AQUASEARCH INC, SB-2, 1996-11-13

AQUASEARCH INC
SB-2, 1996-11-13
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE>

As filed with the Securities and Exchange Commission on November 13, 1996
Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
AQUASEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

COLORADO 2833 33-0034535
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
73-4460 QUEEN KA'AHUMANU HIGHWAY,
SUITE 110, KAILUA-KONA, HAWAII 96740

(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------

MARK E. HUNTLEY, PH.D.
73-4460 QUEEN KA'AHUMANU HIGHWAY,
SUITE 110, KAILUA-KONA, HAWAII 96740

(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------------
COPIES TO:
STEVEN L. BERSON, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CA 94304-1050
(415) 493-9300
FAX: (415) 496-4088

----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time as the selling shareholders may decide.
----------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act of
1933 registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

----------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.0001 per
share................................. 2,562,500 $0.35 $896,875.00 $271.78
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended, based upon the
average of the bid and ask prices of Aquasearch, Inc. Common stock as
reported on The Nasdaq Electronic Bulletin Board on November 11, 1996.

----------------------

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.

<PAGE>

AQUASEARCH, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS ON FORM SB-2

ITEM NUMBER AND HEADING
IN FORM SB-2 REGISTRATION LOCATION IN PROSPECTUS
- --------------------------------------------------------- ---------------------------------------------------------------
<S> <C>
1. Front of Registration Statement and Outside
Front Cover of Prospectus........................ Outside Front Cover Page of Prospectus; Front of Registration
Statement

2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front and Outside Back Cover Pages of Prospectus;
Available Information

3. Summary Information and Risk Factors............... Prospectus Summary; Risk Factors; Inside Front
Cover Page of Prospectus

4. Use of Proceeds.................................... Not Applicable

5. Determination of Offering Price.................... Not Applicable

6. Dilution............................................ Not Applicable

7. Selling Security Holders............................ Selling Shareholders

8. Plan of Distribution................................ Plan of Distribution

9. Legal Proceedings................................... Not Applicable

10. Directors, Executive Officers, Promoters and
Control Persons................................... Management

11. Security Ownership of Certain Beneficial Owners
and Management..................................... Principal Shareholders

12. Description of Securities............................ Prospectus Summary; Capitalization; Description
of Securities

13. Interest of Named Experts and Counsel................ Not Applicable

14. Disclosure of Commission Position on Indemni-
fication for Securities Act Liabilities............ Not Applicable

15. Organization Within Last Five Years.................. Not Applicable

16. Description of Business.............................. Prospectus Summary; Risk Factors, Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business
17. Management's Discussion and Analysis or Plan
of Operation....................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations

18. Description of Property.............................. Business

19. Certain Relationships and Related
Transactions......................................... Not Applicable

20. Market for Common Equity and Related
Stockholder Matters................................ Outside Front Cover Page of Prospectus; Prospectus
Summary; Price Range of Common Stock and Dividend
Policy; Description of Securities

21. Executive Compensation............................... Management

22. Financial Statements................................. Consolidated Financial Statements

23. Changes in and Disagreements with Accountants
on Accounting Financial Disclosure................ Not Applicable

</TABLE>

<PAGE>

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall not be there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to the registration or qualification under the securities laws
of any such State.

<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 13, 1996

2,562,500 SHARES

AQUASEARCH, INC.

COMMON STOCK

The shares offered by this Prospectus may be sold by one or more
shareholders (see "Selling Shareholders") from time to time through brokers, to
dealers acting as principals, directly to purchasers in negotiated transactions,
or any combination of these methods of sale. Sales may be made at prevailing
market prices at the time of such sales, at prices related to such prevailing
prices, at fixed prices that may be changed or at negotiated prices. The
Company will not receive any proceeds from the sale of the shares offered by
this Prospectus.

The Company will pay the expenses of this offering (excluding brokerage
commissions), estimated at $40,000.

The Company's Common Stock is currently traded in the over-the-counter
market on the NASD "Electronic Bulletin Board" under the symbol "AQSE: bb."
The closing bid price of the Company's Common Stock on November 11, 1996 was
$0.37 per share. There is only a limited market for the Company's Common
Stock and, therefore, there is no reliable source upon which shareholders can
base an investment decision and shareholders may have difficulty selling
shares.

_____________________________

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS.

____________________________

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is November 13, 1996

<PAGE>

PROSPECTUS SUMMARY

EXCEPT FOR HISTORICAL INFORMATION, THIS PROSPECTUS CONTAINS FORWARD-LOOKING
INFORMATION THAT INVOLVES VARIOUS RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE CAPTION "RISK FACTORS"
COMMENCING ON PAGE 5 AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S
REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. PROSPECTIVE
INVESTORS ARE URGED TO CONSIDER THE FACTORS DISCUSSED UNDER THE CAPTION "RISK
FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS IN EVALUATING AN INVESTMENT IN
THE SHARES OFFERED HEREBY.

EXCEPT AS OTHERWISE NOTED AND UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL
INFORMATION IN THIS PROSPECTUS REFLECTS (I) SHAREHOLDER APPROVAL OF AND
AMENDMENT OF THE COMPANY'S ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK FROM 50,000,000 SHARES TO 100,000,000 SHARES,
(II) SHAREHOLDER APPROVAL OF AND AMENDMENT OF THE COMPANY'S ARTICLES OF
INCORPORATION TO AUTHORIZE A CLASS OF 5,000,000 SHARES OF UNDESIGNATED PREFERRED
STOCK WITH SUCH RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS AS MAY BE
DETERMINED FROM TIME TO TIME BY THE BOARD OF DIRECTORS OF THE COMPANY AND (III)
SHAREHOLDER APPROVAL OF THE DISTRIBUTION AND DEVELOPMENT AGREEMENT AND THE STOCK
SUBSCRIPTION AGREEMENT, EACH DATED AS OF MAY 14, 1996, BETWEEN THE COMPANY AND
CULTOR LTD. THE MATTERS SET FORTH IN THE PREVIOUS SENTENCE WERE APPROVED BY THE
COMPANY'S SHAREHOLDERS AT A SPECIAL MEETING OF SHAREHOLDERS HELD ON SEPTEMBER
24, 1996. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND
NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

Aquasearch develops and commercializes high value natural products from
microalgae using its proprietary, cost-effective, photosynthetic, closed-system
technology known as the Aquasearch Growth Module (the "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.

Aquasearch believes that its AGM platform technology can be used to
cultivate hundreds of species of microalgae. The AGM utilizes
computer-controlled equipment to monitor and adjust the turbulence rate, pH, gas
exchange, temperature and nutrient levels within the AGM to optimize microalgae
growth rates. Aquasearch believes that the AGM offers significant technical and
economic advantages compared with the open pond systems currently used by
certain competitors, including increased yields and the ability to economically
cultivate hundreds of microalgal species at commercial scale that cannot be
produced in open pond systems due to substantially higher risks of contamination
and lack of control. Aquasearch also believes that the AGM compares favorably
with other known closed systems with respect to both capital and operating
costs. Notwithstanding these perceived advantages of the Company's technology,
the production of certain species of microalgae on a commercial scale involves
various risks and uncertainties.

Aquasearch's first commercial product is astaxanthin, a naturally occurring
red pigment derived from HAEMATOCOCCUS PLUVIALIS, a freshwater microalga. The
primary market for astaxanthin currently is aquaculture. According to industry
sources, the global aquaculture market steadily doubled in value from $13
billion in 1985 to $26 billion in 1990 and is projected to grow to more than $50
billion by the year 2000. Industry sources indicate that farmed salmon and
shrimp (the fastest and fourth fastest growing aquaculture products) will
account for more than half the total value of world aquaculture production by
the year 2000. Free swimming salmon and shrimp acquire pink flesh from natural
astaxanthin contained in microalgae and other species ingested in the wild.
Farmed salmon and shrimp, however, currently acquire pink flesh from the
addition of synthetic astaxanthin (or a less effective substitute product) to
their feed. The world market for astaxanthin in aquaculture is estimated to be
approximately $125 million in 1996, and continued growth is expected.

-2-

<PAGE>

Aquasearch believes it is the first company to produce commercial
quantities of natural astaxanthin from microalgae at economically viable
production costs. The world market for astaxanthin is currently dominated by a
single producer, Hoffman-LaRoche, which has maintained the market price of its
synthetic astaxanthin product (which is derived from petrochemicals) at
approximately $2,500 per kilogram for more than a decade. Aquasearch's natural
astaxanthin product will compete directly with Hoffman-LaRoche's synthetic
astaxanthin product. There can be no assurance that the market price of
synthetic astaxanthin will be maintained at historical levels or what effect
this may have on the market price of Aquasearch's natural astaxanthin product.

In May 1996, Aquasearch entered into a three-year exclusive Distribution
and Development Agreement (the "Cultor Distribution and Development Agreement")
with Cultor Ltd. ("Cultor") pursuant to which Aquasearch will act as the
exclusive worldwide supplier of natural astaxanthin derived from microalgae to
Cultor in the field of animal feed and animal nutrition and Cultor will act as
the exclusive worldwide distributor of Aquasearch's natural astaxanthin product
in the field of animal feed and animal nutrition. Cultor is a $2 billion
Finnish food conglomerate that is a leading worldwide producer of animal feed
and animal nutrition products. Aquasearch estimates that Cultor and its
affiliated companies currently utilize approximately $30 million of synthetic
astaxanthin per year in feed products for the aquaculture and livestock
industries. Astaxanthin is currently used by Svenska Foder AB, a subsidiary of
Cultor, in poultry feed to impart a more reddish hue to egg yolks. Recently
published studies by Svenska Foder indicate that natural astaxanthin may have
additional benefits with respect to fertility, weight gain and feed efficiency
in broiler chickens and layer hens.

Aquasearch is currently producing natural astaxanthin at the rate of eight
kilograms per month at its existing one-acre research and development/production
facility. The production targets under the Cultor Distribution and Development
Agreement are 40 kilograms per month at the end of the first year and 120
kilograms per month at the end of the second year. In order to meet these
production targets, Aquasearch must significantly expand and improve its
production facilities and processes within the next eighteen months, which will
involve various risks and uncertainties.

Aquasearch has established relationships with several international
scientific institutes and universities, including Scripps Institution of
Oceanography, University of California, San Diego, University of Hawaii at Manoa
and the University of Southern Mississippi, which together provide Aquasearch
with access to a library of more than 6,000 live microalgal species. Aquasearch
has an active Scientific Advisory Board consisting of nine Ph.D.s with expertise
in the fields of aquaculture, marine biology, fluid dynamics, and the chemistry,
photobiology, physiology and mass culture of microalgae.

Aquasearch is a development stage company incorporated in Colorado; its
principal executive offices are located at 73-4460 Queen Ka'ahumanu Highway,
Suite 110, Kailua-Kona, Hawaii 96740; its telephone number is (808) 326-9301;
and its Website is http//www.hula.net/aqse/mainpage.htm. Unless otherwise
indicated, all references in this Prospectus to the "Company" and "Aquasearch"
refer to Aquasearch, Inc., a Colorado corporation.

-3-

<PAGE>

RISK FACTORS

Prospective investors are urged to consider the factors discussed under the
caption "Risk Factors" commencing on page 5 of this Prospectus in evaluating an
investment in the Common Stock offered hereby.

THE OFFERING

All of the shares being offered hereby are being sold by shareholders of
the Company. Aquasearch will not receive any of the proceeds from the sale of
the shares offered hereby.

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
---------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ------- ------ ------ ------- ------- -------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ -- $ -- $ -- $ -- $ -- $ -- $ 10
Loss from operations....... (237) (81) (89) (142) (284) (117) (796)
Net loss .................. (251) (81) (142) (240) (286) (117) (793)
Net loss per share ........ $ (0.02) $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ Nil (0.02)
Weighted average shares
outstanding............... 16,647,91 17,287,45 20,132,100 22,782,063 25,541,021 23,463,313 38,000,000

</TABLE>

JULY 31, 1996
-------------
ACTUAL
------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash equivalents................................ $46
Total assets.................................... 663
Deficit accumulated during development stage.... 2,246
Total shareholders' equity...................... 376

-4-

<PAGE>

RISK FACTORS

EXCEPT FOR HISTORICAL INFORMATION, THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE VARIOUS RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING THOSE SET FORTH IN THE
FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS AND OTHER RISKS DETAILED
FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE COMMISSION. AN
INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND THE
SHARES SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE
FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS
PROSPECTUS, IN EVALUATING THE COMPANY AND ITS BUSINESS.

HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES

The Company was founded in 1988 and has experienced quarterly and annual
operating losses since its inception. The Company's net loss in fiscal 1995 was
approximately $300,000 and the Company's accumulated deficit at July 31, 1996
was approximately $2.3 million. The Company's losses to date have resulted
primarily from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. The Company
expects to continue to incur operating losses for at least the next two years as
it expands its production facilities to meet the production targets under the
Cultor Distribution and Development Agreement (as hereinafter defined) and
increases its research and development efforts. The Company expects to have
quarter-to-quarter and year-to-year fluctuations in revenues, expenses and
losses, some of which could be significant. Future financial results will be
affected by, among other things, the following factors: the Company's ability to
successfully manage the transition from a research and development company to a
commercial-scale production enterprise, the Company's ability to complete
successfully the commercialization and cost optimization of its natural
astaxanthin product; production costs and yield issues associated with the
scale-up of production of its natural astaxanthin product; the progress of the
Company's research and development programs with respect to the development of
additional microalgal products; the time and costs of obtaining regulatory
approvals for those products subject to such approval; the Company's ability to
protect its proprietary rights; the costs of filing, protecting and enforcing
the Company's patent claims; competing technological and market developments and
the costs of commercializing and marketing the Company's existing and potential
products. There can be no assurance that the Company will ever be able to
achieve or sustain profitability in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

RISKS INHERENT IN COMMERCIAL PRODUCTION OF MICROALGAE

The development of technology to cultivate and harvest a wide variety of
microalgae species is a lengthy and technically challenging process. The
Company has faced a number of significant technical problems in the development
of its AGM technology and in its initial production of natural astaxanthin
derived from HAEMATOCOCCUS PLUVIALIS, including various forms of microbial
contamination, variability in production cycle times due to technical and
biological factors, and proportional losses of final product due to processing
inefficiencies. As a result of these factors and, to a lesser extent, ongoing
experimentation with processes and methods and limited capacity, the Company
failed to meet the five kilogram per month production target under the Svenska
Foder Supply Agreement (as hereinafter defined) since it began shipments in
April 1996. The Company has recently implemented procedures that it believes
will resolve many of these technical problems, although there can be no
assurances in this regard.

The Company expects to encounter additional technical problems in
connection with the scale-up in production of HAEMATOCOCCUS PLUVIALIS (and any
other potential microalgal products). Some of these problems may be presently
unknown, may never have been faced, and may have the effect of lowering
production yields. There can be no assurance that the Company will be
successful in correcting these technical problems. The Company's failure to
satisfy its production targets under the Svenska Foder Supply Agreement and/or
the Cultor Distribution and Development Agreement for an extended

-5-

<PAGE>

period could have a material adverse effect on the Company's business, financial
condition, results of operations and its relationships with its corporate
partners. See "Business--Overview," "--The Aquasearch Solution," "--Products
and Potential Products," "--Manufacturing" and "--Corporate Partner
Relationships."

LIMITED MANUFACTURING EXPERIENCE

To be successful, the Company must be able to produce its products at
acceptable costs in compliance with contractual requirements, regulatory
requirements and local health, safety and environmental regulations. The
Company is at an early stage of development and has only limited experience
producing products derived from microalgae. To date, the Company's only
commercial shipments of its first product, natural astaxanthin derived from
microalgae, have been made to one customer, Svenska Foder AB ("Svenska Foder"),
a Swedish animal feed and animal nutrition company and a subsidiary of Cultor
Ltd. ("Cultor"), a Finnish multinational corporation, pursuant to a Supply
Agreement entered into in July 1995 between the Company and Svenska Foder for
three years commencing with the first shipment of five kilograms of natural
astaxanthin per month in April 1996 (the "Svenska Foder Supply Agreement"). The
production targets under the Svenska Foder Supply Agreement require the Company
to produce five kilograms of natural astaxanthin per month. However, in
connection with the recent scale-up of volume production of natural astaxanthin
to meet the production targets under the Svenska Foder Supply Agreement, the
Company has not been able to meet the production target since April 1996 due to
lower than expected manufacturing yields and, to a lesser extent, limited
capacity. Although the Company is currently producing natural astaxanthin at
the rate of eight kilograms per month, as the Company continues to increase
production, it may experience lower than anticipated production yields or
production constraints from time to time that may adversely affect its ability
to satisfy customer orders, including, in particular, the production
requirements under the Svenska Foder Supply Agreement and/or the Cultor
Distribution and Development Agreement. While the Company's inability to
satisfy its production targets to date has not disrupted relations with its
corporate partners, continued inability to satisfy demand may have a material
adverse effect on the Company's business, financial condition, results of
operations and its relationships with its corporate partners. See
"Business--Overview," "--Products and Potential Products," "--Manufacturing" and
"--Corporate Partner Relationships."

RISKS ASSOCIATED WITH SCALE-UP OF PRODUCTION FACILITIES

To date, the Company has not produced large quantities of natural
astaxanthin. The Company has experienced significant delays in product
development and cultivation and harvesting process development from time to time
and its product development and cultivation and harvesting processes will
require additional research and development as well as substantial additional
capital and other resources prior to full scale commercialization. The Company
estimates that it will require approximately $5 million in financing over the
next four months to complete the expansion of its existing research and
development/production facility from a one-acre facility to a four-acre facility
and an additional $10 million over the next two to three years to complete the
construction and commence operation of a ten-acre production facility dedicated
solely to the production of natural astaxanthin derived from microalgae and to
fund research and development of new microalgae products. Construction and
facility scale-up costs as well as research and development and production costs
could substantially exceed budgeted amounts and estimated time frames may
require significant extension. Any such additional costs or delays could have a
material adverse effect on the Company's business, financial condition, results
of operations and relationships with its corporate partners.

The Company believes that its existing one-acre research and
development/production facility is sufficient, based on existing technology and
processes, to meet the current five kilograms of natural astaxanthin per month
production target under the Svenska Foder Supply Agreement, but not the
September 1997 40 kilogram per month production target under the Cultor
Distribution and Development Agreement. After completion of the expansion of
the existing one-acre research and development/production facility to a
four-acre facility, the Company believes that it will have sufficient production
capacity, based on existing technology and processes, to meet the September 1997
40 kilogram per month production target under the Cultor Distribution and
Development Agreement, but not the September 1998 120 kilogram per month
production target.

-6-

<PAGE>

In order to meet the September 1998 120 kilogram per month production target
under the Cultor Distribution and Development Agreement, the Company must
complete construction and scale-up of the new ten-acre production facility.

Although the Company is currently culturing and harvesting HAEMATOCOCCUS
PLUVIALIS in commercial quantities of approximately 320 kilograms per month (dry
weight) (which results in approximately eight kilograms per month of natural
astaxanthin) using its current AGM technology, in order to meet the September
1997 40 kilogram per month production target and the September 1998 120 kilogram
per month production target, the Company will be required to increase its
current production capacity by five-fold and fifteen-fold, respectively. This
scale-up of the Company's current production technology poses a number of
significant risks that presently cannot be quantified or fully assessed. For
example, the Company's production process is critically dependent upon supplies
of freshwater, cold seawater and utilities provided by the Natural Energy
Laboratory of Hawaii Authority, and any interruption in these supplies could
have a material adverse effect on the Company's production capability.
Furthermore, microbial contamination of the Company's water supplies also poses
significant risks to productivity that may override the Company's existing
efforts and capability to maintain the sterility of its water supply. The
success of the Company's proposed expansion plans will be dependent upon the
timely performance of a large number of contractors, sub-contractors, suppliers
and various agencies of the State of Hawaii that regulate and license
construction, each of which is beyond the control of the Company. Any failure
by these contractors, suppliers or state agencies to perform in a timely manner
could cause delays, cost overruns or changes in the Company's construction and
expansion plans, which could have a material adverse effect on the Company's
business, financial condition, results of operations and relationships with its
corporate partners.

The Company has projected a cost of manufacture for natural astaxanthin
that assumes that its current manufacturing processes can be scaled to larger
AGMs. To date, the Company has not demonstrated that it can culture and harvest
HAEMATOCOCCUS PLUVIALIS using such larger AGMs. If the Company's current AGM
design and processes are not readily scalable to larger sizes, then the Company
may have to expend substantial additional research effort and capital resources
to scale its technology in order to increase yields. Difficulty in scaling the
Company's current processes may translate into higher than projected product
costs or entail significant reengineering efforts in order to meet commercially
viable cost targets, which could have a material adverse effect on the Company's
business, financial condition, results of operations and relationships with its
corporate partners.

There can be no assurance that the Company will be successful in resolving
known or unknown biological and engineering development problems, that the
Company will be able to develop its products within the estimated time schedule,
or in accordance with present cost projections, or that the products developed
by the Company will be commercially viable or widely accepted. See
"Business--Overview," "--Products and Potential Products," "--Manufacturing" and
"--Corporate Partner Relationships."

SUBSTANTIAL NEAR-TERM CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; DILUTION

The Company will require approximately $5 million in funding over the next
four months and an additional $10 million over the next two to three years in
order to further commercialize its natural astaxanthin product and scale-up its
production facilities to satisfy the 1998 production targets under the Cultor
Distribution and Development Agreement and to fund research and development of
new microalgae products. The Company expects to obtain this funding primarily
from sales of equity and/or convertible debt securities in the private and/or
public markets. The Company's capital requirements will depend on many factors
including, but not limited to, the timing of development of the Company's
products, the timing of the scale-up of the existing one-acre research and
development/production facility to a four-acre facility, the timing of the
construction and scale-up of the new ten-acre natural astaxanthin production
facility, market acceptance of the Company's natural astaxanthin product, and
the response of competitors to the Company's natural astaxanthin product and
technology. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the current shareholders of the Company
will be reduced and such equity securities may have rights, preferences, and
privileges senior to those of the

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<PAGE>

holders of the Company's Common Stock. There can be no assurance that
additional capital will be available on terms favorable to the Company or its
shareholders, if at all. Moreover, the Company's cash requirements may vary
materially due to production yield problems, research and development results,
product testing results, changing relationships with its corporate partners,
changes in the focus and direction of the Company's research and development
programs, competitive and technological advances, litigation and other factors.
If adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into collaboration
agreements on unattractive terms that may require the Company to relinquish
certain technology or product rights, including patent and other intellectual
property rights. The Company's inability to raise capital would have a material
adverse effect on the Company's business, financial condition, results of
operations and relationships with its corporate partners. See "Use of
Proceeds," "--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "--Liquidity and Capital Resources" and
"Business--Overview," "--Manufacturing" and "--Corporate Partner Relationships--
Cultor."

SUBSTANTIAL LONG-TERM CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; DILUTION

Substantial expenditures will be required to enable the Company to continue
its research and development activities and to manufacture and market its
products. The level of expenditures required for these activities will depend
in part on whether the Company develops, manufactures and markets its products
independently or with other companies through collaborative arrangements. The
Company's future capital requirements will also depend on one or more of the
following factors: the Company's ability to scale-up and manufacture its natural
astaxanthin product in cost-effective commercial quantities; market acceptance
of the Company's natural astaxanthin product; the extent and progress of its
research and development programs; the time and costs of obtaining regulatory
clearances (for those products subject to such clearance); the progress of
preclinical and clinical studies (where applicable); the costs involved in
filing, protecting and enforcing patent claims; competing technological and
market developments; the cost of developing and/or operating production
facilities for its existing product and potential products (depending on which
products the Company decides to produce itself); and the costs of
commercializing the Company's products. There can be no assurance that funding
to carry on these activities will be available at all or on favorable terms to
permit successful commercialization of the Company's products. In addition, the
Company has no credit facility or other committed sources of capital, and there
can be no assurance that it will be able to establish such arrangements on
satisfactory terms, if at all. To the extent that capital resources are
insufficient to meet future capital requirements, the Company will have to raise
additional funds to continue development of its technologies and products.
There can be no assurance that such funds will be available on favorable terms,
or at all. To the extent that additional capital is raised through the sale of
equity and/or convertible debt securities, the issuance of such securities could
result in dilution to the Company's shareholders. If adequate funds are not
available, the Company may be required to curtail operations significantly or to
obtain funds through entering into collaboration agreements on unattractive
terms that may require the Company to relinquish certain technology or product
rights, including patent and other intellectual property rights. The Company's
inability to raise capital would have a material adverse effect on the Company's
business, financial condition, results of operations and relationships with its
corporate partners. See "--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "--Liquidity and Capital
Resources," "Business--Products and Potential Products," "--Manufacturing" and
"--Corporate Partner Relationships."

EFFECT OF INCREASED COMPETITION ON MARKET PRICE OF SYNTHETIC AND NATURAL
ASTAXANTHIN

The primary competition for the Company's natural astaxanthin product is
currently synthetic astaxanthin. The synthetic astaxanthin market is currently
dominated by a single producer, Hoffman-LaRoche, Inc. ("Hoffman-LaRoche"), which
has maintained the market price of its synthetic astaxanthin (derived from
petrochemicals) at approximately $2,500 per kilogram for more than a decade.
The Company does not know Hoffman-LaRoche's cost of production for synthetic
astaxanthin or its probable response to the introduction of the Company's
competitive product. Hoffman-LaRoche has significantly greater research and
development, technical, financial, sales and marketing resources than the
Company and holds a commanding market share. There can be no assurance that the
market price for synthetic astaxanthin will remain at $2,500

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after commercial introduction of the Company's natural astaxanthin product. Any
significant decrease in the market price for synthetic astaxanthin is likely to
have an adverse effect on the market price for the Company's natural astaxanthin
product, which could have a material adverse effect on the Company's business,
financial condition, results of operations and relationships with its corporate
partners. See "Business--Overview," "--Products and Potential
Products--Existing Product: Astaxanthin--Aquaculture" and "Competition."

RISKS ASSOCIATED WITH POTENTIAL JOINT VENTURE

Pursuant to the Cultor Distribution and Development Agreement, Cultor and
Aquasearch may, at Cultor's option, mutually develop a new joint venture company
for the sole purpose of producing and selling natural astaxanthin in the field
of animal feed and animal nutrition. Pursuant to this arrangement, Aquasearch
would contribute the ten-acre natural astaxanthin production facility in return
for its 50% stake in the new company and Cultor would contribute cash equal to
the appraised value of this production facility in return for its 50% stake.
Under the Cultor Distribution and Development Agreement, Cultor also has the
option to acquire a further 25% stake in the new company (thus increasing
Cultor's stake to 75%) for cash based on a formula. The formula provides that
the purchase price for the additional shares to be acquired by Cultor from
Aquasearch will equal the greater of (i) $1 million, (ii) half of the current
replacement value of the astaxanthin production facility initially contributed
by Aquasearch or (iii) an amount equal to X multiplied by Y; where "X" equals
the difference between the Transfer Price (as defined) and the Aquasearch
Production Costs (as defined) for the six-month period commencing on November 1,
1998 and ending on April 30, 1999 and "Y" equals six (or, in other words, an
amount equal to twelve times annual profit in the third year of the contract).

The decision to form, and the timing of the decision to form, the new joint
venture company is solely within the discretion of Cultor and may occur at any
time during the three years after the date that the Aquasearch shareholders
approve the Cultor Distribution and Development Agreement and the Cultor Stock
Subscription Agreement, if any. Similarly, the decision to exercise, and the
timing of the decision to exercise, the option to purchase from Aquasearch a
further 25% stake in the new joint venture company (thus increasing Cultor's
stake to 75%) is solely within the discretion of Cultor and may occur at any
time during the three years after the date that the Aquasearch shareholders
approve the Cultor Distribution and Development Agreement and the Cultor Stock
Subscription Agreement, if any. There can be no assurance that the Company will
have developed markets for its natural astaxanthin product other than animal
feed and animal nutrition at the time, if any, that Cultor exercises its option
to form the joint venture company. Similarly, there can be no assurance that
the Company will have developed microalgal products other than natural
astaxanthin at the time, if any, that Cultor exercises its option to form the
joint venture company. See "Business--Overview" and "--Corporate Partner
Relationships--Cultor."

CUSTOMER CONCENTRATION

The Company has entered into a three-year exclusive Supply Agreement with
Svenska Foder with respect to the production, sale and use of natural
astaxanthin in animal feed and animal nutrition applications in Sweden, Denmark,
Norway and Finland for poultry, pigs, cattle and horses and a three-year
exclusive Distribution and Development Agreement with Cultor with respect to the
production, sale and use of natural astaxanthin in the field of animal feed and
animal nutrition worldwide. The failure of the Company to gain additional
customers for its natural astaxanthin product in other applications and
customers for its other potential products, the loss of Cultor or Svenska Foder
or any potential corporate partner as a customer, or a significant reduction in
the level of sales to Cultor or Svenska Foder or any potential corporate partner
could have a material adverse effect on the Company's business, financial
condition, results of operations and relationships with its corporate partners.
See "Business--Aquasearch's Strategy--Expand Strategic Alliances" and
"--Corporate Partner Relationships."

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<PAGE>

RELIANCE ON CORPORATE PARTNER RELATIONSHIPS

An important element of the Company's business strategy involves developing
strategic relationships with companies that have established research and
development, sales, marketing and distribution capabilities for the microalgal
products that the Company intends to develop. The Company has entered into
significant agreements with Svenska Foder and Cultor with respect to its natural
astaxanthin product. In July 1995, the Company executed the three-year
exclusive Svenska Foder Supply Agreement with Svenska Foder covering the
production, sale and use of the Company's natural astaxanthin product for animal
feed and animal nutrition applications in Sweden, Denmark, Norway and Finland
for poultry, pigs, cattle and horses. In May 1996, the Company executed the
three-year exclusive Cultor Distribution and Development Agreement with Cultor
covering the production and distribution of the Company's natural astaxanthin
product worldwide in the field of animal feed and animal nutrition.

The Company intends to enter into strategic relationships with other
companies to apply its technology, fund development, commercialize future
products, and assist in obtaining regulatory approvals. There can be no
assurance that any of the Company's present or future corporate partners will
perform their obligations as expected or devote sufficient resources to the
development, testing or marketing of the Company's potential products developed
under such arrangements. Any parallel development by a strategic partner of
alternative technologies or products, preclusion of the Company from entering
into competitive arrangements, failure to obtain timely regulatory approvals,
premature termination of an agreement, or failure by a strategic partner to
devote sufficient resources to the development and commercialization of the
Company's products could have a material adverse effect on the Company's
business, financial condition, results of operations and relationships with its
corporate partners.

The Company's agreements with its consultants and corporate partners are
complex. There may be provisions within such agreements that give rise to
disputes regarding the rights and obligations of the parties. These and other
possible disagreements could lead to delays in research, development or
commercialization of certain products, or could result in litigation or
arbitration, which could be time-consuming and expensive, and could have a
material adverse effect on the Company's business, financial condition, results
of operations and relationships with its corporate partners.

There can be no assurance that the Company will be able to maintain or
expand its relationships with its existing corporate partners or to replace its
existing corporate partners in the event any such relationship were terminated.
In the event of the termination of the Svenska Foder Supply Agreement or the
Cultor Distribution and Development Agreement, the Company's ability to
distribute its natural astaxanthin product in the field of animal feed and
animal nutrition would be materially adversely affected, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's primary strategy for the development, regulatory approval,
production and commercialization of certain of its products is to enter into
collaborations with various corporate partners, licensors, licensees and others.
There can be no assurance that the Company will be able to negotiate
collaborative arrangements in the future on acceptable terms, if at all, or that
such collaborative arrangements will be beneficial to the Company. To the
extent that the Company is not able to establish such arrangements, it would
face increased capital requirements to undertake such activities at its own
expense and might encounter significant delays in introducing its products into
certain markets or find that the development, manufacture or sale of its
products in such markets is adversely affected. See "Business--Aquasearch's
Strategy--Expand Strategic Alliances" and "--Corporate Partner Relationships."

COMPETITION

Competition in the world market for astaxanthin is intense and is expected
to increase significantly in the near future. The Company's natural astaxanthin
product will compete directly with the synthetic astaxanthin product developed
and

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marketed worldwide by Hoffman-LaRoche. Hoffman-LaRoche has significantly
greater research and development, technical, financial, management, marketing
and sales resources than the Company as well as a worldwide reputation and
dominant market share. In addition, at least three companies, Astacarotene,
Heliosynthese and Cyanotech Corporation, have either announced plans to produce
natural astaxanthin from microalgae or have produced small quantities for test
and commercial purposes.

The Company's natural astaxanthin product is expected to compete with
synthetic astaxanthin (and any other alternative products) primarily on the
basis of product performance, price and proprietary position. Although
Hoffman-LaRoche has maintained the market price of synthetic astaxanthin at
approximately $2,500 per kilogram for more than a decade, there can be no
assurance that Hoffman-LaRoche will maintain the price of its synthetic
astaxanthin product in response to the introduction of the Company's natural
astaxanthin product. Any such pricing or other competitive pressure could have
a material adverse effect on the Company's business, financial condition,
results of operations and relationships with its corporate partners. The
existence of products of which the Company is not aware, or products that may be
developed in the future, may also adversely affect the marketability of the
Company's natural astaxanthin product.

Aquasearch anticipates that competition to develop microalgal products
other than natural astaxanthin will also be intense. The Company's competitors
for these potential products are expected to include major pharmaceutical, food
processing, chemical and specialized biotechnology companies, many of which will
have financial, technical and marketing resources significantly greater than
those of Aquasearch. In addition, other emerging marine bioscience companies,
similar to Aquasearch, may form collaborations with large established companies
to support research, development and commercialization of products that may be
competitive with future products of Aquasearch. Also, academic institutions,
governmental agencies and other public and private research organizations are
conducting research activities and seeking patent protection and may
commercialize products competitive with those of Aquasearch on their own or
through joint ventures. The existence of products of which Aquasearch is not
aware, or products that may be developed in the future, may adversely affect the
marketability of additional products developed by Aquasearch.

Aquasearch believes that its AGM and related microalgae cultivation and
harvesting technologies currently offer significant technical and economic
advantages compared with the open pond systems currently used by certain
competitors, including increased yields and the ability to cultivate hundreds of
microalgal species at commercial scale that cannot be produced in open pond
systems due to substantially higher risks of contamination and lack of control.
Aquasearch also believes that its AGM and related microalgae cultivation and
harvesting technologies compare favorably with other known closed systems with
respect to capital and operating costs. However, the existence of technology of
which Aquasearch is not aware, or technology that may be developed in the
future, may adversely affect the technical and competitive advantages that
Aquasearch currently believes it holds compared with competing open pond and
known closed system microalgae cultivation technologies.

Aquasearch's competitive position will also depend on its ability to
attract and retain qualified scientific and other personnel, develop effective
proprietary products, successfully perform its collaboration agreements with its
corporate partners, implement research and development and production plans,
obtain patent protection and secure adequate capital sources. See "Business --
Competition."

DEPENDENCE ON KEY PERSONNEL

The Company's prospects depend to a significant extent upon certain members
of senior management, including, in particular, Mark E. Huntley, Ph.D., the
Company's Chairman, President and Chief Executive Officer. The Company does not
maintain key man life insurance on Dr. Huntley and has no employment agreement
with Dr. Huntley or any other senior executives. The loss of any senior
executive or other key employee could have a material adverse effect on the
Company's business, financial condition, results of operations and relationships
with its corporate partners.

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The Company is highly dependent on its ability to attract and retain key
scientific, technical, management and operating personnel, including consultants
and members of its Scientific Advisory Board and its Business Advisory Board.
As the number of qualified marine and aquatic microbiologists is limited,
competition for such personnel is intense. The Company will need to develop
expertise and add skilled employees or retain consultants in such areas as
research and development, clinical testing, government approvals, manufacturing
and marketing in the future. There can be no assurance that the Company will be
able to attract and retain the qualified personnel or develop the expertise
needed in these areas. The Company currently has a small research and
development and management group with limited operating experience. The loss of
the services of one or more members of the research and development or
management group or the inability to hire additional personnel and develop
expertise as needed would have a material adverse effect on the Company's
business, financial condition, results of operations and relationships with its
corporate partners.

Members of the Company's Scientific Advisory Board assist the Company in
optimizing its production and processing methods and formulating research and
development strategy pertaining to both existing and potential microalgal
products. Most members of the Scientific Advisory Board are not employed by the
Company and each of these members may have commitments to other entities that
could limit their availability to the Company. There can be no assurance that
the Company will be able to retain its key Scientific Advisory Board members.
See "Business -- Scientific Advisory Board."

RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH

Until recently, the Company was engaged exclusively in research and
development activities. Following the execution of the Svenska Foder Supply
Agreement and the Cultor Distribution and Development Agreement, the Company
commenced the transition toward becoming a full-scale commercial producer of
microalgae products. These changes in its business have placed significant
demands on the Company's management, working capital and financial and
management control systems. Failure to upgrade the Company's operating,
management and financial control systems or difficulties encountered during such
upgrades could adversely affect the Company's business, financial condition,
results of operations and relationships with its corporate partners. Although
the Company believes that its systems and controls are adequate to address its
current needs, there can be no assurance that such systems will be adequate to
address future expansion of the Company's business. The Company's results of
operations will be adversely affected if revenues do not increase sufficiently
to compensate for the increase in operating expenses resulting from any
expansion and there can be no assurance that any expansion will be profitable or
that it will not adversely affect the Company's results of operations. In
addition, the success of any future expansion plans will depend in part upon the
Company's ability to continue to improve and expand its management and financial
control systems, to attract, retain and motivate key personnel, and to raise
additional required capital. There can be no assurance that the Company will be
successful in these regards. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview" and "--Liquidity and
Capital Resources" and "Business--Aquasearch's Strategy," "--Products and
Potential Products" and "--Manufacturing."

RISKS ASSOCIATED WITH EXPANSION INTO ADDITIONAL MARKETS AND PRODUCT DEVELOPMENT

Other than its natural astaxanthin product, the Company currently has no
products available for commercial sale. The Company believes that its near-term
prospects are substantially dependent on the expansion of the worldwide market
for natural astaxanthin and the Company's ability to successfully develop and
commercialize new products and penetrate new markets. There can be no assurance
that the Company can successfully develop its natural astaxanthin or any other
potential microalgae products, that any such products will be capable of being
produced in commercial quantities at reasonable cost, or that any such products
will achieve market acceptance. The Company has no experience marketing its
products directly and is presently entirely dependent on the marketing skills
and efforts of its corporate partners. There can be no assurance that the
marketing efforts of such corporate partners will be successful or whether such
corporate partners will eventually compete with the Company or assist the
Company's competitors. Many other companies have significantly greater
marketing and product development experience and resources to devote to
marketing and product development than the Company. The

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<PAGE>

Company has entered into, and expects to enter into additional, selected
strategic alliances with third parties for product development, marketing and
sales. There can be no assurances regarding the performance of such third
parties, or the overall success, if any, of such strategic alliances. The
inability of the Company to successfully develop or commercialize its natural
astaxanthin or any potential microalgae products would have a material adverse
effect on the Company's business, financial condition, results of operations and
its relationships with its corporate partners. See "Business--Aquasearch's
Strategy" and "--Products and Potential Products."

DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF INTELLECTUAL
PROPERTY PROTECTION

Aquasearch relies upon a combination of patents, copyright protection,
trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position. The Company's
future prospects depend in part on its ability to obtain patent protection for
its products and processes, to preserve its copyright and trade secrets and to
operate without infringing the proprietary rights of third parties. Aquasearch
has been awarded one patent in the United States and one patent in Australia for
its closed system microalgae cultivation process. The Company currently has one
additional patent application pending in the United States.

The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the
Company's pending patent applications will result in issued patents, that the
Company will develop additional proprietary technologies that are patentable,
that any patents issued to the Company or its corporate partners will provide a
basis for commercially viable products or will provide the Company with any
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have a material adverse effect on the ability of the
Company to do business. In addition, patent law relating to the scope of claims
in the technology fields in which the Company operates is still evolving. The
degree of future protection for the Company's proprietary rights, therefore, is
uncertain. Furthermore, there can be no assurance that others will not
independently develop similar or alternative technologies, duplicate any of the
Company's technologies, or, if patents are issued to the Company, design around
the patented technologies developed by the Company. In addition, the Company
could incur substantial costs in litigation if it is required to defend itself
in patent suits brought by third parties or if it initiates such suits.

Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office that could result in substantial cost to the Company. No assurance can
be given that any such patent application will not have priority over patent
applications filed by the Company. In addition, the laws of certain foreign
countries may not protect the Company's patent and other intellectual property
rights to the same extent as the laws of the United States.

The Company's future prospects also depend in part on the Company neither
infringing patents or proprietary rights of third parties nor breaching any
licenses that may relate to the Company's technologies and products. There can
be no assurance that the Company will not infringe the patents, licenses or
other proprietary rights of third parties. In addition, the Company may in the
future receive notices claiming infringement from third parties as well as
invitations to take licenses under third party patents. Any legal action
against the Company or its collaborative partners claiming damages and seeking
to enjoin commercial activities relating to the affected products and processes
could, in addition to subjecting the Company to potential liability for damages,
require the Company or its corporate partners to obtain a license in order to
continue to manufacture or market the affected products and processes. There
can be no assurance that the Company or its corporate partners would prevail in
any such action or that any license (including licenses proposed by third
parties) required under any such patent would be made available on commercially
acceptable terms, if at all. There may be a significant number of United States
and foreign patents and patent applications in the Company's area of interest,
and the Company believes that there may be significant litigation in the
industry regarding patent and other intellectual property rights. If the
Company becomes involved

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in such litigation, it could consume a substantial portion of the Company's
managerial and financial resources, which could have a material adverse effect
on the Company's business, financial condition, results of operations and
relationships with its corporate partners.

The enactment of legislation implementing the General Agreement on Trade
and Tariffs has resulted in certain changes in United States patent laws that
became effective on June 8, 1995. Most notably, the term of patent protection
for patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate twenty years after the
effective date of filing may result in a substantially shortened term of the
Company's patent protection which may adversely affect the Company's patent
position.

While the disclosure and use of the Company's proprietary technology,
know-how and trade secrets are generally controlled under agreements with the
parties involved, there can be no assurance that all confidentiality agreements
will be honored, that others will not independently develop similar or superior
technology, that disputes will not arise concerning the ownership of
intellectual property, or that dissemination of the Company's proprietary
technology, know-how and trade secrets will not occur. See "Business--Patents,
Licenses and Proprietary Technology."

UNCERTAINTY REGARDING OBTAINING AND MAINTAINING GOVERNMENT APPROVALS

Aquasearch's natural astaxanthin product, potential products and its
research and production activities are or may become subject to varying degrees
of regulation by a number of government authorities in the United States and
other countries, including the United States Food and Drug Administration
("FDA") pursuant to the Federal Food, Drug and Cosmetic Act. Each existing or
potential microalgal product that is developed or marketed by Aquasearch, its
licensees or its corporate partners can present unique regulatory problems and
risks, depending on the product type, uses and method of manufacture. The FDA
regulates, in varying degrees and in different ways, dietary supplements, other
food products, medical devices and pharmaceutical products, including their
manufacture, testing, exportation, labeling, and, in some cases, advertising.
Generally, prescription pharmaceuticals and certain types of medical devices are
regulated more vigorously than foods, such as dietary supplements. Any future
products developed by Aquasearch for use in human nutrition, pharmaceuticals or
cosmetics, if any, will require Aquasearch to develop and adhere to Good
Manufacturing Practices ("GMP") as required by the FDA, ISO standards as
required in Europe, and any other applicable standards mandated by federal,
state, local or foreign laws, regulations and policies. Currently, the
Company's production facilities do not comply with GMP or ISO standards and
significant capital expenditures would have to be made and compliance procedures
implemented before the Company's production facilities could meet GMP and ISO
qualifications.

The Company is also subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of its products, importation
of organisms, and occupational safety, among others. Federal, state and foreign
laws, regulations and policies are always subject to change and depend heavily
on administrative policies and interpretations. The Company is working with
Svenska Foder and Cultor with respect to compliance with foreign laws,
regulations and policies pertaining to use of its natural astaxanthin product in
the field of animal feed and animal nutrition. There can be no assurance that
any changes with respect to federal, state and foreign laws, regulations and
policies, and, particularly with respect to the FDA or other such regulatory
bodies, with possible retroactive effect, will not have a material adverse
effect on the Company's business, financial condition, results of operations and
relationships with its corporate partners. There can be no assurance that any
of the Company's potential products will satisfy applicable regulatory
requirements. See "Business -- Government Regulation and Product Testing."

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Aquasearch's natural astaxanthin product and any potential food color products
for use in the United States will require FDA clearance, unless they meet the
requirements of current color additive regulations. The process of obtaining
clearances for a new color additive is expensive and time consuming. Extensive
information is required on the toxicity of the additive, including
carcinogenicity studies and other animal testing. Although the FDA approved the
Hoffman-LaRoche synthetic astaxanthin product as a food additive in 1995, there
can be no assurance that the FDA will grant similar approval for Aquasearch's
natural astaxanthin product. Further, no assurances can be given that
Aquasearch's potential nutrition and food color products, if any, will be
cleared by the FDA on a timely basis, if at all.

Regulatory approvals in other markets in which Aquasearch's natural
astaxanthin product is likely to be distributed, including in particular, the
EEC, Japan, Canada and Australia, vary by market. The Company believes that the
approval process in Australia, Japan and certain other Asian countries will come
under their "natural" status and be approved relatively quickly; however, there
can be no assurances in this regard. The Aquasearch natural astaxanthin product
has not been submitted for approval by the EEC, and there can be no assurance
that the determination by Swedish authorities that the Company's natural
astaxanthin product be considered a food ingredient (rather than a food
additive) will have any influence on the determination to be made by the EEC.

Under the terms of the Cultor Distribution and Development Agreement,
Cultor has the responsibility to obtain any health regulatory and other
approvals necessary in each country in which Cultor determines to distribute the
product.

The Company is subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on the Company's business, financial
condition, results of operations and relationships with its corporate partners.
See "Business--Government Regulation and Product Testing."

CONCENTRATION OF PRODUCTION CAPACITY; RELIANCE ON CLIMATIC CONDITIONS

All of the Company's production capacity is currently located at its
Kailua-Kona, Hawaii facility, on property leased from the State of Hawaii and
situated on a 200-year-old lava flow adjacent to a dormant volcano. The Company
maintains minimal finished goods inventory. In the event that production at, or
transportation from, such facility were interrupted by fire, volcanic eruption,
earthquake, tidal wave, hurricane, or other natural disaster, work stoppage,
termination or suspension of the Company's facility lease by the State of Hawaii
for public use or similar purposes, other regulatory actions or any other cause,
the Company would be unable to continue to produce its products at such
facility. Such an interruption would have a material adverse effect on the
Company's business, financial condition, results of operations and relationships
with its corporate partners. See "Business--The Aquasearch Solution" and
"--Properties."

Due to the importance of sunlight and a consistent warm temperature for
microalgae growth, the Company's production may be significantly affected by
weather patterns and unusual seasonal weather changes. Any unseasonably cool or
cloudy weather would adversely impact the Company's production and could have a
material adverse effect on the Company's business, financial condition, results
of operations and relationships with its corporate partners.

RISKS ASSOCIATED WITH INTERNATIONAL SALES

The Company currently has distribution arrangements with two companies;
Svenska Foder, a Swedish company, and Cultor, a Finnish company. The Company
expects that international sales will represent a significant portion of its
revenue for the foreseeable future because aquaculture production, the primary
market for natural astaxanthin today, is more highly developed in Europe and
Asia than in the United States. The Company's business, financial condition and
results of operations may be materially and adversely affected by any
difficulties associated with managing accounts receivable from international
customers, tariff regulations, imposition of governmental controls, political
and economic instability or other

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trade restrictions. Although the Company's international sales are currently
denominated in United States dollars, fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to
customers in the affected country, leading to a reduction in sales in that
country.

PRODUCT LIABILITY

The Company faces an inherent business risk of exposure to product
liability claims alleging that the use of its technology or products resulted in
adverse effects. There can be no assurance that the Company's current level of
product liability insurance together with indemnification rights under its
existing license agreements and other collaborative arrangements will be
adequate to protect the Company. It is uncertain whether the Company will be
able to obtain increased levels of insurance as the Company grows, that any
level of insurance would be economically practical or that it would be able to
renew its current or future policies. A product liability claim or recall in
excess of insured amounts or amounts recoverable under applicable contractual
arrangements could have a material adverse effect on the Company's business,
financial condition, results of operations and relationships with its corporate
partners.

POSSIBLE VOLATILITY OF STOCK PRICE; LIMITED LIQUIDITY; ABSENCE OF DIVIDENDS

The market price of the Company's Common Stock has experienced, and may
continue to experience, a high level of volatility, as frequently occurs with
publicly traded life sciences companies and many companies whose securities
trade on the NASD Electronic Bulletin Board. See "Risk Factors--Risks
Associated with Low-Priced Over-The-Counter" Securities." Announcements of
technological innovations or new commercial products by the Company or its
competitors, developments or disputes concerning patent or proprietary rights,
publicity regarding actual or potential benefits relating to products under
development by the Company or its competitors, general regulatory developments
affecting the Company's products in both the United States and foreign
countries, market conditions for life sciences companies in general and economic
and other internal and external factors, as well as period-to-period
fluctuations in financial results, may have a significant impact on the
Company's business or the future market price of the Common Stock. Since the
Company's initial public offering of Common Stock in January 1989, the average
daily trading volume in the Common Stock as reported on the NASD Electronic
Bulletin Board has been relatively low. See "Price Range of Common Stock."
There can be no assurance that a more active public trading market will develop
for the Common Stock. The Company has never declared or paid any cash dividends
on its Common Stock and does not intend to do so for the foreseeable future.
See "Dividend Policy."

RISKS ASSOCIATED WITH LOW-PRICED "OVER-THE-COUNTER" SECURITIES

The Company's Common Stock is currently traded in the "over-the-counter
market" in the "Electronic Bulletin Board" of the National Association of
Securities Dealers, Inc. (the "NASD"). See "Price Range of Common Stock."
Securities of companies traded on the NASD Electronic Bulletin Board are
generally more difficult to dispose of and to obtain accurate quotations as to
price than securities of companies that are traded on the Nasdaq National
Market, the Nasdaq SmallCap Market or the major stock exchanges.

The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Securities and Exchange
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. Such exceptions include any equity security listed on Nasdaq or a
national securities exchange and any equity security issued by an issuer that
has (i) net tangible assets of at least $2,000,000, if such issuer has been in
continuous operation for three years, (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average annual revenue of at least $6,000,000, if such issuer
has been in continuous operation for less than three years. Unless an exception
is available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.

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<PAGE>

In addition, trading in the Company's securities is currently subject to
Rule 15g-9 promulgated under the Exchange Act for non-Nasdaq and non-exchange
listed securities. Pursuant to Rule 15g-9, broker/dealers who recommend the
Company's securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if their market price is at least
$5.00 per share.

The impact of the regulations applicable to penny stocks on the Company's
securities is to reduce the market liquidity of the Company's securities by
limiting the ability of broker/dealers to trade the Company's securities and the
ability of purchasers of the Company's securities to sell their securities in
the secondary market. The low price of the Company's Common Stock also has a
negative effect on the amount and percentage of transaction costs paid by
individual shareholders and the potential ability of the Company to raise
additional capital by issuing additional shares. The primary reasons for these
effects include the internal policies of certain institutional investors that
prohibit the purchase of low-priced stocks, the fact that many brokerage houses
do not permit low-priced stocks to be used as collateral for margin accounts or
to be purchased on margin and certain brokerage house policies and practices
that tend to discourage individual brokers from dealing in low-priced stocks.
In addition, since broker's commissions on low-priced stocks represent a higher
percentage of the stock price than commissions on higher priced stocks, the
current low share price of the Common Stock results in individual shareholders
paying transaction costs that are a higher percentage of their total share value
than would be the case if the Company's share price were substantially higher.

The Company intends to apply for listing on the Nasdaq SmallCap Market as
soon as it meets the eligibility requirements. In order to be eligible for
listing on the Nasdaq SmallCap Market, the Company's Common Stock must maintain
a minimum bid price of $3.00, the Company must have a minimum shareholders'
equity of $2 million, total assets of at least $4 million and at least two
market makers. If the net proceeds of any offerings of any equity or
convertible debt or other securities of the Company are sufficient to satisfy
all listing requirements other than the minimum bid price of $3.00 per share,
then the Board of Directors is likely to recommend that the Company effect a
reverse stock split in order to meet this minimum price per share listing
requirement. Any such reverse stock split would require shareholder approval.
There can be no assurance that the net proceeds of any offering by the Company
will be sufficient to satisfy some or all listing requirements or that any
proposed reverse stock split will be approved by the shareholders or
successfully implemented following such approval.

CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED

The purchasers of the Shares offered hereby will be able to resell such
Shares in the public market only if there is then a current prospectus relating
to the shares and only if the Shares are qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the proposed purchasers reside. The Company has undertaken and intends to
file and keep current a prospectus which will permit the purchase and sale of
the Shares, but there can be no assurance that the Company will be able to do
so. Although the Company intends to seek to qualify for sale the Shares in
those states in which the securities are to be offered, no assurance can be
given that such qualifications will occur. The Shares may be deprived of any
value and the market for the Shares may be limited if a current prospectus
covering the Shares is not kept effective or if the Shares are not qualified or
exempt from qualification in the jurisdictions in which the prospective
purchasers of the Shares then reside.

POTENTIAL ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK

The Company's Articles of Incorporation authorize the issuance of up to
5,000,000 shares of "blank check" Preferred Stock, with such designations,
rights, preferences, privileges and restrictions as determined by the Board of
Directors from time to time. As a result, the Board of Directors is empowered,
without further shareholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of

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<PAGE>

the holders of the Common Stock. In the event of issuance, the Preferred Stock
could be used, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company. Although the Company
has no present plans to issue any shares of Preferred Stock, there can be no
assurance that the Company will not issue Preferred Stock at some time in the
future. See "Description of Securities--Preferred Stock."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Immediately prior to this offering, the Company had 41,173,161 shares of
Common Stock outstanding. Of the shares outstanding immediately prior to this
offering, 20,597,428 have been registered under the Securities Act and,
therefore, will be freely tradeable under the Securities Act. The 20,282,701
remaining shares are "restricted securities," as that term is defined under Rule
144 promulgated under the Securities Act and may be sold pursuant to such Rule
during certain periods noted below. Of such 20,282,701 restricted securities,
13,090,460 shares are currently eligible or will become eligible prior to
September 1996 for resale without registration under the Securities Act;
3,800,000 shares may be sold at various times during the period from March 1998
to July 1998 (if not previously sold pursuant to the exercise of registration
rights hereinafter described); and 4,000,000 shares may be sold after January
1999 (if not previously sold pursuant to the exercise of registration rights
hereinafter described). No prediction can be made as to the effect, if any,
that sales of shares of Common Stock or the availability of such shares for sale
will have on the market prices prevailing from time to time. The possibility
exists, however, that substantial amounts of Common Stock may be sold in the
public market which may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.

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<PAGE>

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock is currently traded in the "pink sheets" (OTC
Bulletin Board Symbol: AQSE). The following table sets forth for the periods
indicated the high and low bid quotations for the Company's Common Stock as
reported by M.H. Myerson & Company, one of the Company's market makers. These
quotations are believed to represent inter-dealer quotations, without adjustment
for retail mark-up, mark-down or commissions and may not represent actual
transactions.

HIGH BID LOW BID
-------- -------
FISCAL 1994
First Quarter. . . . . . . . . . . $0.10 $0.03125
Second Quarter . . . . . . . . . . $0.15 $0.02
Third Quarter. . . . . . . . . . . $0.125 $0.02
Fourth Quarter . . . . . . . . . . $0.125 $0.08

FISCAL 1995
First Quarter. . . . . . . . . . . $0.20 $0.10
Second Quarter . . . . . . . . . . $0.25 $0.10
Third Quarter. . . . . . . . . . . $0.25 $0.125
Fourth Quarter . . . . . . . . . . $0.36 $0.125

FISCAL 1996
First Quarter. . . . . . . . . . . $0.74 $0.21
Second Quarter . . . . . . . . . . $0.75 $0.50
Third Quarter. . . . . . . . . . . $0.97 $0.53
Fourth Quarter . . . . . . . . . . $0.66 $0.31

FISCAL 1997
First Quarter (through November 11) $0.40 $0.33

As of the date of this Prospectus, the Company had approximately 2,000
record holders of its 41,173,161 shares of Common Stock.

DIVIDEND POLICY

The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain all available funds for use in the operation
and expansion of its business. The Company does not anticipate paying any cash
dividends in the foreseeable future. As of July 31, 1996, the Company had an
accumulated deficit at approximately $2.3 million, and until this deficit is
eliminated will be prohibited from paying dividends except out of net profits.

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<PAGE>

CAPITALIZATION

The following table sets forth the unaudited total capitalization of
the Company as of July 31, 1996:

JULY 31, 1996
-------------
(IN THOUSANDS)
<S> <C>
Long-term obligations, including current portion....................................... $ --
-------
-------
Shareholders' equity:
Common Stock, par value $0.001 per share, 50,000,000 shares authorized,
39,410,488 shares issued and outstanding, actual and as adjusted (1)(2)......... $ 5
Additional paid-in capital........................................................ $ 2,617
Deficit accumulated during the development stage.................................. $ (2,246)
---------

Total shareholders' equity ............................................. $ 376
--------

Total capitalization.......................................... 663
--------
--------
__________________________

</TABLE>

(1) Excludes 6,215,655 shares of Common Stock issuable upon exercise of options
outstanding as of July 31, 1996, at an average exercise price of $0.1662
per share.

(2) Excludes: (i) 45,530 shares of Common Stock earned (but not yet issued) as
payment for services rendered to the Company by consultants, and
(ii) 5,000,000 shares of Common Stock reserved for future issuance pursuant
to the Company's 1996 Stock Option Plan. See "Management--Employee Benefit
Plans."

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<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
the financial statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus. The statement of operations data for the years ended
October 31, 1993, 1994 and 1995 and the balance sheet data at October 31, 1993,
1994 and 1995 are derived from, and are qualified by reference to, the audited
financial statements included elsewhere in this Prospectus and should be read in
conjunction with the audited financial statements and notes thereto. The
statement of operations data at October 31, 1991 and 1992 and the balance sheet
data at October 31, 1991 and 1992 are derived from audited financial statements
that are not included in this Prospectus. The statement of operations data for
the quarters ended April 30, 1995 and 1996 and the balance sheet data at
April 30, 1996 are derived from unaudited financial statements that have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. The historical results are not necessarily
indicative of results for any future period.

NINE MONTHS
YEAR ENDED OCTOBER 31, ENDED JULY 31,
----------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $ -- $ -- $ -- $ -- $ -- $ -- $ 10

Operating expenses:
Research and development........ 134 9 4 27 89 17 495
General and administrative...... 98 72 85 115 195 100 283
------- -------- ------- ---------- ---------
Total operating expenses........ 232 81 89 142 284 (117) 796
------- -------- ------- ---------- --------- --------- ---------
Other income (expense)............ (19) -- (52) (97) (2) -- 2
Net loss.......................... $ (251) $ (81) $ (142) $ (240) $ (289) $ (117) $ (793)
-------- -------- ------- -------- ------- -------- ----------
-------- -------- ------- -------- ------- -------- ---------
Net loss per share................ $ (0.02) $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ Nil $ (0.02)
Weighted average shares
outstanding............... 16,647,912 17,287,454 20,132,100 22,782,063 25,541,021 23,463,313 38,000,000

OCTOBER 31, JULY 31,
------------------------------------------------------- ----------
1991 1992 1993 1994 1995 1996
-------- --------- -------- ------- -------- ----------
(IN THOUSANDs)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 20 $ -- $ 146 $ 87 $ 27 46

Working capital...................... (23) (95) 131 (19) (159) (226)

Total assets......................... 22 -- 146 87 489 663

Long-term obligations, including
current portion..................... -- -- -- -- -- --
Deficit accumulated during
development stage ................... (701) (782) (924) (1,164) (1,453) (2,246)
Total shareholders' equity (deficit).. (23) (95) 131 (19) 256 376

</TABLE>

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<PAGE>

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

EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND OTHER PARTS OF
THIS PROSPECTUS CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER
THE CAPTION "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS AND OTHER
RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"). PROSPECTIVE INVESTORS
ARE URGED TO CONSIDER THE FACTORS DISCUSSED UNDER THE CAPTION "RISK FACTORS" IN
EVALUATING AN INVESTMENT IN THE SHARES OFFERED HEREBY.

OVERVIEW

Aquasearch is a development stage company that is developing a proprietary,
cost-effective, photosynthetic, closed-system known as the Aquasearch Growth
Module to cultivate microalgae. The Company was founded in February 1988 as a
Colorado corporation and acquired all the assets of Aquasearch, Inc., a
California corporation, in May 1988 in a stock-for-stock exchange. The Company
commenced operations in Borrego Springs, California and developed its first
prototype of the AGM in the summer of 1988. During the period from the summer
of 1988 until March 1993, the Company conducted additional research and
development to refine its production technology.

In March 1993, the Company formed a joint venture company with Cyanotech
Corporation ("Cyanotech"), an unaffiliated producer of microalgae, to develop
commercial systems for the production of astaxanthin-rich microalgae.
Aquasearch contributed approximately $147,000 in capital to the joint venture
company and licensed its AGM technology to the joint venture company. Cyanotech
contributed approximately $15,000 in capital to the joint venture company and
made available its facilities and personnel at the HOST Business Park at Keahole
Point, Kailua-Kona, Hawaii. AGMs were constructed in July 1993 that
demonstrated the economics of the production process and provided samples of
astaxanthin-rich microalgae for analysis and trial applications.

In the summer of 1994, Aquasearch initiated discussions with Cultor
regarding the purchase of astaxanthin-rich microalgae. While awaiting a
response from Cultor, Cyanotech elected to discontinue its participation in the
joint venture company and the joint venture agreement was terminated by mutual
consent in November 1994. The dissolution agreement provided that all
intellectual property rights to the AGM technology reverted to Aquasearch.

In December 1994, Cultor initiated a series of feeding trials with farmed
salmon using astaxanthin-rich microalgae produced by the Company.

In April 1995, the Company leased a half-acre site within the HOST Business
Park and began construction of a small research and development facility capable
of producing small amounts of microalgae containing astaxanthin for marketing
purposes. This half-acre facility, comprised of AGMs and an operating
laboratory, was completed in June 1995.

In July 1995, the Company entered into a Supply Agreement with Svenska
Foder, a subsidiary of Cultor, pursuant to which Svenska Foder agreed to act as
the exclusive distributor of the Company's natural astaxanthin product for
animal feed and animal nutrition applications in Sweden, Norway and Finland for
poultry, pigs, cattle and horses. The Svenska Foder Supply Agreement has a term
of three years and has a production target of five kilograms of natural
astaxanthin per month.

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<PAGE>

In July 1995, the Company leased additional space in the HOST Business Park
to expand its half-acre research and development facility to a one-acre research
and development/production facility. Construction of the one-acre research and
development/production facility was completed in October 1995.

In May 1996, the Company entered into a three-year Distribution and
Development Agreement with Cultor pursuant to which the Company will act as the
exclusive worldwide supplier of natural astaxanthin derived from microalgae to
Cultor in the field of animal feed and animal nutrition and Cultor will act as
the exclusive worldwide distributor of Aquasearch's natural astaxanthin product
in the field of animal feed and animal nutrition. The production targets under
the Cultor Distribution and Development Agreement are 40 kilograms per month at
the end of the first year and 120 kilograms per month at the end of the second
year. The Company is currently producing natural astaxanthin at the rate of
approximately eight kilograms per month at its existing research and
development/production facility. In order to meet the production targets under
the Cultor Distribution and Development Agreement, the Company must
significantly expand and improve its production facilities and processes within
the next eighteen months, which will involve various risks and uncertainties.
See "Risk Factors--Risks Inherent in Commercial Production of Microalgae,"
"--Limited Manufacturing Experience," "--Risks Associated With Scale-Up of
Production Facilities," "--Substantial Near-Term Capital Needs; Uncertainty of
Additional Funding; Dilution" and "--Substantial Long-Term Capital Needs;
Uncertainty of Additional Funding; Dilution."

Under the Cultor Distribution and Development Agreement, Cultor and
Aquasearch may, at Cultor's option, mutually develop a new joint venture company
for the sole purpose of producing and selling natural astaxanthin derived from
microalgae in the field of animal feed and animal nutrition. Pursuant to this
arrangement, Aquasearch would contribute a ten-acre natural astaxanthin
production facility to be constructed in 1997 in return for its 50% stake in the
new company and Cultor would contribute cash equal to the appraised value of the
new ten-acre production facility in return for its 50% stake. Under the Cultor
Distribution and Development Agreement, Cultor also has the option to increase
its stake in the new company by purchasing from Aquasearch a further 25% of the
new company (thus increasing Cultor's stake to 75%) for cash based on a formula.
The formula provides that the purchase price for the additional shares to be
acquired by Cultor from Aquasearch will equal the greater of (i) $1 million,
(ii) half of the current replacement value of the astaxanthin production
facility initially contributed by Aquasearch or (iii) an amount equal to X
multiplied by Y; where "X" equals the difference between the Transfer Price (as
defined) and the Aquasearch Production Costs (as defined) for the six-month
period commencing on November 1, 1998 and ending on April 30, 1999 and "Y"
equals six (or, in other words, an amount equal to twelve times annual profit in
the third year of the contract). Aquasearch will license certain technology to
the new company to make, use and sell natural astaxanthin derived from
microalgae within the field of animal feed and animal nutrition only and will
retain the right to make, use and sell natural astaxanthin derived from
microalgae in all fields other than animal feed and nutrition as well as the
right to make, use and sell any microalgal products other than natural
astaxanthin in all fields, including the field of animal feed and animal
nutrition. See "Business--Cultor Distribution and Development Agreement" and
"Risk Factors--Risks Associated With Potential Joint Venture," "Customer
Concentration," and "--Reliance on Corporate Partner Relationships."

The Company believes that strategic relationships and collaborations will
continue to be an important part of its business strategy. There can be no
assurances that the Company will be able to maintain existing corporate partner
relationships, enter into future relationships to develop additional
applications for natural astaxanthin or to develop new microalgae products or
that any such relationships will be successful. See "Risk Factors--Customer
Concentration" and "--Reliance on Corporate Partner Relationships."

Since inception, the Company's 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, 1996, the Company had an accumulated deficit of approximately
$2.3 million. The Company's losses to date have resulted primarily from costs
incurred in research and development and from general and administrative costs
associated with the Company's operations. The Company expects to continue to
incur operating losses for at least the next two years

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<PAGE>

as it expands its production facilities to meet the production targets under the
Cultor Distribution and Development Agreement and increases its research and
development efforts. The Company expects to have quarter-to-quarter and
year-to-year fluctuations in revenues, expenses and losses, some of which could
be significant. See "Risk Factors--History of Losses and Expectation of Future
Losses."

The Company has a limited operating history and any assessment of the
Company's prospects must include the technology risks, market risks, expenses
and other difficulties frequently encountered by development stage companies,
and particularly companies attempting to enter competitive industries with
significant technology risks and barriers to entry. Although the Company has
attempted to address these risks by, among other things, hiring and retaining
highly qualified persons and forging strategic alliances with companies that
complement the Company's technical strengths, there can be no assurance that the
Company will overcome these risks in a timely manner, if at all.

Following the execution of the Svenska Foder Supply Agreement and the
Cultor Distribution and Development Agreement, the Company commenced the
transition toward becoming full-scale commercial producer of microalgae
products. These changes in its business have placed and will continue to place
significant demands on the Company's management, working capital and financial
and management control systems. See "Risk Factors--Risks Associated With
Management of Growth."

To date, the Company's operations have been funded by sales of equity and
debt securities.

RESULTS OF OPERATIONS

REVENUES

Since inception, the Company has been primarily engaged in basic research
and development and manufacture process development; recruiting personnel;
purchasing operating assets; and raising capital. In March and April 1996, the
Company made its first shipment of its natural astaxanthin product to Svenska
Foder under the Svenska Foder Supply Agreement, which resulted in revenues of
approximately $10,000.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses include salaries, consulting fees,
development materials, equipment depreciation and costs associated with
operating the Company's one-acre research and development/production
facility. Research and development expenses were approximately $89,000 for
the fiscal year ended October 31, 1995 compared with $27,000 and $4,000 in
1994 and 1993, respectively. These increases were primarily attributable to
increases in staffing, consultant costs, and costs associated with completion
of the Company's one-acre research and development/ production facility.
During the nine-month period ended July 31, 1996, the Company had research
and development expenses of approximately $495,000 compared with
approximately $17,000 during the nine-month period ended July 31, 1995.
Substantially all of these funds were expended to improve the Company's
natural astaxanthin production system. From inception through July 31,
1996, the Company's total research and development expenses were
approximately $939,000. Aquasearch believes it will need to incur significant
additional research and development expenses in future periods.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses consist principally of salaries and
fees for professional services. General and administrative costs were
approximately $283,000 for the nine months ended July 31, 1996, and $195,000,
$115,000 and $85,000 for the fiscal years ended October 31, 1995, 1994 and 1993,
respectively. The increase in general and administrative expenses since 1993
reflects additional costs associated with personnel additions, legal fees
incurred in connection with

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<PAGE>

developing and protecting the Company's intellectual property position and
raising capital, as well as other expenses. From inception through July 31,
1996, the Company's total general and administrative expenses were approximately
$1.1 million. The Company anticipates that its general and administrative
expenses will increase over time as it expands its production capacity, expands
its intellectual property protection and raises additional capital.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date through public and private
sales of equity securities. In the nine months ended July 31, 1996, Aquasearch
raised approximately $889,000 of net proceeds from the sale of 6,530,000 shares
of Common Stock in private placement transactions. In the fiscal years ended
October 31, 1995, 1994 and 1993, Aquasearch raised approximately $546,000,
$7,500 and $246,000 of net proceeds from the sale of 7,622,500, 250,000 and
4,036,900 shares of Common Stock, respectively, in private placement
transactions. From inception through July 31, 1996, the Company had raised
total net proceeds of approximately $2.3 million through public and private
sales of equity and debt securities.

In the nine months ended July 31, 1996, operating activities consumed
approximately $687,000 compared with $108,000 in the nine months ended July 31,
1995. The primary reason for this increase was that, during the nine months
ended July 31, 1995, the Company had no production facilities, no full-time
employees and its primary activity was testing and marketing samples of its
natural astaxanthin product on a trial basis. By comparison, as of July 31,
1996, the Company had constructed and commenced research and development and
production at a one-acre facility, maintained a production staff of eight
full-time employees and had substantially increased its marketing and sales
activities. In the fiscal year ended October 31, 1995, operating activities
consumed approximately $211,000 compared with $153,000 in 1994 and $100,000 in
1993. From inception through July 31, 1996, operating activities have consumed
approximately $1.7 million.

Capital expenditures for the nine months ended July 31, 1996 amounted to
approximately $206,000 compared with $70,000 in the comparable period in the
prior year. The primary reason for this increase was the acquisition of capital
equipment for its new one-acre production facility. Capital expenditures for
the fiscal year ended October 31, 1995, 1994 and 1993 were $315,000, $0 and $0,
respectively. From inception through July 31, 1996, total capital expenditures
have been approximately $569,000.

As of July 31, 1996, the Company's sole source of liquidity was
approximately $47,000 in cash and cash equivalents.

In August 1996, the Company issued $135,000 aggregate principal amount of
promissory notes in a private placement transaction to three investors to
provide working capital financing (the "1996 Bridge Loan"). The promissory
notes issued in connection with the 1996 Bridge Loan (the "1996 Bridge Loan
Notes") bear interest at 7.25% per annum and are now due upon demand. See
"Description of Securities--Warrants--1996 Bridge Loan Warrants."

The Company plans to raise approximately $5 million of additional capital
through a private placement of Units consisting of Common Stock and Warrants to
Purchase Common Stock during the fourth fiscal quarter of 1996 and the first
fiscal quarter of 1997. If successfully completed, the Company believes that
the net proceeds of such offering would be sufficient to complete the expansion
of the Company's existing one-acre research and development/production facility
into a four-acre facility. This four-acre facility is expected to provide the
Company with sufficient production capacity, based on existing technology and
processes, to meet the August 1997 40 kilogram per month production target under
the Cultor Distribution and Development Agreement, but not the August 1998 120
kilogram per month production target. In order to meet the August 1998 target,
the Company must complete construction and scale-up of a new ten-acre facility
dedicated solely to the production of natural astaxanthin. The Company will be
required to raise an additional $10 million in financing over the next two to
three years in order to complete and commence operation of the ten-acre
facility. The Company intends to raise this additional capital primarily from
sales of additional equity and/or convertible debt securities in the public
and/or private markets. The financing and scale-up of the Company's production
facilities is subject to a number of risks and uncertainties.

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See "Risk Factors--Risks Inherent in Commercial Production of Microalgae,"
"--Limited Manufacturing Experience," "--Risks Associated With Scale-Up of
Production Facilities," "--Substantial Near-Term Capital Needs; Uncertainty of
Additional Funding" and "--Substantial Long-Term Capital Needs; Uncertainty of
Additional Funding."

BUSINESS

EXCEPT FOR HISTORICAL INFORMATION, THIS SECTION AND OTHER PARTS OF THIS
PROSPECTUS CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVES VARIOUS RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE
CAPTION "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS AND OTHER RISKS
DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE COMMISSION.
PROSPECTIVE INVESTORS ARE URGED TO CONSIDER THE FACTORS DISCUSSED UNDER THE
CAPTION "RISK FACTORS" IN EVALUATING AN INVESTMENT IN THE SHARES OFFERED HEREBY.

OVERVIEW

Aquasearch believes that its AGM platform technology can be used to
cultivate hundreds of species of microalgae. The AGM utilizes
computer-controlled equipment to monitor and adjust the turbulence rate, pH, gas
exchange, temperature and nutrient levels within the AGM to optimize microalgae
growth rates. Aquasearch believes that the AGM offers significant technical and
economic advantages compared with the open pond systems currently used by
certain competitors, including increased yields and the ability to economically
cultivate hundreds of microalgal species at commercial scale that cannot be
produced in open pond systems due to substantially higher risks of contamination
and lack of control. Aquasearch also believes that the AGM compares favorably
with other known closed systems with respect to both capital and operating
costs. Notwithstanding these perceived advantages of the Company's technology,
the production of various species of microalgae on a commercial scale involves
various risks and uncertainties. See "Risk Factors--Risks Inherent in
Commercial Production of Microalgae."

Aquasearch's first commercial product is astaxanthin, a naturally occurring
red pigment derived from HAEMATOCOCCUS PLUVIALIS, a freshwater microalga. The
primary market for astaxanthin currently is aquaculture. According to industry
sources, the global aquaculture market steadily doubled in value from $13
billion in 1985 to $26 billion in 1990, and is projected to grow to more than
$50 billion by the year 2000. Industry sources indicate that farmed salmon and
shrimp (the fastest and fourth fastest growing aquaculture products) will
account for more than half the total value of world aquaculture production by
the year 2000. Free swimming salmon and shrimp acquire pink flesh from natural
astaxanthin contained in microalgae and other species ingested in the wild.
Farmed salmon and shrimp, however, currently acquire pink flesh only from the
addition of synthetic astaxanthin (or a less effective substitute product) to
their feed. The world market for astaxanthin in aquaculture is estimated to be
approximately $125 million in 1996, and continued growth is expected.

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Hoffman-LaRoche, which has maintained the market price of its synthetic
astaxanthin product (which is derived from petrochemicals) at approximately
$2,500 per kilogram for more than a decade. Aquasearch's natural astaxanthin
product will compete directly with Hoffman-LaRoche's synthetic astaxanthin
product. There can be no assurance that the market price of synthetic
astaxanthin will be maintained at historical levels or what effect this may have
on the market price of Aquasearch's natural astaxanthin product. See "Risk
Factors--Effect of Increased Competition on the Market Price of Synthetic and
Natural Astaxanthin."

In May 1996, Aquasearch entered into a three-year exclusive Distribution
and Development Agreement with Cultor pursuant to which Aquasearch will act as
the exclusive worldwide supplier of natural astaxanthin derived from microalgae
to Cultor in the field of animal feed and animal nutrition and Cultor will act
as the exclusive worldwide distributor of Aquasearch's natural astaxanthin
product in the field of animal feed and animal nutrition. Cultor is a $2
billion Finnish food conglomerate that is a leading worldwide producer of animal
feed and animal nutrition products. Aquasearch estimates that Cultor and its
affiliated companies currently utilize approximately $30 million of synthetic
astaxanthin per year in feed products for the aquaculture and livestock
industries. Astaxanthin is currently used by Svenska Foder, a subsidiary of
Cultor, in poultry feed to impart a more reddish hue to egg yolks. Recently
published studies by Svenska Foder indicate that natural astaxanthin, as
compared with synthetic astaxanthin, may have additional benefits with respect
to fertility, weight gain and feed efficiency in broiler chickens and layer
hens.

Under the Cultor Distribution and Development Agreement, Cultor and
Aquasearch may, at Cultor's option, mutually develop a new joint venture company
for the sole purpose of producing and selling natural astaxanthin derived from
microalgae in the field of animal feed and animal nutrition. Pursuant to this
arrangement, Aquasearch would contribute a ten-acre natural astaxanthin
production facility to be constructed in 1997 in return for its 50% stake in the
new company and Cultor would contribute cash equal to the appraised value of the
new ten-acre production facility in return for its 50% stake. Under the Cultor
Distribution and Development Agreement, Cultor also has the option to increase
its stake in the new company by purchasing from Aquasearch a further 25% of the
new company (thus increasing Cultor's stake to 75%) for cash based on a formula.
The formula provides that the purchase price for the additional shares to be
acquired by Cultor from Aquasearch will equal the greater of (i) $1 million,
(ii) half of the current replacement value of the astaxanthin production
facility initially contributed by Aquasearch or (iii) an amount equal to X
multiplied by Y; where "X" equals the difference between the Transfer Price (as
defined) and the Aquasearch Production Costs (as defined) for the six-month
period commencing on November 1, 1998 and ending on April 30, 1999 and "Y"
equals six (or, in other words, an amount equal to twelve times annual profit in
the third year of the contract). Aquasearch will license certain technology to
the new company to make, use and sell natural astaxanthin derived from
microalgae within the field of animal feed and animal nutrition only and will
retain the right to make, use and sell natural astaxanthin derived from
microalgae in all fields other than animal feed and nutrition as well as the
right to make, use and sell any microalgal products other than natural
astaxanthin in all fields, including the field of animal feed and animal
nutrition. The Company's obligations and performance under the Cultor
Distribution and Development Agreement and the potential formation of a new
joint venture company with Cultor involve various risks and uncertainties. See
"Risk Factors--Risks Associated With Potential Joint Venture" and "--Reliance on
Corporate Partner Relationships."

Aquasearch is currently producing natural astaxanthin at the rate of
approximately eight kilograms per month at its existing one-acre research and
development/production facility. The production targets under the Cultor
Distribution and Development Agreement are 40 kilograms per month at the end of
the first year and 120 kilograms per month at the end of the second year. In
order to meet these production targets, Aquasearch must significantly expand and
improve its production facilities and processes within the next eighteen months,
which will involve various risks and uncertainties. See
"Business--Manufacturing--Astaxanthin" and "--Corporate Partner
Relationships--Cultor" and "Risk Factors--Risks Inherent in Commercial
Production of Microalgae," "--Limited Manufacturing Experience," "--Risks
Associated With Scale-Up of Production Facilities," "--Substantial Near-Term
Capital Needs; Uncertainty of Additional Funding; Dilution", "--Risks Associated
With Managing Growth."

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INDUSTRY BACKGROUND

Microalgae have the following properties that make their commercial
production attractive: (i) microalgae grow ten times faster than sugar cane, the
fastest growing land-based crop (which makes it possible to harvest new crops
every two to three days utilizing optimal culture and processing technologies),
(ii) microalgae have a uniform cell structure with no bark, stems, branches or
leaves (which permits easier extraction of products and higher utilization of
cells and makes it practical to manipulate and control growing conditions in
order to optimize particular cell characteristics), (iii) microalgae naturally
produce many different and unusual fats, sugars, proteins, amino acids,
vitamins, enzymes, pigments and other bioactive compounds and (iv) the raw
materials required for microalgae growth are abundant and include sunlight,
carbon dioxide and nitrogen.

Existing and potential commercial applications for microalgae include
animal and human nutrition, natural food colorings, cosmetics ingredients and
colorings, diagnostic products, pharmaceuticals, research grade chemicals and
pigments and dyes. The largest volume of microalgae products produced today are
algae used as human food and nutritional supplements. These include forms of
SPIRULINA spp., CHLORELLA spp., lake grown blue green algae (APHANIZOMENON
FLOS-AQUAE) and natural beta carotene from DUNALIELLA SALINA. These microalgae
food supplements contain, in varying degrees, highly absorbable sources of
phytonutrients including mixed carotenoids, B vitamins, GLA, protein and
essential amino acids. Emerging commercial applications for microalgae include
products for drug design, pharmaceuticals and diagnostics. One company has
developed an infant formula ingredient from microbial oils enriched with
microbial fatty acid components derived from microalgae and fungi that may be
linked to the development and function of the brain and retina.

Although many potentially valuable compounds have been identified in
microalgae, until recently there was no technology to provide for cost effective
production of multiple species of microalgae in commercial quantities. To the
Company's knowledge, and with the exception of the infant formula product,
substantially all other commercial quantities of microalgal products are
currently produced in open pond environments with microalgal species that thrive
in harsh environments which eliminate or neutralize competing species, predators
and contaminants. These few species, such as SPIRULINA spp., CHLORELLA spp.,
and DUNALIELLA SALINA require a medium for growth characterized by either an
extremely high salinity or pH or another chemistry that is hostile to most
competing species, predators and contaminants. Accordingly, the problem of
contamination is drastically reduced in such abnormal environments, as is the
number of microalgal species that can be produced.

Commercial cultivation of the other three principal groups of microbes --
bacteria, yeasts and fungi -- is currently accomplished in closed, controlled
bioreactors (fermentors), and provides the basis for multi-billion dollar
industries (such as pharmaceuticals) based on natural products produced by these
microbes. The Company believes that microalgae are the only major group of
microbes that are not currently widely cultivated in closed, controlled
cultivation systems and that such closed systems are essential for commercial
exploitation of the estimated 30,000 species of microalgae.

THE AQUASEARCH SOLUTION

Aquasearch has designed, developed and implemented proprietary production
technologies, systems and processes that provide a controlled environment for
the principal conditions required to optimize and maintain microalgae growth.
This technology includes the AGM, which is a closed-system, photosynthetic,
bioreactor, that utilizes computer-controlled equipment to monitor and adjust
the turbulence rate, pH, gas exchange, temperature and nutrient levels within
the AGM to optimize microalgae growth rates. To date, the AGM has produced at
least a doubling of growth rate in tested species compared with conventional
open pond technology. Equally important, the AGM is a closed, sterile,
controlled, photosynthetic system that protects the cultured microalgal species
from the bacteria and other microbial contaminants that frequently destroy them
in conventional open pond systems.

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As a result, the AGM enables the continuous growth and harvesting of
microalgae for periods of up to six months without re-inoculation, thus enabling
a semi-batch continuous production cycle. The specific processes and controlled
conditions are designed to meet the unique requirements of each microalgal
species. To date, Aquasearch has conducted experiments on five different
microalgal species, each with significantly different optimal growth
environments. In each case, the AGM has provided a stable environment that
fostered sustained continuous growth. Based on these preliminary studies, the
Company believes that the AGM can be used to cultivate hundreds of species of
microalgae.

The Company has also designed, developed and implemented proprietary
harvesting technologies, systems and processes for the production of microalgae
that it believes provide significant competitive advantages over traditional
microalgae production techniques.

Aquasearch believes that the capital costs of operating the AGM compares
favorably with other known closed, cultivation systems, thus reducing the
Company's costs of production and potentially expanding the number of microalgae
species that can be commercially exploited.

Notwithstanding these perceived advantages of the Company's technology, the
production of certain species of microalgae on a commercial scale involves many
significant technical challenges, some of which may never have been faced
before. See "Risk Factors--Risks Inherent in Commercial Production of
Microalgae."

The Company believes that the location of its research and development and
production facility in the Hawaii Ocean Science and Technology ("HOST") Business
Park at Keahole Point, Kailua-Kona, Hawaii is an important competitive
advantage. Aquasearch believes that the combination of consistent warm
temperatures, abundant sunlight, low rainfall and the provision of cold, clean
deep seawater at this facility makes this a favorable location to economically
cultivate microalgae on a large scale year round. The Company believes that, in
contrast to its facility (and others in the HOST Business Park), other
microalgae production facilities located in areas lacking these characteristics
are likely to be subject to significantly higher costs of production and fewer
production days per year.

At the HOST Business Park, Aquasearch has access to cold, clean deep
seawater that is pumped up from a depth of 2,000 feet. This seawater is used as
a means of controlling the temperature of the AGM and may be used by Aquasearch
as a source of nutrients for culture of marine microalgae. Additionally,
Aquasearch's facility has access to a complete industrial infrastructure and is
located 30 miles from a deep water port and immediately adjacent to an
international airport. See "Business--Properties."

The concentration of the Company's existing and planned production capacity
in the HOST Business Park involves certain risks and uncertainties relating to
potential natural disasters such as volcanic eruptions, earthquakes, tidal
waves, hurricanes and related matters indigenous to Hawaii. See "Risk
Factors--Concentration of Production Capacity; Reliance on Climatic Conditions."

AQUASEARCH'S STRATEGY

The Company's objective is to become the leader in cost effective
cultivation technology to produce high value natural products from microalgae.
The Company's strategies to achieve this goal may be summarized as follows:

- - BUILD SIGNIFICANT MARKET SHARE IN THE ASTAXANTHIN MARKET. Aquasearch
intends to build upon its position as the first cost effective producer of
commercial quantities of natural astaxanthin from microalgae. Through its
collaboration with Cultor, Aquasearch's products will gain faster access to
the world market than would have been possible if Aquasearch had attempted
to build its own marketing and distribution channel first. The Company
believes that the combination of its microalgae cultivation technology and
expertise with Cultor's animal feed and

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animal nutrition research and development capabilities and worldwide sales,
marketing and distribution network is an important competitive advantage.
Aquasearch plans to independently develop and/or collaborate with Cultor
and other corporate partners with respect to the development of additional
applications for its natural astaxanthin product.

- - CONTINUALLY IMPROVE AND ENHANCE ITS CORE PLATFORM TECHNOLOGY. Aquasearch
has developed proprietary, cost effective, microalgae cultivation and
harvesting technologies and processes that it believes provide it with a
significant competitive advantage over other known cultivation
technologies. Aquasearch plans to continue to improve upon its AGM
technology and other technologies in order to improve yields of natural
astaxanthin from HAEMATOCOCCUS PLUVIALIS and to develop additional products
from other microalgae species.

- - DEVELOP OTHER COMMERCIAL PIGMENTS. Aquasearch plans to undertake
additional research and development of potential commercial pigments from
other species of microalgae. In particular, Aquasearch plans to determine
whether canthaxanthin, another carotenoid pigment, can be derived
cost-effectively from microalgae in commercial quantities. Synthetic
canthaxanthin is currently used in cakes, candy, soda and processed meats.
The Company believes that the world market for synthetic canthaxanthin is
currently approximately $200 million per year.

- - EXPAND STRATEGIC ALLIANCES. Aquasearch intends to strengthen existing and
develop new relationships with companies interested in commercializing
microalgae products. In particular, Aquasearch is targeting potential
partners, like Cultor, that have greater research and development,
scientific, technical, financial, marketing, sales and/or distribution
resources than Aquasearch. The Company's primary objective in expanding
relationships with these companies is to gain visibility into their product
requirements in order further develop Aquasearch's technology and expand
the markets for its existing and potential products.

- - DEVELOP PHARMACEUTICALS, COSMETICS AND OTHER APPLICATIONS. Aquasearch
currently plans to conduct research and development of potential
pharmaceutical, cosmetics and other applications from microalgae.
Aquasearch intends to identify such potentially marketable compounds
through the efforts of its existing technical staff, its Scientific
Advisory Board and existing academic relationships with major scientific
institutes and universities.

PRODUCTS AND POTENTIAL PRODUCTS

The following discussion describes the Company's existing natural
astaxanthin product and potential future products:

EXISTING PRODUCT: ASTAXANTHIN

Substantially all of Aquasearch's efforts to date have been focused on the
development of its AGM technology and the initial production of natural
astaxanthin derived from HAEMATOCOCCUS PLUVIALIS. The Company has entered into
two major agreements with respect to the production and distribution of its
natural astaxanthin product in the field of animal feed and animal nutrition.
See "Business--Corporate Partner Relationships." The two primary markets for
natural astaxanthin are currently aquaculture and poultry feed.

AQUACULTURE. Astaxanthin is the red pigment that occurs in the natural
diets of a number of marine species (including, but not limited to, salmon,
shrimp, carp, trout, red sea bream, ornamental fish, lobsters and crabs) which
provides the red coloring in their flesh or shells. In nature, astaxanthin,
like other marine pigments, is produced only by microalgae and is then passed up
the food chain. Farmed salmon, trout and shrimp do not obtain astaxanthin in
non-pigmented commercial fish feed. The resulting salmon, trout and shrimp
taste the same as pink salmon, trout and shrimp, but, due to consumer
preference, fetch about half the price. (Studies have demonstrated that color
is the most significant factor influencing consumer salmon purchases.) For this
reason, fish farmers have an important incentive to add astaxanthin (in
synthetic or natural form) or an alternative product into their fish feed in
order to increase the value of their produce.

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The aquaculture market for synthetic astaxanthin is currently estimated to
be approximately $125 million per annum, and continued growth is expected. This
market is currently dominated by a single producer, Hoffman-LaRoche, which has
maintained the market price of synthetic astaxanthin at about $2,500 per
kilogram for more than a decade. Aquasearch has entered into an exclusive
distribution agreement with Cultor with respect to the production and
distribution of Aquasearch's natural astaxanthin product derived from
HAEMATOCOCCUS PLUVIALIS. Cultor owns Ewos, a Finnish company with production
facilities worldwide, which Aquasearch believes currently sells approximately
one-third of the world's salmon feed. Aquasearch's natural astaxanthin product
has compared favorably with synthetic astaxanthin in tests conducted by Cultor.
Aquasearch's natural astaxanthin product will compete directly with
Hoffman-LaRoche's synthetic astaxanthin product in the aquaculture feed market.
There can be no assurance that the market price of synthetic astaxanthin will be
maintained at historical levels or what effect this may have on the market price
of Aquasearch's natural astaxanthin product. See "Risk Factors--Effect of
Increased Competition on the Market Price of Synthetic and Natural Astaxanthin."

POULTRY FEED. The amount of natural pigments ingested in the diet
determines the hue of the egg yolks produced by poultry. For many years,
poultry producers have added synthetic canthaxanthin -- a closely related
pigment to astaxanthin -- and other natural pigments (such as marigolds) to
livestock feeds in order to satisfy consumer preferences for various colored egg
yolks. Recent legislation in Sweden, however, requires that all colorants added
to animal feeds be derived from natural sources. This legislation prompted
Svenska Foder, the largest poultry feed producer in Sweden, to seek out
Aquasearch to provide natural astaxanthin as an alternative colorant for poultry
feed. Aquasearch's natural astaxanthin product has compared favorably with
synthetic astaxanthin in tests performed by Svenska Foder. In addition,
recently published studies by Svenska Foder suggest that natural astaxanthin may
have additional benefits with respect to fertility, weight gain and feed
efficiency in broiler chickens and layer hens.

OTHER POTENTIAL APPLICATIONS. Aquasearch intends to explore, independently
and jointly with its corporate partners, additional applications of natural
astaxanthin in the field of animal feed and animal nutrition and in other
fields, such as human nutrition and food coloring. The Company believes that
the potential market for astaxanthin in human health and nutrition is large. No
assurance can be given that Aquasearch or any of its corporate partners will be
successful in developing additional commercial applications for the Company's
natural astaxanthin product. See "Risk Factors--Risks Inherent in Commercial
Production of Microalgae," "--Limited Manufacturing Experience," "--Risks
Associated With Scale-Up of Production Facilities," "--Substantial Long-Term
Capital Needs; Uncertainty of Additional Funding," "--Reliance on Corporate
Partner Relationships," "--Risks Associated with Expansion into Additional
Markets and Product Development."

POTENTIAL PRODUCTS

OTHER PIGMENTS FROM MICROALGAE. Using its platform technology, Aquasearch
has the capability of cultivating additional microalgal species rich in
pigments. Microalgae contain the entire spectrum of colors found in aquatic
environments, including more than 1,000 specific pigments. These pigments may
be useful in other feeds for the aquaculture and animal feed markets. In
addition, the Company believes that natural pigments found in microalgae can be
substituted for synthetic pigments currently used in the food processing
industry. For example, canthaxanthin is used widely in the food industry today
for colorings in cakes, candy, soda and processed meats. The Company believes
that the worldwide market for synthetic canthaxanthin is currently in excess of
$200 million. Aquasearch is aware of a number of microalgae species that contain
a high percentage of canthaxanthin. Similarly, there is a growing demand for
natural pigments in cosmetics, skin and hair care products that could be derived
from microalgal species. Aquasearch believes it has the technical expertise to
identify microalgae species that produce pigments that could be useful in the
food processing, cosmetics and consumer products industries, among others. The
Company believes that the combined worldwide market for canthaxanthin and three
other pigments currently being evaluated by the Company is in excess of $700
million. The Company's development of additional microalgae pigmentation
products involves many significant risks and uncertainties. See "Risk
Factors--Risks Inherent in Commercial Production of Microalgae," "--Limited
Manufacturing Experience," "--Risks Associated With Scale-Up of

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Production Facilities," "--Substantial Long-Term Capital Needs; Uncertainty of
Additional Funding," "--Reliance on Corporate Partner Relationships," "--Risks
Associated with Expansion into Additional Markets and Product Development."

AQUACULTURE FEEDS. Microalgae are the primary source of food for most
aquatic species in their larval stages. According to independent sources, the
aquaculture market currently produces approximately 18% of the world's fisheries
consumption based on 1994 figures (which are the most recent data available) and
is estimated to be a $35 billion market in 1996. Aquaculture feeds typically
represent the highest cost of production for the aquaculture farmer and many are
required to grow or purchase microalgae or microalgae sources for their
hatcheries. Problems of contamination are a significant business risk and some
farmers are currently purchasing prepared larval feeds. One of the significant
obstacles to the development of aquaculture has been the difficulty of feeding
the larvae. Aquasearch believes that the AGM can provide a cost effective
technology for growing feed for the aquaculture industry, both for existing
species and future aquaculture species. The Company's development of microalgae
aquaculture feed products involves many significant risks and uncertainties.
See "Risk Factors--Risks Inherent in Commercial Production of Microalgae,"
"--Limited Manufacturing Experience," "--Risks Associated With Scale-Up of
Production Facilities," "--Substantial Long-Term Capital Needs; Uncertainty of
Additional Funding," "--Reliance on Corporate Partner Relationships," "--Risks
Associated with Expansion into Additional Markets and Product Development."

COSMETICS. Aquasearch believes that microalgae contain several significant
features of importance to the cosmetics industry. First, the natural colors
that occur in microalgae can be used directly as coloring agents in cosmetics.
Second, many species of microalgae possess light blocking compounds that
regulate the amount of ultraviolet and other wavelengths they absorb and have
potential applications in sunscreens and other products containing sun blocking
agents. Last, bioactive agents derived from microalgae may be useful as
cosmetics themselves. For example, Aquasearch is aware that an extract from a
marine organism is an active ingredient in a wrinkle-reducing skin cream
marketed by Estee Lauder. This product currently generates more than a million
dollars a year in royalties to its developer. Aquasearch believes that the
market for cosmetics derived from microalgae is a potentially large market.
Aquasearch does not currently have the expertise to develop and commercialize
cosmetics products on its own. Aquasearch's strategy will be to establish the
AGM as a core technology for the cultivation of commercial quantities of
microalgae and to seek collaborative research and development and marketing,
sales and distribution relationships with established cosmetics and consumer
goods companies in order to develop and commercialize potential microalgal
cosmetics products. The Company's development of microalgae cosmetics products
involves many significant risks and uncertainties. See "Risk Factors--Risks
Inherent in Commercial Production of Microalgae," "--Limited Manufacturing
Experience," "--Risks Associated With Scale-Up of Production Facilities,"
"--Substantial Long-Term Capital Needs; Uncertainty of Additional Funding,"
"--Reliance on Corporate Partner Relationships," "--Risks Associated with
Expansion into Additional Markets and Product Development."

PHARMACEUTICALS. Most pharmaceutical products developed to date have been
derived from land-based plants, and the biodiversity of microalgae is comparable
to that of land-based plants. Aquasearch is aware of at least one company,
Martek Biosciences Corporation, that is collaborating with Merck & Co. and
others to develop pharmaceuticals from microalgae. Aquasearch is also aware
that in clinical trials certain compounds derived from microalgae enhanced the
production of an anti-cancer drug. In connection with this project, Aquasearch
was awarded a Master Agreement from the U.S. National Cancer Institute for large
scale production of biomass for isolation of agents from natural sources,
although no contracts have yet been issued. Aquasearch believes that the market
for pharmaceuticals derived from microalgae is potentially a large market.
Aquasearch does not currently have the expertise to develop and commercialize
pharmaceutical products on its own. Aquasearch's strategy will be to establish
the AGM as a core technology for the cultivation of commercial quantities of
microalgae and to seek collaborative research and development and sales,
marketing and distribution relationships with established pharmaceutical
companies in order to develop and commercialize potential microalgal
pharmaceutical products. The Company's development of pharmaceutical products
from microalgae involves many significant risks and uncertainties. See "Risk
Factors--Risks Inherent in Commercial Production of Microalgae," "--Limited
Manufacturing Experience," "--Risks Associated With Scale-Up of Production
Facilities," "--Substantial Long-Term Capital Needs; Uncertainty of

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Additional Funding," "--Reliance on Corporate Partner Relationships," "--Risks
Associated with Expansion into Additional Markets and Product Development."

MANUFACTURING

ASTAXANTHIN

Aquasearch began culturing HAEMATOCOCCUS PLUVIALIS at its current facility
in the HOST park in 1995. HAEMATOCOCCUS PLUVIALIS is cultured using a series of
photobioreactors of varying sizes to achieve culturing consistency before
entering the AGM. The AGM is a large photobioreactor that utilizes
computer-controlled equipment to monitor and adjust the turbulence rate, pH,
gas exchange, temperature and nutrient levels within the AGM to optimize
microalgae growth rates.

The AGMs are harvested regularly and the extracted amount is pumped from
the AGM into open ponds where, using proprietary processes, the microalgae is
caused to turn red (biosynthesis of astaxanthin). Once the optimal reddening
has occurred, the microalgae are drained from the ponds and dewatered. The
microalgae slurry is then further processed, dried and packaged using
proprietary equipment and processes.

Aquasearch is currently producing natural astaxanthin at the rate of
approximately eight kilograms per month (derived from approximately 180
kilograms of dried HAEMATOCOCCUS PLUVIALIS) at its HOST Park production facility
in order to provide samples for research and development by Cultor and to
satisfy its obligations under the Svenska Foder Supply Agreement. In order to
meet the Cultor Distribution and Development Agreement production targets of 40
and 120 kilograms of natural astaxanthin per month by the end of the first and
second years, respectively, the Company will have to significantly increase its
plant and production capacity in the near future. Aquasearch plans to
accomplish this expansion in two steps: first, the existing one-acre facility
will be expanded to four acres and second, a separate, stand-alone facility of
approximately ten acres will be constructed. The ten acre site will be designed
and developed as a dedicated facility solely for the production of natural
astaxanthin to meet the production targets under the Cultor Distribution and
Development Agreement. After construction of the ten acre site is completed, the
existing facility will be used primarily for the research and development of new
microalgal products. This expansion and improvement will place significant
additional responsibilities on management; require massive scale-up of the
Company's existing manufacturing facility and techniques; require significant
additional capital; and require additional scientific, technical and
manufacturing expertise. Although there can be no assurances that Aquasearch
will be successful in meeting these challenges, management is in the process of
securing the necessary expertise and resources to accomplish them. See "Risk
Factors--Risks Inherent in Commercial Production of Microalgae," "--Limited
Manufacturing Experience," "--Risks Associated With Scale-Up of Production
Facilities," "--Substantial Near-Term Capital Needs; Uncertainty of Additional
Funding," "--Substantial Long-Term Capital Needs; Uncertainty of Additional
Funding," "--Dependence on Cultor; Reliance on Future Collaborations," "--Risks
Associated with Expansion into Additional Markets and Product Development."

OTHER MICROALGAE SPECIES

In addition to HAEMATOCOCCUS PLUVIALIS, the Company has used its AGM
technology to successfully culture the following species of microalgae:
CHLORELLA SOROKINIENSIS, LYNGBYA LAGERHEIMII, SPIRULINA PLATENSIS and
HAEMATOCOCCUS LACUSTRIS. Commercial production of additional species of
microalgae will require the development of custom processes to create optimal
conditions for the cultivation and harvesting of each species. Based on
preliminary studies, Aquasearch believes that the fundamental aspects of the
technology used to produce HAEMATOCOCCUS PLUVIALIS will be directly applicable
to the production of hundreds other species of microalgae and that principal
variations are likely to occur in the modification of harvesting processes
rather than adaptation of the AGM.

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MARKETING AND SALES

Aquasearch's primary business strategy is to continue development of its
platform technology and to establish its expertise and reputation as a cost
effective developer and manufacturer of high value microalgal products. The
Company presently plans to develop strategic research and development, sales and
marketing and distribution arrangements with established companies that have
significant market shares in the fields in which Aquasearch intends to develop
and sell products. The Company believes that this approach reduces the time to
market for its products and increases the likelihood of market acceptance for
its products. Alternatively, Aquasearch does not believe that acquiring or
developing the legal, regulatory, sales and marketing expertise necessary to
compete with established vertically integrated companies with significant market
shares is likely to yield the best return on investment for the Company or its
shareholders. In general, Aquasearch intends to follow substantially the same
strategy with respect to the development, marketing and sale of future products
that it followed in connection with the development, marketing and sale of its
natural astaxanthin product; namely, to identify potential corporate partners
already familiar with the potential product as part of their own research and
development efforts and to enter into strategic development agreements to
manufacture value-added products to the specifications of these corporate
partners. Once new products are in production, the Company may create one or
more separate operating companies with licenses to use the technology solely for
the specific microalgal species and end use.

CORPORATE PARTNER RELATIONSHIPS

SVENSKA FODER

In July 1995, Aquasearch signed the Svenska Foder Supply Agreement with
Svenska Foder, a Swedish poultry feed company, pursuant to which Svenska Foder
agreed to act as the exclusive distributor of Aquasearch's natural astaxanthin
for animal feed and animal nutrition applications in Sweden, Denmark, Norway and
Finland for poultry, pigs, cattle and horses. The Svenska Foder Supply
Agreement has a term of three years and requires Aquasearch to deliver five
kilograms of natural astaxanthin per month. Svenska Foder is currently using
the natural astaxanthin in place of synthetic astaxanthin in chicken feed to
increase the reddish hue in egg yolks. Recently published studies by Svenska
Foder suggest that natural astaxanthin may have additional benefits with respect
to fertility, weight gain and feed efficiency in broiler chickens and layer
hens. Development of additional commercial applications for the Company's
natural astaxanthin product by Svenska Foder or Aquasearch involves many
significant risks and uncertainties. See "Risk Factors--Risks Inherent in
Commercial Production of Microalgae," "--Limited Manufacturing Experience,"
"--Risks Associated With Scale-Up of Production Facilities," "--Substantial
Near-Term Capital Needs; Uncertainty of Additional Funding," "--Substantial
Long-Term Capital Needs; Uncertainty of Additional Funding," "--Reliance on
Corporate Partner Relationships," "--Risks Associated with Expansion into
Additional Markets and Product Development." Cultor owns a majority stake in
Svenska Foder.

CULTOR

The Cultor Distribution and Development Agreement provides that from and
after the date that is one year after the date of shareholder approval the
target production requirement for the Company and the target purchase
requirement for Cultor is 40 kilograms of natural astaxanthin per month. The
target production requirement for the Company and the target purchase
requirement for Cultor from and after the date that is two years after the date
of shareholder approval is 120 kilograms of

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natural astaxanthin per month. Cultor has the obligation to obtain all
governmental approvals for, promote and distribute the product, at its own
expense, in each country in which it proposes to sell the product. During the
term of the Agreement, the Company and Cultor will share equally in the margin
(the "Transfer Price") between the production costs of Aquasearch (the
"Aquasearch Production Costs") and the net sales price (which is equal to the
gross sales price to the end user less volume bonuses, freight and agent's
commissions).

The Agreement provides that Cultor and Aquasearch may, at Cultor's option,
mutually develop a new joint venture company for the sole purpose of producing
and selling natural astaxanthin in the field of animal feed and animal
nutrition. Pursuant to this arrangement, Aquasearch would contribute a ten-acre
natural astaxanthin production facility to be constructed in 1997 in return for
its 50% stake in the new company and Cultor would contribute cash equal to the
appraised value of the ten-acre production facility in return for its 50% stake.
Under the Agreement, Cultor also has the option to increase its stake in the new
company by purchasing from Aquasearch a further 25% of the new company (thus
increasing Cultor's stake to 75%) for cash based on a formula. The formula
provides that the purchase price for the additional shares to be acquired by
Cultor from Aquasearch will equal the greater of (i) $1 million, (ii) half of
the current replacement value of the astaxanthin production facilities initially
contributed by Aquasearch or (iii) an amount equal to X multiplied by Y; where
"X" equals the difference between the Transfer Price and the Aquasearch
Production Costs for the six-month period commencing on November 1, 1998 and
ending on April 30, 1999 and "Y" equals six (or, in other words, an amount equal
to twelve times annual profit in the third year of the contract).

Under the Agreement, Aquasearch will license certain technology to the new
company to make, use and sell natural astaxanthin within the field of animal
feed and animal nutrition only and will retain the right (i) to make, use and
sell natural astaxanthin in all fields other than animal feed and nutrition and
(ii) to make, use and sell any microalgal products other than natural
astaxanthin in all fields, including the field of animal feed and animal
nutrition. The Agreement contains detailed provisions regarding the financing
and management of the new company, procedures for resolving deadlocks between
the parties, mechanisms governing the buy-out of one party by the other,
covenants mandating the distribution of 40% of the annual profits of the new
company to its shareholders and establishing royalty rates under a marketing
agreement that may be entered into between the new company and Cultor,
provisions restricting the transfer of ownership interests by Aquasearch and
Cultor and providing for rights of first refusal and registration rights,
termination provisions and detailed provisions governing the allocation of
intellectual property rights upon termination.

In connection with the execution of the Cultor Distribution and Development
Agreement, Cultor and Aquasearch also entered into a Stock Subscription
Agreement dated as of May 14, 1996 (the "Cultor Subscription Agreement"). The
Cultor Subscription Agreement required Cultor to purchase $200,000 of
Aquasearch's Common Stock at a purchase price equal to the average of the
closing bid price of the Common Stock on each of (i) January 25, 1996 and (ii)
the day before the Cultor Subscription Agreement was executed (which was May 13,
1996); except that the purchase price cannot exceed $.50 per share. At the time
this term was negotiated in January 1996, the $0.50 cap on the purchase price
represented a substantial premium above the $0.15 purchase price paid by
investors in the most recent private financing closed in January 1996 and a
substantial premium above the then current bid price. Cultor required a cap on
the purchase price beforehand in order to avoid paying a higher price due to the
announcement of the execution of the Cultor Distribution and Development
Agreement and the Cultor Subscription Agreement. Following shareholder approval
of the Cultor Distribution and Development Agreement at a Special Meeting of
Shareholders held on September 24, 1996, Cultor purchased 400,000 shares of the
Company's Common Stock at a purchase price of $0.50 per share.

The Company believes that the Cultor Distribution and Development Agreement
is beneficial to the Company in the following ways. First, the arrangement will
substantially reduce the time to market for the Company's natural astaxanthin
product because Cultor, at its own expense, will be responsible for obtaining
all regulatory approvals and promoting and selling the product. Second, by
establishing an exclusive arrangement with Cultor (along with its affiliated
entities, the second largest consumer of synthetic astaxanthin in the world),
the Company believes it has established an additional barrier to entry

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to potential competitors. Third, the Company retains all of its intellectual
property rights to develop applications for astaxanthin outside the field of
animal feed and animal nutrition and will obtain an exclusive license to use all
microalgae technology developed by the new company, if any. Fourth, the Company
believes that the collaboration with Cultor to develop the market for
astaxanthin in animal feed and nutrition will enhance the Company's reputation
in the industry and stimulate additional research and development with respect
to microalgae products other than astaxanthin. The Company's obligations and
performance under the Cultor Distribution and Development Agreement and the
potential formation of a new joint venture company with Cultor involve various
risks and uncertainties. See "Risk Factors--Risks Associated with Potential
Joint Venture" and "--Dependence on Cultor; Reliance on Future Collaborations."
In addition, in order to meet the production targets under the Cultor
Distribution and Development Agreement, Aquasearch must significantly expand and
improve its production facilities and processes within the next eighteen months,
which will involve various risks and uncertainties. See
"Business--Manufacturing--Astaxanthin" and "--Corporate Partner
Relationships--Cultor" and "Risk Factors--Risks Inherent in Commercial
Production of Microalgae," "--Limited Manufacturing Experience," "--Risks
Associated With Scale-Up of Production Facilities," "--Substantial Near-Term
Capital Needs; Uncertainty of Additional Funding," "--Reliance on Corporate
Partner Relationships," "--Risks Associated with Expansion into Additional
Markets and Product Development."

Notwithstanding the foregoing, if the Company is unable to develop any
commercial uses for natural astaxanthin outside of the field of animal feed and
animal nutrition and if the Company is unable to develop, cultivate and sell
microalgae products other than astaxanthin, then the Company and its
shareholders will have sold the Company's sole product and source of revenues to
Cultor for the purchase price set forth in the Cultor Distribution and
Development Agreement. The Company believes that its ability to develop
additional uses for astaxanthin outside of the field of animal feed and
nutrition and its ability to develop microalgal products other than astaxanthin
will be significantly enhanced by its collaboration with Cultor in developing
the astaxanthin market for animal feed and animal nutrition.

COMPETITION

The Company's natural astaxanthin product will compete directly with the
synthetic astaxanthin product developed and marketed worldwide by
Hoffman-LaRoche. Hoffman-LaRoche has significantly greater research and
development, technical, financial, management, marketing and sales resources
than Aquasearch as well as a worldwide reputation and a dominant market share.
See "Risk Factors--Effect of Increased Competition on the Market Price of
Synthetic and Natural Astaxanthin." In addition, at least three companies,
Astacarotene, Heliosynthese and Cyanotech Corporation, have either announced
plans to produce natural astaxanthin from microalgae or are producing small
quantities for test and commercial purposes. Aquasearch believes that
competition in the astaxanthin market will intensify significantly in the near
future. Alternative sources of pigmentation that have been tested include
astaxanthin from shrimp shells, paprika and a yeast strain PFAFFIA RHODOZYMA.
Aquasearch believes that only PFAFFIA RHODOZYMA continues to be evaluated as a
potential alternative to synthetic or natural astaxanthin. Aquasearch's natural
astaxanthin product is expected to compete with synthetic astaxanthin (and any
other alternative products) primarily on the basis of product performance, price
and proprietary position. In this regard, although Hoffman-LaRoche maintained
the market price of synthetic astaxanthin at approximately $2,500 per kilogram
for more than a decade when there was no viable competitive product available,
there can be no assurance that Hoffman-LaRoche will not cut the price of its
synthetic astaxanthin product significantly in response to the introduction of
the Company's natural astaxanthin product. Any such pricing or other
competitive pressure could have a material adverse effect on Aquasearch's
business, financial condition, results of operations and relationships with
corporate partners. See "Risk Factors--Effect of Increased Competition on the
Market Price of Synthetic and Natural Astaxanthin." The existence of products
of which Aquasearch is not aware, or products that may be developed in the
future, may also adversely affect the marketability of Aquasearch's natural
astaxanthin product.

Aquasearch intends to develop other high value natural products from
microalgae that will compete with existing natural and synthetic products.
Aquasearch anticipates that competition to develop additional microalgal
products will be intense. Aquasearch's future competitors are expected to
include major pharmaceutical, food processing, chemical and

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specialized biotechnology companies, many of which will have financial,
technical and marketing resources significantly greater than those of
Aquasearch. In addition, specialized biotechnology companies may form
collaborations with large established companies to support research, development
and commercialization of products that may be competitive with future products
of Aquasearch. Also, academic institutions, governmental agencies and other
public and private research organizations are conducting research activities and
seeking patent protection and may commercialize products competitive with those
of Aquasearch on their own or through joint ventures. The existence of products
of which Aquasearch is not aware, or products that may be developed in the
future, may adversely affect the marketability of additional products developed
by Aquasearch.

Aquasearch believes that its AGM and related microalgae cultivation and
harvesting technologies currently offer significant technical and economic
advantages compared with the open pond systems currently used by certain
competitors, including increased yields and the ability to cultivate hundreds of
microalgal species that cannot be produced in open pond systems due to
substantially higher risks of contamination and lack of control. Aquasearch
also believes that its AGM and related microalgae cultivation and harvesting
technologies compare favorably with other known closed systems with respect to
capital and operating costs. However, the existence of technology of which
Aquasearch is not aware, or technology that may be developed in the future, may
adversely affect the technical and competitive advantages that Aquasearch
currently believes it holds compared with competing open pond and known closed
system microalgae cultivation technologies.

Aquasearch's competitive position will also depend on its ability to
attract and retain qualified scientific and other personnel, develop effective
proprietary products, successfully perform under the Cultor Distribution and
Development Agreement, implement research and development and production plans,
obtain patent protection and secure adequate capital sources. See "Risk
Factors--Competition."

PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY

Aquasearch relies upon a combination of patents, copyright protection,
trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position. The Company's
future prospects depend in part on its ability to obtain patent protection for
its products and processes, to preserve its copyright and trade secrets and to
operate without infringing the proprietary rights of third parties. Aquasearch
has been awarded one patent in the United States and one patent in Australia for
its closed system microalgae cultivation process. The Company has one additional
patent application pending in the United States.

The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, which are analogous to the Company, are generally uncertain and
involve complex legal and factual questions. There can be no assurance that any
of the Company's pending patent applications will result in issued patents, that
the Company will develop additional proprietary technologies that are
patentable, that any patents issued to the Company or its strategic partners
will provide a basis for commercially viable products or will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the ability of the Company to do business. In addition, patent law relating
to the scope of claims in the technology fields in which the Company operates is
still evolving. The degree of future protection for the Company's proprietary
rights, therefore, is uncertain. Furthermore, there can be no assurance that
others will not independently develop similar or alternative technologies,
duplicate any of the Company's technologies, or, if patents are issued to the
Company, design around the patented technologies developed by the Company. In
addition, the Company could incur substantial costs in litigation if it is
required to defend itself in patent suits brought by third parties or if it
initiates such suits.

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can be given that any such patent application will not have priority over patent
applications filed by the Company. In addition, the laws of certain foreign
countries may not protect the Company's patent and other intellectual property
rights to the same extent as the laws of the United States.

The Company's future prospects also depend in part on the Company neither
infringing patents or proprietary rights of third parties nor breaching any
licenses that may relate to the Company's technologies and products. There can
be no assurance that the Company will not infringe the patents, licenses or
other proprietary rights of third parties. In addition, the Company may in the
future receive notices claiming infringement from third parties as well as
invitations to take licenses under third party patents. Any legal action
against the Company or its strategic partners claiming damages and seeking to
enjoin commercial activities relating the affected products and processes could,
in addition to subjecting the Company to potential liability for damages,
require the Company or its strategic partners to obtain a license in order to
continue to manufacture or market the affected products and processes. There
can be no assurance that the Company or its strategic partners would prevail in
any such action or that any license (including licenses proposed by third
parties) required under any such patent would be made available on commercially
acceptable terms, if at all. The Company has not conducted an exhaustive patent
search and no assurance can be given that patents do not exist or could not be
filed that would have a material adverse effect on the Company's ability to
develop and market its products. There are a significant number of United
States and foreign patents and patent applications in the Company's area of
interest, and the Company believes that there may be significant litigation in
the industry regarding patent and other intellectual property rights. If the
Company becomes involved in such litigation, it could consume a substantial
portion of the Company's managerial and financial resources, which could have a
material adverse effect on the Company's business, financial condition, results
of operations and relationships with corporate partners.

While the disclosure and use of the Company's proprietary technology,
know-how and trade secrets are generally controlled under agreements with the
parties involved, there can be no assurance that all confidentiality agreements
will be honored, that others will not independently develop similar or superior
technology, that disputes will not arise concerning the ownership of
intellectual property, or that dissemination of the Company's proprietary
technology, know-how and trade secrets will not occur. See "Risk
Factors--Dependence on Proprietary Technology and Unpredictability of
Intellectual Property Position."

GOVERNMENT REGULATION AND PRODUCT TESTING

Aquasearch's natural astaxanthin product, potential products and its
manufacturing and research activities are or may become subject to varying
degrees of regulation by a number of government authorities in the United States
and other countries, including the United States Food and Drug Administration
("FDA") pursuant to the Federal Food, Drug and Cosmetic Act. Each existing or
potential microalgal product that is developed or marketed by Aquasearch, its
licensees or its strategic partners for use by humans may present unique
regulatory problems and risks, depending on the product type, uses and method of
manufacture. The FDA regulates, in varying degrees and in different ways,
dietary supplements, other food products, medical devices and pharmaceutical
products, including their manufacture, testing, exportation, labeling, and, in
some cases, advertising. Generally, prescription pharmaceuticals and certain
types of medical devices are regulated more vigorously than foods, such as
dietary supplements. Any future products developed by Aquasearch for use in
human nutrition, pharmaceuticals or cosmetics, will require Aquasearch to
develop and adhere to Good Manufacturing Practices ("GMP") as

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required by the FDA, ISO standards as required in Europe, and any other
applicable standards mandated by federal, state, local or foreign laws,
regulations and policies. Currently, the Company's production facilities do not
comply with GMP or ISO standards and significant capital expenditures and
compliance procedures would have to be made and implemented before the Company's
production facilities could meet GMP and ISO qualifications.

The Company is or may become subject to other federal, state and foreign
laws, regulations and policies with respect to labeling of its products,
importation of organisms, and occupational safety, among others. Federal, state
and foreign laws, regulations and policies are always subject to change and
depend heavily on administrative policies and interpretations. The Company is
working with Svenska Foder and Cultor with respect to compliance with foreign
laws, regulations and policies pertaining to use of its natural astaxanthin
product in the field of animal feed and animal nutrition. There can be no
assurance that any changes with respect to federal, state and foreign laws,
regulations and policies, and, particularly with respect to the FDA or other
such regulatory bodies, with possible retroactive effect, will not have a
material adverse effect on the Company's business, financial condition, results
of operations and relationships with corporate partners. There can be no
assurance that any of the Company's potential products will satisfy applicable
regulatory requirements. See "Risk Factors--Uncertainty Regarding Obtaining and
Maintaining Government Approvals."

The Company's natural astaxanthin product is viewed as a food ingredient by
regulatory authorities in Sweden. Regulatory authorities in other jurisdictions
may view the Company's natural astaxanthin product as a food additive. All new
color additives for ultimate human consumption in the United States require
premarket clearances from the FDA. Therefore, Aquasearch's natural astaxanthin
product and any additional food color products for use in the United States will
require FDA clearance, unless they meet the requirements of current color
additive regulations. The process of obtaining clearances for a new color
additive is expensive and time consuming. Extensive information is required on
the toxicity of the additive, including carcinogenicity studies and other animal
testing. No assurances can be given that any potential Aquasearch food color
product will be cleared by the FDA on a timely basis, if at all.

Although the FDA approved the Hoffman-LaRoche synthetic astaxanthin product
as a food ingredient in 1995, there can be no assurances that the FDA will grant
similar approval for Aquasearch's natural astaxanthin product.

Regulatory approvals in other markets in which Aquasearch's natural
astaxanthin product is likely to be distributed, including in particular, the
EEC, Japan, Canada and Australia, vary by market. Currently, the Aquasearch
natural astaxanthin product has been approved in Sweden for use in poultry feed
and is considered by the Swedish authorities as a feed ingredient rather than a
food additive. The Company believes that the approval process in Australia,
Japan and certain other Asian countries will come under their "natural" status
and be approved relatively quickly; however, there can be no assurances in this
regard. The Aquasearch natural astaxanthin product has not been submitted for
approval by the EEC, and there can be no assurance that the determination by
Swedish authorities will have any influence on the determination to be made by
the EEC.

Under the terms of the Cultor Distribution and Development Agreement,
Cultor has the responsibility to obtain any FDA and other approvals necessary in
each country in which Cultor determines to distribute the product.

The Company is also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on the Company's business, financial
condition, results of operations and relationships with corporate partners. See
"Risk Factors--Uncertainty Regarding Obtaining and Maintaining Government
Approvals."

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EMPLOYEES

As of the date of this Prospectus, 1996, Aquasearch has sixteen full-time
employees, of whom five have Ph.D.s, nine are involved in the production and
harvesting process, five are involved in research and development and two are
involved in administration and support. The Company considers relations with
its employees to be good. None of the Company's employees is covered by a
collective bargaining agreement.

PROPERTIES

The Company is located in Kailua-Kona, Hawaii, at the HOST Business Park.
The facility in Kailua-Kona currently consists of approximately five leased
acres containing a number of AGMs, reddening ponds, a processing facility, a
laboratory, administrative offices and additional space for production and
research and development. All products are currently produced at this facility.
Aquasearch has no production facilities or offices outside the State of Hawaii.
See "Risk Factors--Concentration of Production Capacity; Reliance on Climatic
Conditions."

The Company has initiated the application process for a thirty-year lease
of its current five acre parcel from the Natural Energy Laboratory of Hawaii
Authority ("NELHA"), the state entity which administers the HOST Business Park.
Leases of thirty years have historically been awarded to companies once they
have completed their research and development stage, which the Company plans to
complete this year. The government-administered process to award a thirty-year
lease has usually taken less than two years. More than half of the 800-acre
HOST Business Park facility is currently undeveloped and the Company believes
that, as one of the fastest growing and largest employers in HOST Business Park,
its lease application is likely to be considered favorably, although there can
be no assurances in this regard.

Construction to expand the Company's existing one-acre research and
development/production facility is scheduled to begin in the first quarter of
fiscal 1997. The design and engineering process for this expansion was
initiated in April 1996 when Aquasearch solicited bids from various engineering
firms. As a result of the bidding process, Aquasearch retained Harris Group,
Inc. of Seattle, an engineering firm with extensive experience in the design of
biotech, microbe-based production plants, to design the build-out of the
facility. The engineering process for this expansion was completed in September
1996.

LEGAL PROCEEDINGS

Aquasearch is not currently a party to any legal proceedings.

SCIENTIFIC ADVISORY BOARD

The Aquasearch Scientific Advisory Board is composed of leading experts in
aquaculture, marine biology and fluid dynamics and the chemistry, photobiology
and mass culture of microalgae. The Scientific Advisory Board provides guidance
to the Company regarding the optimization of its production and processing
methods and research and development pertaining to both existing and potential
microalgal products. The Scientific Advisory Board held its inaugural meeting
in May 1996 and is scheduled to meet approximately four times per year. Between
meetings, individual Scientific Advisory Board members consult with the Company
on an as-needed basis. Aquasearch believes that the individual and collective
knowledge and experience of its Scientific Advisory Board provides the Company
with an important competitive advantage. The current members of the Aquasearch
Scientific Advisory Board are as follows:

DR. JOHN BARDACH received a B.Sc. in Zoology from Queen's University,
Canada in 1946 and a Ph.D. in Zoology from University of Wisconsin in 1949. He
has served as Director of the Bermuda Biological Station, the Hawaii Institute
of Marine Biology and the East-West Center, as well as Professor at the
University of Hawaii. Dr. Bardach's numerous international appointments have
included Chairmanship of the U.S. National Academy of Sciences Panel on Aquatic
Food Sources, the

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World Bank-FAO Panel on Aquaculture Research Needs of Developing Countries, and
the State of Hawaii Aquaculture Advisory Council. Two of his books, HARVEST OF
THE SEA and AQUACULTURE (now in its 25th printing), establish him as one of the
fathers of modern aquaculture.

DR. ROBERT R. BIDIGARE received a B.S. (SUMMA CUM LAUDE) in Aquatic Biology
from Eastern Michigan University in 1977 and a Ph.D. in Biological Oceanography
from Texas A&M University in 1981. Dr. Bidigare currently is Associate
Professor of Oceanography at University of Hawaii. Dr. Bidigare serves on the
Advisory Board for the National Center for the Culture of Marine Phytoplankton,
is a member of the NASA SeaWIFS Science Working Team and an observer on the
International Oceanographic Commission Group of Experts on Standards and
Reference Materials. Dr. Bidigare has authored more than 75 scientific papers,
and is a recognized expert on plant pigment chemistry, bio-optics and
biochemistry of microalgae.

DR. JOHN CULLEN received a B.Se. (Honors in Biology) from University of
California, Santa Cruz in 1974 and a Ph.D. in Biological Oceanography from
Scripps Institution of Oceanography, University of California, San Diego, in
1980. Dr. Cullen has held faculty positions at the University of Texas, the
Bigelow Laboratory for Ocean Sciences and Dalhousie University in Halifax,
Canada, where he now holds the Chair of Environmental Observation Technology.
Dr. Cullen's research has focused in the area of microalgae growth rates,
productivity, nutrient requirements and bio-optics.

DR. WILLIAM FENICAL received a B.S. in Biochemistry from California State
Polytechnic University in 1963, an M.S. in Organic Chemistry from San Jose State
University in 1965 and a Ph.D. in Organic Chemistry from University of
California, Riverside in 1968. Dr. Fenical joined the faculty of Scripps
Institution of Oceanography, University of California, San Diego, in 1973, where
he has served as Director of the University of California-wide Institute of
Marine Resources (1988-1993) and Director of the Marine Research Division since
1989. Dr. Fenical is recognized as one of the world's authorities on the
chemistry of marine natural products, an area in which he has published more
than 250 scientific articles. Dr. Fenical has served as an advisor on marine
natural product chemistry to the National Institutes of Health, the National
Research Council, and numerous pharmaceutical companies, including Sterling
Winthrop, Ligand, Pharmagenesis and Bristol-Myers. He serves on the editorial
boards of the JOURNAL OF NATURAL PRODUCTS, MOLECULAR MARINE BIOLOGY AND
BIOTECHNOLOGY, and the JOURNAL OF MARINE BIOTECHNOLOGY. He holds seven patents
for novel chemical compounds of a biomedical nature, including a wrinkle
reducing agent that is the active ingredient in a skin cream marketed by Estee
Lauder, which produces more than $1 million per year in royalties for the
University of California.

DR. MARK E. HUNTLEY received a B.Sc. degree (SUMMA CUM LAUDE) in Biology
from the University of Victoria, Canada in 1976 and earned a Ph.D. in Biological
Oceanography from Dalhousie University in Halifax, Canada in 1980. Dr. Huntley
is a research biologist at Scripps Institution of Oceanography, University of
California, San Diego, and President, Chief Executive Officer and Chairman of
the Board of Directors of Aquasearch. Dr. Huntley has won numerous awards and
grants in his field, published more than 75 articles and a book, and lectured
throughout the world. He serves on the Executive Committee of the Global Ocean
Ecosystem Dynamics program, a component of the U.S. Global Change Research
Program, and the only element of the International Geosphere-Biosphere Program
that is examining the impact of global climate change on marine ecosystems. He
has served as an advisor to numerous international, national and state agencies,
including the United States State Department, the United States Department of
Interior and the White House Office of Science and Technology Policy. Dr.
Huntley is a co-founder of Aquasearch and a co-inventor of the Aquasearch Growth
Module.

DR. EDWARD A. LAWS received a B.A. (MAGNA CUM LAUDE) in Chemistry from
Harvard College in 1967 and a Ph.D. in Chemical Physics from Harvard College in
1971. He was an instructor in Oceanography at Florida State University from
1971 through 1974, and then joined the faculty at the University of Hawaii,
where he is now a Professor of Oceanography. Dr. Laws has served as Chairman of
the Oceanography Department, School of Ocean and Earth Science and Technology at
the University of Hawaii, which was ranked by the National Academy of Sciences
in 1995 as the fifth best program of its kind in the nation. Dr. Laws recently
was appointed Assistant Vice President, Graduate Research and Education, of the
University

-41-

<PAGE>

of Hawaii. Dr. Laws is an expert on the large-scale cultivation of microalgae,
an area in which he has focused his research and has graduated a number of
Ph.D.s.

DR. ALEX LEONARD received a B.A. in Zoology (SUMMA CUM LAUDE) from Trinity
College, Dublin in 1984 and a Ph.D. in Marine Biology from Scripps Institution
of Oceanography, University of California, San Diego, in 1992. As Project
Manager and Principal Scientist for CalBioMarine Technologies of Carlsbad,
California, Dr. Leonard designed and operated cultivation systems for marine
microalgae and invertebrates on projects funded by the National Science
Foundation and the National Institutes of Health. Dr. Leonard is currently the
Vice President of Manufacturing of Aquasearch.

DR. PETER P. NIILER received his B.S. degree from Lehigh University in
1960, earned honors as a Fulbright Scholar at Cambridge University, England in
1961, and was awarded a Ph.D. as a Woodrow Wilson Fellow from Brown University
in 1964. Dr. Niiler has taught and conducted research at Harvard College, Nova
University and Oregon State University. He is currently a Professor of
Oceanography at Scripps Institution of Oceanography, University of California,
San Diego, where he heads one of the largest oceanographic research programs in
the nation. Dr. Niiler has published more than 125 scientific papers and has
invented various oceanographic instrumentation technologies that are now in
commercial production with sales of $6 million annually. Dr. Niiler is an
expert in applied mathematics and fluid mechanics and was a co-inventor of
processes used in the Aquasearch Growth Module.

DR. DONALD REDALJE received his B.S. in Environmental Biology from the
University of California, Santa Barbara in 1971 and his Ph.D. from University of
Hawaii in 1980. He has conducted research and taught at Scripps Institution of
Oceanography, University of California, San Diego, the Naval Postgraduate
School, Moss Landing Marine Laboratory, and the University of Southern
Mississippi, where he recently served as Director of the Center for Marine
Science. Dr. Redalje is internationally recognized for his development of a
method to measure the productivity of microalgae, and is an expert on the
biochemistry and physiology of marine plants. Dr. Redalje is a co-founder of
Aquasearch and co-inventor of the Aquasearch Growth Module.

Most members of the Scientific Advisory Board are not employed by the
Company and each of these members may have commitments to other entities that
could limit their availability to the Company. There can be no assurance that
the Company will be able to retain its key Scientific Advisory Board members.
See "Risk Factors--Dependence on Key Personnel."

-42-

<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of Aquasearch and their respective
ages and positions with Aquasearch are set forth in the following table.

Name Age Position
<S> <C> <C>
Mark E. Huntley, Ph.D................................. 46 President, Chief Executive Officer and Chairman
Pearn P. Niiler, Ph.D................................. 58 Director
Michael C.B. Smith................................... 40 Director
Martin Bussell........................................ 40 Chief Financial Officer
Alexander B. Leonard, Ph.D............................ 34 Vice President of Manufacturing
John J. Emerick....................................... 32 Vice President of Operations
Steven L. Berson...................................... 41 Secretary

</TABLE>

MARK E. HUNTLEY, PH.D., is a co-founder of Aquasearch, a co-inventor of the
Aquasearch Growth Module and has served as the President, Chief Executive
Officer and Chairman of the Board since inception. Dr. Huntley has served as a
research biologist at Scripps Institution of Oceanography, University of
California, San Diego since 1980. Dr. Huntley has won numerous awards and
grants in his field, published more than 75 articles and a book, and lectured
throughout the world. Dr. Huntley serves on the Executive Committee of the
Global Ocean Ecosystem Dynamics program, a component of the United States Global
Change Research Program, and the only element of the International
Geosphere-Biosphere Program that is examining the impact of global climate
change on marine ecosystems. Dr. Huntley has served as an advisor to numerous
international, national and state agencies, including The United States State
Department, the United States Department of the Interior and the White House
Office of Science and Technology Policy. Dr. Huntley received a B.Sc. degree
(SUMMA CUM LAUDE) in Biological Oceanography from the University of Victoria,
Canada 1976 and a Ph.D. in Biological Oceanography from Dalhousie University in
Halifax, Canada in 1980.

PEARN P. NIILER, PH.D., has been a consultant to the Company since 1990 and
has served as a director of the Company since 1991. Dr. Niiler is an expert in
applied mathematics and fluid dynamics and was a co-inventor of various
processes used in the Aquasearch Growth Module. Dr. Niiler is a Professor of
Oceanography at Scripps Institution of Oceanography, University of California,
San Diego, where he heads one of the largest oceanographic research programs in
the nation. Dr. Niiler has taught and conducted research at Harvard College,
Nova University and Oregon State University and has published more than 125
scientific papers. Dr. Niiler received his B.S. degree from Lehigh University,
earned honors as a Fulbright Scholar at Cambridge University, England, and was
awarded a Ph.D. as a Woodrow Wilson Fellow from Brown University.

MICHAEL C.B. SMITH has been a consultant to the Company since 1993 and has
served as a director of the Company since March 1996. Mr. Smith was primarily
responsible for structuring and negotiating the terms of the Company's strategic
relationships with Svenska Foder and Cultor. Mr. Smith spent ten years as a
senior executive with Whitbread Plc of England (one of Britain's largest leisure
retailers and brewers). With Whitbread he held positions of President and CEO
of Keg Restaurants Ltd (a $200 million-turnover company operating in Canada, USA
and Australia); CEO of a franchised fast food chain based in Britain; and VP
Marketing for Whitbread's most profitable retail concept. Mr. Smith received
his MBA from Cranfield Institute of Technology. Mr. Smith is a private investor
who devotes such time as is necessary to the Company's business.

MARTIN BUSSELL has been a consultant to the Company and Acting Chief
Financial Officer since June 1996. Mr. Bussell has been Chief Financial Officer
of Elia Fashions, a retail clothing company, in Vancouver, British Columbia,
since

-43-

<PAGE>

1995. From 1993 to 1995, Mr. Bussell was Director of Planning and then Finance
Planning Manager of Spectra Group, a multi-concept, publicly traded, restaurant
company based in Vancouver. From 1987 to 1993, Mr. Bussell was the Vice
President, Commercial for Keg Restaurants, U.S., a division of Whitbread Plc.
From 1977 to 1987, Mr. Bussell managed the Financial Accounting Department of
the Whitbread Retail Division, which had more than 15,000 employees and annual
sales in excess of $4 billion. Mr. Bussell is a Member of the Institute of
Chartered Management Accountants.

ALEXANDER B. LEONARD, PH.D., has served as the Company's Director of
Manufacturing since August 1995 and as Vice President of Manufacturing since
March 1996. Prior to joining Aquasearch, Dr. Leonard served as Project Manager
and Principal Scientist for CalBioMarine Technologies, Inc., a research-stage
marine biotechnology company, from October 1992 to July 1995. At CalBioMarine
Technologies, Inc., Dr. Leonard designed and operated cultivation systems for
marine microalgae and invertebrates on projects funded by the National Science
Foundation and the National Institutes of Health. Dr. Leonard received a B.A.
in Zoology (SUMMA CUM LAUDE) from Trinity College, Dublin in 1984 and a Ph.D. in
Marine Biology from Scripps Institution of Oceanography, University of
California, San Diego in 1992.

JOHN J. EMERICK has served as the Company's Business Manager since July
1995 and its Vice President of Operations since August 1996. Prior to joining
Aquasearch, Mr. Emerick served as Team Manager in a Florida pulp mill for
Proctor & Gamble, where he was engaged in production management and engineering
development during the period from June 1985 to June 1987. From June 1987 to
March 1992, Mr. Emerick served in various positions, including Top Engineering
Executive, for Tetra-Pak Materials, Inc., an international packaging
conglomerate, in which he was responsible for all engineering processes in the
plant, including research, implementation and training. During the period from
July 1992 to February 1995, Mr. Emerick served as General Manager of Advanced
Neuro Dynamics of Honolulu, the largest NLP seminar and training company in the
world. Mr. Emerick received his B.A. in Mechanical Engineering (HIGH HONORS)
from Georgia Tech University in 1985.

STEVEN L. BERSON has served as the Secretary of the Company since March
1996. Mr. Berson is a partner in the law firm of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, counsel to the Company. Mr. Berson received a
B.A. from the University of North Carolina at Chapel Hill in 1977 and a J.D.
from Vanderbilt University in 1981.

KEY CONSULTANTS

TIMOTHY J. SCOBLE is a consultant to the Company and has been a member of
the Business Advisory Board since June 1996. Mr. Scoble has been the Chief
Executive Officer of Spectra Group since June 1994. During the period from
February 1990 to May 1994, Mr. Scoble held various positions at Whitbread Plc,
including Finance Director of Thresher, a spirits retailer with annual sales in
excess $600 million; Chief Financial Officer of Keg Restaurants; and Finance
Director of Pizza Hut (UK), a 200 store restaurant joint venture between Pepsico
and Whitbread Plc. Mr. Scoble is a Member of the Institute of Chartered
Management Accountants.

BUSINESS ADVISORY BOARD

The Aquasearch Business Advisory Board provides the Company with direct
access to consultants with significant experience in the fields of finance and
marketing at a time when the Company's stage of development and finances do not
justify retaining full-time officers with comparable expertise. The Business
Advisory Board meets quarterly and on an as-needed basis to advise the Company
with respect to a variety of strategic planning and financial matters. The
Business Advisory Board currently consists of Mr. Smith, Mr. Bussell and
Mr. Scoble.

-44-

<PAGE>

BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION

All directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors. There are no
family relationships among the directors or officers of the Company.

The Board of Directors currently has an Audit Committee and a Compensation
Committee. The Audit Committee oversees the actions taken by the Company's
independent auditors and reviews the Company's internal financial and accounting
controls and policies. The Compensation Committee is responsible for
determining salaries, incentives and other forms of compensation for officers,
employees and consultants of the Company and administers the Company's incentive
compensation and benefit plans.

DIRECTOR COMPENSATION

Directors of the Company do not receive cash for services they provide as
directors. From time to time, certain directors who are not employees of the
Company have served as consultants to the Company for which they have been paid
customary fees based on the value of the services rendered and/or received
grants of options to purchase shares of the Company's Common Stock. The Company
does not provide additional compensation for committee participation or special
assignments of the Board of Directors.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

The following table sets forth the compensation paid to the Company's Chief
Executive Officer and the three other most highly paid executive officers
(determined as of October 31, 1995) for the fiscal years ended October 31, 1995,
October 31, 1994 and October 31, 1993.

-45-

<PAGE>

SUMMARY COMPENSATION TABLE

LONG TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS
------------------- -----------------------
RESTRICTED
STOCK SECURITIES
NAME AND FISCAL SALARY BONUS AWARDS UNDERLYING
PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3) OPTIONS (#)
- ------------------------ ------ ------ ------ ----------- -----------

Mark E Huntley, Ph D. 1995 - - $264,000(4) 1,665,250(7)
President and Chief 1994 - - $ 60,000(5) -
Executive Officer 1993 - - $ 67,500(6) -

- ------------------
(1) The Company paid no salary in the period covered by the above table.

(2) The Company paid no bonuses in the period covered by the above table.

(3) The dollar value of each of the restricted stock awards in the table
above is determined by multiplying the closing market price of the
unrestricted common stock on the date of grant of the stock award by
the number of shares awarded. The valuations of the restricted stock
awards are different from those reflected in the attached financial
statements and previous financial statements filed with the Commission
because the valuations in the financial statements were based upon the
purchase price of comparable stock (i.e., Rule 144 restricted stock)
available under private placement during the relevant time periods.

(4) On August 24, 1995, the Board of Directors authorized and approved the
grant of 1,320,000 shares of Common Stock to Dr. Huntley for past
services. The last trade of the Company's unrestricted Common Stock
on August 24, 1995 was at $0.20 per share.

(5) On May 2, 1994, the Board of Directors authorized and approved the
issuance of 400,000 shares of Common Stock to Dr. Huntley for past
services. The last trade of the Company's unrestricted Common Stock
on May 2, 1994 was at $0.15 per share.

(6) On May 26, 1993, Board Directors authorized and approved the issuance
of 450,000 shares of Common Stock to Dr. Huntley for past services.
The last trade of the Company's unrestricted Common Stock on May 26,
1993 was at $0.15 per share.

(7) On August 1, 1995, the Board of Directors authorized and approved the
grant of a stock option to Dr. Huntley to purchase 1,665,250 shares of
Common Stock of the Company, at an exercise price of $0.125 per share,
vesting over a seven-year period, subject to accelerated vesting upon
the achievement of certain milestones.

The total annual salary and bonus for any other executive officer did
not exceed $100,000 for the fiscal year ended October 31, 1995.

-46-

<PAGE>

OPTION GRANTS IN FISCAL 1995

STOCK OPTION GRANTS

The following table contains information concerning the stock option
grants made to each of the Named Executive Officers for the year ended
October 31, 1995:

<TABLE>
<CAPTION>
OPTION GRANTS IN YEAR ENDED OCTOBER 31, 1995

INDIVIDUAL GRANTS
-----------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERMS (1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED (2) FISCAL YEAR PER SHARE DATE 5% 10%
- ----------------- ----------- ------------ --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark E. Huntley,
Ph.D., President
and CEO 1,665,250 29.33% $ 0.125 08/01/02 $ 84,739 $197,478

Tana Alcalay,
CFO and Secretary 930,112 16.38 0.125 08/01/02 47,331 110,302
</TABLE>

(1) Assumes a value of $0.125 for each share of Common Stock on the date
of grant. Potential gains are net of the exercise price but before
taxes associated with the exercise. The 5% and 10% assumed annual
rates of compounded stock appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the
company's estimate or projection of the future Common Stock price.
Actual gains, if any, on stock option exercises are dependent on the
future financial performance of the Company, overall market conditions
and the option holders' continued employment through the vesting
period.

(2) Grants generally vest at a rate of 20% at the end of the first year
following the date of grant and 1/48 per month for each month
thereafter, as long as the optionee remains an employee with,
consultant to, or director of, the Company. The maximum term of
each option granted is seven years from the date of grant. the
exercise price is equal to the fair market value of the stock on
the grant date as determined by the Board of Directors.

The following table sets forth for each of the Named Executive
Officers certain information with respect to the exercise of options to
purchase Common Stock during the year ended October 31, 1995 and the number
of shares subject to both exercisable and unexercisable stock options as of
October 31, 1995.

OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS

There were no option exercises in fiscal 1995 by any Named Executive
Officer. The following table sets forth information concerning stock options
held by each of the Named Executive Officers on October 31, 1995.

<PAGE>

<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUE TABLE

NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISABLE, IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT FISCAL YEAR END HELD AT FISCAL YEAR END(1)
-------------------------------------- --------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------------- ----------------- ------------------ ----------------------
<S> <C> <C> <C> <C>
Mark E. Huntley, Ph.D. 1,665,250 -- $ 141,554 --
Tana Alcalay 930,112 -- 79,060 --
</TABLE>

- ---------------

(1) Value of unexercised options is based on the last reported sale price
of the Company's Common Stock of $0.21 per share on October 31, 1995
(the Company's fiscal year-end) minus the exercise price.

EMPLOYEE BENEFIT PLANS

1996 STOCK OPTION PLAN. In March 1996, the Board of Directors
adopted the 1996 Stock Option Plan. The 1996 Stock Option Plan provides for
the grant of incentive stock options to employees and nonstatutory stock
options and stock purchase rights to employees and consultants. A total of
5,000,000 shares of Common Stock have been reserved for issuance under the
1996 Stock Option Plan, all of which are currently available for grant. The
1996 Stock Option Plan will be administered by the Board of Directors, except
that with respect to option grants to executive officers, the 1996 Stock
Option Plan is administered by the Compensation Committee of the Board of
Directors. Options and stock purchase rights granted under the 1996 Stock
Option Plan will vest as determined by the relevant administrator, and may
accelerate and become fully vested in the event of an acquisition of the
Company if so determined by the relevant administrator. The exercise price of
options and stock purchase rights granted under the 1996 Stock Option Plan
will be as determined by the relevant administrator, although the exercise
price of incentive stock options must be at least equal to the fair market
value of the Company's Common Stock on the date of grant. The Board of
Directors may amend or modify the 1996 Stock Option Plan at any time. The
1996 Stock Option Plan will terminate in March 2006, unless terminated
earlier by the Board of Directors. The adoption of the 1996 Stock Option
Plan is subject to the approval of the shareholders of the Company.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company has adopted provisions in its Restated Articles of
Incorporation that eliminate the personal liability of its directors for
monetary damages arising from a breach of their fiduciary duties in certain
circumstances to the fullest extent permitted by law and authorize the Company
to indemnify its directors and officers to the fullest extent permitted by law.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.

The Company's Restated Articles of Incorporation provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Colorado law, including circumstances in which indemnification
is otherwise discretionary under Colorado law. The Company plans to enter
into indemnification agreements with its officers and directors containing
provisions which will in some respects be broader than the specific
indemnification provisions contained in the Colorado Corporations Code. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.

At present, there is no pending material litigation or proceeding
involving a director or officer of the Company where indemnification will be
required or permitted. The Company is not aware of any threatened material
litigation or proceeding which may result in a claim for such
indemnification.

<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of the date of this
Prospectus for (i) each entity or group that is known by the Company to
beneficially own five percent or more of the outstanding Common Stock of the
Company, (ii) each director, (iii) the Named Executive Officers and (iv) the
Company's directors and officers as a group.

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF SHARES
SHARES BENEFICIALLY OWNED
BENEFICIALLY BEFORE
BENEFICIAL OWNER (1) OWNED OFFERING
- --------------------------------------------------------------- ----------------------------- --------------------------
<S> <C> <C>
Mark E. Huntley, Ph.D.(2)...................................... 5,733,186 13.5
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740
Caymus Capital Ltd............................................. 2,200,000 5.3
c/o Yorkton Securities, Inc.(3)
1055 Dunsmuir Street
10th Floor
Vancouver, British Columbia V7X1L4
Pearn P. Niiler, Ph.D. (4)..................................... 1,918,402 4.5
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740
Tana Alcalay (5)............................................... 1,731,050 4.1
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740
Michael C.B. Smith(6).......................................... 1,961,050 4.6
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740
All directors and officers as a group (6 persons) ............. 11,681,338 24.9%

</TABLE>

- --------------------

(1) Except pursuant to applicable community property laws or as indicated in
the footnotes to this table, to the Company's knowledge, each shareholder
identified in the table possesses voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by such
shareholder.
(2) Includes options to purchase 1,665,250 shares of Common Stock exercisable
within 60 days of the date of this Prospectus.
(3) These shares are held in the "street name" of Yorkton Securities, Inc.
only. Yorkton Securities, Inc. does not possess voting or investment power
with respect to any of these shares and disclaims beneficial ownership of
all of these shares.
(4) Includes options to purchase 1,291,050 shares of Common Stock exercisable
within 60 days of the date of this Prospectus.
(5) Includes options to purchase 930,112 shares of Common Stock exercisable
within 60 days of the date of this Prospectus.
(6) Includes options to purchase 1,741,050 shares of Common Stock exercisable
within 60 days of the date of this Prospectus.

<PAGE>

SELLING SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership by the Selling Shareholder of shares of the Company's
Common Stock. The shares offered by this Prospectus were purchased by the
Selling Shareholder from the Company at a price of $0.125 per share in
connection with a private placement of the Common Stock of the Company effected
in July 1995. The Selling Shareholders may sell the shares of Common Stock
offered hereby from time to time and may choose to sell less than all or none of
such shares.

BENEFICIAL NUMBER OF BENEFICIAL
OWNERSHIP SHARES OWNERSHIP
NAME BEFORE OFFERING(1) OFFERED AFTER OFFERING
- ----------------------------- --------------------- ---------- -----------------------
PERCENT*
NUMBER PERCENT NUMBER *
--------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Tana Alcalay 1,731,050 4.1% 125,000 1,606,050 3.8%
Jeff Barber 62,500 * 62,500 0 *
Edward Brill 62,500 * 62,500 0 *
California Progressions, Inc. 125,000 * 125,000 0 *
Gary Davidson 615,750 1.5% 125,000 490,750 1.2%
Joanne Gioa 125,000 * 125,000 0 *
Martin Gutlove 250,000 * 250,000 0 *
Mark Huntley 5,683,186 13.3% 62,500 5,620,686 13.1%
Kenneth Koock 175,000 * 125,000 50,000 *
Joel Marcus 462,500 1.1% 312,500 150,000 *
Charles Muellecker 625,000 1.5% 625,000 0 *
Pearn Niiler 1,918,402 4.5% 125,000 1,793,402 4.2%
Mark Shefts 312,500 * 312,500 0 *
Rocco Vezza 62,500 * 62,500 0 *
Rod Wood 62,500 * 62,500 0 *

</TABLE>

* Less than 1%.
** Assumes that all shares offered by this Prospectus are sold and no
beneficially owned shares are sold other than by this Prospectus.

-50-

<PAGE>

DESCRIPTION OF SECURITIES

The authorized securities of the Company consist of: (i) 100,000,000 shares
of Common Stock, par value $0.0001 per share (the "Common Stock"), (ii)
5,000,000 shares of Preferred Stock, par value $0.0001 per share (the "Preferred
Stock") and (iii) warrants to purchase an aggregate of 24,106 shares of Common
Stock at an exercise price of $0.56 per share (subject to adjustment) issued to
three investors in connection with the August 1996 bridge financing (the "1996
Bridge Loan Warrants"). In addition, the Company is currently involved in a
private placement offering (the "Private Placement") of 12,000,000 Units (the
"Units") (subject to increase or decrease), consisting of one share of Common
Stock and one Warrant to purchase one share of Common Stock (the "Private
Placement Warrants"). The terms of the Private Placement are described below
under the caption "Private Placement Common Stock and Warrants."

The following summary of certain provisions of the Common Stock, the
Preferred Stock, the 1996 Bridge Loan Warrants, the Private Placement Common
Stock and the Private Placement Warrants does not purport to be complete and is
subject to, and qualified in its entirety by, the provisions of the Company's
Amended and Restated Articles of Incorporation, the 1996 Bridge Loan Notes, and
that certain Confidential Private Placement Memorandum, as amended to date,
relating to the Private Placement where such rights are set forth in full, and
the provisions of applicable law.

COMMON STOCK

As of the date of this Prospectus, there were outstanding: (i) 41,173,161
shares of Common Stock held of record by approximately 2,000 shareholders,
(ii) options to purchase an aggregate of 6,345,655 shares of Common Stock, (iii)
the 1996 Bridge Loan Warrants, (iv) and (v) 45,530 shares of Common Stock earned
(but not yet issued) as payment for services rendered to the Company by
consultants. The holders of Common Stock are entitled to one vote for each
share held of record upon such matters and in such manner as may be provided by
law. Subject to preferences applicable to any outstanding shares of Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and liquidation
preferences of any outstanding shares of the Preferred Stock. Holders of Common
Stock have no preemptive rights or rights to convert their Common Stock into any
other securities. There are no redemption or sinking fund provisions applicable
to the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock issuable upon exercise of the 1996 Bridge Loan Warrants and the
Private Placement Warrants will be, fully paid and nonassessable. See "Dividend
Policy."

PREFERRED STOCK

As of the date of this Prospectus, no shares of Preferred Stock were
authorized or outstanding. The Board of Directors has the authority, without
further action by the shareholders, to issue Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. Preferred Stock could thus be issued
quickly with terms calculated to delay or prevent a change in control of the
Company or to serve as an entrenchment device for incumbent management.
Additionally, the issuance of Preferred Stock may have the effect of decreasing
the market price of the Common Stock, and may adversely affect the voting and
other rights of the holders of Common Stock. At present, Aquasearch has no
plans to issue any of the Preferred Stock.

-51-

<PAGE>

WARRANTS

1996 BRIDGE LOAN WARRANTS. In connection with the 1996 Bridge Loan, the
Company issued warrants to purchase a total of 24,106 shares of Common Stock at
an exercise price of $0.56 per share (subject to adjustment) to the holders of
the 1996 Bridge Loan Notes. The exercise price of the 1996 Bridge Loan Warrants
will be reduced to equal the purchase price paid for Units in the Private
Placement prior to the time the Bridge Loan Notes are paid in full in the event
that the purchase price of such Units is less than $0.56 per Unit. The 1996
Bridge Loan Warrants are entitled to certain registration rights with respect to
the Common Stock issuable upon exercise of the 1996 Bridge Loan Warrants. See
"--Registration Rights--Registration Rights of Holders of 1996 Bridge Loan
Warrants."

1996 BRIDGE LOAN NOTES

In August 1996, the Company issued $135,000 aggregate principal amount of
1996 Bridge Loan Notes to three investors to provide the Company with working
capital financing. The 1996 Bridge Loan Notes bear interest at 7.25% per annum
and are now due upon demand by the holders of the 1996 Bridge Loan Notes. The
Company issued warrants to purchase a total of 24,106 shares of Common Stock at
an exercise price of $0.56 per share (subject to adjustment) to the holders of
the 1996 Bridge Loan Notes. The exercise price of the 1996 Bridge Loan Warrants
will be reduced to equal the lowest purchase price paid for Units in the Private
Placement prior to the time the Bridge Loan Notes are paid in full in the event
that the purchase price of such Units is less than $0.56 per share. The 1996
Bridge Loan Warrants are entitled to certain registration rights with respect to
the Common Stock issuable upon exercise of the 1996 Bridge Loan Warrants. See
"--Registration Rights--Registration Rights of Holders of 1996 Bridge Loan
Warrants."

PRIVATE PLACEMENT COMMON STOCK AND WARRANTS

The Company is currently conducting a private offering of 12,000,000 Units
(subject to increase or decrease) to "accredited investors" as defined in Rule
501 under the Securities Act. Each Unit consists of one share of Common Stock
(the "Unit Common Stock"), and one redeemable Warrant to purchase one share of
Common Stock (the "Warrant Common Stock"). The Warrants are exercisable at
$1.00 per share, subject to adjustment, over a three-year period following the
date of closing (the "Closing Date") of the Private Placement. A registration
statement (the "Registration Statement") covering the resale to the public of
the Unit Common Stock and the Warrant Common Stock will be filed by the Company
within 90 days after the Closing Date. The Unit Common Stock, the Warrant
Common Stock and the Warrants will be separately transferable; however, only the
resale of the Unit Common Stock and the Warrant Common Stock will be covered by
the Registration Statement. The Warrants will be redeemable by the Company at
$.01 per Warrant during their three-year exercise period upon 30 days' notice
anytime that the closing bid price per share of the Common Stock exceeds $1.50
per share (subject to adjustment) for 20 trading days out of 30 consecutive
trading days ending on the third day prior to the date of the notice of
redemption.

The purchase price for the Units is determined by dividing the total dollar
amount tendered by each purchaser by the closing bid price of the Common Stock
on the NASD Electronic Bulletin Board minus $0.10 (the "Unit Purchase Price") on
the date such purchaser's funds (in the form of a check or wire transfer) are
received by either (i) First Honolulu Securities, Inc., as lead Placement Agent
or (ii) Wilson Sonsini Goodrich & Rosati, as Escrow Agent.

Because the purpose of the Private Placement is to enhance the financial
position of the Company without increasing the volatility of the trading price
of the Common Stock, prior to closing the sale of the Units by the Company to
each purchaser, the purchaser is required to deliver a written confirmation to
Wilson Sonsini Goodrich & Rosati, as Escrow Agent (i) confirming the accuracy of
the calculation of the number of Units to be delivered to such purchaser at such
closing based upon the formula previously described and (ii) representing and
warranting that the purchaser has not sold or otherwise transferred (subject to
certain exceptions) any shares of Aquasearch Common Stock during the period from
October 10, 1996

-52-

<PAGE>

through the date thereof and covenanting not to sell or otherwise transfer
(subject to certain exceptions) any shares of Aquasearch Common Stock from and
after the date thereof until the Private Placement terminates. The Company
reserves the right in its sole discretion to reject, in whole or in part, any
subscription for Units from a purchaser who has sold or otherwise transferred
(subject to certain exceptions) shares of Aquasearch Common Stock since
October 10, 1996.

REGISTRATION RIGHTS

REGISTRATION RIGHTS OF EXISTING COMMON STOCK HOLDERS. As of the date of
this Prospectus, the holders of an aggregate of 3,800,000 shares of Common Stock
purchased in a private placement in July 1995 (the "July 1995 Shares") and the
holders of 4,000,000 shares of Common Stock purchased in a private placement in
January 1996 (the "January 1996 Shares") , respectively, have certain demand
rights to register those shares under the Securities Act. The holders of the
July 1995 Shares have requested the Company to register their shares pursuant to
this registration statement and the holders of the January 1996 Shares may
request the Company to register their shares at any time after June 30, 1996.
The registration rights of the holders of the July 1995 Shares and the January
1996 Shares are in all other respects identical.

Upon the written request of the holders of a majority of the of the July
1995 Shares or the January 1996 Shares, as the case may be, the Company is
required to use its best efforts to prepare and file a registration statement
covering the aggregate number of shares requested to be registered. The holders
of the July 1995 Shares or the January 1996 Shares, as the case may be, are
entitled to only one demand registration with respect to their shares. The
costs and expenses of each such registration shall be payable as follows:
(i) the Company shall pay $10,000 and (ii) the holders of the shares of Common
Stock to be covered by such registration statement shall pay the balance pro
rata. The Company shall not be required to prepare and file a registration
statement until such time as the holders of the shares of Common Stock to be
covered by such registration statement as specified in the demand registration
request deposit funds with the Company sufficient, in the Company's reasonable
belief, to pay the costs for the registration estimated to exceed $10,000.

The holders of the July 1995 Shares and the January 1996 Shares are also
entitled to certain piggyback registration rights. If at any time the Company
proposes to register shares of Common Stock for sale by the Company, the Company
shall provide the holders of the July 1995 Shares and the January 1996 Shares
with at least thirty days notice prior to such filing. Upon the written request
of a holder of the July 1995 Shares or the January 1996 Shares, given within
five days after notice from the Company, the Company will take such action as is
required to cause such shares to be included in the registration statement to be
filed by the Company. The costs and expenses of all such registrations shall be
paid by the Company.

This Prospectus relates to the request by the holders of the July 1995
Shares to file a registration statement covering the resale to the public of
such shares. Simultaneously with the filing of this registration statement,
the Company is engaged in the Private Placement of the Units. There can be no
assurance that the market price of the Common Stock will not be adversely
affected by the Private Placement at the time that this registration statement
is declared effective by the Commission or that the market price of the Common
Stock will not be adversely affected in the future at such time as the
registration statement covering the sale of the shares underlying the Units sold
in the Private Placement is declared effective by the Commission or any future
registration statement covering the sale of the January 1996 Shares is declared
effective by the Commission. See "Risk Factors--Shares Eligible for Future
Sale; Registration Rights."

REGISTRATION RIGHTS OF HOLDERS OF 1996 BRIDGE LOAN WARRANTS. Upon the
closing of the Private Placement financing by the Company, the holders of the
1996 Bridge Loan Warrants will become a party to the same Registration Rights
Agreement as the purchasers of the Units in the Private Placement and will enjoy
the same rights and be subject to the same obligations with respect to the
registration and sale of the Common Stock issuable upon exercise of the 1996
Bridge Loan Warrants as the purchasers of the Units in the Private Placement.

-53-

<PAGE>

TRANSFER AGENT

The Transfer Agent and Registrar for the Common Stock and the Warrants is
American Securities Transfer & Trust, Inc.

PLAN OF DISTRIBUTION

The sale of all or a portion of the shares of Common Stock offered hereby
by the Selling Shareholders may be effected from time to time at prevailing
market prices at the time of such sales, at prices related to such prevailing
prices, at fixed prices that may be changed or at negotiated prices. The
Selling Shareholders may effect such transactions by selling directly to
purchasers in negotiated transactions, to dealers acting as principals or
through one or more brokers, or any combination of these methods of sale.
Dealers or brokers may receive compensation in the form of discounts,
concessions or commissions from the Selling Shareholders. The Selling
Shareholders and any brokers or dealers that participate in the distribution may
under certain circumstances be deemed to be "underwriters" within the meaning of
the Securities Act, and any commissions received by such brokers or dealers and
any profits realized on the resale of shares by them may be deemed to be
underwriting discounts and commissions under the Securities Act. The Company
and the Selling Shareholders may agree to indemnify such brokers or dealers
against certain liabilities, including liabilities under the Securities Act. In
addition, the Company has agreed to indemnify the Selling Shareholders and any
underwriter with respect to the shares of Common Stock offered hereby against
certain liabilities, including, without limitation, certain liabilities under
the Securities Act, or, if such indemnity is unavailable, to contribute toward
amounts required to be paid in respect of such liabilities.

The Company has advised the Selling Shareholders that the anti-manipulative
Rules 10b-6 and 10b-7 promulgated under the Exchange Act may apply to sales in
the market, has furnished the Selling Shareholders with a copy of these Rules
and has informed the Selling Shareholders of the possible need for delivery of
copies of this Prospectus.

To the extent required under the Securities Act or the rules of the
Commission, a supplemental prospectus will be filed, disclosing (a) the name of
any such brokers or dealers, (b) the number of shares involved, (c) the price at
which such shares are to be sold, (d) the commissions paid or discounts or
concessions allowed to such brokers or dealers, where applicable, (e) that such
brokers or dealers did not conduct any investigation to verify the information
set out or incorporated by reference in this prospectus, as supplemented, and
(f) other facts material to the transaction.

There is no assurance that the Selling Shareholders will sell any or all of
the shares of Common Stock offered hereby.

The Company has agreed to pay certain costs and expenses incurred in
connection with the registration of the shares of Common Stock offered hereby,
except that the Selling Shareholders shall be responsible for all selling
commissions, transfer taxes and related charges in connection with the offer and
sale of such shares.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich &
Rosati, Palo Alto, California.

-54-

<PAGE>

EXPERTS

The consolidated financial statements of Aquasearch Corporation as of
October 31, 1995, 1994, and 1993 and the related statements of loss and
accumulated deficit, cash flows, and stockholders' equity for the then ended and
for the period from inception to October 31, 1995, have been included herein and
in the Registration Statement in reliance on the report of Johnson, Holscher &
Company, P.C., independent certified public accountants, and upon the authority
of said firm as experts in accounting and auditing.

AVAILABLE INFORMATION

Aquasearch is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files annual and quarterly reports and other information with the
Securities and Exchange Commission (the "Commission"). The Company has filed a
registration statement on Form SB-2 (herein, together with all amendments and
exhibits referred to as the "Registration Statement") with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information, exhibits and schedules set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock, reference is hereby made to the Registration Statement, exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete and, in each instance, if such contract or document is filed as an
exhibit to the Registration Statement or pursuant to a filing under the Exchange
Act, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement or pursuant to a filing under the Exchange
Act, and each such statement being qualified in all respects by such reference
to such exhibit. Copies of such materials may be inspected, without charge, at
the offices of the Commission, or obtained at prescribed rates from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at Seven World Trade Center (13th Floor), New York, New York
10019.

-55-

<PAGE>

FINANCIAL STATEMENTS

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors.................................... F-1

Audited Financial Statements:
Balance Sheets.................................................... F-2
Statements of Loss and Accumulated Deficit........................ F-3
Statements of Cash Flows.......................................... F-4
Statements of Stockholders' Equity ............................... F-5
Notes to Financial Statements..................................... F-6

<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Aquasearch, Inc.
San Diego, California

We have audited the accompanying balance sheets of Aquasearch, Inc. (a
development stage enterprise) (a Colorado corporation) as of October 31, 1995,
1994 and 1993, and the related statements of loss and accumulated deficit, cash
flows, and stockholders' equity for the years then ended and for the period from
inception to October 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aquasearch, Inc. (a development
stage enterprise) as of October 31, 1995, 1994 and 1993, and the results of its
operations, cash flows, and changes in stockholders' equity for the years then
ended and for the period from inception to October 31, 1995, in conformity with
generally accepted accounting principles.

Englewood, Colorado
December 2, 1995 except
Note 5 dated January 26, 1996 /s/ Johnson, Holscher & Company
Professional Corporation

F-1

<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS

OCTOBER 31, 1995, 1994, AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS

CURRENT ASSETS
Cash.................................................................. $ 27,208 $ 1,213 $ 146,585
Cash in escrow........................................................ - 85,000 -
Stock subscriptions receivable........................................ 35,000 - -
Prepaid expenses...................................................... 9,177 - -
Refundable deposits................................................... 2,535 1,207 -
---------- ---------- -----------
Total current assets................................................ 73,920 87,420 146,585

PLANT AND EQUIPMENT - AT COST
Plant................................................................. 408,219 - -
Other equipment....................................................... 7,740 - -
Less accumulated depreciation......................................... (320) - -
---------- ---------- -----------
Net plant and equipment............................................. 415,639 - -
---------- ---------- -----------
Total assets....................................................... $ 489,559 $ 87,420 $ 146,585
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable...................................................... $ 233,181 $ 21,866 $ 15,441
Deposits held......................................................... - 85,000 -
---------- ---------- -----------
Total current liabilities........................................... 233,181 106,866 15,441

STOCKHOLDERS' EQUITY
Common stock ($0.0001 par value, 50,000,000 shares authorized,
32,583,688 outstanding)............................................... 4,379 3,467 3,341
Additional paid-in capital............................................ 1,704,785 1,141,060 1,051,686
Deficit accumulated during the development stage...................... (1,452,786) (1,163,973) (923,883)
---------- ---------- -----------
Total stockholders' equity (deficit)................................ 256,378 (19,446) 131,144
---------- ---------- -----------
Total liabilities and stockholders' equity...................... $ 489,559 $ 87,420 $ 146,585
---------- ---------- -----------
---------- ---------- -----------

</TABLE>

The accompanying notes are an integral part of the financial statements

F-2

<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF LOSS AND ACCUMULATED DEFICIT

FOR THE YEARS ENDED OCTOBER 31, 1995, 1994, AND 1993 AND FOR THE PERIOD FROM
INCEPTION TO OCTOBER 31, 1995

<TABLE>
<CAPTION>
From Inception to
October 31,
1995 1995 1994 1993
----------------- --------- -------- --------
<S> <C> <C> <C> <C>
OPERATIONS
Sales.......................................... - - - -
Cost of sales.................................. - - - -
Research and development costs................. 444,165 89,264 27,063 4,188
-------------- ---------- ---------- ----------
Gross profit (loss)............................ (444,165) (89,264) (27,063) (4,188)

General and administrative expenses............ 794,495 195,171 115,131 85,072
-------------- ----------- ---------- ----------
Earnings (loss) from operations................
(1,238,660) (284,435) (142,194) (89,260)

OTHER INCOME (EXPENSE)
Interest....................................... (12,244) (1,762) - (2,137)
Other.......................................... - - - -
Investment in joint venture.................... (147,096) - (97,096) (50,000)
-------------- ----------- ---------- ----------
Total other income and (expense)............... (159,340) (1,762) (97,096) (52,137)
-------------- ----------- ---------- ---------
Earnings (loss) before income taxes
and extraordinary item...................... (1,398,000) (286,197) (239,290) (141,397)

Extraordinary item - loss on write down (14,502) - - -
of assets to liquidation basis..............
-------------- ---------- ---------- ----------
Earnings (loss) before income taxes........... (1,412,502) (286,197) (239,290) (141,397)

Federal and state income taxes................. (6,016) (2,616) (800) (800)
-------------- ---------- ---------- ----------
Net Income (Loss).............................. (1,418,518) (288,813) (240,090) (142,197)

ACCUMULATED DEFICIT:
Balance, beginning of period................ (34,268) (1,163,973) (923,883) (781,686)
-------------- ----------- ---------- ----------
Balance, end of period...................... (1,452,786) (1,452,786) (1,163,973) (923,883)
-------------- ---------- ---------- ----------
-------------- ---------- ---------- ----------
Loss per share................................. ($0.08) ($0.01) ($0.01) ($0.01)
-------------- ---------- ---------- ----------
-------------- ---------- ---------- ----------
Weighted average shares outstanding............ 18,346,629 25,541,021 22,782,063 20,132,100
-------------- ----------- ---------- ----------
-------------- ----------- ---------- ----------

</TABLE>

The accompanying notes are an integral part of the financial statements

F-3
<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED OCTOBER 31, 1995, 1994, AND 1993 AND FOR THE PERIOD FROM
INCEPTION TO OCTOBER 31, 1995

<TABLE>
<CAPTION>
From Inception to
October 31,
1995 1995 1994 1993
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss..................................... $(1,418,518) $ (288,813) $ (240,090) $ (142,197)
Adjustments to reconcile net loss to
net cash provided by operating activities:

Amortization................................... 3,527 - - -

Depreciation.................................... 6,027 320 - -
Expenses paid with common stock........... 183,365 12,998 82,000 56,287
Loss on write down of assets to
liquidation basis..................... 5,392 - - -
Changes in:
Other current assets.................. (11,511) (10,505) (1,207) -

Receivables..................................... (35,000) (35,000) - -
Accounts payable...................... 149,484 110,536 6,425 (13,979)
----------- ---------- ------------ ------------
Cash used by operating activities........ (1,117,234) (210,464) (152,872) (99,889)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets...................... (325,543) (315,180) - -
----------- ---------- ------------ ------------
Cash used by investing activities........ (325,543) (315,180) - -

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common
stock.......................................... 1,489,593 571,580 7,500 246,430
Increase in notes payable................... 29,800 - - -
Offering costs.............................. (49,462) (19,941) - -
----------- ---------- ------------ ------------
Cash provided by financing activities... 1,469,931 551,639 7,500 246,430
----------- ---------- ------------ ------------
Net increase (decrease) in cash................ 27,154 25,995 (145,372) 146,541

Cash - beginning of the period................. 54 1,213 146,585 44
----------- ---------- ------------ ------------
Cash - end of the period....................... $ 27,208 $ 27,208 $ 1,213 $ 146,585
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes................................. $ 4,400 $ 800 $ 800 $ 800

Interest........................................ $ 12,244 $ 1,762 $ - $ 2,137

</TABLE>

The accompanying notes are an integral part of the financial statements

F-4

<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF STOCKHOLDERS' EQUITY

FROM INCEPTION TO OCTOBER 31, 1995

<TABLE>
<CAPTION>
Common Stock
------------------------------ Additional Total
Number of Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
----------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance October 31, 1988........ 20,000,000 $ 2,000 $ 72,730 $ (101,984) $ (27,254)

Issuance of stock for cash
($0.05 per share)
January 12, 1989.......... 4,000,000 400 165,291 - 165,691

Treasury shares acquired at
no cost, January 1989..... (1,207,972) - - - -

Exercise of A warrants for cash
($0.12 per share) March 3,
1989...................... 55,000 5 6,595 - 6,600

Exercise of A warrants for cash
($0.12 per share) April 21,
1989...................... 95,000 10 11,390 - 11,400
Exercise of A warrants for cash
($0.12 per share) June 5,
1989...................... 20,000 2 2,398 - 2,400

Treasury shares acquired at
no cost, June
1989..................... (601,912) - - - -

Exercise of A warrants for cash
($0.12 per share) September
1989..................... 177,500 19 21,281 - 21,300

Exercise of A warrants for cash
($0.12 per share)
August 28,
1989...................... 145,000 14 17,386 - 17,400

Exercise of A warrants for cash
($0.12 per share)
October 30,
1989...................... 63,500 6 7,614 - 7,620

Treasury shares acquired at
no cost, October
1989...................... (9,388,954) - - - -

Rent provided at no
charge......................... - - 1,000 - 1,000

</TABLE>

The accompanying notes are an integral part of the financial statements

F-5

<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF STOCKHOLDERS' EQUITY

FROM INCEPTION TO OCTOBER 31, 1995
(CONTINUED)
<TABLE>
<CAPTION>

COMMON STOCK
------------------------------ ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Loss for the year ended
October 31, 1989............................. - - - (183,333) (183,333)
---------- ----- ------- -------- --------

Balance October 31, 1989........................ 13,357,162 2,456 305,685 (285,317) 22,824

Exercise of A warrants for cash
($0.12 per share) December 1989............... 390,000 39 41,440 - 41,479

Exercise of A warrants for cash
($0.12 per share) January 1990................ 224,000 23 26,857 - 26,880

Exercise of A warrants for cash
($0.12 per share) February 9, 1990........... 80,000 8 9,592 - 9,600

Exercise of A warrants for cash
($0.12 per share) April 25,
1990.......................................... 30,000 3 3,597 - 3,600

Exercise of A warrants for cash
($0.12 per share) May 14, 1990................ 30,000 3 3,597 - 3,600

Issuance of stock for
services ($0.05 per share) May 31, 1990....... 300,000 30 12,778 - 12,808

Exercise of A warrants for cash
($0.12 per share) June 28, 1990............... 15,000 1 1,789 - 1,790

Issuance of restricted stock for
cash ($0.07 per share)
August 8, 1990................................ 140,000 14 9,786 - 9,800

</TABLE>

The accompanying notes are an integral part of the financial statements

F-6

<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF STOCKHOLDERS' EQUITY

FROM INCEPTION TO OCTOBER 31, 1995
(CONTINUED)
<TABLE>
<CAPTION>

Exercise of A warrants for cash
($0.12 per share) August
1990...................................... 110,000 11 13,169 - 13,180

Services provided at no charge
August 27, 1990........................... - - (263) - (263)

Exercise of A warrants for cash
($0.12 per share) September 5, 1990....... 160,000 16 19,114 - 19,130

Exercise of A warrants for cash
($0.12 per share) October 1990............ 1,753,000 175 209,385 - 209,560

Rent provided at no charge.................. - - 1,000 - 1,000

Loss for the year ended
October 31, 1990.......................... (163,839) (163,839)

----------- --------- ----------- ------------- ---------------
Balance October 31, 1990.................... 16,589,162 2,779 657,526 (449,156) 211,149

Issue stock in consideration for loans
($0.04 per share) September
1991...................................... 290,000 29 11,571 - 11,600

Sale of restricted stock for
cash ($0.04 per share) October 1991....... 125,000 13 4,988 - 5,000

Rent provided without charge................ 1,000 - 1,000

Loss for the year........................... (251,401) (251,401)

----------- --------- ----------- ------------- ---------------
Balance October 31, 1991.................... 17,004,162 2,821 675,085 (700,557) (22,652)

</TABLE>

The accompanying notes are an integral part of the financial statements

F-7

<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF STOCKHOLDERS' EQUITY

FROM INCEPTION TO OCTOBER 31, 1995
(CONTINUED)
<TABLE>
<CAPTION>

COMMON STOCK
-------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Restricted stock for past
services ($0.04 per share)
November 1991........................... 34,000 3 1,357 - 1,360

Restricted stock for services
($0.01 per share)
February 1992........................... 247,500 25 2,900 - 2,925

Restricted stock for services
($0.04 per share)
February 1992........................... 12,000 1 479 - 480

Restricted stock for cash ($0.15
per share)
February 1992........................... 20,000 2 2,998 - 3,000

Restricted stock for services
($0.04 per share)
May 1992................................ 10,000 1 398 - 399

Restricted stock for services
($0.0001 per share)
August 1992............................. 150,000 15 - - 15

Rent provided without charge
during the year........................... - - 1,000 - 1,000

Loss during the - - - (81,128) (81,128)
year......................................
----------- --------- ----------- ------------- ---------------
Balance October 31, 1992.................. 17,477,662 2,868 684,217 (781,685) (94,601)

Sale of stock ($0.08 per share)
February 1993............................ 975,000 98 73,367 - (21,136)

Sale of stock ($0.08 per share)
April 1993............................... 2,200,000 220 170,704 - 149,788

</TABLE>

The accompanying notes are an integral part of the financial statements

F-8

<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF STOCKHOLDERS' EQUITY

FROM INCEPTION TO OCTOBER 31, 1995
(CONTINUED)
<TABLE>
<CAPTION>

COMMON STOCK
------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>

Stock issued for services ($0.08
per share)
May 1993............................ 673,751 68 53,833 - 203,689

Conversion of notes and advances
for stock ($0.08 per share)
May 1993............................ 861,900 87 69,315 - 273,091
Rent provided at no charge............ 250 - 273,341

Loss for the period................... (142,197) 131,144

Balance October 31, 1993.............. 22,188,313 3,341 1,051,686 (923,883) 131,144
----------- --------- ----------- ------------- ---------------
Stock issued ($0.03 per share)
January 1994........................ 250,000 25 7,475 - 7,500

Stock issued for services
($0.08 per share)
May 1994............................ 775,000 76 61,924 - 62,000

Stock issued for services
($0.08 per share)
June 1994........................... 250,000 25 19,975 - 20,000

Loss for the year ended
October 31, 1994.................... (240,090) (240,090)

----------- --------- ----------- ------------- ---------------
Balance October 31, 1994.............. 23,463,313 3,467 1,141,060 (1,163,973) (19,446)
Stock issued for cash ($0.10 per
share)
March 1995.......................... 1,710,000 171 166,408 - 166,579

Stock issued for services
($0.10 per share)
June 1995........................... 50,000 5 4,995 - 5,000

</TABLE>

The accompanying notes are an integral part of the financial statements

F-9

<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF STOCKHOLDERS' EQUITY

FROM INCEPTION TO OCTOBER 31, 1995
(CONTINUED)
<TABLE>
<CAPTION>

Stock subscribed for cash
($0.0625 per share)
July 1995............... 3,200,000 320 199,680 - 200,000

Stock issued for cash ($0.08 per
share)
September 1995........... 2,712,500 271 184,795 - 185,066

Reissue stock previously
canceled at no cost
October 1995............. 1,320,000 132 (132) - -

Stock issued for services
(valued at $0.0625 per
share)
October 1995............. 127,875 13 7,979 - 7,992
Loss for the year............. (288,813) (288,813)

----------- --------- ----------- ------------- ---------------
Balance October 31, 1995...... 32,583,688 $ 4,379 $1,704,785 $(1,452,786) $ 256,378

----------- --------- ----------- ------------- ---------------
----------- --------- ----------- ------------- ---------------

</TABLE>

The accompanying notes are an integral part of the financial statements.

F-10

<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

OCTOBER 31, 1995, 1994, AND 1993

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS ACTIVITY
The Company was formed to design and market aquaculture technology. The
Company has one contract with Svenska Foder AB which runs for three years
from the first product shipment, which has not yet occurred. Because no
significant sales have occurred and because the Company has devoted most of
its efforts to research and development, the Company is considered to be in
the development stage.

INCOME TAXES
Since its inception the Company has incurred net operating losses.
Accordingly, no provision has been made for income taxes.

LOSS PER SHARE
Loss per share was computed on a weighted average basis of shares
outstanding during the period.

CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.

STOCK ISSUED FOR SERVICES
Stock issued for services is based on management's estimate of the market
price for the Company's restricted stock at the date of issue.

PLANT AND EQUIPMENT
Plant and equipment is stated at cost. Depreciation is provided on the
straight line method over ten years for the plant and five years for all
other equipment.

2. COMMON STOCK, WARRANTS AND OPTIONS

On January 12, 1989, the Company sold to the public 4,000,000 shares of its
$0.0001 par value common stock. The shares were sold as part of a unit for
$0.05 per unit. Each unit consisted of one share of common stock and one
common stock purchase warrant ("A" warrant). The "A" warrant entitled the
holder thereof to purchase one additional share of common stock and one
common stock purchase warrant ("B" warrant) for $0.12 per share. The "B"
warrant entitles the holder to purchase one additional share of common
stock for $1.00. The warrants may be redeemed by the Company at $0.0001
per warrant. The offering netted $165,691 to the Company on the date of
closing.

During the years ended October 31, 1989 and 1990, 3,348,000 "A" warrants
were exercised at $0.12 per share which netted the Company $393,523 (after
issue costs). All remaining "A" warrants have been canceled. At
October 31, 1995, there were 3,348,000 "B" warrants outstanding. These
warrants are due to expire on March 15, 1996, but this date may be extended
by the Board of Directors.

F-11
<PAGE>

The Company has granted stock options to two employees to purchase up to
100,000 shares of common stock. Additionally, the Board of Directors has
approved an option to Mark Huntley, the president and chief executive
officer of the Company, to acquire enough stock to bring his shares to 15%
of the total shares outstanding. The Board has also approved options to
three other key employees and stockholders which allows each of them to
acquire enough stock to bring each of their total shares to 5% of the total
shares outstanding.

3. RELATED PARTY TRANSACTIONS

The Company has paid rent to an officer/stockholder for the use of office
space during the last three years as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED AMOUNT
------------------ -------
<S> <C>
1995 $ 4,260
1994 $ 8,800
1993 $ 20,330
</TABLE>

During the year ended October 31, 1991, the Company borrowed $29,000 from
stockholders. The four separate notes were unsecured, carried an interest
rate of 12% and were due in August, 1992. As an inducement for the loans,
the Company issued a total of 290,000 shares of restricted stock to the
lenders. For purposes of the financial statements this stock was valued at
$0.04 per share based on recent sales of restricted stock. Loan issue
costs of $5,322 were charged to interest expense in 1991 and unamortized
loan issue costs of $6,693 were written off. During the year ended
October 31, 1993 these loans were converted to 430,650 shares of common
stock.

During the year ended October 31, 1995, the Company reissued 1,320,000
shares of common stock to Mark Huntley, the president and chief executive
officer of the corporation. These are shares which he had previously
returned to the Company.

The Company has also issued restricted stock for services to various
officers as follows:

<TABLE>
<CAPTION>
NUMBER OF
YEAR SHARES VALUE
---- ----------- ----------
<S> <C> <C>
1995 177,875 $12,992
1994 1,025,000 $82,000
1993 650,938 $52,075
1992 300,000 $ 30

</TABLE>

F-12

<PAGE>

4. INCOME TAXES

Since its formation the Company has incurred net operating losses. These
losses total approximately $1,201,000 and are due to expire between the
years 1999 and 2011.

The Company also has a research credit carryover totaling $28,969 which
expires between the years 2003 and 2006.

5. GOING CONCERN

At October 31, 1995, the Company had incurred net operating losses totaling
$(1,452,786) over the years. As of that date the Company had a working
capital deficit of $(159,261). During December 1995 and January 1996, the
Company sold additional shares of restricted stock which were sufficient to
pay the accounts payable at October 31, 1995. As of January 24, 1996 the
Company's unaudited balance sheet showed cash of $332,537 and working
capital of $256,601. This situation combined with the Company's plans to
sell additional shares of stock lead management to believe that the Company
has sufficient resources to operate through October 1996.

The Company has substantially completed construction of a one acre
production facility at the Hawaii Ocean and Technology Business Park in
Kailua-Kona, Hawaii. The Company has a signed contract with Svenska Foder
AB, subsidiary of Cultor Group, a European producer of animal feed. The
contract is a three year contract for the production of astaxanthin, to be
used as a supplement in poultry feed. Additionally, Svenska Foder has been
granted worldwide distribution rights for the product for the first year of
the contract, but such rights will only be extended provided that purchases
of substantially increased amounts above the contract minimum. Management
of Aquasearch, Inc. estimates the Kona production facility is capable of
producing more than required under the Svenska contract.

6. INVESTMENT IN OCEANCOLOR

In March, 1993, the Company invested $50,000 in a joint venture
(OceanColor, Inc.) with Cyanotech Corporation. Aquasearch and Cyanotech
each owned 50% of OceanColor. During the year ended October 31, 1994,
Aquasearch, Inc. invested an additional $97,100 in this joint venture. In
November 1994, the joint venture was dissolved with the licensing rights to
Aquasearch, Inc. technology reverting entirely to Aquasearch. At the time
of dissolution, there was approximately $7,500 worth of equipment in the
joint venture which was distributed to Aquasearch.

7. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES

During the year ended October 31, 1995, the Company constructed its plant
facility at a cost of $408,219. At year end there remained in accounts
payable approximately $100,800 of this cost. Accordingly, this amount
remaining in accounts payable has been removed from cash paid for the
purchase of fixed assets on the statement of cash flows.

F-13

<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Eight Section (b) of the Registrant's Articles of Incorporation
provides for the indemnification of officers and directors to the extent
permitted by law and further provides that such person shall not be liable to
the corporation for any loss or damage suffered by the corporation on account of
any action taken by him as a director or officer of the corporation if he acted
in good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to a criminal matter, if he
had no reasonable cause to believe that his conduct was unlawful.

The Registrant has entered into indemnification agreements with its
directors and executive officers, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.

ITEM 25 . OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission registration
fee.

<TABLE>

<S> <C>
Securities and Exchange Commission registration fee.... $ 322.00

Printing and engraving expenses........................ 1,000.00

Legal fees and expenses................................ 40,000.00

Accounting fees and expenses........................... 2,000.00

Miscellaneous expenses................................. 678.00
------------
Total.................................................. $ 44,000
------------
------------

</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

Over the past three years, the Company has sold shares of common stock on
several occasions without registering the securities under the Securities Act.

In March 1995, the Company issued 1,710,000 shares of common stock in a
private placement (at $0. 10 per share) netting the Company $171,000. No
underwriters were used. The Company did not publicly offer the securities or
register the securities under the Securities Act, but limited subscriptions to
"accredited investors" (including officers and directors of the Company) under
Rule 505 of Regulation D. The offering proceeds were used to initiate
construction of the Company's production facility at Keahole Point.

In June 1995, the Company issued 50,000 shares of common stock to Robert
Bidigare, Ph.D., for services rendered in connection with the analysis of
scientific data emanating from feed trials with Cultor Ltd. The shares were
issued to Dr. Bidigare without registration pursuant to the exemption provided
by Section 4(2) of the Securities Act.

In July 1995, after the contract with Svenska Foder was signed, the Company
also issued 3,200,000 shares of common stock pursuant to a private placement (at
$0.0625 per share), netting the Company $165,000 cash and a $35,000 receivable.
No underwriters were used and the Company did not publicly offer the securities
or register the securities under the Securities Act. The Company sold the
shares of common stock to a "non-U.S. person" pursuant to a Regulation S
offering.

In September 1995, the Company issued 2,562,500 shares of common stock
pursuant to a private placement (at $0.08 per share), netting the Company
$175,000. No underwriters were used and the Company did not publicly offer the
securities or register the securities

II-1

<PAGE>

under the Securities Act. The Company sold the shares of common stock to
"accredited investors" pursuant to an offering under Rule 505 of Regulation D.
The terms of the offering included piggyback registration rights and limited
demand registration rights.

The proceeds from the July and September 1995 private placements were used
to accelerate the construction timetable of the Company's production facility at
Keahole Point and increase the scope of the project.

In January 1996, the Company issued 4,000,000 shares of common stock
pursuant to a private placement (at $0.15 per share), netting the Company
approximately $600,000. No underwriters were used and the Company did not
publicly offer the securities or register the securities under the Securities
Act. The Company sold the shares of common stock to "accredited investors"
pursuant to an offering under Rule 505 of Regulation D. The terms of the
offering included piggyback registration rights and limited demand registration
rights.

In September of 1996, the Company commenced a private placement of
12,000,000 Units (subject to increase or decrease) to "accredited investors" as
defined in Rule 501 under the Securities Act. Each Unit consists of one share
of Common Stock, and one redeemable Warrant to purchase one share of Common
Stock. The Warrants are exercisable at $1.00 per share, subject to adjustment,
over a three year period following the date of closing (the "Closing Date") of
the Private Placement. A registration statement covering the resale to the
public of the Unit Common Stock and the Warrant Common Stock will be filed by
the Company within 90 days after the Closing Date. The Unit Common Stock, the
Warrant Common Stock and the Warrants will be separately transferable; however,
only the resale of the Unit Common Common Stock and the Warrant Common Stock
will be covered by the Registration Statement. The Warrants will be redeemable
by the Company at $.01 per Warrant during their three-year exercise period upon
30 days notice anytime that the closing bid price per share of the Common Stock
exceeds $1.50 per share (subject to adjustment) for 20 trading days out of 30
consecutive trading days ending on the third day prior to the date of the notice
of redemption.

ITEM 27. EXHIBITS
3.1* Articles of Incorporation of Registrant

3.2* By-laws of Registrant

5.1+ Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C.

10.1# Distribution and Development Agreement between Cultor Ltd. and
Aquasearch, Inc., dated May 14, 1996

10.2# Stock Subscription Agreement between Cultor Ltd. and Aquasearch,
Inc., dated May 14, 1996

11.1 Statement Regarding Computation of Per Share Earnings

15.1 Letter of Unaudited Interim Financial Information

23.1 Consents of Experts and Counsel

24.1 Power of Attorney

II-2

<PAGE>

27.1 Financial Data Schedule

* Incorporated by reference to the exhibit filed with Registrant's Annual
Report on Form 10-KSB filed October 31, 1995.
+ To be filed by amendment.
# Incorporated by reference in the exhibit filed with Registrant's Current
Report on Form 8-K filed September 13, 1996.

ITEM 28. UNDERTAKING

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer of controlling persons of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned Registrant hereby undertakes:

1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement.

2. That, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

3. That, for purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

4. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

II-3

<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Honolulu, State of Hawaii, on this 12th day of
November, 1996.

AQUASEARCH, INC.

/s/ MARK E. HUNTLEY
--------------------------------------------
Mark E. Huntley
President and Chief Executive Officer

Pursuant to the requirements of the
Securities Act of 1933, this Registration Statement has been signed by the
following persons in the capacities indicated on the date signed by the Company:

Signature Title
---------------------------------- ----------------------------

/s/ MARK E. HUNTLEY Chairman of the Board,
-------------------------- Chief Executive Officer and
(Mark E. Huntley) President (Principal Executive
Officer)

/s/ PEARN P. NIILER Director
--------------------------
(Pearn P. Niiler)

/s/ MICHAEL C.B. SMITH Director
--------------------------
(Michael C.B. Smith)

/s/ MARTIN B. BUSSELL Chief Financial Officer
--------------------------
(Martin B. Bussell)

II-4

<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibits Page
<S> <C>
3.1 Articles of Incorporation of Registrant.............................................................. (A)

3.2 By-Laws of Registrant................................................................................. (A)

5.1 Opinion of Wilson, Sonsini, Goodrich & Rosati, P.C.................................................... (B)

10.1 Distribution and Development Agreement between Cultor Ltd. and Aquasearch, Inc., dated May 14,
1996.................................................................................................. (C)

10.2 Stock Subscription Agreement between Cultor Ltd. and Aquasearch, Inc., dated May 14,
1996.................................................................................................. (C)

23.1 Consents of Experts and Counsel....................................................................... (__)

27.1 Financial Data Schedule............................................................................... (__)

</TABLE>

(A) Incorporated by reference to the exhibit filed with Registrant's Annual
Report on Form 10-KSB filed October 31, 1995.
(B) To be filed by amendment.
(C) Incorporated by reference to the exhibit filed with Registrant's Current
Report on Form 8-K filed September 13, 1996.

<PAGE>

CONSENT OF JOHNSON, HOLSCHER & COMPANY, P.C.

We consent to the reference of our firm under the captions "Consolidated
Financial Statements" and "Experts" and to the use of our report dated December
2, 1995 except as to Note 11, as to which the date is January 26, 1996, in the
Registration Statement (Form SB-2) and the related Prospectus of Aquasearch,
Inc. for the registration of 2,562,500 shares of its Common Stock.

/s/ JOHNSON, HOLSCHER & COMPANY
Professional Corporation

Englewood, Colorado
November 12, 1996

II-6

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheets and statements of operations of the Company's 10-QSB for the nine months
ended July 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 46,464
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 60,825
<PP&E> 623,290
<DEPRECIATION> 21,343
<TOTAL-ASSETS> 662,772
<CURRENT-LIABILITIES> 286,617
<BONDS> 0
0
0
<COMMON> 5,063
<OTHER-SE> 371,092
<TOTAL-LIABILITY-AND-EQUITY> 662,772
<SALES> 10,000
<TOTAL-REVENUES> 10,000
<CGS> 28,144
<TOTAL-COSTS> 805,596
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 793,111
<INCOME-TAX> 213
<INCOME-CONTINUING> (793,324)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (793,324)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0

</TABLE>