<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, 1998
                                         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 Changed Since Last Report

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                          
                                          
                                YES   X       NO
                                     ---         ---

The number of shares outstanding of Registrant's Common Stock, $0.0001 par value
at January 31, 1998 was 47,819,881 shares.

                                     1

<PAGE>

                                   AQUASEARCH, INC.

                                 FORM 10-QSB FOR THE
                            QUARTER ENDED JANUARY 31, 1998

                                       CONTENTS

PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
     ITEM 1:  FINANCIAL STATEMENTS

          BALANCE SHEETS                                                       3

          STATEMENTS OF LOSS AND ACCUMULATED DEFICIT                           4

          STATEMENTS OF CASH FLOWS                                             5

          NOTES TO FINANCIAL STATEMENTS                                        6


     ITEM 2:  MANAGEMENT'S PLAN OF OPERATION

          OVERVIEW                                                             7

          MANAGEMENT'S PLAN OF OPERATION FOR FISCAL 1998                       9

          RESULTS OF OPERATIONS -- COMPARISON OF QUARTERS AND
               YEARS ENDED JANUARY 31, 1997 AND 1998                          11

          LIQUIDITY AND CAPITAL RESOURCES                                     11


PART II - OTHER INFORMATION

     ITEM 1:  LEGAL PROCEEDINGS                                               12

     ITEM 2:  CHANGES IN SECURITIES                                           12

     ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                 12

     ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             12

     ITEM 5:  OTHER INFORMATION                                               12

     ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K                                12
</TABLE>

                                     2

<PAGE>

                                   Aquasearch, Inc.

                          (A Development Stage Enterprise)

                                    Balance Sheets

<TABLE>
<CAPTION>
                                                                     October 31,         January 31,
                                                                        1997                1998
                                                                      (Audited)          (Unaudited)
                                                                    --------------------------------
<S>                                                                 <C>                 <C>
Assets
Current assets:
   Cash                                                             $     47,006        $    23,222
   Accounts receivable                                                     1,219              4,931
   Prepaid expenses                                                       24,439             13,757
   Refundable deposits                                                     4,570              5,370
                                                                    --------------------------------
Total current assets                                                      77,234             47,280
                                                                    --------------------------------

Notes receivable                                                          30,516             30,516
   Plant and equipment:
   Plant                                                                 738,889            739,023
   Equipment                                                             173,052            180,940
   Less accumulated depreciation                                        (104,894)          (125,609)
                                                                    --------------------------------
Net plant and equipment                                                  807,047            794,354
                                                                    --------------------------------
Total assets                                                        $    914,797         $  872,150
                                                                    --------------------------------
                                                                    --------------------------------

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
   Accounts payable                                                 $    446,344         $  446,065
   Notes payable                                                         575,000            975,000
                                                                    --------------------------------
Total current liabilities                                              1,021,344          1,421,065
                                                                    --------------------------------

Stockholders' Equity (Deficit)
   Preferred stock (5,000,000 shares authorized)                               -                  -
     Common stock ($0.0001 par value, 100,000,000
     shares authorized, 47,819,881, shares outstanding at
     October 31, 1997, and January 31, 1998)                               5,904              5,904
   Additional paid-in capital                                          4,699,470          4,699,470
   Deficit accumulated during the development stage                   (4,811,921)        (5,254,289)
                                                                    --------------------------------
Total stockholders' equity (deficit)                                    (106,547)          (548,915)
                                                                    --------------------------------
Total liabilities and stockholders' equity (deficit)                $    914,797         $  872,150
                                                                    --------------------------------
                                                                    --------------------------------
</TABLE>

                                    3
<PAGE>

                                   Aquasearch, Inc.

                           (A Development Stage Enterprise)

                     Statements of Loss and Accumulated Deficit

<TABLE>
<CAPTION>
                                                          For the Period     For the Three         For the Three
                                                           From inception     Months Ended         Months Ended
                                                           To January 31,      January 31,          January 31,
                                                                1998               1997                 1998
                                                            (Unaudited)        (Unaudited)          (Unaudited)
                                                          ------------------------------------------------------
<S>                                                       <C>                 <C>                 <C>
Sales                                                     $     11,077        $        570        $          -
Cost of sales                                                   23,464                   -                   -
                                                          ------------------------------------------------------
Gross profit (loss)                                            (12,387)                570                   -
Research and development costs                               2,112,549             207,949             226,013
General and administrative expenses                          2,902,128             243,427             197,523
                                                          ------------------------------------------------------


Loss from operations                                        (5,027,064)           (450,806)           (422,536)

Other Income (Expense)
Interest                                                       (24,014)              3,178             (18,832)
Other                                                           (6,702)               (194)                  -
Investment in joint venture                                   (147,096)                  -                   -
                                                          ------------------------------------------------------
Total other income (expense)                                  (177,812)              2,984             (18,832)
                                                          ------------------------------------------------------
Loss before income taxes and
 extraordinary item                                         (5,204,876)           (447,822)           (442,368)

Extraordinary item - loss on write down
 of assets to liquidation basis                                (14,502)                   -                  -
                                                          ------------------------------------------------------
Loss before income taxes                                    (5,219,378)           (447,822)           (442,368)

Federal and State income taxes                                       -                   -                   -
                                                          ------------------------------------------------------
Net loss                                                    (5,219,378)           (447,822)           (442,368)

Accumulated Deficit
Balance, beginning of period                                   (34,268)         (2,948,718)         (4,811,921)
                                                          ------------------------------------------------------
Balance, end of period                                    $ (5,253,646)       $ (3,396,540)       $ (5,254,289)
                                                          ------------------------------------------------------
                                                          ------------------------------------------------------

Loss per share                                            $      (0.23)       $      (0.01)       $      (0.01)
                                                          ------------------------------------------------------
                                                          ------------------------------------------------------

Weighted average shares outstanding                         22,936,599          42,376,389          47,819,881
                                                          ------------------------------------------------------
                                                          ------------------------------------------------------
</TABLE>

                                          4

<PAGE>

                                   Aquasearch, Inc.

                            (A Development Stage Enterprise)

                                  Statements of Cash Flows

<TABLE>
<CAPTION>
                                                          For the Period       For the Three     For the Three
                                                          From inception        Months Ended      Months Ended
                                                          To January 31,        January 31,       January, 31
                                                              1998                  1997              1998
                                                           (Unaudited)           (Unaudited)       (Unaudited)
                                                          ------------------------------------------------------
<S>                                                       <C>                 <C>                  <C>
Cash Flows from Operating Activities
Net loss                                                  $ (5,220,021)       $   (447,822)        $  (442,368)
Adjustments to reconcile net loss to net
 cash used in operating activities:
   Amortization                                                  3,527                   -                   -
   Depreciation                                                131,316              14,173              20,715
   Expenses paid with common stock                             755,319                   -                   -
   Loss on write down of assets to
    liquidation basis                                            5,392                   -                   -
   Changes in:
      Other current assets                                     (18,926)           (108,444)              9,882
      Receivables                                               (4,931)                803              (3,712)
      Accounts payable                                         362,352             (48,055)               (279)
      Deposits held                                                  -            (346,535)                  -
                                                          ------------------------------------------------------
Cash used in operating activities                           (3,985,972)           (935,880)           (415,762)

Cash Flows from Investing Activities
Purchase of fixed assets                                      (829,547)            (18,107)             (8,022)
                                                          ------------------------------------------------------
Cash used in investing activities                             (829,547)            (18,107)           (329,099)

Cash Flows from Financing Activities
Cash (held in) released from escrow                                  -             335,980                   -
Increase in notes receivable                                   (30,516)                  -                   -
Issuance of common stock                                     4,136,322             935,979                   -
Increase (decrease) in notes payable                         1,004,800            (135,000)            400,000
Offering costs                                                (271,919)            (74,005)                   -
                                                          ------------------------------------------------------
Cash provided by financing activities                        4,838,687           1,062,954             400,000
                                                          ------------------------------------------------------

Net increase (decrease) in cash                                (23,784)           (108,967)            (23,784)
Cash, beginning of the period                                       54             187,166              47,006
                                                          ------------------------------------------------------
Cash, end of the period                                   $     23,222      $      296,133      $       23,222
                                                          ------------------------------------------------------
                                                          ------------------------------------------------------
</TABLE>

                                 5

<PAGE>

                                   Aquasearch, Inc.

                           (A Development Stage Enterprise)

                            NOTES TO FINANCIAL STATEMENTS
                                   January 31, 1998
                                     (Unaudited)

1.   COMMON STOCK AND STOCK PURCHASE WARRANTS

     As of January 31, 1998, there were a total of 5,373,218 Common Stock 
Purchase Warrants (the "Warrants") issued and outstanding, of which 5,347,244 
Warrants had an exercise price of $1.00 per share and 25,974 Warrants had an 
exercise price of $0.21 per share. No Warrants were exercised during the 
three months ended January 31, 1998. The Warrants are redeemable by the 
Company at $.01 per Warrant during their three-year exercise period upon 30 
days' notice anytime that the closing bid price per share of the Common Stock 
exceeds $1.50 per share for 20 trading days out of 30 consecutive trading 
days ending on the third day prior to the date of the notice of redemption.  
Additionally, there are warrants to be issued under the Convertible Notes 
Payable and the Short-Term Notes.  

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

<TABLE>
<CAPTION>
                                         Shares of                   Additional                      Total
                                           Common        Common        Paid-In    Accumulated    Stockholders'
    Description                            Stock          Stock        Capital      Deficit     Equity (Deficit)
                                        ------------------------------------------------------------------------
<S>                                     <C>             <C>          <C>          <C>             <C>
Balance, October 31, 1997               47,819,881      $   5,904    $ 4,699,470  $ (4,811,921)   $  (106,547)
  Loss for the three months
  ended January 31, 1998                        --             --             --      (442,368)      (442,368)
                                        ------------------------------------------------------------------------
Balance, January 31, 1998               47,819,881      $   5,904    $ 4,699,470  $ (5,254,289)   $  (548,915)
                                        ------------------------------------------------------------------------
                                        ------------------------------------------------------------------------
</TABLE>

     On November 14, 1996, the Company executed a Letter of Intent with C. 
Brewer and Company, Limited ("C. Brewer") with respect to the acquisition by 
the Company of between 80 and 90 acres of property in the Ka'u region of the 
Big Island of Hawaii valued at between $900,000 and $1,000,000 in exchange 
for the issuance to C. Brewer of between 2,570,000 and 2,850,000 shares of 
Common Stock of the Company (the "C. Brewer Common Stock") at a purchase 
price of $0.35 per share. In addition, C. Brewer acquired a three-year 
warrant (the "C. Brewer Warrant") to purchase up to 500,000 shares of Common 
Stock at a purchase price of $1.25 per share. The stockholders' equity at 
January 31, 1998 does not reflect the issuance of the C. Brewer Common Stock 
or the C. Brewer Warrant. The Company does not plan to finalize its agreement 
with C. Brewer until such time as Aquasearch clearly has the ability to 
further expand its production facilities beyond its current one-acre site, 
which is contingent on obtaining further capital. 

2.   ISSUANCE OF SHORT-TERM NOTES

     During the quarter ended January 31, 1998, the Company issued $400,000 
of Short-Term Notes bearing interest at 10% per annum. The noteholder will 
also receive warrants to purchase shares of the Company's Common Stock at an 
exercise price of $0.50 per share. The number of shares underlying the 
warrant is computed based on the 10% of the face value of the note divided by 
the closing bid price at the time the note was funded.  The note is due April 
1, 1998.  The noteholder is an officer/director of the Company.

                                     6

<PAGE>

3.   MANAGEMENT'S REPRESENTATIONS OF INTERIM FINANCIAL INFORMATION

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

ITEM 2.  MANAGEMENT'S PLAN OF OPERATION

THE FOLLOWING DISCUSSION OF MANAGEMENT'S PLAN OF OPERATION CONTAINS CERTAIN 
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE 
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS THAT 
INDICATE WHAT THE COMPANY "BELIEVES," "EXPECTS" AND "ANTICIPATES" OR SIMILAR 
EXPRESSIONS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES 
AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS 
OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH 
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE 
INFORMATION CONTAINED UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE 
OPERATING RESULTS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE 
FISCAL YEAR ENDED OCTOBER 31, 1997  (THE "1997 FORM 10-KSB"). THE READER IS 
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,  
WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE OF THIS QUARTERLY 
REPORT ON FORM 10-QSB. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY 
RELEASE THE RESULTS OF ANY REVISION OF THESE FORWARD-LOOKING STATEMENTS. THE  
READER IS STRONGLY URGED TO READ THE INFORMATION SET FORTH UNDER THE CAPTION  
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" IN THE 1997 FORM 10-KSB 
FOR A MORE DETAILED DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES.

OVERVIEW

     INCEPTION THROUGH JANUARY 31, 1997. Aquasearch, Inc. ("Aquasearch" or 
the "Company") has been engaged, since its inception in 1989, in the 
development of proprietary photobioreactor technology for commercial 
cultivation of microalgae. In 1994, the Company initiated discussions with 
Cultor Ltd. ("Cultor"), a Helsinki-based foods conglomerate that is the 
second largest producer of salmon and trout feed in the world, regarding the 
purchase of microalgae rich in astaxanthin - the primary pigment used in 
salmon and trout feed. In early 1995, Cultor completed a series of feeding 
trials with farmed salmon, using the Company's microalgae product. In July 
1995, the Company entered into a Supply Agreement with Svenska Foder AB (the 
"Svenska Foder Supply Agreement"), then a subsidiary of Cultor, pursuant to 
which Svenska Foder agreed to act as exclusive distributor of the Company's 
natural astaxanthin product for animal feed and animal nutrition applications 
in Sweden, Norway and Finland for poultry, pigs, cattle and horses. The 
Svenska Foder Supply Agreement had a term of three years, and target 
production of five kilograms of natural astaxanthin per month. In October 
1995, the Company completed construction of a one-acre research and 
development/production facility in the HOST Business Park at Keahole Point, 
Kailua-Kona, Hawaii.

     On May 14, 1996, the Company entered into a three-year Distribution and 
Development Agreement with Cultor (the "Cultor Distribution and Development 
Agreement"), which was approved by the shareholders of the Company on 
September 24, 1996, pursuant to which the Company will act as the exclusive 
worldwide supplier of natural astaxanthin derived from microalgae to Cultor 
in the field of 

                                        7

<PAGE>

animal feed and animal nutrition and Cultor will act as the exclusive 
worldwide distributor of Aquasearch's natural astaxanthin product in the 
field of animal feed and animal nutrition. Production targets under the 
Cultor Distribution and Development Agreement were initially 40 kilograms per 
month at the end of the first year (September 24, 1997) and 120 kilograms per 
month at the end of the second year (September 24, 1998); however, Cultor and 
the Company agreed to (i) extend the term of the Agreement one year, (ii) 
eliminate the September 24, 1997 production target and (iii) provide that the 
September 24, 1998 and 1999 production targets will be 40 kilograms and 120 
kilograms per month, respectively. In order to meet the revised production 
targets, the Company must significantly expand and improve its production 
facilities, which will involve many significant risks and uncertainties. 
Under the Cultor Distribution and Development Agreement, Cultor and 
Aquasearch may, at Cultor's option, mutually develop a new joint venture 
company for the sole purpose of producing and selling natural astaxanthin 
derived from microalgae in the field of animal feed and animal  nutrition. 
The terms of the Cultor Distribution and Development Agreement are more fully 
described under the caption "Part I, Description of Business-Corporate 
Partner Relationships-Cultor" of the 1997 Form 10-KSB.

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

     On September 24, 1996, the Company's shareholders approved: (i) the 
Cultor Distribution and Development Agreement; (ii) a Stock Subscription 
Agreement with Cultor pursuant to which Cultor agreed to purchase 400,000 
shares of the Company's Common Stock at a purchase price of $0.50 per share 
(the "Cultor Stock Subscription Agreement"); and (iii) an amendment to the 
Company's Articles of Incorporation to increase the number of shares of 
Common Stock that the Company is authorized to issue from 50,000,000 shares 
to 100,000,000 shares and authorized the creation and issuance from time to 
time of up to 5,000,000 shares of Preferred Stock in one or more series with 
such designations, rights, preferences, privileges and restrictions as the 
Board of Directors may determine.

     In October 1996, the Company's consultants completed the initial phase 
of the design work for the Company's planned intermediate expansion from a 
one-acre facility to a four-acre facility. Construction of expanded 
production facilities is anticipated to begin in early 1998 and is expected 
to take approximately four to six months. The construction of these expanded 
facilities is dependent upon the timely performance of a variety of 
contractors and sub-contractors, the availability of supplies and equipment, 
and the availability of requisite capital. While the Company has certain 
plans to address all these requirements, there can be no assurance that the 
Company will be able to complete its expansion in a timely manner.

     On October 22, 1996, Cultor acquired 400,000 shares of the Company's 
Common Stock pursuant to the terms of the Cultor Stock Subscription Agreement.

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

FEBRUARY 1, 1997 THROUGH JANUARY 31, 1998. The Company has experienced 
certain significant developments over the past twelve months.

     In February 1997, the Company completed a private placement of a total 
of 5,044,570 Units, consisting of one share of Common Stock and one Common 
Stock Purchase Warrant (the "Warrants"). 

                                       8

<PAGE>

The purchase price of the Units ranged from $0.21 per Unit to $0.43 per Unit. 
The Warrants have a term of three years and are exercisable at $1.00 per 
share, subject to adjustment.  The Warrants are redeemable by the Company at 
$.01 per Warrant upon 30 days' notice anytime that the closing bid price per 
share of the Common Stock exceeds $1.50 per share for 20 trading days out of 
30 consecutive trading days ending on the third day prior to the date of the 
notice of redemption.  The net proceeds from this offering, net of placement 
agent fees and commissions, was $1,105,421.

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

     In September 1997, Aquasearch executed a Letter of Intent with Inflazyme 
Pharmaceuticals, Limited to enter into a ten-year drug development and 
manufacturing agreement.  Under the terms of the agreement, Aquasearch would 
produce large-scale research quantities of several thousand different 
microalgae in its AGM photobioreactors.  Inflazyme intends to investigate 
each species for therapeutic activity in the areas of inflammation, cancer, 
blood and cardiovascular diseases.  Aquasearch would receive cost-plus 
reimbursement of all its research costs (including dedicated physical 
facilities); potential milestone payments associated with steps in the U.S. 
Food and Drug Administration drug approval process; and royalties on future 
net product sales.

MANAGEMENT'S PLAN OF OPERATION FOR FISCAL 1998

     During fiscal 1998, Aquasearch intends to focus its efforts on 
strengthening its intellectual property position, optimizing the performance 
of its proprietary AGM technology, expanding its production capacity to meet 
the targets under the Cultor Distribution and Development Agreement, 
initiating a business in pharmaceutical drug development, and improving 
productivity through employee incentives.

-    INTELLECTUAL PROPERTY:  The Company is maintaining several international
     patent applications under the aegis of the Patent Cooperation Treaty, and
     contemplates new filings that will enhance its formal claims to
     intellectual property.  At the same time, Aquasearch continues to develop
     certain trade secrets that management believes would consolidate its
     competitive stance.

-    TECHNOLOGY IMPROVEMENT:  Aquasearch intends to enlarge the size of its
     proprietary AGM technology by a factor of at least two during 1998. 
     Furthermore, the process control system is slated for hardware and
     software improvements.  The Company believes that, as in 1997, this effort
     will continue to reduce capital costs, reduce labor costs, and improve
     productivity.

-    EXPANSION OF PRODUCTION CAPACITY:  Aquasearch is poised to significantly
     increase its production capacity.  Construction permits have already been
     issued that, when implemented, would augment production capacity by at
     least five-fold.  Furthermore, the Company is planning to increase its
     production capacity by the construction of a separate ten-acre facility
     dedicated to astaxanthin production for Cultor.  All increases in
     production capacity are contingent on the availability of financing.

-    PHARMACEUTICAL DRUG DEVELOPMENT:  The Company believes that the
     consummation of its contract with Inflazyme will pay for a large fraction
     of the Company's pharmaceutical research and development costs.  The
     Company believes that between seven and ten new personnel will need to be
     hired to perform under the Inflazyme project.  The Company intends to keep
     its current 

                                 9

<PAGE>

     personnel entirely focused on astaxanthin-related science and
     technology.  New personnel hired for the Inflazyme work will be dedicated
     entirely to that project and will function as a separate team, which costs
     will be borne by Inflazyme.  The Company believes that additional
     laboratory facilities may also be required for Inflazyme's contract
     research and development.  The Company expects, based on its Letter of
     Intent and the current form of the draft contract between the parties,
     that costs for such dedicated facilities will be borne by Inflazyme. 
     Aquasearch intends, during 1998, to pursue additional drug development
     agreements with other biotechnology and pharmaceutical companies.

-    IMPROVEMENTS IN PRODUCTIVITY THROUGH EMPLOYEE INCENTIVES:  At the outset
     of fiscal year 1998 Aquasearch implemented an incentive compensation
     program to award significant cash bonus incentives to all employees
     provided that the Company meets certain quarterly production targets. 
     Targets are planned that management believes would significantly advance
     the Company's research and development and production efforts.  Under 
     the incentive program, cash bonuses would represent as much as a 25% 
     increase in salary on a quarterly basis.  The Company also intends to 
     award stock options to all employees as a further incentive to increase 
     productivity.  Aquasearch believes that employee incentives will 
     significantly enhance productivity.

     Significant improvements in productivity were realized by the Company in
     the first quarter of fiscal 1998.  During the quarter, the Company
     achieved:

               -    Increases of more than five-fold in yield (weight of
                    astaxanthin per unit of production capacity) over any
                    performance the Company has yet achieved;
               -    Sustained operation, for the entire quarter, of the largest
                    photobioreactor the Company has ever operated, and which
                    the Company believes to be the largest photobioreactor in
                    existence; and
               -    Production that exceeded its first quarter target.

     The Company has set a yield target for the second quarter which, if
     achieved, will make it possible to substantially reduce its previous
     estimate of capital requirements.  Attainment of the next yield target
     will make it possible for the Company to achieve its 1998 production
     commitment to Cultor after expanding its facility to two acres (rather
     than to four acres, as previously estimated).  The Company believes that
     further improvements in yield are likely to be derived from additional
     research and automation, which have been solely responsible for the
     Company's yield improvements to date.

     The Company expects to continue producing relatively small amounts of
     astaxanthin (less than 6 kg (dry weight) per month) until September 1998,
     when its first monthly shipment of 40 kg (dry weight) is due under
     contract.  The Company is currently satisfying Cultor's requirements for 
     product testing, regulatory approvals and related developmental 
     activities.  The Company will focus in the forthcoming quarter on 
     continuing to improve yields and increasing the cost-effectiveness of 
     its production.

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

     Since inception, the Company's primary operating activities have consisted
of basic research and development and production process development.  From
inception through January 31, 1998, the Company had an accumulated deficit of
approximately $5.3 million.  The Company's losses to date have resulted
primarily from costs incurred in research and development and from general and
administrative 

                                       10

<PAGE>

costs associated with the Company's operations.  The Company expects to 
continue to incur operating losses for at least the next two years as it 
expands its production facilities to meet the production targets under the 
Cultor Distribution and Development Agreement and increases its research and 
development efforts.  The Company expects to have quarter-to-quarter and 
year-to-year fluctuations in revenues, expenses and losses, some of which 
could be significant.

     The Company has a limited operating history and any assessment of the 
Company's prospects must 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.  Although the Company has 
attempted to address these risks by, among other things, hiring and retaining 
highly qualified persons and forging strategic alliances with companies that 
complement the Company's technical strengths, there can be no assurance that 
the Company will overcome these risks in a timely manner, if at all.

     The Company is in the process of transitioning toward becoming a 
full-scale commercial producer of microalgal products.  These changes in its 
business have placed and will continue to place significant demands on the 
Company's management, working capital and financial and management control 
systems.

RESULTS OF OPERATIONS - COMPARISON OF QUARTERS ENDED JANUARY 31, 1997 AND 1998

     Revenues for the quarter ended January 31, 1998 were $ -0-  compared 
with revenues of $570  for the quarter ended January 31, 1997. The Company 
has continued to supply Cultor with sufficient astaxanthin product to conduct 
additional tests, trials and other analyses involved in product development 
under the Cultor Distribution and Development Agreement.

     The Company's Scientific Advisory Board, in conjunction with the 
Company's engineers and representatives from Cultor, have recommended certain 
improvements in hardware and procedures that are designed to improve 
production. The Company has implemented and will continue to implement these 
recommendations as resources allow.

     Consistent with the Company's efforts to implement improvements in its 
production system, research and development costs increased by $18,064, or 
approximately  9%, during the quarter ended January 31, 1998 compared with 
the quarter ended January 31, 1997.

     General and administrative expenses decreased by $45,904, or 
approximately 19% during the quarter ended January 31, 1998 compared with the 
quarter ended January 31, 1997.  The decrease in general and administrative 
expenses was primarily due to a decrease in legal costs relating to patent 
filings.

     The Company incurred a net loss of  $442,368 or $0.01 per share, for the 
quarter ended January 31, 1998 compared with a net loss of  $447,822, or 
$0.01 per share, for the same period in 1997.

LIQUIDITY AND CAPITAL RESOURCES

     Cash decreased by $23,784 in the quarter ended January 31, 1998 from the 
prior period, resulting in a cash balance of $23,222 at January 31, 1998. 
Purchases of fixed assets of $8,022 were made during the quarter, primarily 
for equipment, bringing the Company's net plant and equipment assets to 
$794,354 and total assets to $872,150.

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<PAGE>

     The Company currently estimates that it will require between $1.5 
million and $2.0 million in  operating capital over the next twelve months 
before any planned capital expenditures.  Beginning with the shipment of 
increased amounts of astaxanthin to Cultor in September 1998, the Company 
expects to generate revenues of $0.6 to $1.1 million per annum (depending 
upon global market price), which would substantially offset operating capital 
requirements.  As a result of recent increases in yield, the Company has 
reduced its estimate of further capital requirements to a total of $2.4 
million (a decrease of $1.3 million from previous estimates).  This $2.4 
million in financing is required during the next twelve months to automate, 
optimize and expand the Company's existing research and 
development/production facility from a one-acre facility to a two-acre 
facility, and repayment of $0.4 million short-term debt.

     Taking into account all factors over the next twelve months, the Company 
anticipates a need for a total of approximately $3.3 to 3.9 million in 
financing.  Management expects this amount to repay short-term debt, and to 
complete the construction of an expanded production facility that produces 
significant revenues.  In 1999 the Company will seek additional financing to 
complete construction and begin operation of a separate production facility 
dedicated solely to the production of natural astaxanthin derived from 
microalgae and to fund research and development of new microalgal products.  
If the Company is not able to raise sufficient capital to automate, optimize 
and expand its one-acre facility to a two-acre facility or to construct the 
separate facility, the Company's ability to meet its production targets under 
the Cultor Distribution and Development Agreement would be adversely affected 
as would its ability to fund the research and development of new microalgal 
products.  

     The Company believes that its existing 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 fiscal 1998.  Aquasearch is presently pursuing additional sources of 
capital in order to maintain and expand its operations.  These capital 
sources include government contracts and grants, product sales, license 
agreements and equity or debt financing.  There can be no assurance that the 
Company will be successful in raising the additional capital necessary to 
sustain or expand its operations, or that such capital will be available on 
terms that would not result in substantial dilution to existing investors.  
The Company's inability to raise sufficient capital could cause it to 
significantly curtail operations, which would have a material adverse effect 
on the Company's business, financial condition, results of operations and 
relationships with its corporate partners. See "Factors That May Affect 
Future Operating Results--Substantial Near-Term Capital Needs; Uncertainty of 
Additional Funding; Dilution" and "--Substantial Long-Term Capital Needs; 
Uncertainty of Additional Funding; Dilution"  in the 1997 10-KSB.

                             PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS  -- None

ITEM 2.  CHANGES IN SECURITIES  -- None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES  -- None

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

ITEM 5.  OTHER INFORMATION  -- None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


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<PAGE>

          (a)       EXHIBITS  -- None

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


SIGNATURE

     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 13, 1998              By:  /s/ Mark E. Huntley
                                        --------------------------------------
                                        Mark E. Huntley, Ph.D.
                                        President and Chief Executive Officer



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