UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549FORM 10-QSB(Mark one)[X]  Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended July 31, 2001or[  ]  Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934Commission File Number:  33-23460-LAAQUASEARCH, INC.(Exact name of Registrant as specified in its charter)Colorado

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

(IRS Employer Identification Number)73-4460 Queen Ka'ahumanu Highway, Suite 110
Kailua-Kona, Hawaii  96740(Address of principal executive offices)(808) 326-9301(Registrant's telephone number, including area code)Not Applicable(Former name, former address and former fiscal year, if changed since last report)Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YES  [X]       NO[ 
]115,899,118 shares of $0.0001 par value common stock outstanding as of
July 31, 2001.






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Aquasearch, Inc.

Form 10-QSB
For the Quarter Ended July 31, 2001

Contents

PagePart I - Financial InformationItem 1:  Financial StatementsCondensed Balance Sheets

3Condensed Statements of Operations

4,5Condensed Statements of Cash Flows

6Notes to Condensed Financial Statements

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

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

13Part II - Other InformationItem 1:  Legal Proceedings

15Item 2:  Changes In Securities

15Item 3.  Defaults Upon Senior Securities

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

16Item 5:  Other Information

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

16


2

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Aquasearch, Inc.
(A Development Stage Enterprise)

Condensed Balance Sheets

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

$   104,558
$   509,492Accounts receivable
101,829

12,356Inventories
625,133

-Prepaid expenses and other
21,454

14,936Total current assets
852,974

536,784Notes receivable
76,249

50,000Plant and equipment:Plant
3,282,950

3,015,319Equipment
1,100,177

1,093,952Less accumulated depreciation
(846,394)

(662,002)Net plant and equipment
3,536,733

3,447,269Total assets
$4,465,956

$4,034,053Liabilities and stockholders' equityCurrent liabilities:Accounts payable
$ 1,798,472

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

297,000Short-term advance
-

500,000Notes payable
2,022,087

710,000Notes payable to officer
854,362

757,419Total current liabilities
4,971,921

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

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

11,679Additional paid-in capital
18,720,878

16,970,990Notes receivable
-

(29,179)Deficit accumulated during the development stage
(19,239,555)

(16,355,821)Total stockholders' equity
(505,965)

597,669Total liabilities and stockholders' equity
$ 4,465,956

$ 4,034,053


See accompanying notes to condensed financial statements.

3

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Aquasearch, Inc.
(A Development Stage Enterprise)

Condensed Statements of Operations

For the Period
From Inception
to July 31,
2001(Unaudited)

For the Three
Months Ended
July 31,
2001(Unaudited)

For the Three
Months Ended
July 31,
2000(Unaudited)RevenuesProducts

$     346,615

$   158,349

$              -Contract services

184,302

100,112

-Royalties

217,587

10,249

-Total revenues

748,504

268,710

-Costs and expensesCost of products sold

231,202

121,166

-Cost of contract services

184,302

100,112

-Research and development costs

8,111,221

213,227

721,748Selling, general and administrativeexpenses

9,386,881

599,135

565,106Total costs and expenses

17,913,606

1,033,640

1,286,854Loss from operations

(17,165,102)

(764,930)

(1,286,854)Other income (expense)Interest

(2,179,493)

(65,884)

(90,604)Other

266,638

(2,420)

43,260Investment in joint venture

(147,096)

-

-Total other income (expense)

(2,059,951)

(68,304)

(47,344)Loss before extraordinary item

(19,225,053)

(833,234)

(1,334,198)Extraordinary item - loss on write downof assets to liquidation basis

(14,502)

-

-Net loss

$(19,239,555)

$(833,234)

$(1,334,198)Loss per share

$          (0.47)

$      (0.01)

$         (0.01)Weighted average shares outstanding

41,043,855

115,899,118

103,259,590


See accompanying notes to condensed financial statements.

4

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Aquasearch, Inc.
(A Development Stage Enterprise)

Condensed Statements of Operations

For the Period
From Inception
to July 31,
2001(Unaudited)

For the Nine
Months Ended
July 31,
2001(Unaudited)

For the Nine
Months Ended
July 31,
2000(Unaudited)RevenuesProducts

$     346,615

$      335,538

$                -Contract services

184,302

184,302

-Royalties

217,587

217,587

-Total revenues

748,504

737,427

-Costs and expensesCost of products sold

231,202

207,738

-Cost of contract services

184,302

184,302

-Research and development costs

8,111,221

887,572

1,832,571Selling, general and administrativeexpenses

9,386,881

2,027,286

1,362,127Total costs and expenses

17,913,606

3,306,898

3,194,698Loss from operations

(17,165,102)

(2,569,471)

(3,194,698)Other income (expense)Interest

(2,179,493)

(313,046)

(470,685)Other

266,638

(1,217)

177,241Investment in joint venture

(147,096)

-

-Total other income (expense)

(2,059,951)

(314,263)

(293,444)Loss before extraordinary item

(19,225,053)

(2,883,734)

(3,488,142)Extraordinary item - loss on write downof assets to liquidation basis

(14,502)

-

-Net loss

$(19,239,555)

$(2,883,734)

$(3,488,142)Loss per share

$          (0.47)

$         (0.03)

$         (0.04)Weighted average shares outstanding

41,043,855

111,387,609

97,177,707


See accompanying notes to condensed financial statements.

5

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Aquasearch, Inc.
(A Development Stage Enterprise)

Condensed Statements of Cash Flows

From
Inception to
July 31,
2001(Unaudited)

For the Nine
Months Ended
July 31,
2001(Unaudited)

For the Nine
Months Ended
July 31,
2000(Unaudited)Cash flows from operating activities:Net loss

$(19,239,555)

$(2,883,734)

$(3,488,142)Adjustments to reconcile net loss to netcash used in operating activities:Depreciation

846,394

184,392

184,446Allowance on note receivable

108,500

10,500

31,500Expenses paid with common stock

1,247,653

25,193

166,617Discount on convertible notes payable

1,608,382

142,995

362,482Changes in:Accounts receivable

(101,829)

(89,473)

5,264Inventories

(625,133)

(625,133)

-Prepaid expenses and othercurrent assets

(21,454)

(6,518)

(3,364)Accounts payable

1,798,472

626,507

203,426Due to officer

297,000

-

(55,200)Cash used in operating activities

(14,081,570)

(2,615,271)

(2,592,971)Cash flows from investing activities:Purchases of fixed assets

(4,383,126)

(273,856)

(33,737)Increase in notes receivable

(125,053)

(7,570)

(31,500)Cash used in investing activities

(4,508,179)

(281,426)

(65,237)Cash flows from financing activities:Proceeds from issuance of common stock

7,336,033

1,260,000

544,575Repayment of short-term advance

-

(500,000)

-Proceeds from notes payable

12,040,950

1,842,087

2,264,063Repayment of notes payable

(105,285)

-

(105,285)Offering costs

(577,391)

(110,324)

-Cash provided by financing activities

18,694,307

2,491,763

2,703,353Net increase (decrease) in cash

104,558

(404,934)

45,145Cash, beginning of the period

-

509,492

90,522Cash, end of the period

$    104,558

$   104,558

$   135,667Supplemental non-cash information:Conversion of convertible notespayable to common stock

$ 8,643,863

$   430,000

$ 3,164,063Reduction in notes payable to officer andrelated interest for exercise of stockoptions

540,000

27,000

-


See accompanying notes to condensed financial statements.

6

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Aquasearch, Inc.
(A Development Stage Enterprise)

Notes To Condensed Financial Statements
July 31, 2001

1.  General

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

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

2.  Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or market.  At
July 31, 2001, inventories consisted of $553,645 of work in process and $71,488 of finished goods and are stated at net realizable value.

3. Revenue Recognition

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

4. Notes Payable

Notes payable consisted of the following:



July 31,
2001

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

$  470,300

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

-

370,00090 day short-term bridge financing notes, unsecured,bearing interest at 10% per annum (notes have notbeen executed as of September 19, 2001)

400,000

-90 day short-term bridge financing notes, bearinginterest at 12% per annum (notes have notbeen executed as of September 19, 2001)

300,000

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

-

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

551,787

-


7

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Aquasearch, Inc.
  (A Development Stage Enterprise)



Notes To Condensed Financial Statements
July 31, 2001



4. Notes Payable (continued)



July 31,
2001

October 31,
 2000One-year bank loan, unsecured, bearing interestat 2.5% above the bank's prime rate (10% atJuly 31, 2001)

100,000

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

200,000

-Total notes payable

$2,022,087

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

$100,000

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

754,362

657,419Total notes payable to officer

$854,362

$757,419


During the quarter ended July 31, 2001, we received $350,000 of 90-day
short-term bridge financing from an individual. The promissory notes for this
financing have not been executed as of September 19, 2001. Terms of the
unexecuted notes include interest payable at 10% per annum. In the event of
default, the holder of the notes may elect to receive in lieu of the outstanding
principal and any unpaid accrued interest, shares of our common stock at $0.125
per share. In addition, upon the increase in the number of authorized shares of
our common stock from 150 million to 200 million, the note holder will receive a
warrant to purchase 300,000 shares of our common stock. The warrant will have an
exercise price of $0.375 per share and a term of three years.

During the quarter ended July 31, 2001, we received $50,000 of 90-day
short-term bridge financing from an individual. Subsequent to July 31, 2001, we
issued 333,333 shares of common stock and a three-year warrant to purchase
50,000 shares of common stock at an exercise price of $0.40 per share, in satisfaction
of the short-term note.

During the quarter ended July 31, 2001, we received $100,000 of 90-day
short-term bridge financing from an individual. The promissory note for this
financing has not been executed as of September 19, 2001. Terms of the
unexecuted note call for interest payable at 12% per annum. In the event of
default, the holder of the note may elect to receive in lieu of the outstanding
principal and any unpaid accrued interest, shares of our common stock at $0.147
per share. In addition, upon the increase in the number of authorized shares of
our common stock from 150 million to 200 million, the note holder will receive a
warrant to purchase 680,000 shares of our common stock. The warrant will have an
exercise price of $0.275 per share and a term of three years.

During the quarter ended July 31, 2001, we received $200,000 of 90-day
short-term bridge financing from an individual. The promissory note for this
financing has not been executed as of September 19, 2001. Terms of the
unexecuted note call for interest payable at 12% per annum. The note is to be
collateralized by our astaxanthin and The AstaFactorTM revenues
and inventory. In addition, upon the increase in the number of authorized shares
of our common stock from 150 million to 200 million, the note holder will
receive a warrant to purchase 1,000,000 shares of our common stock. The warrant
will have an exercise price of $0.254 per share and a term of three years.

During the quarter ended July 31, 2001, we issued a $50,000 principal amount
one-year convertible note bearing interest at 10% per annum. The holder of the
convertible note has an option to convert his convertible note into our common
stock. The convertible note provides that upon conversion, the holder would
receive a warrant to purchase shares of our common stock. The warrant has an
exercise price of $0.375 per share and a term of three years.

5.  Common Stock and Common Stock Purchase Warrants

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

Shares of
Common
Stock

Common
Stock

Additional
Paid-In
Capital

Notes
Receivable

Accumulated
Deficit

Total
Stockholders'
Equity
(Deficit)Balance, April 30, 2001

115,899,118

$ 12,712

$18,712,054

$          -

$ (18,406,321)

$ 318,445Discount on convertiblenotes payable

-

-

8,824

-

-

8,824Loss for the three monthsended July 31, 2001

-

-

-

-

(833,234)

(833,234)Balance, July 31, 2001

115,899,118

$ 12,712

$18,720,878

$          -

$ (19,239,555)

$(505,965)


8

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Aquasearch, Inc.
(A Development Stage Enterprise)

Notes To Condensed Financial Statements
July 31, 2001(Unaudited)



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

Discount on convertible notes payable of $8,824 results from the difference between the conversion price and the fair value of the common stock underlying the convertible notes on their respective issuance dates for convertible notes issued during the quarter ended
July 31, 2001.

The following is a summary of our common stock purchase warrant transactions for the quarter ended
July 31, 2001:



Exercise
Price

Outstanding at
April 30, 2001

Issued

Exercised

Outstanding at
April 30, 2001$0.375

200,000

-

-

200,000$0.40

1,800,000

-

-

1,800,000$0.48

150,000

-

-

150,000$0.50

6,961,513

-

-

6,961,513$0.54

1,350,000

-

-

1,350,000$0.75

627,475

-

-

627,475$1.00

489,249

-

-

489,249$1.50

154,599

-

-

154,599$2.00

79,491

-

-

79,49111,812,327

-

-

11,812,327


At July 31, 2001, we had reserved a sufficient number of shares of our common stock for issuance upon exercise of the warrants.



ITEM 2.  MANAGEMENT'S PLAN OF OPERATION

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

9

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

Management's Plan of Operation for the Next Twelve Months

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

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

(1)  The AstaFactorTM - Nutraceutical Astaxanthin

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

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

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

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

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

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

10

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(2)  Drug Development

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

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

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

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

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

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

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

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

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

11

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

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

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

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

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

1) Library Access Fee

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

2) Licensing Fee

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

3)	Milestone Payments

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

4)	Royalties

·
	activated by FDA approval and full commercialization*

(3)  Expanding our Nutraceutical Product Pipeline

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

12

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

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

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

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

Since inception, our primary operating activities have consisted of basic research and development and production process development; recruiting personnel; purchasing operating assets; and raising capital.  From inception through
July 31, 2001, we had an accumulated deficit of approximately $19.2 million.  Our losses to date have resulted primarily from costs incurred in research and development and from selling, general and administrative expenses associated with operations.  We expect to continue to incur operating losses for at least the next year as we increase the expansion of our product pipeline.*  We expect to have quarter-to-quarter and year-to-year fluctuations in revenues, expenses and losses, some of which could be significant.*

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

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

Results of Operations

Revenues.
 
We began sales of The AstaFactorTM, our nutraceutical astaxanthin
product, on March 30, 2000. During the quarters ended July 31, 2001 and 2000
sales of The AstaFactorTM totaled approximately $143,000 and
$17,000, respectively. During the nine months ended July 31, 2001, sales of The AstaFactorTM
totaled $287,000. During the quarters ended July 31, 2001
and 2000, we had revenues of approximately $15,000 and $31,000, respectively,
from sales of our natural astaxanthin product, AquaxanTM. During
the nine months ended July 31, 2001 and 2000, we had revenues of approximately
$47,000 and $155,000, respectively, from sales of AquaxanTM. The
aforementioned amounts for the periods ended July 31, 2000 were classified as
other income in the accompanying financial statements, since they were
considered to be incidental to our ongoing research and development activities.
We have recognized approximately $30,000, $54,000, and $100,000 of revenues for
the quarters ended January 31, April 30, and July 31, 2001, respectively,
pursuant to our subcontract with Physical Sciences, Inc. for our work on the
U.S. Department of Energy project. Royalty revenues for the quarter ended July
31, 2001 included amounts received pursuant to a litigation settlement
agreement.

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Cost of Products Sold.


Cost of products sold include manufacturing and production costs associated with The AstaFactorTM
and AquaxanTM. Cost of products
sold were approximately $121,000 and $208,000 for the three and nine month
periods ended July 31, 2001, respectively. This resulted in gross margins of
approximately $37,000 and $128,000, or 23% and 38%, for the three and nine month
periods ended July 31, 2001, respectively.

Research and Development Costs. 

Research and development costs include salaries, research supplies and
materials, and expenses related to product development and our compound drug
discovery library. Research and development costs decreased by approximately
$509,000 and $945,000, or 70% and 52%, during the quarter and nine months ended
July 31, 2001 compared to the respective periods one year ago. The decreases
reflect our transition from product development to production of The AstaFactorTM
and the reimbursement of certain costs pursuant to our
subcontract with Physical Sciences, Inc. From inception through July 31, 2001,
research and development costs have totaled approximately $8.1 million. We
expect to incur significant research and development costs in the future.*

Selling, General and Administrative Expenses. 

Selling, general and administrative expenses consist principally of
salaries, fees for professional services, and promotional and marketing expenses
related to The AstaFactorTM. Selling, general and administrative
expenses increased by $34,000 and $665,000, or 6% and 49%, during the quarter
and nine months ended July 31, 2001 compared to the respective periods one year
ago. The increases were primarily due to personnel additions, investor relations
consulting costs, and sales and marketing efforts of The AstaFactorTM.
From inception through July 31, 2001, selling, general and administrative
expenses have totaled approximately $9.4 million. We anticipate that selling,
general and administrative expenses will continue to increase as we expand
production capacity, develop more new products, increase our intellectual
property protection, and raise additional capital.*

Interest Expense. 

Interest expense for the quarters ended July 31, 2001 and 2000 included
$8,824 and $67,070, respectively, for the discount resulting from the difference
between the conversion price and the fair value of the common stock underlying
the convertible notes issued during those quarters. Interest expense for the
nine months ended July 31, 2001 and 2000 included $142,995 and $362,482,
respectively, for the discount resulting from the difference between the
conversion price and the fair value of the common stock underlying the
convertible notes issued during those periods.

Liquidity and Capital Resources

We have financed our operations principally through public and private sales
of debt and equity securities. During the quarters ended January 31, April 30,
and July 31, 2001, we raised approximately $661,000, $1,581,000, and $750,000,
respectively, of net proceeds from the sale of shares of common stock and/or the
issuance of debt in private placement transactions. From inception through July
31, 2001, we raised total net proceeds of approximately $19 million through
public and private sales of equity and debt securities.

During the quarters ended July 31, 2001 and 2000, cash used in operating
activities totaled approximately $817,000 and $768,000, respectively. During
both of the nine months ended July 31, 2001 and 2000, cash used in operating
activities totaled approximately $2.6 million. From inception through July 31,
2001, cash used in operating activities have totaled approximately $14.1
million.

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Capital expenditures for the quarters ended January 31, April 30, and July
31, 2001 totaled approximately $224,000 and $42,000, $7,000 respectively. From
inception through July 31, 2001, capital expenditures have totaled approximately
$4.4 million.

As of July 31, 2001, we had approximately $100,000 in cash.

Subsequent to July 31, 2001, we obtained debt financing of $100,000 from an
officer of the Company and $75,000 from an individual.

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

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



PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS  -- None

ITEM 2.  CHANGES IN SECURITIES

During the quarter ended July 31, 2001, we received $350,000 of 90-day
short-term bridge financing from an individual. The promissory notes for this
financing have not been executed as of September 19, 2001. Terms of the
unexecuted notes include interest payable at 10% per annum. In the event of
default, the holder of the notes may elect to receive in lieu of the outstanding
principal and any unpaid accrued interest, shares of our common stock at $0.125
per share. In addition, upon the increase in the number of authorized shares of
our common stock from 150 million to 200 million, the note holder will receive a
warrant to purchase 300,000 shares of our common stock. The warrant will have an
exercise price of $0.375 per share and a term of three years.

During the quarter ended July 31, 2001, we received $50,000 of 90-day
short-term bridge financing from an individual. Subsequent to July 31, 2001, we
issued 333,333 shares of common stock and a three-year warrant to purchase
50,000 shares of common stock at an exercise price of $0.40 per share, in satisfaction
of the short-term note.

During the quarter ended July 31, 2001, we received $100,000 of 90-day
short-term bridge financing from an individual. The promissory note for this
financing has not been executed as of September 19, 2001. Terms of the
unexecuted note call for interest payable at 12% per annum. In the event of
default, the holder of the note may elect to receive in lieu of the outstanding
principal and any unpaid accrued interest, shares of our common stock at $0.147
per share. In addition, upon the increase in the number of authorized shares of
our common stock from 150 million to 200 million, the note holder will receive a
warrant to purchase 680,000 shares of our common stock. The warrant will have an
exercise price of $0.275 per share and a term of three years.

During the quarter ended July 31, 2001, we received $200,000 of 90-day
short-term bridge financing from an individual. The promissory note for this
financing has not been executed as of September 19, 2001. Terms of the
unexecuted note call for interest payable at 12% per annum. The note is to be
collateralized by our astaxanthin and
The AstaFactorTM revenues
and inventory. In addition, upon the increase in the number of authorized shares
of our common stock from 150 million to 200 million, the note holder will
receive a warrant to purchase 1,000,000 shares of our common stock. The warrant
will have an exercise price of $0.254 per share and a term of three years.

During the quarter ended July 31, 2001, we issued a $50,000 principal amount
one-year convertible note bearing interest at 10% per annum. The holder of the
convertible note has an option to convert his convertible note into our common
stock. The convertible note provides that upon conversion, the holder would
receive a warrant to purchase shares of our common stock. The warrant has an
exercise price of $0.375 per share and a term of three years.

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

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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES  -- None

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

A Special Meeting of the Company's shareholders was held on September 14,
2001. All shareholders of record as of the close of business on July 31, 2001
were entitled to notice of and to vote at the Special Meeting. The following
matters were approved:

1) An amendment to the Company's Articles of Incorporation to
      increase the number of shares of authorized common stock of the Company
      from 150,000,000 to 200,000,000.

2) The change of the Company's state of incorporation from the State
      of Colorado to the State of Delaware.

3) The form of indemnification agreement to be entered into between
      Aquasearch, Inc., a Delaware corporation, and its officers and directors.

4) The reelection of existing directors for the ensuing year.

ITEM 5.  OTHER INFORMATION  -- None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS  -- None

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



SIGNATURES

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

AQUASEARCH, INC.Dated: September 19, 2001
      
      By:  /s/ Mark E. HuntleyMark E. Huntley, Ph.D.President and Chief Executive OfficerBy:  /s/ Earl S. FusatoEarl S. FusatoChief Financial Officer








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