past decade. Consumers in certain niche
markets are willing to pay a premium price. Global annual consumption of
astaxanthin is in excess of 65,000 kilograms. Almost all astaxanthin is
consumed in five countries which are, in order of importance, Norway, Chile,
Scotland, Canada and Japan.

PRODUCTION CAPACITY. Our current production capacity amounts to less than
1.0% of the global market. We plan to increase production capacity only in
response to demand. We have the option to increase capacity in two phases.
The first phase would involve constructing more finishing ponds, which would
result in an expansion of our current production capacity by a factor of
five. We estimate this first phase would cost less than $1.8 million, and
could generate annual sales approaching $2.0 million, if sold at current
animal feed prices. The second phase would probably require a new site,
because adjacent space is limited at our current site. The modular nature of
the AGM-based production system lends itself well to expansion at any
foreseeable scale. We believe that the experience gained in our recent plant
expansion will make it easier for us to expand our capacity at our existing
site or at adjacent or other sites.

PRODUCT FORMULATION. Any feed ingredient, including astaxanthin-rich
microalgae, requires careful formulation and testing prior to market. Our
primary goal has been to create a product that is at least equal, if not
superior to, competitive feed ingredients. We have focused on creating a
product with longer shelf life that is safer and easier to handle, and
produces a better result in the diet. We believe we have achieved these
goals. We also believe that further improvement is possible. If significant
changes are made in product formulation, then new regulatory approvals may
have to be obtained. Therefore, we have been very careful to develop our
product to a high standard before placing it on the market.

MARKETING STRATEGY. We believe that astaxanthin-rich microalgae will account
for a very significant share of the global astaxanthin market. We intend to
be a leader in this market for the following reasons:

         1)   A SUPERIOR PRODUCT. We believe a product that is safer, easier to
              handle, has a longer shelf life, and provides equal or greater
              efficacy per unit cost will eventually take significant market
              share.

         2)   CONSUMER AWARENESS. Farmed salmon now account for almost 40% of
              global salmon production. Consumers are generally not aware
              that the farmed salmon they eat contain a synthetic,
              petrochemical-based coloring. Recent studies by the U.S. FDA
              have shown that farmed salmon are easily distinguished from
              wild salmon because they do not contain the


                                       20

<PAGE>

              natural form of astaxanthin. All other factors being equal, we
              believe that informed consumers will generally prefer a natural
              astaxanthin product over a synthetic one.

The former lead manager of sales and marketing of astaxanthin at Cultor,
Martin Guerin, is now our VP, Sales and Marketing. We recently re-negotiated
our Distribution and Development Agreement with Cultor.

REGULATORY ISSUES. All feed ingredients are regulated in the countries where
they are sold. Regulations differ among astaxanthin-consuming nations.
Product specifications may differ, the stringency of regulations may differ,
and the time required for the application process may differ. In Europe, for
example, we expect regulatory approval could take up to three years, whereas
in Chile we expect such approval should take substantially less time.

COMPETITION.  AQUAXAN-TM- competes directly with only one product produced
from HAEMATOCOCCUS microalgae, NATUROSE-TM-, manufactured and sold by
Cyanotech.  NATUROSE-TM- is advertised to contain 1.5% astaxanthin.
AQUAXAN-TM- contains 3% astaxanthin.

TIMING OF PRODUCT RELEASE.  We began our first sales of AQUAXAN-TM- in July
1999.

(4)  DRUG DISCOVERY LIBRARIES

THE DRUG DISCOVERY PROCESS. A large number of modern medicines were
originally discovered in plants. The drug discovery process generally starts
by identifying a plant that has "bioactive" properties. The compound
responsible for bioactivity is identified through a sequence of chemical
extraction, testing, and purification. The pure compound is tested, first in
animal models and then in human clinical trials. If the entire process is
completed, the result is a new drug.

In conjunction with EnzyMed, our strategic partner, we have developed a drug
discovery process adapted to microalgae. Our role in this process is to (1)
identify and cultivate bioactive microalgae species, and (2) chemically
extract, test, and purify the bioactive fractions. Our tests rely on cell
cultures, human tissue cultures and genomic screens, conducted in
collaboration with certain university research laboratories. Bioactive
fractions are then subjected to Combinatorial Biocatalysis, a process which
creates, on average, hundreds of derivative compounds from each pure
bioactive compound using EnzyMed's proprietary enzymatic methods. The
resulting Microalgae Compound Libraries are then ready to market.

THE PRODUCT. Compound libraries are a major source of drug discovery in
today's pharmaceutical industry. The "library" consists of pure compounds
commonly in sets of 96, packaged in special containers designed for
"High-Throughput Screening." The screening process identifies new drug
candidates by testing for bioactivity, often targeted at certain diseases.
Tests might be based on the ability to kill certain types of cells (e.g.
bacteria, cancer), or they might be based on genetic pathways involved in
specific diseases. Any positive result from a screening test could eventually
lead to a new medicine.

We believe the Aquasearch/EnzyMed Microalgae Compound Library is unique
because it has these features:

         1)   Unexplored resource
              -   Few microalgae have been screened by the pharmaceutical
                  industry


                                       21

<PAGE>

         2)   Quantity
              -   Species: 30,000
              -   Bioactive compounds: thousands
              -   Average derivatives of each bioactive compound: hundreds via
                  Combinatorial Biocatalysis

         3)   Possible Patentability
              -   Bioactive compounds in microalgae may be new to science
              -   Bioactive derivatives from Combinatorial Biocatalysis may be
                  new to science

THE MARKET. Consumers of compound libraries are biopharmaceutical companies.
These companies are strongly motivated to find new sources of drugs.
According to a 1997 study by Andersen Consulting, the pharmaceutical industry
must increase its rate of discovery of new drugs by a factor of 10 in five
years in order to maintain its historic growth rate.

Compound libraries are typically marketed as a package that includes the
following terms and conditions:

         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 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

PRODUCTION CAPACITY. We are producing our first compound library in
collaboration with EnzyMed. We have provided EnzyMed with a purified extract
of a known bioactive compound, and they are now producing derivatives using
Combinatorial Biocatalysis.

We have demonstrated capability in identification, microalgae cultivation,
extraction, purification, and testing of bioactivity. Our research team
includes professional scientists with expertise in all these areas. However,
we have only limited facilities and equipment for chemistry (extraction,
purification) and biochemistry (testing). In these areas, we now rely on
collaborations with several universities and members of our Scientific
Advisory Board. We plan to expand capacity with a 6,000 sq. ft. laboratory
dedicated to drug discovery and appropriate equipment, at an estimated cost
of $2.0 million. Our ability to finance this expansion depends on funds we
would have to raise through revenues, debt or equity.

EnzyMed has demonstrated capability in Combinatorial Biocatalysis. Its
contract customers for this type of "lead optimization" currently include
leading pharmaceutical and biopharmaceutical companies.


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<PAGE>

MARKETING STRATEGY. Both Aquasearch and EnzyMed have considerable marketing
know-how in the drug discovery market. A number of major pharmaceutical and
biotech companies have already expressed an interest in our first compound
library. Senior officers of both companies are responsible for marketing the
compound libraries.

TIMING OF PRODUCT RELEASE.  We plan to release our first library for access
within six months.

(5)  EXPANDING OUR PRODUCT PIPELINE

PRODUCT AREAS.  We have established two areas to expand our product pipeline:

         -    Nutraceuticals
         -    Pharmaceutical drug development

BASIC STRATEGY: NUTRACEUTICALS.  We have identified many potential
nutraceutical products among the microalgae, mostly through the published
scientific literature.

We are focused on markets for high-value products that, like those for
natural astaxanthin and our second nutraceutical product, have potential
sales of more than $100 million, and few or no known competitors. At our
recently completed 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.

BASIC STRATEGY: PHARMACEUTICAL DRUG DEVELOPMENT. Our process for expanding
the pipeline in drug development is firmly founded on strategic
collaborations and alliances. We have strongly leveraged our ability to
identify, extract, test, and purify novel bioactive substances from
microalgae through partnerships with major universities. Additionally, we
have enhanced our ability to produce Microalgae Compound Libraries through
our collaboration with EnzyMed.

We are focused in the next year on developing strategic license agreements
with biopharmaceutical companies. We expect many biopharmaceutical companies
will be interested to access our Compound Libraries for drug discovery. We
believe our management team has well-developed networks and relationships in
the biotechnology industry that bring credibility to our marketing approach.

PRODUCT DEVELOPMENT: MarBEC.  MarBEC is a 5-year, $26 million Engineering
Research Center ("ERC"), funded in 1998 by the U.S. National Science
Foundation.  There are fewer than two dozen ERCs in the U.S.  In 1998, more
than 160 universities competed for only 5 ERCs awarded by the National
Science Foundation.

MarBEC combines the expertise of world-leading marine science and ocean
engineering programs at the


                                       23

<PAGE>

School of Ocean and Earth Sciences and Technology at University of Hawaii
with the nationally-famous chemical engineering program at the Department of
Chemical Engineering at University of California, Berkeley.

CORE RESEARCH:  Discovery and development of new products from microalgae

COST:  Industrial Partnership, $20,000 annually

BENEFITS TO AQUASEARCH:

              -   New research results prior to public disclosure
              -   Preferential rights to intellectual property
              -   Privilege to sponsor focused research, resulting in exclusive
                  intellectual property rights
              -   Preferred access to specialized and unique facilities and
                  equipment
              -   Preferred access to microalgae culture collections
              -   Membership on Industrial Advisory Board (current members:
                  Aquasearch, Monsanto, Cargill, Inc. and Cyanotech)
              -   Opportunity to influence specific research
              -   Preferential access to student interns

In the first ten years of the ERC program, two dozen centers generated more
than 1,000 patents. Industry members in other ERCs have cited the principal
benefits as (1) strategic relationships arising out of the academic/industry
network, (2) access to specialized equipment and facilities, and (3) better
educated ERC graduates.

PRODUCT DEVELOPMENT: OTHER UNIVERSITIES.  We are currently negotiating
research agreements with medical schools at four universities.  If
consummated, these agreements will strongly leverage our own product
development efforts.

CORE RESEARCH:  Pre-clinical screening for drug candidates

              -   Purification of extracts from approximately 1,200 species of
                  microalgae in 3 years
              -   Tissue culture screening
              -   Genomic screening: allows extracts to be tested for effects
                  on specific diseases
              -   Genetic control of microalgae biochemistry
              -   Targets: skin cancer, breast cancer, antivirals, antifungals

COST:  Approximately $500,000 per year. Projects range from 1 to 3 years.

BENEFITS TO AQUASEARCH:
              -   Ownership of intellectual property
              -   Increases value of drug candidates

We recognize that pre-clinical screening is costly. However, we believe it is
a very cost-effective investment. The industry-standard license fee for one
compound alone would more than double our anticipated investment.

If we are able to enter into agreements with all four universities, we expect
to generate and screen approximately 10,000 extracts over 3 years at a cost
of $1.5 million. If our pre-clinical trials yield only one bioactive
compound, the minimum license fee we expect would be $3 million.


                                       24

<PAGE>

We have three options for screening and pre-clinical trials. We can do them
ourselves, with a corporate partner, or with a university partner. The cost
of facilities, equipment and expertise dictates that we work with a partner.
The advantage of the university partners we have chosen is significant,
because the universities perform contract research and we retain ownership of
the compounds.

TIMING OF PRODUCT RELEASE. Our pipeline expansion is a process designed to
yield many more products at minimal cost. Our goal is two products per year.
The result could be less, or it could be far greater.

GENERAL ASPECTS OF PLANNED OPERATIONS

We expect to steadily increase revenues from sales of AQUAXAN-TM-. However,
we do not expect this product alone to be profitable, because we intend to
reserve significant production capacity for nutraceutical astaxanthin.

Subject to the necessary regulatory review, we intend to launch our
nutraceutical astaxanthin product in the first half of 2000. We anticipate
that we will become profitable within one year of the launch if we hit our
sales targets - with no increase in production capacity. However, there can
be no assurance that this will occur.

Strategic relationships and collaborations will continue to be an important
part of our business strategy. We now have such relationships with EnzyMed,
MarBEC and Cultor. We expect collaborations will expand to include other
corporations and other universities. However, we cannot be certain to
maintain existing partner relationships, nor can we guarantee to develop
other successful relationships.

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 January 31, 2000, we had an accumulated deficit of approximately
$12.8 million. Our losses to date have resulted primarily from costs incurred
in research and development and from general and administrative expenses
associated with operations. We expect to continue to incur operating losses
for at least the next year as we increase the expansion of our product
pipeline. We expect to have quarter-to-quarter and year-to-year fluctuations
in revenues, expenses and losses, some of which could be significant.

We do 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. Since inception, our main activities have been basic research and
development and


                                      25

<PAGE>

manufacture process development; recruiting personnel; purchasing operating
assets; and raising capital. In July 1999 we began to ship our natural
astaxanthin product. During the quarter ended January 31, 2000, we had
revenues of approximately $54,000 in connection with these shipments. The
amount has been classified as other income in the accompanying financial
statements.

RESEARCH AND DEVELOPMENT COSTS. Research and development costs include
salaries, development materials, plant and equipment depreciation and costs
associated with operating our three-acre research and development/production
facility. Research and development costs increased by approximately $232,000,
or 70%, during the quarter ended January 31, 2000 compared to the quarter
ended January 31, 1999. The increase reflects additional costs associated
with personnel additions, optimizing the very large Ultra-AGM, expanding
production capacity, and expenses incurred in connection with our human
safety clinical trial and U.S. FDA application for our nutraceutical
astaxanthin product. From inception through January 31, 2000, research and
development costs totaled approximately $5.3 million. We expect to incur
significant additional research and development costs in the future.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist principally of salaries and fees for professional services. General
and administrative expenses totaled approximately $397,000 for the quarter
ended January 31, 2000 compared with approximately $404,000 for the quarter
ended January 31, 1999. General and administrative expenses for the quarter
ended January 31, 2000 included costs associated with personnel additions,
legal fees incurred in connection with developing and protecting our
intellectual property and raising capital. From inception through January 31,
2000, general and administrative expenses totaled approximately $5.8 million.
We anticipate that general and administrative expenses will increase over
time as we continue expanding our production capacity, develop more new
products, increase our intellectual property protection, and raise additional
capital.

INTEREST EXPENSE. Interest expense for the quarters ended January 31, 2000
and 1999 included $92,647 and $264,671, 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.

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, 2000 and
1999, we raised approximately $735,000 and $1.5 million, respectively, from
the sale of shares of common stock and/or the issuance of debt in private
placement transactions. From inception through January 31, 2000, we raised
total net proceeds of approximately $12.9 million through public and private
sales of equity and debt securities.

During the quarter ended January 31, 2000, operating activities consumed
approximately $736,000 compared with $602,000 for the quarter ended January
31, 1999. From inception through January 31, 2000, operating activities have
consumed approximately $8.9 million. Capital expenditures from inception
through January 31, 2000 totaled approximately $3.8 million.

As of January 31, 2000, our liquidity was approximately $110,000 in cash and
cash equivalents.

We estimate a need for approximately $3.0 million in operating capital over
the next twelve months. We need an additional $0.5 million to consummate
strategic research agreements with four university medical schools. Projected
product sales will begin to pay some operating costs. We now believe that
product sales could lead to profitability within twelve months after the
start of sales of nutraceutical astaxanthin, and that some future expansion
could be financed out of profits. In the near term, we believe that existing


                                       26
<PAGE>

capital resources, funds to be 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 are now pursuing more
sources of capital to maintain operations and, more importantly, to expand
our product pipeline. These capital sources include government contracts and
grants, product sales, license agreements and equity or debt financing. We
cannot guarantee success in raising the additional capital necessary to
sustain or expand 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. See "Factors That
May Affect Future Operating Results" in the 1999 Form 10-KSB.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

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

On December 14, 1998, Cyanotech filed a motion for partial summary judgment
of non-infringement and invalidity of the 5,541,056 Patent.

On March 1, 1999, Aquasearch filed a motion for partial summary judgement
against Cyanotech for breach of contract and misappropriation of trade
secrets. On March 26, 1999, Aquasearch filed a cross-motion for summary
judgment of patent infringement. All motions for summary judgment were heard
in November 1999.

On April 1, 1999, Cyanotech filed an amended complaint against Aquasearch.
The amended complaint added claims which asserted that Aquasearch
misappropriated Cyanotech trade secrets, breached the terms of the 1994
Dissolution Agreement and committed unfair competition.

On July 27, 1999, Aquasearch filed an amended answer denying all of
Cyanotech's allegations.

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

In addition, the Court denied Cyanotech's motion for partial summary judgment
of non-infringement and invalidity of our patent. In doing so, the Court
upheld the validity of the 5,541,056 Patent.

On January 14, 2000, Cyanotech filed a motion for reconsideration on the
Court's December 30, 1999 order. Aquasearch filed its opposition to the
motion for reconsideration on February 1, 2000.

On March 3, 2000 the Court denied Cyanotech's motion for reconsideration.


                                       27

<PAGE>

We may be required to dedicate significant management time and incur
significant legal fees and expenses to continue our pursuit and settlement of
this action, which could have a material adverse effect on our business,
financial condition, results of operations and relationships with corporate
partners. In addition, in the event that Cyanotech were to prevail in an
appeal of the Court's ruling, a finding of noninfringement or declaration of
invalidity of our patent could have a material adverse effect on our
business, financial condition, results of operations and relationships with
corporate partners.

ITEM 2.  CHANGES IN SECURITIES

During the quarter ended January 31, 2000, we issued $485,000 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 January 31, 2000, some of the
holders of these convertibles notes and other outstanding convertible note
holders (amounting to $1,345,000 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 8,517,142 shares of Common Stock and also issued 742,000
warrants in connection thereof.

During the quarter ended January 31, 2000, we sold a total of 1,666,667
shares of our common stock to an individual at $0.15 per share. In connection
with the sale we issued 250,000 warrants with an exercise price of $0.40 per
share and a term of three years.

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

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES  -- None

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

On December 27, 1999 a special meeting of shareholders was held to approve an
amendment to the Company's Articles of Incorporation to increase the number
of shares of authorized common stock of the Company from 100,000,000 shares
to 150,000,000 shares.

There were 42,431,619 votes in favor of the amendment, 3,752,165 votes
against the amendment and 132,225 abstentions.

ITEM 5.  OTHER INFORMATION  -- None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  EXHIBITS  -- 27 Financial Data Schedule

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


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<PAGE>


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, 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: March 15, 2000                     By:  /s/ Mark E. Huntley
                                          -------------------------------------
                                          Mark E. Huntley, Ph.D.
                                          President and Chief Executive Officer

                                          By:  /s/ Earl S. Fusato
                                          -------------------------------------
                                          Earl S. Fusato
                                          Chief Financial Officer

                                       29