<PAGE>


                    U. S. 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 the quarterly period ended April 30, 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 small business issuer 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
                (Issuer's telephone number, including area code)

                                 NOT APPLICABLE
                 (Former name, former address and former fiscal
                       year, if changes since last report)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

                               YES  X  NO
                                   ---    ---

As of April 30, 2000, the number of shares outstanding of issuer's common stock,
$0.0001 par value, was 101,341,457 shares.



<PAGE>



                                Aquasearch, Inc.

                               Form 10-QSB For The
                          Quarter Ended April 30, 2000

                                    Contents

<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
                                                                                                              Page
<S>                                                                                                        <C>
     Item 1:  Financial Statements

         Condensed Balance Sheets                                                                                3

         Condensed Statements of Operations                                                                   4, 5

         Condensed Statements of Cash Flows                                                                      6

     Notes to Condensed Financial Statements                                                                     7


     Item 2:  Management's Plan of Operation

         Overview                                                                                                9

         Management's Plan of Operation for the Next Twelve Months                                              19

         Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                                                              27


PART II - OTHER INFORMATION

         Item 1:  Legal Proceedings                                                                             29

         Item 2:  Changes In Securities                                                                         29

         Item 3.  Defaults Upon Senior Securities                                                               30

         Item 4:  Submission of Matters to a Vote of Security Holders                                           30

         Item 5:  Other Information                                                                             30

         Item 6:  Exhibits And Reports on Form 8-K                                                              30
</TABLE>


                                       2
<PAGE>

                                AQUASEARCH, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                            CONDENSED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                     April 30,          October 31,
                                                                       2000                1999
                                                                    (Unaudited)          (Audited)
                                                               -----------------------------------------
<S>                                                              <C>                  <C>
   Assets
   Current assets:
      Cash                                                       $     499,284        $      90,522
      Accounts receivable                                               42,283               24,300
      Prepaid expenses                                                  10,052               11,507
      Refundable deposits                                                7,052                3,053
                                                               -----------------------------------------
   Total current assets                                                558,671              129,382
                                                               -----------------------------------------

   Note receivable from officer                                         50,000               50,000
   Plant and equipment:
      Plant                                                          2,805,882            2,795,258
      Equipment                                                      1,042,062            1,060,348
      Less accumulated depreciation                                   (536,226)            (413,244)
                                                               -----------------------------------------
   Net plant and equipment                                           3,311,718            3,442,362
                                                               -----------------------------------------
   Total assets                                                  $   3,920,389        $   3,621,744
                                                               =========================================

   Liabilities and stockholders' equity
   Current liabilities:
      Accounts payable                                           $     628,214        $     894,995
      Due to officer                                                   297,000              241,800
      Notes payable                                                    365,000              170,000
      Notes payable to officer                                         825,000            1,830,000
                                                               -----------------------------------------
   Total current liabilities                                         2,115,214            3,136,795
                                                               -----------------------------------------

   Stockholders' equity
      Preferred stock (5,000,000 shares authorized)                          -                    -
      Common stock ($0.0001 par value, 150,000,000 shares
        authorized, 101,341,457 and 87,060,501 shares
        outstanding at April 30, 2000 and
        October 31, 1999, respectively)                                 11,256                9,829
      Additional paid-in capital                                    15,735,582           12,262,839
      Notes receivable                                                 (58,133)             (58,133)
      Deficit accumulated during the development stage             (13,883,530)         (11,729,586)
                                                               -----------------------------------------
   Total stockholders' equity                                        1,805,175              484,949
                                                               -----------------------------------------
   Total liabilities and stockholders' equity                    $   3,920,389        $   3,621,744
                                                               =========================================
</TABLE>


                                       3
<PAGE>


                                AQUASEARCH, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                       CONDENSED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                For the Period       For the Three     For the Three
                                                From Inception       Months Ended       Months Ended
                                                  To April 30,         April 30,          April 30,
                                                      2000               2000               1999
                                                  (Unaudited)         (Unaudited)        (Unaudited)
                                              -----------------------------------------------------------
<S>                                             <C>                 <C>                <C>
  Operations
  Sales                                         $       11,077      $            -     $            -
  Cost of sales                                         23,464                   -                  -
                                              -----------------------------------------------------------
  Gross loss from operations                           (12,387)                  -                  -
  Research and development costs                     5,893,842             553,014            365,110
  General and administrative expenses                6,239,016             399,922            734,539
                                              -----------------------------------------------------------
  Loss from operations                             (12,145,245)           (952,936)        (1,099,649)

  Other income (expense)
  Interest                                          (1,754,295)           (234,201)          (146,328)
  Other                                                177,608              80,449               (151)
  Investment in joint venture                         (147,096)                  -                  -
                                              -----------------------------------------------------------
  Total other income (expense)                      (1,723,783)           (153,752)          (146,479)
                                              -----------------------------------------------------------
  Loss before income taxes and extraordinary
     item                                          (13,869,028)         (1,106,688)        (1,246,128)
  Extraordinary item - loss on write down of
     assets to liquidation basis                       (14,502)                  -                  -
                                              -----------------------------------------------------------
  Net loss                                      $  (13,883,530)     $   (1,106,688)    $   (1,246,128)
                                              ===========================================================

  Loss per share                                $        (0.46)     $        (0.01)    $        (0.02)
                                              ===========================================================

  Weighted average shares outstanding               29,987,669         100,666,790         63,739,962
                                              ===========================================================
</TABLE>


                                       4
<PAGE>


                                AQUASEARCH, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                       CONDENSED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                For the Period       For the Six        For the Six
                                                From Inception       Months Ended       Months Ended
                                                  To April 30,         April 30,          April 30,
                                                      2000               2000               1999
                                                  (Unaudited)         (Unaudited)        (Unaudited)
                                              -----------------------------------------------------------
<S>                                             <C>                 <C>                <C>
  Operations
  Sales                                         $       11,077      $            -     $            -
  Cost of sales                                         23,464                   -                  -
                                              -----------------------------------------------------------
  Gross loss from operations                           (12,387)                  -                  -
  Research and development costs                     5,893,842           1,110,824            691,205
  General and administrative expenses                6,239,016             797,021          1,138,217
                                              -----------------------------------------------------------
  Loss from operations                             (12,145,245)         (1,907,845)        (1,829,422)

  Other income (expense)
  Interest                                          (1,754,295)           (380,080)          (442,159)
  Other                                                177,608             133,981               (398)
  Investment in joint venture                         (147,096)                  -                  -
                                              -----------------------------------------------------------
  Total other income (expense)                      (1,723,783)           (246,099)          (442,557)
                                              -----------------------------------------------------------
  Loss before income taxes and extraordinary
     item                                          (13,869,028)         (2,153,944)        (2,271,979)
  Extraordinary item - loss on write down of
     assets to liquidation basis                       (14,502)                  -                  -
                                              -----------------------------------------------------------
  Net loss                                      $  (13,883,530)     $   (2,153,944)    $   (2,271,979)
                                              ===========================================================

  Loss per share                                $        (0.46)     $        (0.02)    $        (0.04)
                                              ===========================================================

  Weighted average shares outstanding               29,987,669          97,136,766         63,739,962
                                              ===========================================================
</TABLE>


                                       5
<PAGE>


                                AQUASEARCH, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                       CONDENSED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                      For the Period      For the Six      For the Six
                                                      From Inception      Months Ended     Months Ended
                                                       To April 30,         April 30,        April 30,
                                                           2000               2000              1999
                                                        (Unaudited)        (Unaudited)      (Unaudited)
                                                   ---------------------------------------------------------
<S>                                                 <C>                   <C>              <C>
   Cash flows from operating activities
   Net loss                                         $  (13,883,530)       $  (2,153,944)   $  (2,271,979)
   Adjustments to reconcile net loss to net cash
      used in operating activities:
        Depreciation                                       536,226              122,982           80,977
        Expenses paid with common stock                  1,076,395              121,256           19,603
        Discount on convertible notes payable            1,378,906              295,412          365,259
        Changes in:
          Other current assets                             (17,102)              (2,542)          25,543
          Receivables                                      (42,283)             (17,983)               -
          Accounts payable and due to officer              925,214             (211,581)         343,672
                                                   ---------------------------------------------------------
   Cash used in operating activities                   (10,026,174)          (1,846,400)      (1,436,925)

   Cash flows from investing activities
   Change in fixed assets                               (3,847,944)               7,662       (1,135,047)
                                                   ---------------------------------------------------------
   Cash used in investing activities                    (3,847,944)               7,662       (1,135,047)

   Cash flows from financing activities
   Increase in notes receivable                            (48,437)                   -                -
   Proceeds from issuance of common stock                6,054,958              613,500          500,000
   Proceeds from notes payable                           8,638,800            1,634,000        2,084,800
   Offering costs                                         (271,919)                   -                -
                                                   ---------------------------------------------------------
   Cash provided by financing activities                14,373,402            2,247,500        2,584,800
                                                   ---------------------------------------------------------

   Net increase in cash                                    499,284              408,762           12,828
   Cash, beginning of the period                                 -               90,522          151,473
                                                   ---------------------------------------------------------
   Cash, end of the period                           $     499,284        $     499,284    $     164,301
                                                   =========================================================

   Supplemental disclosure of cash flow
      information:
      Non-cash financing transactions:
        Conversion of convertible notes
          payable to common stock                    $   7,448,800        $   2,444,000    $   1,414,800
</TABLE>


                                       6
<PAGE>


                                AQUASEARCH, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                 APRIL 30, 2000
                                   (UNAUDITED)


1.  GENERAL

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

These financial statements should be read in conjunction with the financial
statements in our Annual Report on Form 10-KSB for the year ended October 31,
1999.

2.  COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS

The following is a summary of our common stock purchase warrants for the quarter
ended April 30, 2000:

<TABLE>
<CAPTION>
     Exercise        Outstanding at                                                    Outstanding at
      Price         January 31, 2000           Issued              Exercised           April 30, 2000
----------------- --------------------- --------------------- --------------------- ---------------------
<S>               <C>                   <C>                   <C>                   <C>
    $0.21                    25,974                     -                     -                25,974
    $0.40                 1,000,000               100,000                     -             1,100,000
    $0.50                 6,388,513               485,000              (527,000)            6,346,513
    $0.75                         -               122,291                     -               122,291
    $1.00                         -               260,000                     -               260,000
    $1.50                         -               154,599                     -               154,599
    $2.00                         -                79,491                     -                79,491
                  --------------------- --------------------- --------------------- ---------------------
                          7,414,487             1,201,381              (527,000)            8,088,868
                  ===================== ===================== ===================== =====================
</TABLE>

At April 30, 2000, we had reserved a sufficient number of shares of our common
stock for issuance upon exercise of the warrants.


                                       7
<PAGE>


                                AQUASEARCH, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                 APRIL 30, 2000
                                   (UNAUDITED)


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, January 31, 2000           97,244,310  $  10,846    $14,069,069    $  (58,133)   $  (12,776,842)     $1,244,940
Issuance of stock upon
  conversion of convertible
  notes payable ($0.22 to
  $1.26 per share)                   2,903,480        290      1,100,368             -                 -       1,100,658
Sale of stock ($0.15 per
  share)                               666,667         67         99,933             -                 -         100,000
Issuance of stock upon
  exercise of warrants ($0.50
  per share)                           527,000         53        263,447             -                 -         263,500
Discount on convertible notes
  payable                                    -          -        202,765             -                 -         202,765
Loss for the three months
  ended April 30, 2000                       -          -              -             -        (1,106,688)     (1,106,688)
                                --------------- ----------- -------------- ------------- ---------------- ---------------
Balance, April 30, 2000            101,341,457  $  11,256    $15,735,582    $  (58,133)   $  (13,883,530)     $1,805,175
                                =============== =========== ============== ============= ================ ===============
</TABLE>

Discount on notes payable of $202,765 results from the difference between the
conversion price and the fair value of the common stock underlying the
convertible notes on their respective issuance dates for convertible notes
issued during the quarter ended April 30, 2000.


ITEM 2.  MANAGEMENT'S PLAN OF OPERATION

The following discussion of our 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 we
"believe," "expect" and "anticipate" or similar expressions. These statements
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements 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 our Annual Report on Form 10-KSB for the
year ended October 31, 1999 (the "1999 Form 10-KSB"). You should not place undue
reliance on these forward-looking statements, which reflect our 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.

                                       8
<PAGE>

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.

Our key achievements in the past year include major advances in our platform
technology, the AGM. In the past year, 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.


                                       9
<PAGE>

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 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.



                                       10
<PAGE>

     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.

     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


                                       11
<PAGE>

          (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 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:


                                       12
<PAGE>

               -    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.

     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.


                                       13
<PAGE>

          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 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


                                       14
<PAGE>

          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 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.

          WE COMMENCED SALES OF OUR ASTAXANTHIN PRODUCT, THE ASTAFACTOR-TM-.

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:


                                       15
<PAGE>

     -    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
           (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.


                                       16
<PAGE>

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 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.


                                       17
<PAGE>

(6)  OUR TEAM

NEW MANAGEMENT. We believe our team is stronger than ever - at all levels.
During the last 18 months, we have added important experience and expertise at
the management level, including Martin Guerin, David Tarnas, Tim Esaki and Dr.
Samuel Lockwood. Together, these individuals bring us new experience and
expertise in:

     -    international marketing and sales in food and feed industries;

     -    public/private sector collaboration;

     -    financial reporting, SEC reporting, and controls; and

     -    medical affairs and clinical research.

NEW RESEARCH SCIENTISTS. Dr. Walter Nordhausen, Dr. Mai Lopez, and Dr. Mia Unson
have joined our research team in the last 18 months. 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 for
our recent achievements.

(7)  RECENT FINANCING ACTIVITY

During the period from June 1997 to April 30, 2000, we sold an aggregate of
$7,773,800 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 exercise prices ranging from $0.50 to $2.00 per share
and a term of three years. As part of this transaction, an officer/director
purchased $2,030,000 of convertible notes.

Through April 30, 2000, some of the holders of the convertibles notes (amounting
to $7,448,800 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
42,314,630 shares of common stock and also issued 6,848,181 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.

During the quarter ended April 30, 2000, we sold a total of 666,667 shares of
our common stock to an individual at $0.15 per share. In connection with the
sale we issued 100,000 warrants with an exercise price of $0.40 per share and a
term of three years.

During the quarter ended April 30, 2000, we received $263,500 for the exercise
of warrants to purchase 527,000 shares of common stock.


                                       18
<PAGE>

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:

     -    developing sales of our first nutraceutical product, THE
          ASTAFACTOR-TM-;

     -    formulating our second nutraceutical product;

     -    growing sales of AQUAXAN-TM-;

     -    marketing and selling compound libraries for drug discovery; and

     -    expanding our product pipeline.

(1) THE ASTAFACTOR-TM- - 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 THE ASTAFACTOR-TM-
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

     -    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


                                       19
<PAGE>

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 responsiblity 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. We did not receive any such
objection from the FDA.

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 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.


                                       20
<PAGE>

TIMING OF PRODUCT RELEASE. We commenced sales of THE ASTAFACTOR-TM- on March 30,
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.

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


                                       21
<PAGE>

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 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


                                       22
<PAGE>

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

          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.


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<PAGE>

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.

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


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<PAGE>

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 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


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<PAGE>

          -    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.

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 THE ASTAFACTOR-TM-.


                                       26
<PAGE>

We commenced sales of THE ASTAFACTOR-TM- on March 30, 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 April 30, 2000, we had an accumulated deficit of approximately $13.9
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 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 April 30, 2000, we had
revenues of approximately $70,000 in connection with these shipments. On March
30, 2000 we began sales of our nutraceutical astaxanthin product and have
recognized approximately $9,000 of initial sales through April 30, 2000. These
amounts have been classified as other income in the accompanying financial
statements, since they are considered to be incidental to our ongoing research
and development activities.

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 $188,000, or 51%,
during the quarter ended April 30, 2000 compared to the quarter ended April 30,
1999. The increase reflects additional costs associated with personnel
additions, optimizing the very large Ultra-AGM, expanding production capacity,
development of our nutraceutical astaxanthin product and


                                       27
<PAGE>

expenses incurred in connection with the development of our drug discovery
library. From inception through April 30, 2000, research and development costs
totaled approximately $5.9 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 decreased by approximately $335,000, or 46%, during the
quarter ended April 30, 2000 compared to the quarter ended April 30, 1999. The
decline was primarily due to a decrease in legal fees incurred in connection
with our legal dispute with Cyanotech. From inception through April 30, 2000,
general and administrative expenses totaled approximately $6.2 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 April 30, 2000 and
1999 included $202,765 and $100,588, 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. In the past six months, we raised approximately $2.2
million from the sale of shares of common stock and the issuance of debt in
private placement transactions. From inception through April 30, 2000, we raised
a total of approximately $14.7 million through public and private sales of
equity and debt securities.

During the quarter ended April 30, 2000, operating activities consumed
approximately $1.1 million compared with $835,000 for the quarter ended April
30, 1999. From inception through April 30, 2000, operating activities have
consumed approximately $10 million. Capital expenditures from inception through
April 30, 2000 totaled approximately $3.8 million.

As of April 30, 2000, our liquidity was approximately $500,000 in cash.

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 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


                                       28
<PAGE>

ITEM 1.  LEGAL PROCEEDINGS

On July 13, 1998, Cyanotech filed a complaint against us 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 our trade secrets relating to
closed culture production of astaxanthin. Cyanotech filed the complaint after we
expressed to Cyanotech our concern that Cyanotech infringed the 5,541,056 Patent
and misappropriated our trade secrets.

On September 11, 1998, we 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, we filed a motion for partial summary judgement against
Cyanotech for breach of contract and misappropriation of trade secrets. On March
26, 1999, we filed a cross-motion for summary judgment of patent infringement.
All motions for summary judgment were heard in November 1999.

On December 30, 1999, the United States District Court for the District of
Hawaii granted summary judgment on our motion that Cyanotech infringed the our
patent, misappropriated our 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 our 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. We filed our opposition to the motion for
reconsideration on February 1, 2000.

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

On May 25, 2000, the Court granted our motion to compel Cyanotech to produce
documents related to its BioDome system, financial information relating to its
astaxanthin production, and communications with third parties concerning the
lawsuit. In its order, the Court determined that the information sought on the
BioDome could be relevant in the litigation and could potentially bear on the
remedies or the extent of the patent infringement and trade secret
misappropriations by Cyanotech.

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


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<PAGE>

During the quarter ended April 30, 2000, we issued $1,149,000 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 exercise prices ranging from $0.50 to $2.00 per share
and a term of three years. During the quarter ended April 30, 2000, some of the
holders of these convertible notes and other outstanding convertible note
holders (amounting to $1,099,000 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 2,903,480 shares of common stock and also issued 1,101,381
warrants in connection thereof.

During the quarter ended April 30, 2000, we sold a total of 666,667 shares of
our common stock to an individual at $0.15 per share. In connection with the
sale we issued 100,000 warrants with an exercise price of $0.40 per share and a
term of three years.

During the quarter ended April 30, 2000, we received $263,500 for the exercise
of warrants to purchase 527,000 shares of common stock.

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  --  None

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:  June 14, 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



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