AQUASEARCH INC, SB-2, 1998-09-30

AQUASEARCH INC
SB-2, 1998-09-30
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

Previous: FRANKLIN VALUEMARK FUNDS, 485APOS, 1998-09-30

Next: INSURED MUNICIPALS INCOME TR & INVS QUA TAX EX TR MUT SER 91, 24F-2NT, 1998-09-30

<PAGE>

As filed with the Securities and Exchange Commission on September 30, 1998
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 33-034535
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
OR ORGANIZATION) CODE NUMBER)

73-4460 QUEEN KA'AHUMANU HIGHWAY
SUITE 110
KAILUA-KONA, HAWAII 96740
(808) 326-9301
(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
(808) 326-9301

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
--------------------------
COPIES TO:
STEVEN L. BERSON, ESQ.
MICHAEL S. RUSSELL, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CA 94304
(650) 493-9300
FAX: (650) 496-4088
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time as the selling shareholders may decide.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
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. / /
Pursuant to Rule 416, there are also being registered such additional
shares and warrants as may become issuable pursuant to the anti-dilution
provisions of the warrants.

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

<PAGE>
CALCULATION OF REGISTRATION FEE

- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO TO BE PRICE OFFERING REGISTRATION
BE REGISTERED REGISTERED PER SECURITY (1) PRICE (1) FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
par value $0.0001 per share (2)...... 20,075,648 $0.20 $4,015,130 $1,184.00
- -----------------------------------------------------------------------------------------------------------
Common Stock
par value $0.0001 per share (3)...... 3,418,713 $0.50 $1,709,357 $ 504.00
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of computing the registration fee.
(2) Consists of shares of Common Stock issued upon conversion of Convertible
Notes sold along with Common Stock Purchase Warrants in private
transactions from June 1997 to September 1998.
(3) Consists of 3,418,713 shares of Common Stock issuable upon exercise of
Common Stock Purchase Warrants issued along with Convertible Notes in
private transactions from June 1997 to September 1998.
----------------------------
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

<TABLE>
<CAPTION>
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. Risk Factors.................................... Risk Factors; Inside
Front Cover Page of
Prospectus
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Determination of Offering
Price
6. Dilution........................................ Dilution
7. Selling Security Holders........................ Selling Security Holders
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....................... Capitalization;
Description of Securities
13. Interest of Named Experts and Counsel........... Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.. Not Applicable
15. Organization Within Last Five Years............. Not Applicable
16. Description of Business......................... 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.. Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters............................ Outside Front Cover Page
of Prospectus; 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>

1
<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 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.

2
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1998

AQUASEARCH, INC.

23,494,361 SHARES OF COMMON STOCK

This Prospectus covers the resale to the public by certain holders of
securities of Aquasearch, Inc. (the "Company") named herein (the "Selling
Security Holders") of (i) 20,075,648 shares (the "Shares") of Common Stock, par
value $0.0001 per share of the Company (the "Common Stock") and (ii) 3,418,713
additional shares of Common Stock (the "Warrant Shares") issuable upon exercise
of certain warrants (the "1998 Warrants") to purchase Common Stock. Because of
the possibility of antidilution adjustments to the exercise price of the 1998
Warrants, the number of shares of Common Stock issuable upon such exercise and
subject to this Prospectus is indeterminate and this Prospectus relates to the
resale of such entire indeterminate number of shares of Common Stock. The
Shares and the Warrant Shares are hereinafter referred to collectively as the
"Securities."

The securities offered by this Prospectus may be sold by one or more
Selling Security Holders 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 Selling
Security Holders may effect such transactions by selling the Securities to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Security Holders
and/or the purchasers of the Securities for whom such broker-dealers may act as
agents or to whom they may sell as principals, or both (which compensation as to
a particular broker-dealer might be in excess of customary commissions). In
connection with any sales, Selling Security Holders and any brokers
participating in such sales may be deemed to be "underwriters" within the
meaning of the Securities Act. See "Selling Security Holders" and "Plan of
Distribution."

None of the proceeds from the sale of the Securities by the Selling
Security Holders will be received by the Company. The Company has agreed to
bear all expenses (other than selling commissions and fees and expenses of
counsel and other advisers to the Selling Security Holders) in connection with
the registration of the Securities being offered by the Selling Security
Holders. The Company has agreed to indemnify the Selling Security Holders
against certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act").

The Selling Security Holders acquired the Shares upon the conversion of
$3,305,000 aggregate principal amount of Convertible Notes (the "1998
Convertible Notes") into shares of Common Stock. The Company sold the 1998
Convertible Notes and the 1998 Warrants to the Selling Security Holders in
private transactions. Each 1998 Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $0.50 per share, subject to
adjustment, and has a term of three years from the date of issuance.

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 September 25, 1998 was $0.19
per share. There is no public market for the 1998 Warrants and the 1998
Warrants will not be separately transferrable. There is only a limited market
for the Company's Common Stock and, therefore, shareholders may have difficulty
selling shares.

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

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.

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

3
<PAGE>

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 , 1998

4
<PAGE>

RISK FACTORS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING
STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION RELATIVE TO MARKETS FOR THE
COMPANY'S PRODUCTS AND TRENDS IN REVENUES AND ANTICIPATED EXPENSE LEVELS, AS
WELL AS STATEMENTS INCLUDING WORDS SUCH AS "ANTICIPATE," "EXPECT," "BELIEVE,"
"PLAN," "ESTIMATE" AND "INTEND" AND OTHER SIMILAR EXPRESSIONS. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE
COMPANY TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE INFORMATION
DESCRIBED IN THIS SECTION ENTITLED "RISK FACTORS" AND OTHER RISKS DETAILED FROM
TIME TO TIME IN THE COMPANY'S PERIODIC REPORTS AND OTHER INFORMATION FILED WITH
THE COMMISSION.

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

The Company currently estimates that it will require between $2.0 million
and $2.5 million in operating capital over the next twelve months after planned
capital expenditures. In addition, the Company will require approximately $1.0
million in funding during the remainder of fiscal 1998. The Company may require
up to an additional $5.0 million over the next twelve months to fund
construction of an additional production facility if Cultor and Aquasearch enter
into either a joint venture or other relationship to produce astaxanthin on a
large-scale (assuming that Cultor does not provide any portion of the financing
for this project). The Company expects to obtain this funding from sales of
equity and/or convertible debt securities in the private and/or public markets
and/or bank financing. 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 three-acre facility, the timing of the
construction and scale-up of any new 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 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

5
<PAGE>

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."

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 1997 was
approximately $1.9 million and the Company's accumulated deficit at July 31,
1998 was approximately $6.4 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 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

6
<PAGE>

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's production has fluctuated between one and eight kilograms per
month during the past twenty-four months.

Notwithstanding the Company's significant advances in production capability
in recent quarters, the Company expects to encounter additional technical
problems in connection with the scale-up in production of HAEMATOCOCCUS
PLUVIALIS (and any other potential microalgae 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 obligations to Cultor under the Cultor Distribution and Development
Agreement for an extended 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
shipments of its first product, natural astaxanthin derived from microalgae,
have been made to one customer, Cultor, a Finnish multinational corporation,
pursuant to a Supply Agreement (the "Svenska Foder Supply Agreement") entered
into in July 1995 between the Company and Svenska Foder AB ("Svenska Foder"), a
former subsidiary of Cultor, and/or pursuant to the Cultor Distribution and
Development Agreement. In connection with the sale of Svenska Foder to KKR, a
Danish animal feeds company, in December 1996, Cultor acquired all of Svenska
Foder's rights under the Svenska Foder Supply Agreement. The Company has not
been able consistently to meet the five kilograms of natural astaxanthin
production targets initially set forth in the Svenska Foder Supply Agreement at
its existing one-acre research and development/production facility. Although
the Company believes that its recent advances in production efficiency and
yields are scalable and repeatable at its expanded three-acre site (and any
subsequently developed site), the Company may continue to experience lower than
anticipated production yields or production constraints from time to time that
may adversely affect its ability to satisfy customer orders. While the
Company's inability to satisfy its production targets to date has not disrupted
relations with its corporate partners, the Company's failure to consistently
demonstrate satisfactory large-scale production economies of scale 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 may 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 $1.0 million in financing during the
remainder of fiscal 1998 to automate, optimize and expand its existing research
and development facility from a one-acre facility to a three-acre facility and
an additional $5.0 million over the subsequent twelve months to complete the
construction and commence operation of an additional production facility
dedicated solely to the production of natural

7
<PAGE>

astaxanthin (assuming that Cultor does not finance any portion of this project).
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 will not be sufficient to meet the September
1998 40 kilogram per month production target under the Cultor Distribution and
Development Agreement. To address this need, the Company has budgeted $1.8
million for the expansion of its facility from one to three acres. The
expansion, which began in early 1998, is expected to be completed in November
1998. After completion of the expansion of the existing one-acre research and
development/production facility to a three-acre facility, the Company believes
that it would have sufficient production capacity, based on existing technology
and processes, to exceed the September 1998 40 kilogram per month production
target under the Cultor Distribution and Development Agreement, if sufficient
finishing pond space were available. Because finishing pond space is
constrained at the Keahole Point site, the Company (with Cultor's approval)
plans to limit astaxanthin production to 25 kilograms per month at the Keahole
Point site.

In view of the advancements in astaxanthin production over the past several
quarters, and pending further discussions with Cultor, Aquasearch currently
plans to develop a second site for large-scale astaxanthin production that would
be larger than the site initially contemplated in the Cultor Distribution and
Development Agreement and would have a production capacity significantly greater
than the September 1999 120 kilograms per month production target set forth in
the Cultor Distribution and Development Agreement. There is currently no
agreement between Aquasearch and Cultor as to if, or when, a second site would
be constructed, what the size, location or production capacity of such a site
would be, or how the construction or scale-up of this facility would be
financed. There can be no assurances that Aquasearch and Cultor will reach an
agreement regarding the development, timing, location or financing of a second
site, whether the Cultor Distribution and Development Agreement would need to be
amended or terminated to accommodate these plans, or whether Cultor would have
any role in connection with this project.

The scale-up of the Company's production technology, the expansion of the
existing facility and the construction of a new facility pose 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,
more intensively automated AGMs. To date, the Company has demonstrated that it
can culture and harvest HAEMATOCOCCUS PLUVIALIS using such larger AGMs, but not
ones that are more intensively automated. If the Company's current AGM design
and processes are not readily able to be more intensively automated, then the
Company may have to expend substantial additional research effort and capital
resources to automate its technology in order to increase yields. Difficulty in
automating the Company's current processes may translate into higher than
projected product costs or entail significant reengineering efforts

8
<PAGE>

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."

CUSTOMER CONCENTRATION

The Company entered into a three-year exclusive Distribution and
Development Agreement with Cultor (recently extended to four years) 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 any
potential corporate partner as a customer, or a significant reduction in the
level of sales to Cultor 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."

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

The Company's natural astaxanthin will compete directly or indirectly with
synthetic astaxanthin and products incorporating the Company's natural
astaxanthin will compete directly with products incorporating the synthetic
astaxanthin product. 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 a competitive
product based on natural astaxanthin. 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 after
commercial introduction of products incorporating natural astaxanthin. Any
significant decrease in the market price for synthetic astaxanthin is likely to
have an adverse effect on the market price for products incorporating the
Company's natural astaxanthin, 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

9
<PAGE>

per month. There is currently no agreement between Aquasearch and Cultor as to
if, or when, a second site would be constructed, what the size, location or
production capacity of such a site would be, or how the construction or scale-up
of this facility would be financed. There can be no assurances that Aquasearch
and Cultor will reach an agreement regarding the development, timing, location
or financing of a second site, whether the Cultor Distribution and Development
Agreement would need to be amended or terminated to accommodate these plans, or
whether Cultor would have any role in connection with this project.

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 prior to September 24, 2000. However, Cultor and Aquasearch have held
preliminary discussions regarding the need to amend the Cultor Distribution and
Development Agreement in view of the recent improvements in production economics
achieved by Aquasearch. There can be no assurance as to when or if the Cultor
Distribution and Development Agreement will be amended or whether the terms of
any amendment would be favorable to the Company. 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 or that the Company and
Cultor determine to amend the Cultor Distribution and Development Agreement.
Similarly, there can be no assurance that the Company will have developed
microalgae products other than natural astaxanthin at the time, if any, that
Cultor exercises its option to form the joint venture company or that the
Company and Cultor determine to amend the Cultor Distribution and Development
Agreement. See "Business--Overview" and "--Corporate Partner
Relationships--Cultor."

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 microalgae
products that the Company intends to develop. In May 1996, the Company executed
the three-year exclusive Cultor Distribution and Development Agreement with
Cultor (recently extended to four years) 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

10
<PAGE>

terminated. In the event of the termination of 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
will compete directly or indirectly with the synthetic astaxanthin product
developed and marketed worldwide by Hoffman La-Roche and products incorporating
the Company's natural astaxanthin will compete directly with products
incorporating the synthetic astaxanthin product as well. 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 two
companies, Astacarotene and Cyanotech Corporation ("Cyanotech"), have either
announced plans to produce natural astaxanthin from microalgae or are producing
significant quantities for test and commercial purposes. In particular,
Cyanotech has announced its intention to enter into large scale commercial
production of natural astaxanthin and entered into a $1.5 million supply
agreement in the fiscal quarter ended June 30, 1998.

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 a product incorporating
the Company's natural astaxanthin. 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 microalgae 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.

11
<PAGE>

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
microalgae 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.

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, Earl S. Fusato, the
Company's Chief Financial Officer and David G. Watumull, the Company's Executive
Vice President of Strategic Development and Corporate Finance. 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.

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. 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 microalgae
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

To date, the Company has been engaged almost exclusively in research and
development activities. The Company is in the process of transitioning to a
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 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

12
<PAGE>

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 efforts. 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 actively under development. 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 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, one patent by the European
Patent Office (which is applicable to all member nations of the European Union),
and one patent in Australia for its closed system microalgae cultivation
process. The Company has additional patent applications pending in the United
States and internationally.

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

13
<PAGE>

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. See
"Business--Legal Proceedings."

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 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 microalgae product that is developed or marketed by Aquasearch, its
licensees or its corporate partners can present unique regulatory problems and
risks, depending on

14
<PAGE>

the product type, uses and method of manufacture. Any future products developed
by Aquasearch for use in human nutrition, pharmaceuticals or cosmetics, if any,
may 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
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."

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 the Hawaii
Ocean Sciences Technology ("HOST") Business Park at Keahole Point, Kailua-Kona,
Hawaii, 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 (or any facility that the Company might
construct in the Hawaiian Islands) 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 a distribution arrangement with 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

15
<PAGE>

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 trade restrictions. Although the Cultor
Distribution and Development Agreement provides that sales will be 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.

CONCENTRATION OF STOCK OWNERSHIP

Based upon an aggregate of 68,564,013 shares of Common Stock that will be
outstanding upon completion of this offering (and assuming the sale of all
20,075,648 outstanding shares of Common Stock offered hereby), the Company's
directors and executive officers, as a group, will beneficially own
approximately 15.7% of the Company's outstanding Common Stock. As a result,
these shareholders will have the ability to strongly influence the actions of
the Board of Directors and the outcome of actions that are brought before the
shareholders for approval. Such a high level of ownership may have the effect
of delaying or preventing a change in control of the Company and may adversely
affect the voting and other rights of the holders of Common Stock. See
"Management," "Principal Shareholders", "Selling Shareholders," and "Description
of Securities."

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 ever
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."

16
<PAGE>

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. 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.

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. Under recently implemented
Nasdaq rules, in order to be eligible for listing on the Nasdaq SmallCap Market:
(i) the Company's Common Stock must have a minimum bid price of $4.00; (ii) the
Company must have minimum tangible net assets (total assets less total
liabilities and goodwill) of $4.0 million or a market capitalization of at least
$50 million or net income of at least $750,000 in two of the three prior years;
(iii) the Company must have a public float of at least one million shares with a
market value of at least $5 million; and (iv) the Common Stock must have at
least three market makers and be held of record by at least 300 shareholders.
If at any time the Company were to satisfy all listing requirements other than
the minimum bid price of $4.00 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 trading price listing requirement. Any such reverse stock split would
require shareholder approval. There can be no assurance that at any time the
Company would be able to satisfy some or all listing

17
<PAGE>

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 any securities offered hereby will be able to resell such
securities (or the Common Stock issuable upon exercise thereof) in the public
market only if the securities are qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the proposed purchasers reside. Although the Company intends to seek to
qualify for sale the securities offered hereby in those states in which the
securities are to be offered, no assurance can be given that such qualifications
will occur. The securities may be deprived of any value and the market for the
securities may be limited if the securities are not qualified or exempt from
qualification in the jurisdictions in which the prospective purchasers of the
securities 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 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

Immediately prior to this offering, the Company had 68,564,013 shares of
Common Stock outstanding. Of the shares outstanding immediately prior to this
offering, 46,201,631 have either been registered under the Securities Act or are
freely tradeable without volume limitations under Rule 144(k) under the
Securities Act.

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.

<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:bb). 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
---------- ----------
<S> <C> <C>
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. . . . . . . . . . . . . . . . . $ 0.63 $ 0.33
Second Quarter . . . . . . . . . . . . . . . . $ 0.39 $ 0.20
Third Quarter. . . . . . . . . . . . . . . . . $ 0.28 $ 0.17
Fourth Quarter . . . . . . . . . . . . . . . . $ 0.36 $ 0.19

FISCAL 1998
First Quarter. . . . . . . . . . . . . . . . . $ 0.29 $ 0.20
Second Quarter . . . . . . . . . . . . . . . . $ 0.28 $ 0.19
Third Quarter . . . . . . . . . . . . . . . . $ 0.24 $ 0.18
Fourth Quarter (through September 10, 1998). . $ 0.20 $ 0.18

</TABLE>

As of the date of this Prospectus, the Company had approximately 2,000
record holders of its 68,564,013 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, 1998, the Company had an
accumulated deficit of approximately $6.4 million, and until this deficit is
eliminated will be prohibited from paying dividends except out of net profits.

19
<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, 1995, 1996 and 1997 and the balance sheet data at October 31, 1995, 1996 and
1997 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, 1993 and 1994 and the balance sheet
data at October 31, 1993 and 1994 are derived from audited financial statements
that are not included in this Prospectus. The selected financial data for the
nine months ended July 31, 1997 and 1998 have been derived from unaudited
financial statements included elsewhere in this Prospectus. The results of
operations for the nine months ended July 31, 1998 are not necessarily
indicative of the results that may be expected for the full year.

NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
-------------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ----------- ----------- ---------- ---------- ----------
(RESTATED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues. . . . . . . . . . $ -- $ -- $ -- $ 10 $ 1 $ 1 $ --
Cost of sales . . . . . . . $ -- $ -- $ -- $ 21 $ 2 $ -- $ --
Research and development
costs . . . . . . . . . . 4 27 89 649 794 552 866
General and administrative
expenses. . . . . . . . . 85 115 393 641 1,072 645 634
Earnings (loss) from
operations. . . . . . . . (89) (142) (482) (1,301) (1,867) (1,195) (1,501)
Other income (expense). . . (52) (98) (4) 3 4 5 (117)
Net income (loss) . . . . . $ (142) $ (240) $ (487) $ (1,298) $ (1,863) $ (1,191) $ (1,618)
Net income (loss) per share $ (0.01) $ (0.01) $ (0.02) $ (0.03) $ (0.04) $ (0.03) $ (0.03)
Weighted average shares
outstanding . . . . . . . 20,132,100 22,782,063 25,541,021 37,679,955 44,646,653 44,159,602 47,819,881

OCTOBER 31, JULY 31,
---------------------------------------------------------------- ---------
1993 1994 1995 1996 1997 1998
------ ------- -------- ------- ------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents . $ 146 $ 87 $ 27 $ 187 $ 47 $ 666
Working capital . . . . . . 131 (19) (159) (418) (944) (28)
Total assets. . . . . . . . 146 87 490 1,368 915 2,035
Long-term obligations, including
current portion . . . . . . -- -- -- -- -- --
Deficit accumulated during
development stage . . . . (924) (1,164) (1,651) (2,949) (4,812) (6,430)
Total shareholders' equity (deficit) 131 (19) 256 291 (107) 1,271

</TABLE>

20
<PAGE>

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

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT,
INCLUDING STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION RELATIVE TO
MARKETS FOR THE COMPANY'S PRODUCTS AND TRENDS IN REVENUES AND ANTICIPATED
EXPENSE LEVELS, AS WELL AS STATEMENTS INCLUDING WORDS SUCH AS "ANTICIPATE,"
"EXPECT," "BELIEVE," "PLAN," "ESTIMATE" AND "INTEND" AND OTHER SIMILAR
EXPRESSIONS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG
OTHERS, THE INFORMATION DESCRIBED UNDER THE CAPTION "RISK FACTORS" COMMENCING
ON PAGE 5 HEREOF AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S
PERIODIC REPORTS AND OTHER INFORMATION FILED WITH THE COMMISSION.

OVERVIEW

Aquasearch is a development stage company that is developing a proprietary,
closed-system technology for the large-scale, commercial cultivation of
photosynthetic microalgae. The Company's microalgae cultivation technology is
known as the Aquasearch Growth Module (the "AGM").

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 1988. Until
March 1993, the Company conducted research and development focused on refining
its production technology and cultivating microalgal species of several markedly
different varieties.

In March 1993, the Company formed a joint venture company with 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, a
Finnish food conglomerate, regarding the purchase of astaxanthin-rich
microalgae. While awaiting a response from Cultor, Aquasearch 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 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.

21
<PAGE>

In July 1995, the Company entered into a three-year Supply Agreement with
Svenska Foder, then 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. In December 1996, Cultor sold
Svenska Foder to KKR, a Danish animal feeds company, and assumed all of Svenska
Foder's rights and obligations under the Svenska Foder Supply Agreement.

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 (recently extended to four years) 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. 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. See
"Business--Cultor Distribution and Development Agreement."

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

In October 1996, Cultor acquired 400,000 shares of the Company's Common
Stock at a purchase price of $0.50 pursuant to the Cultor Stock Subscription
Agreement.

In November 1996, the Company executed a Letter of Intent with C. Brewer
and Company, Limited ("C. Brewer") with respect to the acquisition of between 80
and 90 acres of property in the Ka'u region of the Big Island of Hawaii valued
at between $900,000 and $1,000,000 in exchange for C. Brewer's acquisition of
approximately 6% of the Company's outstanding Common Stock. In addition,
C. Brewer acquired a three-year warrant (the "C. Brewer Warrant") to purchase up
to 500,000 shares of Aquasearch Common Stock at a purchase price of $1.25 per
share. In the light of the Company's recent advances in production technology
and yields, the consummation of this transaction will be delayed until the
Company and Cultor determine the best strategy and location for future
development of a natural astaxanthin production facility dedicated solely to
satisfying the requirements of an expanded Aquasearch/Cultor relationship.

Aquasearch has an active Scientific Advisory Board consisting of thirteen
Ph.D.s with expertise in the fields of aquaculture; marine biology; fluid
dynamics; and the chemistry, photobiology, physiology, genetics and mass culture
of microalgae.

INTELLECTUAL PROPERTY AND TECHNOLOGY OPTIMIZATION - LAST TWELVE MONTHS

In June 1997, Aquasearch was awarded European Patent Number 0494887 for a
"Process and Apparatus for the Production of Photosynthetic Microbes," which not
only claims certain processes, but also certain features of its core technology,
the Aquasearch Growth Module. The European patent complements, but does not
supplant claims made in the U.S. Patent awarded in 1996. The Company's European
filing was made under the Patent Cooperation Treaty, and the Company is in the
process of pursuing international patents pursuant thereto.

22
<PAGE>

Aquasearch placed great emphasis in the past nine months on optimizing the
Aquasearch Growth Module and its performance. The Company believes that it has
made significant advances in several key areas of its production technology
during this period, including: (i) biology-based improvements; (ii) advanced
production procedures; (iii) significant increases in AGM size; and
(iv) production automation advancements. These improvements resulted in a
fifteen-fold increase in productivity (weight of Astaxanthin per unit of
production capacity) and sustained operation for a nine-month period of the
largest photobioreactor the Company has operated to date, and which the Company
believes to be the largest photobioreactor in existence.

During the past nine months the Company has increased the size of its
largest AGM from 1,000 gallons to 4,000 gallons. The larger AGM is not only
less costly, but requires less labor, operates for a longer period of time and
has significantly greater productivity than the smaller version. The Company
has conducted intensive engineering studies on an even larger model AGM of more
than 7,000 gallons that has now been designed, and is slated for construction in
the fall of 1998. Management anticipates replacing all production capacity with
the new, very large AGMs in 1998, contingent on available capital. The Company
believes that the use of these very large AGMs will increase total production
capacity by a factor of more than six with no increase in labor costs.

Aquasearch began replacing its computer control system with
state-of-the-art industrial process control in 1997. Improvements that are
still underway have already reduced labor and hardware costs, and have provided
significantly better quality control. The Company believes that its process
control system is already greatly advanced compared to the standard in
biology-based manufacturing. Aquasearch continues to develop certain
proprietary process control software that it believes will provide a significant
competitive advantage over other known systems.

The Company introduced in late 1997 certain changes in nutrient media
formulation, sterility procedures and other practices resulting from its
research that have significantly enhanced productivity.

DEVELOPMENT OF NATURAL ASTAXANTHIN PRODUCTS--LAST TWELVE MONTHS

During the past twelve months, Aquasearch and Cultor have jointly carried
out expensive and essential projects aimed at demonstrating efficacy of the
Company's natural astaxanthin product in salmon and trout feed.

Two important projects were undertaken in 1997. The first project,
conducted on contract with the Norwegian Fisheries Research Institute,
demonstrated equivalence between Aquasearch's natural astaxanthin product and
Hoffman-LaRoche's synthetic astaxanthin with regard to efficacy of pigmentation
of salmonid fish (salmon and trout). The second project, still underway, has
demonstrated a shelf life of more than six months for the Company's natural
astaxanthin product. The shelf life experiments will continue for at least six
months more.

The results of these product development projects have demonstrated,
largely at Cultor's expense, that Aquasearch's product has viable commercial
applications. To the knowledge of Aquasearch, no other company has yet
demonstrated equivalent results for any products that might compete with the
synthetic astaxanthin produced by Hoffman-LaRoche. Aquasearch believes the
results of these projects provide it with a significant competitive advantage.

NEW STRATEGIC BUSINESS RELATIONSHIPS--LAST TWELVE MONTHS

In July 1997, Aquasearch agreed to become a charter member of the Marine
Bioprocess Engineering Center (MarBEC) initiative launched by the University of
Hawaii at Manoa. More than 160 universities -- including University of Hawaii
- -- competed nationwide for a total of five Engineering Research Centers to be
awarded by the National Science Foundation. In August 1998, the University of
Hawaii was notified by the National Science Foundation that it was one of the
five winners. MarBEC, with estimated funding of

23
<PAGE>

approximately $30 million for a 10-year period, will focus entirely on the
development of new enzymes and pigments from microalgae. Charter industry
members (including Aquasearch, Merck, Monsanto, Hoechst and Eastman Chemical)
will have equal preferential rights to new products from microalgae developed by
MarBEC. Aquasearch believes that it is the only charter member of MarBEC that
has developed photobioreactor technology, which is likely to be required for the
commercial exploitation of any new product from microalgae.

In September 1997, Aquasearch executed a Letter of Intent with Inflazyme
Pharmaceuticals, Limited ("Inflazyme") to enter into a ten-year drug
development and manufacturing agreement. Under the terms of the agreement,
Aquasearch would produce large-scale research quantities of several thousand
different microalgae in its AGM photobioreactors. Inflazyme would
investigate each species for therapeutic activity in the areas of
inflammation, cancer, blood and cardiovascular diseases. Aquasearch would
receive cost-plus reimbursement of all its research costs (including
dedicated physical facilities); potential milestone payments associated with
steps in the U.S. Food and Drug Administration drug approval process; and
royalties on future net product sales. The conversion of this Letter of
Intent into a final Screening and Drug Development Agreement has been delayed
due to management changes within Inflazyme. Given the extended delay, there
can be no assurances as to when or if a final agreement will be consummated.

The Company is currently in preliminary discussions with a major U.S.
chemical company and a major Japanese food/pharmaceutical company with respect
to the development of certain human nutritional supplements or nutraceuticals.
The Company is also in late-stage discussions with (i) a smaller U.S.
distribution and extraction company with respect to the possible formation of a
joint venture to commercialize microalgae in the nutraceutical and/or
pharmaceutical markets and (ii) a possible strategic alliance with a U.S.
biotechnology company for the purpose of developing a library of
microalgae-derived compounds for pharmaceutical and/or agricultural
biotechnology screening purposes. There can be no assurances as to when or if
these discussions will lead to the execution of a letter of intent or final
agreement, or whether the terms of such arrangements will be attractive to the
Company.

RECENT FINANCING ACTIVITY

In February 1997, the Company completed a private placement of a total of
5,044,570 Units, consisting of one share of Common Stock and one Common Stock
Purchase Warrant (the "1997 Warrants"). The purchase price of the Units ranged
from $0.21 per Unit to $0.44 per Unit. The 1997 Warrants have a term of three
years and are exercisable at $1.00 per share, subject to adjustment. The 1997
Warrants are redeemable by the Company at $.01 per 1997 Warrant upon 30 days'
notice anytime that the closing bid range 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 net proceeds from this offering, net of placement agent fees
and commissions, were $1,105,421.

In July 1998, the holders of $2.8 million aggregate principal amount of
1998 Convertible Notes exercised their option to convert the outstanding
principal and interest on their 1998 Convertible Notes into 16,870,520 shares of
Common Stock. In addition, the Company also issued 2,918,713 1998 Warrants
under the provisions of the 1998 Convertible Notes. The 1998 Warrants have an
exercise price of $0.50 per share and term of three years. The financial
statements as of July 31, 1998 reflect the conversion of the 1998 Convertible
Notes into shares of Common Stock.

MANAGEMENT'S PLAN OF OPERATION

During the next twelve months, Aquasearch intends to focus its efforts on
strengthening its intellectual property position, optimizing the performance of
its proprietary AGM technology, expanding its production

24
<PAGE>

capacity, initiating a business in pharmaceutical drug development, and
improving productivity through employee incentives.

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

- - TECHNOLOGY IMPROVEMENT: Aquasearch intends to enlarge the size of its
proprietary AGM from 4,000 gallons to 7,000 gallons during 1998.
Furthermore, the process control system is slated for hardware and software
improvements, which the Company believes will reduce capital and labor
costs and improve productivity.

- - EXPANSION OF PRODUCTION CAPACITY: Aquasearch began construction in early
1998 to increase the size of its Keahole Point research and
development/production facility from one acre to three acres. Construction
is expected to be completed in November 1998, and is anticipated to augment
production capacity to approximately 25 kilograms per month (given existing
pond finishing constraints). Pending further discussions with Cultor, the
Company currently plans to develop a second site for large-scale
astaxanthin production. It is currently contemplated that this second site
would be larger than the ten-acre second site initially contemplated in the
Cultor Distribution and Development Agreement and would have a production
capacity significantly greater than 120 kilograms per month.

- - PHARMACEUTICAL DRUG DEVELOPMENT: Aquasearch intends to pursue drug
development agreements with several biotechnology and pharmaceutical
companies. The Company believes that the consummation of such agreements
would cover a significant portion of the Company's pharmaceutical research
and development costs. The Company believes that additional personnel will
need to be hired to perform such projects, but the Company intends to keep
its current personnel entirely focused on astaxanthin-related science and
technology. New personnel hired for drug development work will be
dedicated entirely to those projects and will function as a separate team,
which costs will be borne by strategic partners. The Company believes that
additional laboratory facilities may also be required for drug development
activities. The Company intends that costs for such dedicated facilities
will be borne by strategic partners.

- - IMPROVEMENTS IN PRODUCTIVITY: At the outset of fiscal year 1998,
Aquasearch implemented an incentive compensation program to award
significant cash bonus incentives to all employees provided that the
Company met certain quarterly production targets. Targets were planned
that management believed would significantly advance the Company's research
and production efforts. Under the incentive program, cash bonuses
represent as much as a 25% increase in salary on a quarterly basis. The
Company also awarded stock options to all employees as a further incentive
to increase productivity. Aquasearch believes that the implementation of
its incentive compensation program at the outset of fiscal 1998 was a
significant factor in the Company's productivity gains in fiscal 1998.

The Company expects to continue producing relatively small amounts of
astaxanthin (less than six kilograms dry weight per month) until November 1998,
when it expects to ship 25 kilograms (dry weight) to Cultor. The Company is
currently satisfying Cultor's requirements for product testing, regulatory
approvals and related developmental activities. The Company will focus in the
next twelve months on continuing to improve yields and increasing the
cost-effectiveness of its production.

The Company believes that strategic relationships and collaborations will
continue to be an important part of its business strategy. There can be no
assurances that the Company will be able to maintain existing corporate

25
<PAGE>

partner relationships, enter into future relationships to develop additional
applications for natural astaxanthin or to develop new microalgae products or
that any such relationships will be successful.

Since inception, the Company's primary operating activities have consisted
of basic research and development and production process development; recruiting
personnel; purchasing operating assets; and raising capital. From inception
through July 31, 1998, the Company had an accumulated deficit of approximately
$6.4 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 continues to expand
its production facilities and increases its research and development efforts.
The Company expects to have quarter-to-quarter and year-to-year fluctuations in
revenues, expenses and losses, some of which could be significant.

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

The Company is in the process of transition to a 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.

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 fiscal 1996,
the Company shipped its natural astaxanthin product to Svenska Foder under the
Svenska Foder Supply Agreement, which resulted in revenues of approximately
$10,000. In 1997, Aquasearch's natural astaxanthin product was provided to
Cultor under the Cultor Distribution and Development Agreement, resulting in
revenues of only $1,077; the majority of product shipped or produced was used
primarily for product development projects carried out jointly by Aquasearch and
Cultor.

RESEARCH AND DEVELOPMENT COSTS. Research and development costs 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 costs were
approximately $794,000 for the fiscal year ended October 31, 1997 compared with
$649,000 and $89,000 in 1996 and 1995, respectively. During the nine-month
period ended July 31, 1998, the Company had research and development costs of
approximately $866,000 compared with approximately $552,000 during the
nine-month period ended July 31, 1997. Substantially all of these funds were
expended to improve the Company's natural astaxanthin production system, to
implement improved computerized process control, and to reduce capital costs of
the AGM technology. From inception through July 31, 1998, the Company's total
research and development costs were approximately $2,753,000. Aquasearch
expects 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 $1,072,000, $641,000, and $393,000 for
the fiscal years ended October 31, 1997, 1996 and 1995, respectively, and
$634,000 and $645,000 for the nine-month periods ended July 31, 1998 and 1997,
respectively. The increase in annual general

26
<PAGE>

and administrative expenses since 1995 reflects additional costs associated with
personnel additions, legal fees incurred in connection with developing and
protecting the Company's intellectual property position and raising capital, as
well as other expenses. The decrease in general and administrative expenses
from the nine-month period ended July 31, 1997 to the nine-month period ended
July 31, 1998 was primarily due to decreases in legal, insurance and consulting
expenses. From inception through July 31, 1998, the Company's total general and
administrative expenses were approximately $3,340,000. 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 past six months, Aquasearch raised
approximately $0.8 million from the private placement of convertible notes. In
the fiscal years ended October 31, 1997, 1996 and 1995, Aquasearch raised
approximately $1.3 million, $1.3 million and $572,000 of net proceeds from the
sale of 5,095,727, 7,901,643 and 7,622,500 shares of Common Stock, respectively,
in private placement transactions. From inception through July 31, 1998, the
Company had raised total net proceeds of approximately $7.1 million through
public and private sales of equity and debt securities.

In the nine months ended July 31, 1998, operating activities consumed
approximately $1,537,000 compared with $1,680,000 in the nine months ended July
31, 1997. In the fiscal year ended October 31, 1997, operating activities
consumed approximately $2.0 million compared with $470,000 in 1996 and $295,000
in 1995. From inception through July 31, 1998, operating activities have
consumed approximately $5.1 million.

Capital expenditures for the nine months ended July 31, 1998 amounted to
approximately $447,000 compared with $99,000 in the comparable period in the
prior year. Capital expenditures for the fiscal year ended October 31, 1997,
1996 and 1995 were $167,000, $329,000 and $315,000, respectively. From
inception through July 31, 1998, total capital expenditures have been
approximately $1,268,000.

As of July 31, 1998, the Company's liquidity was approximately $666,000 in
cash and cash equivalents.

27
<PAGE>

BUSINESS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING
STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION RELATIVE TO MARKETS FOR THE
COMPANY'S PRODUCTS AND TRENDS IN REVENUES AND ANTICIPATED EXPENSE LEVELS, AS
WELL AS STATEMENTS INCLUDING WORDS SUCH AS "ANTICIPATE," "EXPECT," "BELIEVE,"
"PLAN," "ESTIMATE" AND "INTEND" AND OTHER SIMILAR EXPRESSIONS. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE
COMPANY TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE INFORMATION
DESCRIBED UNDER THE CAPTION "RISK FACTORS" COMMENCING ON PAGE 5 HEREOF AND
OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S PERIODIC REPORTS AND
OTHER INFORMATION FILED WITH THE COMMISSION.

OVERVIEW

Aquasearch, Inc. is a development stage company that develops and
commercializes natural products from microalgae using its proprietary,
large-scale photobioreactor 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.

The Company believes that the principal impediment to commercializing
microalgae is the lack of large-scale cultivation technology. Other microbes,
such as bacteria and fungi, are cultivated in large, closed-system
"bioreactors." The products manufactured in this way are the basis of both the
pharmaceutical and brewing industries, for example.

Bioreactors are closed to avoid contamination by unwanted species.
Bioreactors are controlled because every microbe prefers certain environmental
conditions, such as temperature, to grow optimally.

Bacteria and fungi grow in the dark. Bioreactors, therefore, are dark.
Microalgae, however, are green plants: they require light. Microalgae cannot
grow in bioreactors. They must be grown in "photobioreactors" -- closed,
controlled cultivation chambers into which light can penetrate. Commercial
bioreactors for cultivating bacteria and fungi are large. The size of
industrial bioreactors is typically in the range of 1,000 to 20,000 gallons.

The Company believes that photobioreactors will have to be more than 1,000
gallons to be of commercial value but, according to recent technology surveys by
experts, most photobioreactors now in use around the world are less than 100
gallons in size.

28
<PAGE>

THE AQUASEARCH GROWTH MODULE

Aquasearch believes it has developed the largest, commercial-scale
photobioreactor known. The Company has for the past year routinely -- and
simultaneously -- operated more than ten AGMs ranging in size from 1,000 to
4,000 gallons.

Aquasearch has spent more than $2.4 million over the last two years on
research and development of its AGM technology. The Company believes that it
has made several significant and proprietary advances in several key areas of
its production technology, including: (i) biology-based improvements, (ii)
advanced production procedures; (iii) significant increases in AGM size; and
(iv) production automation advancements. During the past nine months the
Company has increased the size of its largest AGM from 1,000 gallons to 4,000
gallons. The larger AGM is not only less costly, but requires less labor,
operates for a longer period of time and has significantly greater productivity
than the smaller version. The Company has conducted intensive engineering
studies on an even larger model AGM of more than 7,000 gallons that has now been
designed, and is slated for construction in the fall of 1998. Management
anticipates replacing all production capacity with the new, very large AGMS in
1998, contingent on available capital. The Company believes that the use of
these very large AGMS will increase current total production capacity by a
factor of more than six with no increase in labor costs.

The Company introduced in late 1997 certain changes in nutrient media
formulation, sterility procedures and other practices resulting from its
research that have significantly enhanced productivity.

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 competitive microalgae cultivation 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, primarily due to the large size of the AGM.

Aquasearch believes that its current AGM technology can be used to
cultivate hundreds of species of microalgae for commercial purposes.
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.

ASTAXANTHIN

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. (Recent feeding trials also have demonstrated that

29
<PAGE>

astaxanthin is an important nutritional component to the proper development and
growth of farmed salmon and trout.) The world market for astaxanthin in
aquaculture was estimated to be approximately $150 million in 1998, and
continued growth is expected.

Aquasearch believes it is one of the first companies to produce commercial
quantities of natural astaxanthin from microalgae. 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. Products incorporating Aquasearch's natural astaxanthin product (such
as Cultor's Aquaxan-Registered Trademark- 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 products
incorporating Aquasearch's natural astaxanthin product.

In May 1996, Aquasearch entered into a three-year exclusive Distribution
and Development Agreement with Cultor (recently extended to four years) 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 in
poultry feed to impart a more reddish hue to egg yolks. Research indicates that
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 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
microalgae products other than natural astaxanthin in all fields, including the
field of animal feed and animal nutrition.

The Cultor Distribution and Development Agreement originally called for
production targets of 40 kilograms per month by September 1997 and 120 kilograms
per month by September 1998. By mutual agreement, the initial Aquasearch
production targets were each extended one year and, in addition, the focus of
both parties' development efforts were shifted from achieving monthly production
targets to achieving long-term production economics. Since the Cultor
Distribution and Development Agreement was signed, Cultor has devoted
substantial resources to developing its Aquaxan-Registered Trademark- animal
feed and animal nutrition product (which incorporates Aquasearch's natural
astaxanthin), including conducting extensive product formulation research and
feeding trials. During the past several quarters, the Company has achieved and
sustained significant improvements in virtually every phase of its production
process. As a result of these developments, the Company is expanding its
existing one-acre facility to a three-acre facility and increasing its
production capacity. Based on the current production rate of existing AGMs, the
Company estimates that the expanded facility could produce more than 80
kilograms of astaxanthin per month if sufficient space were available for
finishing ponds. However, since space for finishing ponds at the Keahole Point
site is constrained, the Company (with Cultor's approval) expects to limit
astaxanthin production to approximately 25 kilograms per month at the expanded
site. The extra AGM capacity at the expanded site will be used for further
optimization of the astaxanthin production process and the development-up of new
microalgal products.

30
<PAGE>

The Cultor Distribution and Development Agreement currently provides that,
in the event that Cultor exercises its option to create a joint venture company
with Aquasearch to produce natural astaxanthin, Aquasearch would contribute a
ten-acre natural astaxanthin production facility to be constructed at a later
date in return for a 50% stake in the new company and Cultor would contribute
cash equal to the appraised value of Aquasearch's production facility in return
for a 50% stake. In addition, Cultor had 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, 1999 and ending on April 30, 2000 and "Y"
equals six (or, in other words, an amount equal to twelve times annual profit in
the third year of the contract). In view of the recent advancements achieved in
astaxanthin production, and pending further discussions with Cultor, Aquasearch
currently plans to develop a second site for large-scale astaxanthin production
that would be larger than the site initially contemplated in the Cultor
Distribution and Development Agreement and would have a production capacity
significantly greater than 120 kilograms per month. There is currently no
agreement between Aquasearch and Cultor as to if, or when, a second site would
be constructed, what the size, location or production capacity of such a site
would be, or how the construction or scale-up of this facility would be
financed. There can be no assurances that Aquasearch and Cultor will reach an
agreement regarding the development, timing, location or financing of a second
site, whether the Cultor Distribution and Development Agreement would need to be
amended or terminated to accommodate these plans, or whether Cultor would have
any role in connection with this project. The expansion of the Keahole Point
site and the construction and scale-up of any additional production site will
involve various risks and uncertainties. See "Risk Factors -- Risks Associated
With Scale-Up of Production Facilities."

PHARMACEUTICALS

Most pharmaceutical products developed to date have been derived from the
20,000 species of land-based plants. Aquasearch believes that the 30,000
estimated species of microalgae represent a comparable -- but as yet untapped --
source of pharmaceutical products. The Company is aware of several compounds,
isolated from microalgae, that have demonstrated activity against certain
diseases in pre-clinical trials. However, despite the likelihood of new drug
discoveries among the microalgae, the Company believes that the pharmaceutical
industry has largely ignored the microalgae because commercial scale production
technology, such as the AGM, has been unavailable to produce the amounts
required.

Aquasearch believes that the discovery and manufacture of
pharmaceuticals from microalgae is potentially a large market. According to
industry experts, pharmaceutical companies are now under intense pressure to
fill their development pipelines with new drug candidates. Aquasearch
believes that this pressure, in combination with new screening techniques
based on genomics, is already causing the pharmaceutical industry to broaden
its search for new drugs. The wider and more intensive search for new drug
candidates, Aquasearch believes, will put microalgae high on the list of
unexplored but potentially valuable sources.

Aquasearch believes it is capable of producing the relatively large
quantities of microalgae raw material necessary for the drug discovery process.
The Company was awarded a Master Agreement from the U.S. National Cancer
Institute for just this purpose, although no contracts have yet been issued.
The Company does not have the expertise to develop and fully commercialize
pharmaceutical products on its own. Aquasearch's strategy is to establish the
AGM as a core technology for the cultivation of microalgae and to seek
collaborative research and development, sales, marketing and distributing
relationships with established pharmaceutical companies in order to develop and
commercialize potential pharmaceutical products from microalgae.

31
<PAGE>

In September 1997, Aquasearch executed a Letter of Intent with Inflazyme to
enter into a ten-year drug development and manufacturing agreement. Under the
terms of the agreement, Aquasearch would produce large-scale research quantities
of several thousand different microalgae in its AGM photobioreactors. Inflazyme
would investigate each species for therapeutic activity in the areas of
inflammation, cancer, blood and cardiovascular diseases. Aquasearch would
receive cost-plus reimbursement of all its research costs (including dedicated
physical facilities); potential milestone payments associated with steps in the
U.S. Food and Drug Administration drug approval process; and royalties on future
net product sales. The conversion of this Letter of Intent into a final
Screening and Drug Development Agreement has been delayed due to management
changes within Inflazyme. Given the extended delay, there can be no assurances
as to when or if a final agreement will be consummated.

INDUSTRY BACKGROUND

Microalgae have the following properties that make their commercial
production attractive:

(i) microalgae naturally produce a vast array of natural compounds:
many different and unusual fats, sugars, proteins, amino acids,
vitamins, enzymes, pigments and other bioactive compounds;

(ii) 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);

(iii) ease of processing: 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); 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.

32
<PAGE>

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 photosynthetic microalgae in
commercial quantities. To the Company's knowledge, and with the exception of
the infant formula product, substantially all other commercial quantities of
microalgae products are currently produced in open pond environments with
microalgae 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 microalgae 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 microalgae species
from the bacteria and other microbial contaminants that frequently destroy them
in conventional open pond systems.

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 microalgae
species. To date, Aquasearch has conducted experiments on five different
microalgae 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 cost 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.

The Company believes that the location of its business in Hawaii and, in
particular, the location of its research and development and production facility
in the HOST Business Park at Keahole Point, Kailua-Kona,

33
<PAGE>

Hawaii is an important competitive advantage. The combination of consistent
warm temperatures; abundant sunlight; low rainfall; access to HOST Business Park
scientific equipment, personnel and facilities; tax incentives; and the
provision of cold, clean seawater at this facility makes this a favorable
location to demonstrate the production economics of various species of
microalgae. 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.

However, because of the significant construction costs associated with the
rough lava of the HOST Business Park, the Company believes that large commercial
scale production of fresh water microalgal species, including HAEMATOCOCCUS
PLUVIALIS (the species from which the Company currently derives astaxanthin),
may be undertaken more economically at other similar high sunlight, low rainfall
locations in the Hawaiian Islands In this regard, the Company believes that the
availability of large tracts of land in Hawaii with moderate temperatures; high
sunlight; low rainfall; easy access to fresh water, cooling sea water and power;
a favorable business environment; and proximity to the renowned marine
biotechnology expertise of the University of Hawaii make the Hawaiian Islands
one of the most advantageous and economical locations in the world to cultivate
microalgae on a commercial scale.

The concentration of the Company's existing and planned research and
development facilities and production facilities in the HOST Business Park (as
well as any other potential production sites in the Hawaiian Islands) involves
various risks and uncertainties relating to potential natural disasters such as
volcanic eruptions, earthquakes, tidal waves, hurricanes and related matters
indigenous to Hawaii.

AQUASEARCH'S STRATEGY

The Company's objective is to become the leader in cost-effective
cultivation technology to produce natural commercial 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 one of the first producers
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 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

34
<PAGE>

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
in excess of $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 the scientific institutes and universities (such as
Scripps Institute of Oceanography, University of California, San Diego;
University of Hawaii at Manoa; and the University of Southern Mississippi)
at which members of the Company's Scientific Advisory Board are conducting
teaching and research activities.

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 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, for example, 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. (Industry 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. In addition, recent
feeding trials have demonstrated that astaxanthin is also important nutritional
component to the proper development and growth of farmed salmon and trout.

35
<PAGE>

The aquaculture market for synthetic astaxanthin is currently estimated to
be approximately $150 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 and development 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. Cultor's natural feed additive, Aquaxan-Registered
Trademark-, which will contain Aquasearch's natural astaxanthin, 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.

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 (and a subsidiary of
Cultor prior to December 1996), 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 astaxanthin may have additional benefits with respect to
fertility, weight gain and feed efficiency in broiler chickens and layer hens.
In December 1996, Cultor sold its majority interest in Svenska Foder to KKR, a
Danish animal feeds company. In connection with this sale, Cultor acquired all
of Svenska Foder's rights under the Svenska Foder Supply Agreement.

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.

POTENTIAL PRODUCTS

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 has collaborated with Merck & Co. and
others to develop pharmaceuticals from microalgae. Aquasearch is also aware
that certain compounds derived from microalgae enhanced the production of an
anti-cancer drug that is now in Phase II clinical trials. The Company believes
that many pharmaceutical and biotechnology companies will be interested to
collaborate with Aquasearch to develop new drugs from microalgae. The Company
believes this interest exists especially because of the AGM technology, which
Aquasearch views as unique in its ability to provide the large quantities of
pure material required for research, development and manufacture of drugs from
microalgae. 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.

36
<PAGE>

OTHER PIGMENTS FROM MICROALGAE. Using its AGM technology, Aquasearch has
the capability of cultivating additional microalgae 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 microalgae 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 $1
billion. The Company's development of additional microalgae pigmentation
products involves many significant risks and uncertainties.

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
was 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.

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 $1 million
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 microalgae cosmetics
products. The Company's development of microalgae cosmetics products involves
many significant risks and uncertainties.

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.

37
<PAGE>

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.

The Cultor Distribution and Development Agreement originally called for
production targets of 40 kilograms per month by September 1997 and 120 kilograms
per month by September 1998. By mutual agreement, the initial Aquasearch
production targets were each extended one year and, in addition, the focus of
both parties' development efforts were shifted from achieving monthly production
targets to achieving long-term production economics. Since the Cultor
Distribution and Development Agreement was signed, Cultor has devoted
substantial resources to developing its Aquaxan-Registered Trademark- animal
feed and animal nutrition product (which incorporates Aquasearch's natural
astaxanthin), including conducting extensive product formulation research and
feeding trials. During the past several quarters, the Company has achieved and
sustained significant improvements in virtually every phase of its production
process. As a result of these developments, the Company is expanding its
existing one-acre facility to a three-acre facility and increasing its
production capacity. Based on the current production rate of existing AGMs, the
Company estimates that the expanded facility could produce more than 80
kilograms of astaxanthin per month if sufficient space were available for
finishing ponds. However, since space for finishing ponds at the Keahole Point
site is constrained, the Company (with Cultor's approval) expects to limit
astaxanthin production to approximately 25 kilograms per month at the expanded
site. The extra module capacity at the expanded site will be used for further
optimization of the astaxanthin production process and the development-up of new
microalgal products.

In view of the recent advancements achieved in astaxanthin production, and
pending further discussions with Cultor, Aquasearch currently plans to develop a
second site for large-scale astaxanthin production that would be larger than the
ten-acre site initially contemplated in the Cultor Distribution and Development
Agreement and would have a production capacity significantly greater than 120
kilograms per month. There is currently no agreement between Aquasearch and
Cultor as to if, or when, a second site would be constructed, what the size,
location or production capacity of such a site would be, or how the construction
or scale-up of this facility would be financed. There can be no assurances that
Aquasearch and Cultor will reach an agreement regarding the development, timing,
location or financing of a second site, whether the Cultor Distribution and
Development Agreement would need to be amended or terminated to accommodate
these plans, or whether Cultor would have any role in connection with this
project. The expansion of the Keahole Point site and the construction and
scale-up of any additional production site will involve various risks and
uncertainties. See "Risk Factors -- Risks Associated With Scale-Up of
Production Facilities."

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 LAGERHEIMIL, 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.

38
<PAGE>

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 microalgae 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 microalgae species and end use.

CORPORATE PARTNER RELATIONSHIPS

SVENSKA FODER

In July 1995, Aquasearch signed the Svenska Foder Supply Agreement with
Svenska Foder, 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 had a term of three years
and required Aquasearch to deliver five kilograms of natural astaxanthin per
month. Svenska Foder used the natural astaxanthin in place of synthetic
astaxanthin in chicken feed to increase the reddish hue in egg yolks. Recently
published studies suggest that natural astaxanthin may have additional benefits
with respect to fertility, weight gain and feed efficiency in broiler chickens
and layer hens. In December 1996, Cultor sold Svenska Foder to KKR, a Danish
animal feeds company, and assumed all of Svenska Foder's rights and obligations
under the Svenska Foder Supply Agreement.

CULTOR

The Cultor Distribution and Development Agreement initially provided that
from and after September 24, 1997 the target production requirement for the
Company and the target purchase requirement for Cultor would be 40 kilograms of
natural astaxanthin per month, and that the target production requirement for
the Company and the target purchase requirement for Cultor from and after
September 24, 1998 would be 120 kilograms of natural astaxanthin per month;
however, the Company and Cultor recently agreed to extend the term of the Cultor
Distribution and Development Agreement by one year and to amend the production
targets to be 40 kilograms per month at the end of the second year (September
1998) and 120 kilograms per month at the end of the third year

39
<PAGE>

(September 1999). By mutual agreement, the initial Aquasearch production
targets were each extended one year and, in addition, the focus of both parties'
development efforts were shifted from achieving monthly production targets to
achieving long-term production economics. Since the Cultor Distribution and
Development Agreement was signed, Cultor has devoted substantial resources to
developing its Aquaxan-Registered Trademark- animal feed and animal nutrition
product (which incorporates Aquasearch's natural astaxanthin), including
conducting extensive product formulation research and feeding trials. During
the past several quarters, the Company has achieved and sustained significant
improvements in virtually every phase of its production process. As a result of
these developments, the Company is expanding its existing one-acre facility to a
three-acre facility and increasing its production capacity. Based on the
current production rate of existing AGMs, the Company estimates that the
expanded facility could produce more than 80 kilograms of astaxanthin per month
if sufficient space were available for finishing ponds. However, because space
for finishing ponds at the Keahole Point site is constrained, the Company (with
Cultor's approval) expects to limit astaxanthin production to approximately 25
kilograms per month at the expanded site. The extra module capacity at the
expanded site will be used for further optimization of the astaxanthin
production process and the development and scale-up of new microalgal products.

Under the Agreement, 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 Cultor Distribution and Development 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. The original arrangement called for
Aquasearch to contribute a production site to the joint venture for its 50%
share of the joint venture company and Cultor to contribute cash equivalent to
the value of that production site for its 50% share of the joint venture.
Pursuant to this arrangement, Aquasearch would contribute a natural astaxanthin
production facility to be constructed in return for its 50% stake in the new
company and Cultor would contribute cash equal to the appraised value of the
Aquasearch 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, 1999 and ending on April 30,
2000 and "Y" equals six (or, in other words, an amount equal to twelve times
annual profit in the third year of the contract).

Because of recent advancements in astaxanthin production capability, the
Company, subject to Cultor's approval, plans to develop a second site for
large-scale astaxanthin production. It is currently contemplated that this
second site would be larger than the production site initially contemplated in
the Cultor Distribution and Development Agreement and would have a production
capacity significantly greater than the 120 kilograms per month. There is
currently no written agreement between Aquasearch and Cultor as to if, or when,
a second site will be constructed, or what the size or production capacity of
such a site will be. There can be no assurances that Aquasearch and Cultor will
reach an agreement regarding the development or timing of a second site, or
whether the Cultor Distribution and Development Agreement will need to be
amended to accommodate the construction of a larger site with greater production
capacity. The expansion of the Keahole Point site and the construction and
scale-up of any additional production site will involve various risks and
uncertainties. See "Risk Factors -- Risks Associated With Scale-Up of
Production Facilities."

<PAGE>

Under the Cultor Distribution and Development 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
microalgae 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 pursuant to which Cultor purchased 400,000 shares of Aquasearch 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 reduces 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 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. 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 which
will involve various risks and uncertainties.

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 microalgae 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.
In addition, at least two companies, Astacarotene and Cyanotech, have either
announced plans to produce natural astaxanthin from microalgae or are producing
significant quantities for test and commercial purposes. In particular,
Cyanotech has announced its intention to

41
<PAGE>

enter into large scale commercial production of natural astaxanthin and entered
into a $1.5 million supply agreement in the fiscal quarter ended June 30, 1998.
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
any competing 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. 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 plans to aggressively pursue pharmaceutical drug discovery
alliances with potential corporate partners. Aquasearch is not presently aware
of any other microalgae company engaged or interested in the possibility of
pharmaceutical drug development that also has the capability of large-volume,
commercial scale cultivation represented by Aquasearch's AGM technology.

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 intends to develop other natural products from microalgae that
will compete with existing natural and synthetic products. The Company
anticipates that competition to develop additional microalgae products will be
intense. Aquasearch's future competitors 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, 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'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.

42
<PAGE>

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, one patent by the European
Patent Office (which is applicable to all member nations of the European Union),
and one patent in Australia for its closed system microalgae cultivation
process. The Company has additional patents pending internationally and 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.

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. See "Business--Legal
Proceedings."

43
<PAGE>

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 FDA pursuant to the Federal Food, Drug and
Cosmetic Act. Each existing or potential microalgae 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, may require Aquasearch to develop and adhere to
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 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 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.

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 (although significantly less expensive
than the process related to obtaining clearances for a new pharmaceutical).

44
<PAGE>

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. As of the date of this Prospectus, neither the
Company nor any of its corporate partners, has applied for FDA clearance for the
Company's natural astaxanthin product as a food additive. 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
European Union, 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 European Union, and there can be no assurance
that the determination by Swedish authorities will have any influence on the
determination to be made by the European Union.

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.

EMPLOYEES

As of July 31, 1998, Aquasearch has 18 full-time employees, of whom three
have Ph.D.s, nine are involved in the production and harvesting process, five
are involved in research and development and four 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 the HOST Business Park in Kailua-Kona, Hawaii.
This facility 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.

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

<PAGE>

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 to a three-acre facility began in early 1998.
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. More
recently, the engineering plans for expanded production capability have been
updated in collaboration with the significant involvement of Cultor engineering
personnel.

In late 1997 the Company retained a local team including architects,
engineers and contractors to complete the design process and to obtain the
necessary construction permits. In late 1997, Aquasearch was granted the
necessary permits to begin construction. Construction of the expanded facility
began in early 1998 and is scheduled to be completed in November 1998 at an
estimated cost of $1.8 million.

On November 14, 1996, the Company executed a Letter of Intent with C.
Brewer and Company, Limited ("C. Brewer") with respect to the acquisition by the
Company of between 80 and 90 acres of property in the Ka'u region of the Big
Island of Hawaii valued at between $900,000 and $1,000,000 in exchange for the
issuance to C. Brewer of between 2,570,000 and 2,850,000 shares of Common Stock
of the Company (the "C. Brewer Common Stock") at a purchase price of $0.35 per
share. In addition, C. Brewer acquired a three-year warrant to purchase up to
500,000 shares of Common Stock at a purchase price of $1.25 per share. In the
light of the Company's recent advances in production technology and yields, the
consummation of this transaction will be delayed until the Company and Cultor
determine the best strategy and location for future development of a natural
astaxanthin production facility dedicated solely to satisfying the requirements
of an expanded Aquasearch/Cultor relationship.

LEGAL PROCEEDINGS

On July 13, 1998, Cyanotech filed a complaint (the "Complaint") in the
United States District Court for the District of Hawaii (Case No. CV98-00600ACK)
against the Company. In the Complaint, Cyanotech seeks declaratory judgment of
noninfringement of the Company's U.S. Letters Patent No. 5,541,056 (the
"5,541,056 Patent"); invalidity of the 5,541,056 Patent; and
non-misappropriation of the Company's trade secrets relating to closed culture
production of astaxanthin. Cyanotech filed the complaint after the Company
expressed to Cyanotech its concern that Cyanotech's use of closed system
technology may violate the 5,541,056 patent and constitute misappropriation of
trade secrets. The Company does not believe that Cyanotech's claims are
meritorious. However, the Company may be required to dedicate significant
management time and incur significant legal fees and expenses to pursue this
action, which could have a material adverse effect on the Company's business,
financial condition, results of operations and relationships with corporate
partners. In addition, in the event that Cyanotech were to prevail in this
action, a declaration of invalidity of the 5,541,056 Patent could have a
material adverse effect on the Company's business, financial condition, results
of operations and relationships with corporate partners.

On September 11, 1998, the Company filed an answer denying all of
Cyanotech's allegations and a counter claim, alleging infringement of the
5,541,056 Patent; misappropriation of trade secrets; unfair competition; and
breach of contract relative to its 1994 Dissolution Agreement with Cyanotech.
46

<PAGE>

SCIENTIFIC ADVISORY BOARD

The Aquasearch Scientific Advisory Board is composed of leading experts in
aquaculture, marine biology and fluid dynamics and the chemistry, photobiology,
genetics 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 microalgae products. The Scientific Advisory Board held its inaugural
meeting in May 1996 and was originally scheduled to meet approximately four
times per year. The Company intends to replace such meetings by mid-1998 with
various forms of electronic communication. 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. FAROOQ AZAM received a B.Sc. in Chemistry and Physics in 1962, and
M.SC. in Chemistry and Biochemistry in 1964 from the University of Panjab,
Lahore, Pakistan; he received a Ph.D. in Microbiology, Czechoslovak Academy of
Sciences, Prague in 1968. Dr. Azam is a Professor of Biology at Scripps
Institution of Oceanography in La Jolla, California and one of the world's
leading marine microbiologists. Dr. Azam is noted for his discovery of the
"microbial loop," a pathway that diverts much of the ocean's productivity into
bacteria and other microbes. Before this pathway was discovered in the 1980's
it was generally believed that most of the ocean's productivity was passed up
the food chain to fishes and other predators. Dr. Azam's contributions changed
the field of marine biology.

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. Dr.
Bardach 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 World Bank-FAO Panel on Aquaculture Research Needs of
Developing Countries, and the State of Hawaii Aquaculture Advisory Council.
Three of his books, HARVEST OF THE SEA, AQUACULTURE (now in its 25th printing)
and SUSTAINABLE AQUACULTURE (published in 1997), 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.Sc. (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. JOHN DORE received his Ph.D. in Biological Oceanography from the
University of Hawaii in 1995. Dr. Dore conducted his Ph.D. research on the
microbially-mediated chemical processes of nitrogen cycling. As a graduate
student, Dr. Dore received fellowships from the Research Corporation of the
University of Hawaii (1991-1992) and Achievement Rewards for College Scientists
(1989-1990). As a Post-Doctoral Researcher at the

<PAGE>

University of Hawaii for the past year he has been studying growth and carbon
isotope chemistry of microalgae in continuous cultures. Dr. Dore has published
17 scientific articles. Dr. Dore is a full-time employee of Aquasearch,
responsible for production as well as research and development in the area of
algal nutrition.

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. MALCOLM GREGORY received a B.Sc. (HONOURS) in Applied Microbiology from
the Bath University of Technology, UK in 1981, and a Ph.D. in Algaculture from
King's College, University of London, in 1985, where he focused his research on
cultivation of microalgae in tubular reactors. Dr. Gregory has more than
fifteen years experience in bioprocess engineering, specializing in process
control. With Cyanamid of Great Britain, he implemented control systems for
bulk antibiotics production. At the Interdisciplinary Research Centre for
Process Systems Engineering at University College, London, a world-renowned
center for excellence in biochemical engineering, he developed novel process
control methods now adopted in industry. He is an expert in microbiological
process control.

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 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.

<PAGE>
DR. PEARN 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. MIGUEL OLAIZOLA received his Ph.D. in Biological Oceanography from the
State University of New York at Stony Brook in 1993. Dr. Olaizola devoted his
graduate and post-graduate research to the study of carotenoid biosynthesis in
microalgae, primarily diatoms and cyanobacteria. During 1995 and 1996, Dr.
Oliazola was a Post-Doctoral Researcher at Scripps Institution of Oceanography,
University of California, San Diego, where he studied microalgal growth and
physiology. Dr. Oliazola is a full-time employee of Aquasearch, responsible for
pigment biosynthesis.

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.

DR. ALADAR SZALAY received a M.Sc. in Biochemistry from the Martin Luther
University, Germany in 1966, and a Ph.D. in Biochemistry from the Martin Luther
University, Germany in 1972. He carried out post-doctoral research on plant
genetics at the California Institute of Technology. Dr. Szalay is founding
Director of the Center for Molecular Biology and Gene Therapy at the School of
Medicine of Loma Linda University in California. His career has been built on
the genetic engineering of plants, including microalgae, with nutritionally and
medically important traits. He is an expert on the genetics of microalgae. Dr.
Szalay holds numerous patents in the area of genetic engineering, including
transgenic patents and methods for preparing and using artificial chromosomes.
He has acted as an advisor to a variety of institutions and companies, including
Rockefeller Foundation, Allied Chemical, Siemens AG, and Boehringer Mannheim.

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.

49
<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. .... 48 President, Chief Executive Officer,
and Chairman
Pearn P. Niiler, Ph.D. .... 60 Director
Earl S. Fusato............. 51 Chief Financial Officer, Secretary and
Director
Edward E. David, Ph.D. .... 73 Director
David G. Watumull.......... 48 Executive Vice-President, Strategic
Development and Corporate Finance
</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.

EARL S. FUSATO joined the Company as Chief Financial Officer in April 1997.
Mr. Fusato served as chief financial officer for RESCO, Inc., a Hawaii based
real estate firm from 1992 to 1994, and as a sales representative and consultant
in the real estate industry from 1994 to April 1997. During the period from
1983 to 1992, Mr. Fusato served in various financial positions with VeriFone,
including Vice President, Finance from 1983 to 1987 and Treasurer from 1987 to
1990. Prior to that, Mr. Fusato spent 13 years as an auditor at KPMG Peat
Marwick, LLP and Ernst & Young, LLP. Mr. Fusato is a Certified Public
Accountant.

EDWARD E. DAVID, PH.D., has served as a director of the Company since
September 1997. Dr. David is currently President of EED, Inc., an industrial
and governmental consulting firm, and Vice President and Principal of the
Washington Advisory Group, a science and technology consulting firm. Dr. David
served as President of Exxon Research and Engineering from 1977 to 1986; as
Executive Vice President of Research and Development

50
<PAGE>

of Gould Inc. and as President of Gould Laboratories from 1973 to 1977; and as
Executive Director of the Communications Systems Division of Bell Laboratories
from 1965 to 1970. Dr. David served as Science Advisor to the President of the
United States and Director of the White House Office of Science and Technology
from 1970 to 1973. Dr. David holds 12 honorary degrees, has received numerous
national awards and is a member of the National Academy of Engineering and the
National Academy of Sciences.

DAVID G. WATUMULL joined the Company in 1998 as Executive Vice-President,
Strategic Development and Corporate Finance; he is responsible for new business
development and corporate capital needs. As a consultant to the Company since
September 1997, Mr. Watumull has been instrumental in securing most of the
additional $5 million raised by Aquasearch in the last eighteen months. Mr.
Watumull served as Senior Vice-President at First Honolulu Securities, Inc.
("First Honolulu Securities"), a Honolulu based broker-dealer and investment
banker, and as Chief Investment Officer of First Honolulu Securities's asset
management division, First Honolulu Securities Asset Management, from 1993 to
1997. At First Honolulu Securities, Mr. Watumull was responsible for a $1.3
million private placement financing secured through First Honolulu Securities
for Aquasearch as well as the introduction of Mr. Fusato to the Company. Mr.
Watumull was also directly involved in the negotiations leading to the Letters
of Intent with C. Brewer Ltd. and Inflazyme Pharmaceuticals. From 1993 to 1997
at First Honolulu Securities, Mr. Watumull was a biotechnology industry analyst
with clients that included the Wisconsin State Investment Board. Prior to his
duties with First Honolulu Securities, Mr. Watumull owned his own investment
management firm specializing in biotechnology. From 1983 to 1992, he worked as
a money manager and retail broker at Paine Webber in Honolulu. Mr. Watumull
attended Claremont Men's College (now Claremont McKenna), majoring in
Mathematics.

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 information, on an accrual basis, with
respect to the compensation of Mark E. Huntley, Ph.D., the Chief Executive
Officer of the Company, for the four fiscal years ended October 31, 1997.

51
<PAGE>

YEAR ENDED SALARY/OTHER NO. OF SECURITIES
NAME AND POSITION OCTOBER 31, COMPENSATION STOCK AWARDS(1) UNDERLYING OPTIONS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark E. Huntley, Ph.D., 1997 $ 0(2) $0 0
President and Chief 1996 $ 0(2) $0 0
Executive Officer 1995 $ 0(2) $198,000(3) 1,665,250(4)
1994 $ 0(2) $ 60,000(5) 0
</TABLE>

- --------------------
(1) The dollar value of each of the restricted stock awards in the table above
was determined by multiplying the closing bid price of the Company's Common
Stock on the date of grant of the stock award by the number of shares
awarded.
(2) Dr. Huntley has at all times during 1994, 1995, 1996 and 1997 served as a
consultant to the Company while continuing his employment as a research
biologist at Scripps Institute of Oceanography, University of California,
San Diego. Pursuant to the rules and regulations of the Commission,
however, Dr. Huntley's position as President and Chief Executive Officer of
the Company qualifies him as an employee of the Company. Notwithstanding
this, all compensation paid to Dr. Huntley to date has been as though he
was an independent consultant to the Company.
(3) On August 24, 1995, the Company returned to Dr. Huntley 1,320,000 shares of
Common Stock from the 4,635,575 shares of Common Stock that Dr. Huntley had
gifted to the Company in 1989. Although the Company had intended this
transaction to qualify as a return of capital to Dr. Huntley without any
tax or other consequences to the Company or Dr. Huntley, under the rules
and regulations of the Commission, this transaction qualifies as a stock
grant in return for prior services. The closing bid price of the Common
Stock on the date of grant was $0.15 per share.
(4) On August 1, 1995, the Board of Directors granted a stock option to Dr.
Huntley, with a term of seven years, payable, if exercised, by a promissory
note payable over 3 years with interest at 5% per annum, to purchase up to
1,665,250 shares of Common Stock at an exercise price of $0.0625 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
closing bid price of the Company's Common Stock on May 2, 1994 was at $0.08
per share.

The total annual salary and bonus for any other executive officer did not
exceed $100,000 for the fiscal year ended October 31, 1997.

OPTION GRANTS IN FISCAL 1997

STOCK OPTION GRANTS

The following are grants of stock options made to executive officers and
directors during the fiscal year ended October 31, 1997.

% OF TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO MANAGEMENT EXERCISE OR BASE PRICE
NAME AND POSITION UNDERLYING OPTIONS IN FISCAL YEAR ($/SH) EXPIRATION DATE
- ------------------------- -------------------- --------------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Earl S. Fusato, Chief 1,500,000(1) 41.4% $ 0.36/share 1/28/2007
Financial Officer 1,000,000(2) 27.6% $ 1.00/share 4/07/2007
Edward E. David, $ 0.25/share
Director 50,000(3) 1.4% 7/27/2004
David Watumull, 1,072,000(4) 29.6% $ 0.25/share 8/01/2004
Executive Vice President
</TABLE>

52
<PAGE>

(1) On January 28, 1997, the Company granted a nonstatutory stock option to Mr.
Fusato to purchase 1,500,000 shares at $0.36 per share that vests over five
years.
(2) On April 7, 1997, in connection with Mr. Fusato's purchase of 1,000,000
shares of the Company's common stock, the Company granted him a
nonstatutory stock option to purchase 1,000,000 shares of Common Stock at
$1.00 per share. This option is fully vested.
(3) On July 28, 1997, in connection with Dr. David's purchase of 50,000 shares
of the Company's common stock, the Company granted him a nonstatutory stock
option to purchase 50,000 shares of Common Stock at $0.25 per share. This
option is fully vested.
(4) On August 31, 1997, the Company granted a nonstatutory stock option to Mr.
Watumull to purchase 1,072,000 shares of the Company's common stock at
$0.25 per share. This option is vested at the time of grant with respect
to 112,000 shares and the remaining 960,000 shares vest over four years
beginning February 1, 2000; the 960,000 shares are subject to acceleration
upon Mr. Watumull achieving certain milestones related to strategic
development and financing. If Mr. Watumull should terminate his
relationship to the Company as either an employee or a consultant, he
retains only the options vested at the time of termination, and the
exercise period terminates three months thereafter.

STOCK OPTIONS EXERCISED DURING FISCAL YEAR

No stock options or stock appreciation rights were exercised by any
executive officers or directors of the Company during the fiscal year ending
October 31, 1997.

OPTION VALUES

The following table sets forth information with respect to the value of
unexercised options held by executive officers as of October 31, 1997:

FISCAL YEAR-END OPTION VALUES

NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END(1)
--------------------------------- -----------------------------

NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------ --------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Mark E. Huntley, Ph.D.,
President and
Chief Executive Officer . . . . 1,665,250 -0- $378,906 -0-
</TABLE>

(1) Value of unexercised options is based on the closing bid price of the
Company's Common Stock on the Nasdaq Electronic Bulletin Board on October
31, 1997 ($0.29) minus the exercise price.

LTIP AWARDS DURING FISCAL YEAR

No long term incentive plan awards were made to any executive officers or
directors of the Company during the fiscal year ending October 31, 1997.

<PAGE>

COMPENSATION OF DIRECTORS

As of October 31, 1997, no director had received any compensation for any
service provided to the Company as a director.

EMPLOYMENT CONTRACTS

There are currently no employment contracts or change-in-control
arrangements between the Company and any director or executive officer.

EMPLOYEE BENEFIT PLANS

1997 EMPLOYEE COMPENSATION PACKAGE. In October 1997, the Board of
Directors adopted the 1997 Employee Compensation Package. The 1997 Employee
Compensation Package provides for employee compensation to consist of three
components: (i) base salary; (ii) a cash bonus, equal to 25% of quarterly
salary, payable at the end of each quarter, but only if the Company's
performance equals or exceeds certain cost, revenue and achievement targets
jointly agreed to by management; and (iii) an annual award of stock options to
all employees under the 1996 Stock Option Plan.

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.

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 has entered 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 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.

54
<PAGE>

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) each executive officer and (iv) the Company's
directors and officers as a group. 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.

PERCENTAGE OF SHARES PERCENTAGE OF SHARES
NUMBER OF SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED
DIRECTORS AND OFFICERS(1) BENEFICIALLY OWNED BEFORE OFFERING(1) AFTER OFFERING(2)
- ---------------------------------------------------------- ------------------ -------------------- --------------------
<S> <C> <C> <C>
Mark E. Huntley, Ph.D.(3)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740 . . . . . . . . . . . . . 5,683,186 8.1% 8.1%
Earl S. Fusato (4)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740 . . . . . . . . . . . . . 8,454,529 11.9% 5.1%
Pearn P. Niiler, Ph.D. (5)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740 . . . . . . . . . . . . . 1,918,402 2.7% 2.7%
Edward E. David, Sc.D. (6)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740 . . . . . . . . . . . . . 150,000 * *
David Watumull (7)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740 . . . . . . . . . . . . . 312,000 * *
All directors and officers as a group (5 persons) . . . . 16,518,117 22.2% 15.7%

5% SHAREHOLDERS
- ----------------------------------------------------------
Jean Sawyer Weaver Trust, Jean Sawyer Weaver, Trustee(8)
c/o Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740 . . . . . . . . . . . . . 7,541,223 10.8% 1.7%
Gregory F. Kowal(9)
900 Fort Street, #950
Honolulu, Hawaii 96822 . . . . . . . . . . . . . . . 4,746,735 6.8% 2.3%
</TABLE>
- ---------------------------
* Less than one percent

(1) Applicable percentage of beneficial ownership before the offering made
hereby is based on 68,564,013 shares outstanding as of September 30, 1998,
together with applicable options for each shareholder.

56
<PAGE>

Beneficial ownership is determined in accordance with the rules and
regulations of the Commission, and includes voting and investment power
with respect to shares. Shares of Common Stock subject to options
currently exercisable or exercisable within 60 days after September 30,
1998 are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other shareholder.
(2) Applicable percentage of beneficial ownership after the offering made
hereby assumes the sale of all 20,075,648 outstanding shares of Common
Stock offered hereby.
(3) Includes options to purchase 1,665,250 shares of Common Stock at an
exercise price of $0.0625 per share, with a term of seven years, payable by
a promissory note payable over 3 years with interest at 5% per annum.
(4) Includes options to purchase 500,000 shares and 1,000,000 shares of Common
Stock at an exercise price of $0.36 and $1.00 per share, respectively, that
are exercisable within 60 days of September 30, 1998 and warrants to
acquire 115,384 and 873,713 shares of Common Stock at $1.00 and $0.50 per
share, respectively, that are immediately exercisable.
(5) Includes options to purchase 1,291,050 shares of Common Stock at an
exercise price of $0.0625 per share, with a term of seven years, payable by
a promissory note payable over 3 years with interest at 5% per annum.
(6) Includes options to purchase 50,000 shares of Common Stock at an exercise
price of $0.25 that are immediately exercisable.
(7) Includes options to purchase 312,000 shares at an exercise price of $0.25
per share that are immediately exercisable.
(8) Includes warrants to acquire 1,100,000 shares of Common Stock at $0.50 per
share that are immediately exercisable.
(9) Includes warrants to acquire 476,190 and 500,000 shares of Common Stock at
$1.00 and $0.50 per share, respectively, that are immediately exercisable.

<PAGE>

SELLING SECURITY HOLDERS

The following table sets forth certain information with respect to the
beneficial ownership by the Selling Security Holders of shares of the Company's
Common Stock. The shares offered by this Prospectus were issued by the Company
upon conversion of $3,305,000 aggregate principal amount of the Company's 1998
Convertible Notes by the persons listed in the table below. Applicable
percentage of beneficial ownership before the offering made hereby is based on
68,564,013 shares outstanding as of September 30, 1998, together with applicable
options for each shareholder. Beneficial ownership is determined in accordance
with the rules and regulations of the Commission, and includes voting and
investment power with respect to shares. Shares of Common Stock subject to
options currently exercisable or exercisable within 60 days after September 30,
1998 are deemed outstanding for purposes of computing the percentage ownership
of the person holding such options, but are not deemed outstanding for computing
the percentage of any other shareholder. The Selling Security Holders 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 OWNERSHIP NUMBER OF SHARES BENEFICIAL OWNERSHIP
NAME BEFORE OFFERING OFFERED(1) AFTER OFFERING
- ---------------------------------------------- ------------------------ ---------------- ----------------------
NUMBER PERCENT NUMBER PERCENT
------------------------ ----------------------
<S> <C> <C> <C> <C> <C>
Jean Eliza Weaver Brickley(2). . . . . . . . 699,510 1.0% 599,510 100,000 *
Margret Daul(3). . . . . . . . . . . . . . . 699,510 1.0% 599,510 100,000 *
Jean Farmer(4) . . . . . . . . . . . . . . . 670,184 1.0% 570,184 100,000 *
Earl S. Fusato, Trustee, Earl S.
Fusato Rev. Trust(5) . . . . . . . . . . . . 8,454,529 11.9% 4,821,340 3,633,189 5.1%
Gregory F. Kowal(6). . . . . . . . . . . . . 4,746,735 6.8% 3,205,128 1,581,607 2.3%
Linda and Joe Maloney(7) . . . . . . . . . . 684,409 1.0% 584,409 100,000 *
James Stewart Miller Rev Liv Trust,
James Stewart Miller, Trustee (8). . . . . . 417,468 * 142,468 275,000 *
Lance S. and Elaine Nakamura(9). . . . . . . 2,633,208 3.8% 1,574,673 1,058,535 1.5%
Viiu Niiler and Charles Cole(10) . . . . . . 474,265 * 324,265 150,000 *
Scott Family Trust, Thomas Scott,
Trustee(11). . . . . . . . . . . . . . . . . 1,437,579 2.1% 663,102 774,477 1.1%
Jean Sawyer Weaver Trust, Jean Sawyer
Weaver, Trustee(12) . . . . . . . . . . . . 7,541,223 10.8% 6,391,223 1,150,000 1.7%
Sarah Anna Randsell Weaver(13) . . . . . . . 699,837 1.0% 599,837 100,000 *
</TABLE>
- ---------------------
* Less than 1%.

(1) Assumes that all 20,075,648 outstanding shares offered by this Prospectus
are sold, that the 1998 Warrants are not exercised, and that no
beneficially owned shares are sold other than by this Prospectus.
(2) Includes warrants to acquire 100,000 shares of Common Stock at $0.50 per
share that are immediately exercisable.
(3) Includes warrants to acquire 100,000 shares of Common Stock at $0.50 per
share that are immediately exercisable.
(4) Includes warrants to acquire 100,000 shares of Common Stock at $0.50 per
share that are immediately exercisable.
(5) Includes options to purchase 500,000 shares and 1,000,000 shares of
Common Stock at an exercise price of $0.36 and $1.00 per share,
respectively, that are exercisable within 60 days of September 30, 1998
and warrants to acquire 115,384 and 873,713 shares of Common Stock at
$1.00 and $0.50 per share, respectively, that are immediately
exercisable.

<PAGE>

(6) Includes warrants to acquire 476,190 and 500,000 shares of Common Stock
at $1.00 and $0.50 per share, respectively,that are immediately
exercisable.
(7) Includes warrants to acquire 100,000 shares of Common Stock at $0.50 per
share that are immediately exercisable.
(8) Includes warrants to acquire 25,000 shares of Common Stock at $0.50 per
share that are immediately exercisable.
(9) Includes warrants to acquire 261,363 and 250,000 shares of Common Stock
at $1.00 and $0.50 per share, respectively,that are immediately
exercisable.
(10) Includes warrants to acquire 50,000 shares of Common Stock at $0.50 per
share that are immediately exercisable.
(11) Includes warrants to acquire 292,207 and 120,000 shares of Common Stock
at $1.00 and $0.50 per share, respectively,that are immediately
exercisable.
(12) Includes warrants to acquire 1,100,000 shares of Common Stock at $0.50
per share that are immediately exercisable.
(13) Includes warrants to acquire 100,000 shares of Common Stock at $0.50 per
share that are immediately exercisable.

Selling Security Holder Earl Fusato has been the Company's Chief Financial
Officer and a member of its Board of Directors since the spring of 1997.

59
<PAGE>

CERTAIN TRANSACTIONS

From February to March 1998, the Company sold to Earl S. Fusato, the
Company's Chief Financial Officer, Secretary and a member of its Board of
Directors, certain short-term notes in the aggregate principal amount of
$250,000 with an interest rate of 10% per annum. The notes are payable in full
on September 30, 1998. In connection with the issuance of the notes, the
Company issued to Mr. Fusato warrants to purchase a total of 113,713 shares of
its Common Stock. The warrants have an exercise price of $0.50 per share and
have a term of three years.

In April 1997, the Company sold 1,000,000 shares of Common Stock at $0.21
per share to Mr. Fusato. The total proceeds to the Company were $210,000. No
underwriter was used. This offering was made pursuant to the exemption provided
under Section 4(2) of the Securities Act.

During the period from October 1996 to April 1997, the Company sold an
aggregate of 5,044,570 Units, consisting of one share of Common Stock and one
Common Stock Purchase Warrant (the "Warrants"), in a private placement under
Section 4(2) of the Securities Act of 1933, as amended. During the course of
the private placement, the Earl S. Fusato Revocable Living Trust purchased
115,384 Units at $0.26 per Unit. The Warrants have a term of three years and
are exercisable at $1.00 per share, subject to adjustment. The Warrants are
redeemable by the Company at $.01 per Warrant 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 gross proceeds from this offering were $1,275,980.

60
<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 blank check Preferred Stock (the "Preferred Stock"); (iii)
warrants to purchase an aggregate of 25,974 shares of Common Stock at an
exercise price of $0.21 per share issued to three investors in connection with
the 1996 bridge financing (the "Bridge Loan Warrants"); (iv) the 1997 Warrants
to purchase an aggregate of 5,347,244 shares of Common Stock at an exercise
price of $1.00 per share issued to 43 persons in connection with the 1997
private placement; (v) the 1998 Warrants to purchase a total of 3,418,713 shares
of Common Stock at an exercise price of $0.50 per share.

The following summary of certain provisions of the Common Stock, the
Preferred Stock, the Bridge Loan Warrants, the 1997 Warrants and the 1998
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 Bridge Loan Warrants, the 1997 Warrants and the 1998
Warrants, where such rights are set forth in full, and the provisions of
applicable law.

COMMON STOCK

As of September 30, 1998, there were outstanding: (i) 68,564,013 shares of
Common Stock held of record by approximately 2,000 shareholders, (ii) options to
purchase an aggregate of 9,883,751 shares of Common Stock, (iii) the Bridge
Loan Warrants, (iv) the 1997 Warrants and (v) the 1998 Warrants. 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 Bridge Loan Warrants, the 1997 Warrants and the 1998 Warrants
will be, fully paid and nonassessable. See "Dividend Policy."

PREFERRED STOCK

As of the date of this Prospectus, up to 5,000,000 shares of Preferred
Stock were authorized to be issued, but none were issued 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.

WARRANTS

BRIDGE LOAN WARRANTS. In connection with the August 1996 bridge financing,
the Company issued warrants to purchase a total of 25,974 shares of Common Stock
at an exercise price of $0.21 per share to the holders of certain Bridge Loan
Notes. The Bridge Loan Notes have been paid in full. The Bridge Loan Warrants

61
<PAGE>

are entitled to certain registration rights with respect to the Common Stock
issuable upon exercise of the Bridge Loan Warrants.

1997 WARRANTS. The Company closed a private offering of a total of
5,044,570 Units to "accredited investors" as defined in Rule 501 under the
Securities Act in early 1997. Each Unit consisted 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 1997 Warrants are exercisable at
$1.00 per share, subject to adjustment, at any time prior to December 31, 1999.
The 1997 Warrants will be redeemable by the Company at $.01 per Warrant at any
time prior to December 31, 1999 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 Placement Agent
for this offering, First Honolulu Securities, received 302,674 Common Stock
Purchase Warrants (equal to 6% of the number of Units sold) (the "First Honolulu
Warrants"). The terms of the First Honolulu warrants are identical to the terms
of the 1997 Warrants. The resale of the Warrant Common Stock underlying the
1997 Warrants and the First Honolulu Warrants was registered pursuant to
Registration Statement No. 333-16047. The 1997 Warrants and the First Honolulu
Warrants are not separately transferable.

1998 WARRANTS. During the period from June 1997 to September 1998, the
Company sold an aggregate of $3,305,000 aggregate principal amount of its 1998
Convertible Notes to a total of twelve "accredited investors" as defined under
Rule 501 of the Securities Act. In July 1998, the holders of $2.8 million
aggregate principal amount of the 1998 Convertible Notes exercised their option
to convert their Notes into a total of 16,870,520 shares of Common Stock. In
September 1998, the holders of $0.5 million aggregate principal amount of the
1998 Convertible Notes exercised their option to convert their Notes into a
total of 3,205,128 shares of Common Stock. In connection with the issuance of
the 1998 Convertible Notes, the Company also issued to the Selling Security
Holders 1998 Warrants to purchase a total of 3,418,713 shares of Common Stock.
The 1998 Warrants have an exercise price of $0.50 per share and term of three
years.

TRANSFER AGENT

The Transfer Agent and Registrar for the Common Stock, the 1997 Warrants
and the 1998 Warrants is American Securities Transfer & Trust, Inc.

62
<PAGE>

PLAN OF DISTRIBUTION

The sale of the Securities by the Selling Security Holders may be effected
from time to time in transactions in the over-the-counter market, in privately
negotiated transactions, through the writing of options on the Securities, or
through a combination of such methods of sale, at fixed prices, that may be
changed, at market prices prevailing at the time of sale, at prices relating to
such prevailing market prices or at negotiated prices. The Selling Security
Holders may effect such transactions by selling the Securities to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Security Holders and/or
the purchasers of the Securities for whom such broker-dealers may act as agents
or to whom they may sell as principals, or both (which compensation as to a
particular broker-dealer may be in excess of customary compensation). Any
broker-dealer may act as a broker-dealer on behalf of one or more of the Selling
Security Holders in connection with the offering of certain of the Securities by
the Selling Security Holders.

The Selling Security Holders and any broker-dealers who act in connection
with the sale of the Securities hereunder may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any commissions
received by them and profit on any resale of the Securities as principal might
be deemed to be underwriting discounts and commissions under the Securities Act.
The Company has agreed to indemnify the Selling Security Holders against certain
liabilities, including liabilities under the Securities Act.

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.

EXPERTS

The financial statements of Aquasearch, Inc. as of October 31, 1997 and
1996, and for the years then ended, appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, and as of and for the period from inception to October 31, 1995, by
Johnson, Holscher & Company, P.C., independent auditors, as set forth in their
respective reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firms as experts in
accounting and auditing.

63
<PAGE>

FINANCIAL STATEMENTS

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors ........................................ F-2

Independent Auditor's Report .......................................... F-3

Audited Financial Statements:

Balance Sheets as of October 31, 1995, 1996 and 1997 .................. F-4

Statements of Loss and Accumulated Deficit from Inception to October
31, 1997 and for the Fiscal Years Ended October 31, 1995, 1996 and
1997 ............................................................. F-5

Statements of Cash Flows from Inception to October 31, 1997 and for the
Fiscal Years Ended October 31, 1995, 1996 and 1997 ............... F-6

Statements of Stockholders' Equity (Deficit) from Inception to October
31, 1997 ......................................................... F-7

Notes to Financial Statements ......................................... F-11

Unaudited Financial Statements:

Balance Sheets as of October 31, 1997 and July 31, 1998 (Unaudited) ... F-22

Statements of Loss and Accumulated Deficit for the Period from
Inception to July 31, 1998, for the Three Months Ended July 31,
1998 and for the Nine Months Ended July 31, 1998 (Unaudited) ..... F-23

Statements of Loss and Accumulated Deficit for the Period from
Inception to July 31, 1998, for the Three Months Ended July 31,
1997 and for the Nine Months Ended July 31, 1997 (Unaudited) ..... F-24

Statements of Cash Flows for the Period from Inception to April 30,
1998, for the Nine Months Ended July 31, 1997 and for the Nine
Months Ended July 31, 1998 (Unaudited) ........................... F-25

Notes to Financial Statements (Unaudited) ............................. F-26
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Aquasearch, Inc.

We have audited the accompanying balance sheets of Aquasearch, Inc. (a
development stage enterprise) as of October 31, 1997 and 1996, and the related
statements of loss and accumulated deficit, cash flows, and stockholders' equity
(deficit) for the years then ended and for the period from inception to
October 31, 1997. 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. The financial statements as of and for
the period from inception to October 31, 1995, were audited by other auditors
whose report dated December 2, 1995 except for Note 5 dated January 26, 1996,
and Note 8 dated April 6, 1997, expressed an unqualified opinion on those
statements. The financial statements for the period from inception to
October 31, 1995 include no revenues and a net loss of $1,616,518. Our opinion
on the statements of loss and accumulated deficit, cash flows, and stockholders'
equity (deficit) for the period from inception to October 31, 1997, insofar as
it relates to amounts for prior periods through October 31, 1995, is based
solely on the report of the other auditors.

We conducted our audits 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 audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other auditors, 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, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended and the period from inception to October 31,
1997, in conformity with generally accepted accounting principles.

As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and working capital deficit at October 31, 1997 raise
substantial doubt about its ability to continue as a going concern. The
October 31, 1997 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

January 31, 1998
Honolulu, Hawaii

F-2
<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
and Note 8 dated April 6, 1997 /s/ Johnson, Holscher & Co.
PROFESSIONAL CORPORATION

F-3
<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>

OCTOBER 31
---------------------------------------------------------
1995
1997 1996 (AS RESTATED)
---------------- ---------------- ----------------
(NOTE 8)
<S> <C> <C> <C>
Assets
Current assets:
Cash.......................................................... $ 47,006 $ 187,166 $ 27,208
Cash in escrow................................................ - 460,980 -
Accounts receivable........................................... 1,219 1,933 -
Stock subscriptions receivable................................ - - 35,000
Prepaid expenses.............................................. 24,439 5,534 9,177
Refundable deposits........................................... 4,570 3,145 2,535
----------- ----------- -----------
Total current assets............................................... 77,234 658,758 73,920
----------- ----------- -----------

Notes receivable................................................... 30,516 - -
Plant and equipment:
Plant......................................................... 738,889 676,709 408,219
Equipment..................................................... 173,052 68,349 7,740
Less accumulated depreciation................................. (104,894) (35,876) (320)
----------- ----------- -----------
Net plant and equipment............................................ 807,047 709,182 415,639
Total assets....................................................... $ 914,797 $ 1,367,940 $ 489,559
----------- ----------- -----------
----------- ----------- -----------

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable.............................................. $ 446,344 $ 466,165 $ 233,181
Deposits held................................................. - 460,980 -
Notes payable (NOTE 2)........................................ 575,000 150,000 -
----------- ----------- -----------
Total current liabilities.......................................... 1,021,344 1,077,145 233,181
----------- ----------- -----------

Stockholders' Equity (Deficit)
Preferred stock (5,000,000 shares authorized) (Note 1)........ - - -
Common stock ($0.0001 par value, 100,000,000 shares authorized,
47,819,881, 40,829,331 and 32,583,688 shares outstanding at
October 31, 1997, 1996 and 1995 respectively)................. 5,904 5,204 4,379
Additional paid-in capital.................................... 4,699,470 3,234,309 1,902,785
Deficit accumulated during the development stage.............. (4,811,921) (2,948,718) (1,650,786)
----------- ----------- -----------
Total stockholders' equity (deficit)............................... (106,547) 290,795 256,378
----------- ----------- -----------
Total liabilities and stockholders' equity (deficit)............... $ 914,797 $ 1,367,940 $ 489,559
----------- ----------- -----------
----------- ----------- -----------

</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>

FOR THE YEARS ENDED OCTOBER 31,
----------------------------------------------------
FROM
INCEPTION TO 1995
OCTOBER 31, (AS RESTATED)
1997 1997 1996 (NOTE 8)
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Operations
Sales............................................... 11,077 1,077 10,000 -
Cost of sales....................................... 23,464 2,238 21,226 -
---------- ---------- ---------- ----------
Gross loss from operations.......................... (12,387) (1,161) (11,226) -

Research and development costs...................... 1,886,536 793,770 648,601 89,264
General and administrative expenses................. 2,705,248 1,072,051 640,702 393,171
---------- ---------- ---------- ----------

Loss from operations................................ (4,604,171) (1,866,982) (1,300,529) (482,435)

Other Income (Expense)
Interest............................................ (5,182) 4,465 2,597 (1,762)
Other............................................... (6,702) (686) - (2,616)
Investment in joint venture......................... (147,096) - - -
---------- ---------- ---------- ----------
Total other income (expense)........................ (158,980) 3,779 2,597 (4,378)
---------- ---------- ---------- ----------
Loss before income taxes and extraordinary item..... (4,763,151) (1,863,203) (1,297,932) (486,813)
Extraordinary item - loss on write down of
assets to liquidation basis......................... (14,502) - - -
---------- ---------- ---------- ----------
Loss before income taxes............................ (4,777,653) (1,863,203) (1,297,932) (486,813)

Federal and State income taxes...................... - - - -
---------- ---------- ---------- ----------
Net loss............................................ (4,777,653) (1,863,203) (1,297,932) (486,813)

Accumulated Deficit
Balance, beginning of period........................ (34,268) (2,948,718) (1,650,786) (1,163,973)
---------- ---------- ---------- ----------
Balance, end of period.............................. $(4,811,921) $(4,811,921) $(2,948,718) $(1,650,786)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Loss per share...................................... $ (0.21) $ (0.04) $ (0.03) $ (0.02)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Weighted average shares outstanding................. 22,936,599 44,646,653 37,679,955 25,541,021
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

SEE ACCOMPANYING NOTES.

F-5
<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

FOR THE YEARS ENDED OCTOBER 31
---------------------------------------------
FROM 1995
INCEPTION TO (AS RESTATED)
OCTOBER 31, 1997 1997 1996 (NOTE 8)
----------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss.................................................. $(4,777,653) $(1,863,203) $(1,297,932) $ (486,813)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization......................................... 3,527 - - -
Depreciation......................................... 110,601 69,018 35,556 320
Expenses paid with common stock...................... 755,319 311,154 62,800 210,998
Loss on write down of assets to liquidation basis.... 5,392 - - -
Changes in:
Other current assets............................ (28,808) (20,330) 3,033 (10,505)
Receivables..................................... (1,219) 714 33,067 (35,000)
Accounts payable................................ 362,631 (19,821) 232,968 110,536
Deposits held................................... - (460,980) 460,980 (85,000)
---------- ---------- ---------- ----------
Cash used in operating activities......................... (3,570,210) (1,983,448) (469,528) (295,464)

Cash Flows from Investing Activities
Purchase of fixed assets.................................. (821,525) (166,883) (329,099) (315,180)
---------- ---------- ---------- ----------
Cash used in investing activities......................... (821,525) (166,883) (329,099) (315,180)

Cash Flows from Financing Activities
Cash (held in) released from escrow....................... - 460,980 (460,980) 85,000
Increase in notes receivable.............................. (30,516) (30,516) - -
Issuance of common stock.................................. 4,136,322 1,320,129 1,326,600 571,580
Increase (decrease) in notes payable...................... 604,800 425,000 150,000 -
Offering costs............................................ (271,919) (165,422) (57,035) (19,941)
---------- ---------- ---------- ----------
Cash provided by financing activities..................... 4,438,687 2,010,171 958,585 636,639
---------- ---------- ---------- ----------
Net increase (decrease) in cash........................... 46,952 (140,160) 159,958 25,995
Cash, beginning of the period............................. 54 187,166 27,208 1,213
---------- ---------- ---------- ----------
Cash, end of the period................................... $ 47,006 $ 47,006 $ 187,166 $ 27,208
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

SEE ACCOMPANYING NOTES.

F-6
<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FROM INCEPTION TO OCTOBER 31, 1997
<TABLE>
<CAPTION>

COMMON STOCK
---------------------------
TOTAL
ADDITIONAL STOCKHOLDERS'
NUMBER OF PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1988.................... 20,000,000 $ 2,000 $ 72,730 $ (101,984) $ (27,254)

Sale of stock ($0.05 per share).............. 4,000,000 400 166,291 - 166,691

Treasury shares acquired at no cost.......... (11,198,838) - - - -

Exercise of A warrants for stock
($0.12 per share)....................... 556,000 56 66,664 - 66,720

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

Sale of stock ($0.07 per share).............. 140,000 14 9,786 - 9,800

Stock issued for services ($0.05 per share).. 300,000 30 13,515 - 13,545

Exercise of A warrants for stock
($0.12 per share)....................... 2,792,000 279 328,540 - 328,819

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

Sale of stock ($0.04 per share).............. 125,000 13 5,987 - 6,000

Stock issued in consideration for loans
($0.04 per share)...................... 290,000 29 11,571 - 11,600

Loss for the year ended October 31, 1991..... - - - (251,401) (251,401)
----------- ----------- ----------- ---------- -----------
</TABLE>

F-7
<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)

COMMON STOCK
---------------------------
TOTAL
ADDITIONAL STOCKHOLDERS'
NUMBER OF PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1991.................... 17,004,162 $ 2,821 $ 675,084 $ (700,557) $ (22,652)

Sale of stock ($0.15 per share).............. 20,000 2 2,998 - 3,000

Stock issued for services ($0.0001 to
$0.04 per share)....................... 453,500 45 6,134 - 6,179

Loss for the year ended
October 31, 1992........................ - - - (81,128) (81,128)
----------- ----------- ----------- ---------- -----------

Balance, October 31, 1992.................... 17,477,662 2,868 684,216 (781,685) (94,601)

Sale of stock ($0.08 per share).............. 3,175,000 318 244,071 - 244,389

Stock issued for services
($0.08 per share)....................... 673,751 68 54,083 - 54,151

Conversion of notes and advances for
stock ($0.08 per share)................ 861,900 87 69,315 - 69,402

Loss for the year ended
October 31, 1993........................ - - - (142,198) (142,198)
----------- ----------- ----------- ---------- -----------

Balance, October 31, 1993.................... 22,188,313 3,341 1,051,685 (923,883) 131,143

Sale of stock ($0.03 per share) ............. 250,000 25 7,475 - 7,500

Stock issued for services
($0.08 per share)....................... 1,025,000 101 81,900 - 82,001

Loss for the year ended
October 31, 1994........................ - - - (240,090) (240,090)
----------- ----------- ----------- ---------- -----------
</TABLE>

F-8
<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)

COMMON STOCK
---------------------------
TOTAL
ADDITIONAL STOCKHOLDERS'
NUMBER OF PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1994.................... 23,463,313 $ 3,467 $ 1,141,060 $ (1,163,973) $ (19,446)

Sale of stock ($0.0625 to $0.10 per share)... 7,622,500 762 550,883 - 551,645

Stock issued for services ($0.10 per share).. 177,875 18 12,974 - 12,992

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

Loss for the year ended
October 31, 1995........................ - - - (288,813) (288,813)
----------- ----------- ----------- ----------- -----------
Balance, October 31, 1995,
as previously reported.................. 32,583,688 4,379 1,704,785 (1,452,786) 256,378

Correction of reissuance of stock
previously canceled (NOTE 8)........... - - 198,000 (198,000) -
----------- ----------- ----------- ----------- -----------

Balance, October 31, 1995, as restated....... 32,583,688 4,379 1,902,785 (1,650,786) 256,378

Sale of stock ($0.125 to $0.50 per share).... 7,901,643 791 1,268,758 - 1,269,549

Stock issued for services ($0.125 to
$0.62 per share)........................ 344,000 34 62,766 - 62,800

Loss for the year ended
October 31, 1996........................ - - - (1,297,932) (1,297,932)
----------- ----------- ----------- ----------- -----------
</TABLE>

F-9
<PAGE>

AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)

COMMON STOCK
---------------------------
TOTAL
ADDITIONAL STOCKHOLDERS'
NUMBER OF PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1996.................... 40,829,331 $ 5,204 $ 3,234,309 $ (2,948,718) $ 290,795

Sale of stock ($0.21 to $0.44 per
share)................................. 5,095,727 510 1,123,681 - 1,124,191

Stock issued for services ($0.17 to
$0.892 per share)....................... 103,138 11 35,336 - 35,347

Exercise of options for stock
($0.625 per share)...................... 488,250 49 30,467 - 30,516

Penalty shares ($0.2116 per share)
(NOTE 2)................................ 1,303,435 130 275,677 - 275,807

Loss for the year ended October 31, 1997..... - - - (1,863,203) (1,863,203)
----------- ----------- ----------- ----------- -----------

Balance, October 31, 1997.................... 47,819,881 $ 5,904 $ 4,699,470 $(4,811,921) $ (106,547)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>

SEE ACCOMPANYING NOTES.

F-10
<PAGE>

AQUASEARCH, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

OCTOBER 31, 1997, 1996 AND 1995

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Aquasearch, Inc. (Aquasearch), a Colorado corporation founded in
February 1988, is a development stage company that develops and commercializes
natural products from microalgae using its proprietary, large-scale
photobioreactor technology known as the Aquasearch Growth Module. The Company's
principal operations are located in Kailua-Kona, Hawaii.

Aquasearch's first commercial product is astaxanthin, a naturally occurring
red pigment derived from a freshwater microalgae. The primary market for
astaxanthin currently is aquaculture. 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.

Because no significant sales have occurred and because the Company has
devoted most of its efforts since inception to research and development, the
Company is considered to be in the development stage.

BASIS OF PRESENTATION

The Company's financial statements have been presented on the basis that it
is able to continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred operating losses since inception totaling approximately
$4.8 million. At October 31, 1997, the Company had a working capital deficit of
approximately $950,000. During the year ended October 31, 1997, the Company sold
additional shares of stock through a private placement and issued convertible
notes, which were sufficient to fund its immediate operating financial needs.

F-11
<PAGE>

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF PRESENTATION (CONTINUED)

In May 1996, the Company entered into a three-year (recently extended to
four years) Distribution and Development Agreement with Cultor, Ltd. (Cultor).
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 $2.0 billion Finnish food conglomerate that is a leading
worldwide producer of animal feed and animal nutrition products. The terms of
the extended Cultor agreement require that from September 1998 the Company is to
provide Cultor with 40 kilograms of natural astaxanthin per month increasing to
120 kilograms per month beginning in September 1999. The agreement provides that
Aquasearch and Cultor share equally in the gross margin of the product shipped.

The agreement also 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 that is planned to be constructed in
late 1998 in return for its 50% stake in the new company and Cultor would
contribute cash equal to the appraised value of the facility for its 50% stake.

In connection with the execution of the agreement, Cultor purchased 400,000
shares of the Company's common stock at a purchase price of $0.50 per share.

The Company has begun planning for the expansion of its present one-acre
research and development facility to a four-acre research and
development/production facility that will allow it to meet its September 1998 40
kilogram per month target production requirement under the Cultor Agreement. To
complete the expansion, the Company estimates that it must obtain between $4 and
$7 million of additional capital. In order to meet the September 1999 120
kilogram per month target, the Company anticipates that it must construct a
ten-acre production facility.

The Company currently projects that it will require between $1.5 and $2.0
million in operating capital in 1998, before any planned capital expenditures
related to the construction of its new production facility. The Company is
presently pursuing additional sources of capital in order to maintain and expand
its operations in fiscal 1998. These capital sources include government
contracts and grants, product sales, license agreements and equity and debt
financing.

F-12
<PAGE>

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF PRESENTATION (CONTINUED)

The Company's continued existence is dependent upon its ability to obtain
working capital and long-term financing to meet its obligations on a timely
basis and to fund expansion of its production facilities and continued research
and development of new microalgae products. The Company is presently unable to
reasonably determine the likelihood of obtaining such financing. In addition,
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 any potential corporate partner as a customer,
or a significant reduction in the level of sales to Cultor or any potential
corporate partner could have a material adverse effect on the Company's
business, financial condition and results of operations.

The accompanying financial statements do not include any adjustments,
including those related to the classification of recorded asset amounts or the
amounts or classification of liabilities, that might result from the outcome of
the aforementioned uncertainties.

CASH EQUIVALENTS

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.

CASH IN ESCROW AND DEPOSITS HELD

Cash in escrow and deposits held represent funds received from prospective
purchasers of the Company's common stock for which written confirmation and
representation letters, as required by the private placement memorandum, were
not received as of the balance sheet date.

PLANT AND EQUIPMENT

Plant and equipment is stated at cost. Depreciation is provided on the
straight-line method over ten years for plant and five years for equipment.

PREFERRED STOCK

The Company has authorized 5,000,000 shares of "blank check" preferred
stock, with such designations, rights, preferences, privileges and restrictions
to be determined by the Company's Board of Directors. No preferred stock has
been issued as of October 31, 1997.

F-13
<PAGE>

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK ISSUED FOR SERVICES

Stock issued for services is based on management's estimate of the fair
value of the Company's restricted stock at the date of issue or the fair value
of the services received, whichever is more reliably measurable.

INCOME TAXES

The Company uses the asset and liability method of accounting for income
taxes as required by Statement of Financial Accounting Standards No. 109 (SFAS
109), ACCOUNTING FOR INCOME TAXES. SFAS 109 requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of certain assets and
liabilities.

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 based on the average common shares outstanding during
the period. Average common share equivalents have not been included in the
computation of loss per share as their effect would be anti-dilutive.

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's financial instruments, including
cash, cash in escrow, accounts payable, deposits held and notes payable are
deemed to approximate fair value due to their short-term nature.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

F-14
<PAGE>

2. COMMON STOCK AND COMMON STOCK WARRANTS

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. The 3,348,000 "B"
warrants expired on September 15, 1996.

In August and September 1996, the Company obtained approximately $150,000
of short-term bridge financing from four individual investors pursuant to a note
and warrant purchase agreement dated August 1, 1996. The notes matured on
September 30, 1996.

In conjunction with the execution of the notes, the investors received a
total of 25,974 warrants entitling the holder to purchase one share of common
stock at an exercise price of $0.21 per share. The warrants expire on
December 31, 1999.

During the period from October 1996 to April 1997, the Company sold an
aggregate of 5,044,570 units, consisting of one share of Common Stock and one
Common Stock Purchase Warrant (the "Warrants"), to accredited investors (the
"Unit Investors") in a private placement (the "Unit Offering"). The purchase
price of the units ranged from $0.21 per unit to $0.44 per unit. The Warrants
have a term of three years and are exercisable at $1.00 per share, subject to
adjustment. The Warrants are redeemable by the Company at $0.01 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 gross proceeds
from the Unit Offering were $1,275,980. The placement agent for this Offering
received total commissions of $76,559 (equal to 6% of the gross proceeds from
the sale of the units) and 302,674 Common Stock Purchase Warrants (equal to 6%
of the number of units sold). The terms of the Warrants issued are identical to
the terms of the Warrants issued to the Unit Investors in the Unit Offering.

In addition to the above shares, the Company issued 1,303,000 shares of
Common Stock to the Unit Investors as compensation for the failure by the
Company to cause the registration statement of the shares purchased in the Unit
Offering to be declared effective by the Securities and Exchange Commission on
or before May 29, 1997. The registration statement was declared effective on
November 12, 1997. The shares have been reflected as issued and outstanding as
of October 31, 1997.

F-15
<PAGE>

2. COMMON STOCK AND COMMON STOCK WARRANTS (CONTINUED)

In November 1996, the Company executed a letter of intent with C. Brewer
and Company, Limited (C. Brewer) with respect to the acquisition of between 80
and 90 acres of property on the Big Island of Hawaii valued at between $900,000
and $1,000,000 in exchange for C. Brewer's acquisition of approximately 6% of
the outstanding common stock of the Company. In connection with this
transaction, C. Brewer also acquired a warrant to purchase up to 500,000 shares
of the Company's common stock at an exercise price of $1.25 per share. This
transaction has not been consummated as of October 31, 1997.

During the two quarters ended October 31, 1997, the Company issued one-year
convertible notes payable totaling $560,000. The holders of these notes have an
option to convert to equity under a planned private placement in fiscal 1998.
The convertible notes payable carry an interest rate of 10 percent per annum and
warrants to purchase 100 shares of common stock at $0.50 per share for each
$1,000 aggregate principal amount of convertible notes. The holders are
shareholders and an officer/director of the Company. As of October 31, 1997,
none of the described warrants were issued.

As of October 31, 1997, there were a total of 5,373,218 common stock
purchase warrants issued and outstanding, of which 5,347,244 warrants had an
exercise price of $1.00 per share and 25,974 warrants had an exercise price of
$0.21 per share. No warrants were exercised during the year ended October 31,
1997. At October 31, 1997, the Company had reserved a sufficient number of
shares of its common stock for issuance pursuant to the exercise of the
warrants.

3. COMMON STOCK OPTIONS

In August 1995, the Company granted nonstatutory stock options, exercisable
immediately, to seven individuals to purchase a total of 5,777,462 shares of the
Company's common stock at an exercise price of $0.0625 per share. In addition,
the Company also granted stock options to three individuals which became
exercisable in July 1996 to purchase a total of 180,000 shares of the Company's
common stock at an exercise price of $0.61 per share. The options have a term
of seven years.

In March 1996, the Company's Board of Directors approved a stock option
plan which provides for the granting of nonstatutory stock options to employees
and consultants of the Company. A total of 5,000,000 shares of the Company's
common stock has been reserved for issuance under the plan. Terms of awards
under the plan including vesting requirements, exercise prices and expiration
dates are determined at the discretion of the plan's administrator. The plan
terminates in March 2006.

In July 1996, the Company granted nonstatutory stock options to a
consultant for a total of 400,000 shares of the Company's common stock at an
exercise price of $0.56 per share. The options were immediately exercisable with
respect to 200,000 shares. The remaining options became exercisable in
January 1997 for 100,000 shares and July 1997 for 100,000 shares. The options
have a term of ten years.

F-16
<PAGE>
3. COMMON STOCK OPTIONS (CONTINUED)

In November 1996, the Company granted nonstatutory stock options to ten
employees for a total of 107,307 shares of the Company's common stock at an
exercise price of $0.34 per share. The options vest over a period of five years
and have a term of ten years.

In January 1997, the Company granted a nonstatutory stock option to an
officer/director of the Company for a total of 1,500,000 shares of the Company's
common stock at an exercise price of $0.36 per share. The option vests over a
period of five years and has a term of ten years.

In April 1997, the Company sold a total of 1,000,000 shares of its common
stock to an officer/director of the Company at a purchase price of $0.21 per
share. In addition, the Company granted this person a nonstatutory stock option
for a total of 1,000,000 shares of the Company's common stock at an exercise
price of $1.00 per share. The option is fully vested and has a term of ten
years.

In August 1997, the Company granted a nonstatutory stock option to a
consultant for a total of 1,072,000 shares of the Company's common stock at an
exercise price of $0.25 per share. The option was immediately exercisable with
respect to 112,000 shares. The remainder becomes exercisable on the achievement
of certain agreed on milestones. The option has a term of seven years.

In September 1997, the Company granted nonstatutory stock options to 14
employees for a total of 474,510 shares of the Company's common stock at an
exercise price of $0.25 per share. The options vest over a period of five years
and have a term of ten years.

During the year ended October 31, 1997, the Company granted nonstatutory
stock options to four consultants for a total of 145,000 shares of the Company's
common stock at exercise prices ranging from $0.25 to $0.50 per share. The
options are fully vested and have a term of seven years.

The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6%, expected dividend yield of

F-17
<PAGE>

3. COMMON STOCK OPTIONS (CONTINUED)

0%, volatility factor of the expected market price of the Company's common stock
of 0.63, and an expected life of the option of 4.6 years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1997
---- ----
<S> <C> <C>
Pro forma net loss $1,373,932 $2,115,244

Pro forma loss per share $(0.04) $(0.05)

</TABLE>

A summary of the Company's stock option activity, and related information
for the year ended October 31, 1997 follows:
<TABLE>
<CAPTION>

WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- ---------------
<S> <C> <C>
Outstanding, beginning of
year 6,312,462 $0.11

Granted 4,298,817 0.47

Exercised (488,250) 0.06

Forfeited (197,766) 0.26
---------

Outstanding, end of year 9,925,263 $0.26
---------
---------

Exercisable, end of year 1,695,000 $0.79

</TABLE>

F-18
<PAGE>

3. COMMON STOCK OPTIONS (CONTINUED)

The 488,250 of common stock options exercised during the year were in
exchange for three-year notes receivable bearing interest at 5 percent per
annum.

Weighted-average exercise prices and fair values of options issued during
the year ended October 31, 1997 with exercise prices which equaled or exceeded
the market prices of the Company's stock on the grant date follows:
<TABLE>
<CAPTION>

WEIGHTED-AVERAGE

EXERCISE
OPTIONS PRICE FAIR VALUE
------- ----- -----------
<S> <C> <C> <C>
Options whose exercise
price equaled the market
price of the stock on the
grant date 2,081,817 $0.33 $0.20

Options whose exercise
price exceeded the market
price of the stock on the
grant date 2,217,000 0.59 0.07
---------

Options issued during the
year 4,298,817
---------
---------

</TABLE>

The following summarizes information about the Company's stock options
outstanding at October 31, 1997:
<TABLE>
<CAPTION>

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
------- ------- ----- ----- ------- ------
<S> <C> <C> <C> <C> <C>
$0.06 5,139,212 8.0 years $0.06 20,000 $0.06

$0.25 to $0.36 3,256,051 8.9 0.30 145,000 0.20

$0.50 to $1.00 1,530,000 9.3 0.85 1,530,000 0.85
--------- ---------

9,925,263 1,695,000
--------- ---------
--------- ---------

</TABLE>

F-19
<PAGE>

4. RELATED PARTY TRANSACTIONS

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 its president and chief executive officer. These were
shares which had been previously returned to the Company (see Note 8).

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

<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
------------------
<S> <C> <C>
YEAR
1997 103,138 $39,016
1996 40,000 5,000
1995 177,875 12,992
1994 1,025,000 82,000

</TABLE>

5. INCOME TAXES

Since its formation the Company has incurred net operating losses. As of
October 31, 1997, the Company had a net operating loss carryforward available to
offset future taxable income for federal and state income tax purposes of
approximately $4 million. The net operating loss carryforward for tax reporting
purposes expires in the years from 1999 to 2012. The Company also has a research
credit carryover approximating $90,000 which expires between the years 2003 and
2012.

No deferred tax benefit or liability has been recorded for temporary
differences between book and tax reporting due to the uncertainty of any
eventual recovery or payment.

F-20
<PAGE>

6. INVESTMENT IN OCEANCOLOR, INC.

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

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 October 31, 1995, there remained in accounts
payable approximately $100,800 of this cost. Accordingly, the amount which
remained in accounts payable was removed from cash paid for the purchase of
fixed assets in the statement of cash flows for the year ended October 31, 1995.

8. CORRECTION OF ACCOUNTING FOR REISSUANCE OF STOCK PREVIOUSLY CANCELED

During the year ended October 31, 1995, the Company reissued 1,320,000
shares of restricted stock to its president and chief executive officer. These
were shares which had been previously returned to the Company by the president
and chief executive officer at no cost to the Company. The reissuance was
recorded at par value in the financial statements for the year ended October 31,
1995 with no effect on net loss for that year. The Company has subsequently
valued the reissued stock at $0.15 per share based on the quoted market price of
the restricted stock at the date of reissuance. As a result, the Company's
financial statements for the year ended October 31, 1995 have been restated as
follows:

AS ORIGINALLY
REPORTED AS RESTATED
--------------------------
<S> <C> <C>
Balance sheet:
Additional paid-in capital . . . . . . . . . $1,704,785 $1,902,785
Deficit accumulated during the development
stage . . . . . . . . . . . . . . . . . (1,452,786) (1,650,786)

Statement of loss and accumulated deficit:
General and administrative expenses . . . . 195,171 393,171
Net income (loss) . . . . . . . . . . . . . (288,813) (486,813)
Loss per share . . . . . . . . . . . . . . . (0.01) (0.02)

Statement of cash flows:
Expenses paid with common stock . . . . . . 12,998 210,998

</TABLE>
F-21
<PAGE>

AQUASEARCH, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS

OCTOBER 31, JULY 31,
1997 1998
(AUDITED) (UNAUDITED)
---------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 47,006 $ 666,025
Accounts receivable 1,219 -
Prepaid expenses 24,439 66,216
Refundable deposits 4,570 7,325
---------- ----------
Total current assets 77,234 739,566
---------- ----------

Notes receivable 30,516 109,696
Plant and equipment:
Plant 738,889 1,156,285
Equipment 173,052 202,595
Less accumulated depreciation (104,894) (173,383)
---------- ----------
Net plant and equipment 807,047 1,185,497
Total assets $ 914,797 $2,034,759
---------- ----------
---------- ----------

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 446,344 $ 502,215
Notes payable 575,000 265,000
---------- ----------
Total current liabilities 1,021,344 767,215
---------- ----------

Stockholders' Equity (Deficit)
Preferred stock (5,000,000 shares authorized) - -
Common stock ($0.0001 par value,
100,000,000 shares authorized,
47,819,881 and 65,358,885 shares
outstanding at October 31, 1997, and
July 31, 1998, respectively) 5,904 7,657
Additional paid-in capital 4,699,470 7,689,735
Deficit accumulated during the development
stage (4,811,921) (6,429,848)
---------- ----------
Total stockholders' equity (deficit) (106,547) 1,270,772
---------- ----------
Total liabilities and stockholders' equity
(deficit) $ 914,797 $2,034,759
---------- ----------
---------- ----------

</TABLE>

F-22
<PAGE>

AQUASEARCH, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>

FOR THE PERIOD FROM
INCEPTION FOR THE THREE FOR THE NINE MONTHS
TO JULY 31, MONTHS ENDED ENDED JULY 31,
1998 JULY 31, 1998 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------------------------------------------------
<S> <C> <C> <C>
Sales $ 11,077 $ - $ -
Cost of sales 23,464 - -
------------ ------------ ------------
Gross profit (loss) (12,387) - -

Research and development costs 2,752,740 320,514 866,204
General and administrative expenses 3,339,694 218,562 634,446
------------ ------------ ------------

Loss from operations (6,104,821) (539,076) (1,500,650)

Other Income (Expense)
Interest (119,844) (79,322) (114,662)
Other (9,317) (2,291) (2,615)
Investment in joint venture (147,096) - -
------------ ------------ ------------
Total other income (expense) (276,257) (81,613) (117,277)
------------ ------------ ------------
Loss before income taxes and
extraordinary item (6,381,078) (620,689) (1,617,927)

Extraordinary item - loss on
write down of assets to
liquidation basis (14,502) - -
------------ ------------ ------------
Loss before income taxes (6,395,580) (620,689) (1,617,927)

Federal and State income taxes - - -
------------ ------------ ------------
Net loss (6,395,580) (620,689) (1,617,927)

Accumulated Deficit
Balance, beginning of period (34,268) (5,809,159) (4,811,921)
------------ ------------ ------------
Balance, end of period $ (6,429,848) $ (6,429,848) $ (6,429,848)
------------ ------------ ------------
------------ ------------ ------------

Loss per share $ (0.28) $ (0.01) $ (0.03)
------------ ------------ ------------
------------ ------------ ------------

Weighted average shares outstanding 22,936,599 47,819,881 47,819,881
------------ ------------ ------------
------------ ------------ ------------

</TABLE>

F-23
<PAGE>

AQUASEARCH, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>

FOR THE PERIOD FROM
INCEPTION FOR THE THREE FOR THE NINE MONTHS
TO JULY 31, MONTHS ENDED ENDED JULY 31,
1998 JULY 31, 1997 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------------------------------------------------
<S> <C> <C> <C>
Sales $ 11,077 $ 146 $ 1,077
Cost of sales 23,464 - -
----------- ------------ -----------
Gross profit (loss) (12,387) - 1,077

Research and development costs 2,752,740 152,717 551,543
General and administrative expenses 3,339,694 297,231 644,878
----------- ------------ ------------

Loss from operations (6,104,821) (449,802) (1,195,344)

Other Income (Expense)
Interest (119,844) 223 4,448
Other (9,317) 411 217
Investment in joint venture (147,096) - -
----------- ------------ ------------
Total other income (expense) (276,257) 634 4,665
----------- ------------ ------------

Loss before income taxes and
extraordinary item (6,381,078) (449,168) (1,190,679)
Extraordinary item - loss on
write down of assets to
liquidation basis (14,502) (464) (464)
----------- ------------ ------------
Loss before income taxes (6,395,580) (449,632) (1,191,143)

Federal and State income taxes - - -
----------- ------------ ------------
Net loss (6,395,580) (449,632) (1,191,143)

Accumulated Deficit
Balance, beginning of period (34,268) (3,690,229) (2,948,718)
----------- ------------ ------------
Balance, end of period $(6,429,848) $ (4,139,861) $ (4,139,861)
----------- ------------ ------------
----------- ------------ ------------

Loss per share $ (0.28) $ (0.01) $ (0.03)
------------ ------------ ------------
------------ ------------ ------------

Weighted average shares outstanding 22,936,599 45,713,543 44,159,602
------------ ------------ ------------
------------ ------------ ------------

</TABLE>
F-24
<PAGE>

AQUASEARCH, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE NINE FOR THE NINE
FROM INCEPTION MONTHS ENDED MONTHS ENDED
TO JULY 31, JULY 31, JULY 31,
1998 1997 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $(6,395,580) $(1,191,143) $(1,617,927)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization 3,527 - -
Depreciation 179,091 42,057 68,490
Expenses paid with common stock 901,643 - -
Loss on write down of assets to
liquidation basis 5,392 - -
Changes in:
Other current assets (73,340) (66,959) (44,532)
Receivables 414 1,219
Accounts payable 272,178 (3,783) (90,453)
Deposits held - (460,980) -
------------ ------------ ------------
Cash used in operating activities (5,107,089) (1,680,394) (1,536,879)

Cash Flows from Investing Activities
Purchase of fixed assets (1,268,464) (98,728) (446,939)
------------ ------------ ------------
Cash used in investing activities (1,268,464) (98,728) (446,939)

Cash Flows from Financing Activities
Cash (held in) released from escrow - 460,980 -
Increase in notes receivable (109,696) - (79,180)
Issuance of common stock 7,128,340 1,264,695 2,992,018
Increase (decrease) in notes payable 294,800 100,000 310,000
Offering costs (271,919) (156,213) -
------------ ------------ ------------
Cash provided by financing activities 7,041,525 1,669,462 2,602,838
------------ ------------ ------------

Net increase (decrease) in cash 665,972 (109,660) 619,020
Cash, beginning of the period 54 187,166 47,006
------------ ------------ ------------
Cash, end of the period $ 666,026 $ 77,506 $ 666,026
------------ ------------ ------------
------------ ------------ ------------

</TABLE>

F-25
<PAGE>

AQUASEARCH, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

JULY 31, 1998
(UNAUDITED)

1. COMMON STOCK AND STOCK PURCHASE WARRANTS

As of July 31, 1998, there were a total of 8,291,931 Common Stock Purchase
Warrants (the "Warrants") issued and outstanding, of which 5,347,244 Warrants
had an exercise price of $1.00 per share, 25,974 Warrants had an exercise price
of $0.21 per share, and 2,918,713 Warrants had an exercise price of $0.50 per
share. No Warrants were exercised during the three months ended July 31, 1998.
The $1.00 per share Warrants are redeemable by the Company at $.01 per Warrant
during their three-year exercise period upon 30 days' notice anytime that the
closing bid price per share of the Common Stock exceeds $1.50 per share for 20
trading days out of 30 consecutive trading days ending on the third day prior to
the date of the notice of redemption.

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

SHARES OF COMMON ADDITIONAL PAID-IN TOTAL STOCKHOLDERS'
DESCRIPTION STOCK COMMON STOCK CAPITAL ACCUMULATED DEFICIT EQUITY (DEFICIT)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>

Balance, April 30, 1998 47,819,881 $ 5,904 $ 4,699,470 $ (5,809,159) $ (1,103,785)

Conversion of
convertible notes to
common stock ($0.173 per
share) 16,870,520 1,686 2,915,274 2,916,960

Stock issued for
services ($0.25 per
share) 201,622 20 45,859 45,879

Exercise of options for
stock ($0.625 per share) 466,862 47 29,132 29,179

Loss for the three
months ended July 31,
1998 - - - (620,689) (620,689)
------------- ----------- ----------- ------------ -----------
Balance, July 31,1998 65,358,885 $ 7,657 $7,689,735 $ (6,429,848) $ 1,270,772
------------- ----------- ----------- ------------ -----------
------------- ----------- ----------- ------------ -----------

</TABLE>

F-26
<PAGE>

Stock") at a purchase price of $0.35 per share. In addition, C. Brewer acquired
a three-year warrant (the "C. Brewer Warrant") to purchase up to 500,000 shares
of Common Stock at a purchase price of $1.25 per share. The stockholders' equity
at July 31, 1998 does not reflect the issuance of the C. Brewer Common Stock or
the C. Brewer Warrant. The Company does not yet wish to finalize its agreement
with C. Brewer. Aquasearch had intended to complete the C. Brewer transaction
in order to have sufficient property on which to expand its production
capability to 40 kg astaxanthin per month. However, improvements in
productivity of astaxanthin have rendered the Brewer land acquisition
unnecessary at present.

2. MANAGEMENT'S REPRESENTATIONS OF INTERIM FINANCIAL INFORMATION

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

F-27
<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 . . . . . . . . . . . $ 1,688.00
Printing and engraving expenses . . . . 10,000.00
Legal fees and expenses . . . . . . . . 20,000.00
Accounting fees and expenses . . . . . 4,000.00
Miscellaneous expenses . . . . . . . . 4,312.00
Total . . . . . . . . . . . . . . $40,000.00
-----------
-----------

</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

During the period from June 1997 to September 1998, the Company sold
$3,305,000 aggregate principal amount of Convertible Notes ("1998 Convertible
Notes") to a total of twelve "accredited investors" as defined under Rule 501
of the Securities Act (the "Selling Security Holders"). In connection with
the issuance of the 1998 Convertible Notes, the Company also issued to the
Selling Security Holders a total of 3,305,000 Warrants (the "1998 Warrants")
to purchase a total of 3,418,713 shares of Common Stock. The 1998 Warrants
have an exercise price of $0.50 per share and have a term of three years.
Between July and September 1998, the Selling Security Holders converted the
1998 Convertible Notes into 20,075,648 shares of Common Stock (the "Shares").
The number of Shares and 1998 Warrants issued to the Selling Security Holders
is as follows: Jane Eliza Weaver Brickey, 599,510 Shares, 100,000 Warrants;
Margret Daul, 599,510 Shares, 100,000 Warrants; Jean Farmer, 570,184 Shares,
100,000 Warrants; Earl S. Fusato Revocable Trust, Earl S. Fusato, Trustee,
4,821,340 Shares, 760,000 Warrants; Gregory Kowal, 3,205,128 Shares, 500,000
Warrants; Linda and Joe Maloney, 584,409 Shares, 100,000 Warrants; James
Stewart Miller Revocable Trust, James Stewart Miller, Trustee, 142,468
Shares, 25,000 Warrants; Lance and Elaine Nakamura, 1,574,673 Shares, 250,000
Warrants; Viiu Niiler and Charles Cole, 324,265 Shares, 50,000 Warrants;
Scott Family Trust, Tom Scott, Trustee, 663,102 Shares, 120,000 Warrants;
Jean Sawyer Weaver Trust, Jean S. Weaver, Trustee, 6,391,223 Shares,
1,100,000 Warrants; and Sarah Anna Randsell Weaver, 599,837 Shares, 100,000
Warrants. No underwriters were used in these transactions. This offering
was made under Section 4(2) of the Securities Act.

II-1
<PAGE>

$250,000. The notes are payable in full on September 30, 1998. In connection
with the issuance of the notes, the Company issued to Mr. Fusato warrants to
purchase a total of 113,713 shares of its Common Stock. The warrants have an
exercise price of $0.50 per share and have a term of three years. No
underwriters were used. This offering was made under Section 4(2) of the
Securities Act.

In March 1998, the Company issued 108,000 shares of Common Stock at $0.25
per share to Dr. Pearn Niiler, a Director of the Company, for prior services
rendered to the Company as a member of the Scientific Advisory Board. No
underwriters were used. This offering was made under Section 4(2) of the
Securities Act.

In March 1998, Tana Acalay, formerly the Company's Chief Financial Officer,
exercised options to purchase 466,862 shares of the Company's Common Stock at
the exercise price of $0.063 per share. The total proceeds to the Company were
$29,179. No underwriter was used. This offering was made pursuant to the
exemption provided under Section 4(2) of the Securities Act.

From January to March 1998, the Company issued an aggregate of 126,000
shares of Common Stock at $0.25 per share to the following members of the
Scientific Advisory Board in exchange for services to the Company: Dr. Edward A.
Laws -- 17,000 shares; Dr. Robert R. Bidigare -- 17,000 shares; Dr. William
Fenical -- 17,000 shares; Dr. John Bardach -- 17,000 shares; Dr. Farooq Azam --
12,000 shares; Dr. Malcolm Gregory -- 37,000 shares; and Dr. Aladar Szalay --
9,000 shares. No underwriters were used. This offering was made under Section
4(2) of the Securities Act.

In October 1997, the Company issued 50,000 shares of Common Stock at $0.25
per share to Edward E. David, Sc.D., for consulting services rendered as a
member of the Company's Board of Directors. No underwriter was used. This
offering was made pursuant to the exemption provided under Section 4(2) of the
Securities Act.

In October 1997, the Company sold 50,000 shares of Common Stock at $0.25
per share to Edward E. David, Sc.D., a member of the Company's Board of
Directors. The total proceeds to the Company from this transaction were $12,500.
No underwriter was used. This offering was made pursuant to the exemption
provided under Section 4(2) of the Securities Act.

In October 1997, the Company issued 10,000 shares of Common Stock at $0.25
per share to Oskar R. Zaborsky, Ph.D., for consulting services rendered as a
member of the Company's Board of Directors. No underwriter was used. This
offering was made pursuant to the exemption provided under Section 4(2) of the
Securities Act.

In October 1997, the Company sold 10,000 shares of Common Stock at $0.25
per share to Oskar R. Zaborsky, Ph.D., a member of the Company's Board of
Directors. The total proceeds to the Company from this transaction were $2,500.
No underwriter was used. This offering was made pursuant to the exemption
provided under Section 4(2) of the Securities Act.

In September 1997, Tana Acalay, formerly the Company's Chief Financial
Officer, exercised options to purchase 463,250 shares of the Company's Common
Stock at the exercise price of $0.06 per share. The total proceeds to the
Company were $28,953 in the form or a three year note receivable bearing
interest of five percent per annum. No underwriter was used. This offering was
made pursuant to the exemption provided under Section 4(2) of the Securities
Act.

In April 1997, the Company sold 1,000,000 shares of Common Stock at $0.21
per share to Earl S. Fusato, the Company's Chief Financial Officer, Secretary
and a member of its Board of Directors. The total proceeds to the Company were
$210,000. No underwriter was used. This offering was made pursuant to the
exemption provided under Section 4(2) of the Securities Act.

II-2
<PAGE>

Matsuda Revocable Living Trust - 38,461 Units at $0.26 per Unit; Steve Berson -
95,238 Units at $0.21 per Unit and 22,727 Units at $0.22 per Unit; Alfredo
Briones - 23,255 Units at $0.43 per Unit; David Coury - 90,909 Units at $0.22
per Unit; Earl S. Fusato Revocable Living Trust - 115,384 Units at $0.26 per
Unit; William and Bernice Frankoff - 17,857 Units at $0.28 per Unit; Edward
Fukuyama - 45,454 Units at $0.22 per Unit; Ralph Fuller - 23,255 Units at $0.43
per Unit; Solomon and Alice Goldsmith - 33,333 Units at $0.30 per Unit; Francis
Gray - 45,454 Units at $0.22 per Unit; Christopher and Lynne Harrison - - 75,000
Units at $0.23 per Unit; Hawaiian Trust Company, Ltd - 416,666 Units at $0.24
per Unit; Winston Healy - 34,482 Units at $0.29 per Unit; Dan Hirashima - 68,965
Units at $0.29 per Unit; J.W.A. Buyers Revocable Living Trust - 41,666 Units at
$0.24 per Unit; Raymond & Anna Kam - 90,909 Units at $0.22 per Unit, 86,956
Units at 0.23 per Unit and 41,666 Units at $0.24 per Unit; Gerald and Patricia
Kammier - 45,454 Units at $0.22 per Unit; Gregory Kowal - 476,190 Units at $0.21
per Unit; Eddy Louis - 37,037 Units at $0.27 per Unit; Alan & Amina Miyasaki -
24,390 Units at $0.41 per Unit; Grace Morrow - 108,695 Units at $0.23 per Unit,
153,846 Units at $0.26 per Unit and 38,461 Units at $0.26 per Unit; David
Murakami - 173,809 Units at $0.21 per Unit, 28,000 Units at $0.25 per Unit and
20,833 Units at $0.24 per Unit; Donald and Kimika Nakama - 238,095 Units at
$0.21 per Unit; Lance and Elaine Nakamura -125,000 Units at $0.32 per Unit and
136,363 Units at $0.22 per Unit; Calvin and Eunice Nakata - 100,000 Units at
$0.22 per Unit; Clarence and Margaret Okimoto - 45,454 Units at $0.22 per Unit,
11,869 Units at $0.23 per Unit and 12,000 Units at $0.25 per Unit; Charles Parl
- - 43,478 Units at $0.23 per Unit; Paul F. Glenn Revocable Trust - 37,037 Units
at $0.27 per Unit; Michie Proctor - 113,636 Units at $0.22 per Unit, 119,047
Units at $0.21 per Unit and 454,545 Units at $0.22 per Unit; Scott Family Trust
- - 113,636 Units at $0.44 per Unit and 178,571 Units at $0.28 per Unit; Gene
Seltzer - 43,478 Units at $0.23 per Unit; Yoshiko Takara - 23,255 Units at $0.43
per Unit; Izidor Tischler - 43,478 Units at $0.23 per Unit; Joseph Triggs -
232,558 Units at $0.43 per Unit; Bruce Tyson - 45,454 Units at $0.22 per Unit;
Robert Walker - 47,619 Units at $0.21 per Unit; Eileen Winter - 50,000 Units at
$0.25 per Unit; Alvin Kuo Wong - 41,666 Units at $0.36 per Unit; and Russell
Yamamoto - 217,391 Units at $0.23 per Unit. The Warrants have a term of three
years and are exercisable at $1.00 per share, subject to adjustment. The
Warrants are redeemable by the Company at $.01 per Warrant 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 gross proceeds from
this offering were $1,275,980. The Placement Agent for this offering, First
Honolulu Securities, Inc., received total commissions of $76,558.80 (equal to 6%
of the gross proceeds from the sale of the Units) and 302,674 Common Stock
Purchase Warrants (equal to 6% of the number of Units sold). The terms of the
Warrants issued to First Honolulu Securities, Inc. are identical to the terms of
the Warrants issued to the purchasers in the offering.

In March 1997, John Emerick, the Company's Vice President of Operations,
exercised options to purchase 25,000 shares of the Company's Common Stock at the
exercise price of $0.06 per share. The total proceeds to the Company were
$1,562 in the form of a three year note receivable bearing interest of five
percent per annum. No underwriter was used. This offering was made pursuant to
the exemption provided under Section 4(2) of the Securities Act.

In February 1997, the Company issued 4,000 shares of Common Stock at $0.46
per share to Alber Leong in exchange for services to the Company. No
underwriters were used. This offering was made under Section 4(2) of the
Securities Act.

In November 1996, the Company issued an aggregate of 18,760 shares of
Common Stock at an average price of $0.64/share to the following members of the
Scientific Advisory Board in exchange for services to the Company: Dr. Edward A.
Laws -- 4,690 shares; Dr. Robert R. Bidigare -- 4,690 shares; Dr. William
Fenical -- 4,690 shares; and Dr. John Bardach -- 4,690 shares. No underwriters
were used. This offering was made under Section 4(2) of the Securities Act.

In October 1996, the Company sold 400,000 shares of Common Stock at $0.50
per share to Cultor pursuant to the Cultor Stock Subscription Agreement. The
total proceeds to the Company from this transaction were $200,000. No
underwriters were used. This offering was made in reliance on the exemption
provided under Section 4(2) of the Securities Act.

II-3
<PAGE>

In July 1996, the Company issued 3,000 shares of Common Stock at $0.59 per
share to Alber Leong in exchange for services to the Company. No underwriters
were used. This offering was made under Section 4(2) of the Securities Act.

In February 1996, the Company issued 40,000 shares of Common Stock at $0.62
per share, to Seth Huntley, one of the Company's production technicians, for
services rendered during the period from August 1995 through January 1996. No
underwriter was used. This offering was made to Mr. Huntley without
registration pursuant to the exemption provided under Section 4(2) of the
Securities Act.

In January 1996, the Company sold an aggregate of 4,000,000 shares of
Common Stock at $0.15 per share to the following persons in a private placement
under Section 4(2) of the Securities Act: Bruce Arinaga - 100,000 shares; A.
Bush - 100,000 shares; Gary Davidson - 407,000 shares; Kewalo Holdings - 100,000
shares; James MacNeil - 160,000 shares; First Trust Corp. - 23,300 shares; James
McGonigle - 300,000 shares; Michie Proctor - 680,000 shares; Marty Meyerson -
100,000 shares; Wanda Shefts -100,000 shares; Joel Marcus - 100,000 shares;
Donald Nakama - 580,000 shares; Neal Roberts - 90,700 shares; David Murakami -
350,000 shares; James Miller - 200,000 shares; Marvin Gutlove - 100,000 shares;
Marianne May - 40,000 shares; and Carl Jensen - 240,000 shares. The total
proceeds to the Company from this transaction were $600,000. No underwriters
were used.

In January 1996, the Company sold an aggregate of 2,492,000 shares of
Common Stock at $0.125 per share to the following persons under Regulation S
under the Securities Act: Sodilot S.A. - 320,000 shares; Hans Peter Klein -
320,000 shares; and Caymus Capital - 1,852,000 shares. The total proceeds to the
Company from this transaction were $311,600. No underwriters were used.

In December 1995, the Company issued 40,000 shares of Common Stock at
$0.125 per share to John J. Emerick, the Company's Vice President of Operations,
for services rendered during the period from July 1995 through December 1995.
No underwriter was used. This offering was made to Mr. Emerick without
registration pursuant to the exemption provided under Section 4(2) of the
Securities Act.

In November 1995, the Company issued an aggregate of 264,000 shares of
Common Stock at $0.125 per share to the following persons as partial payment for
their services in constructing the Company's research and development facility
at Keahole Point: Robert E. and Terri L. Lee - 120,000 shares; Clyde and Iola
Matsuyama - 16,000 shares; Dale and Lora Robertson - 8,000 shares; Branden
Fessenden and Amber Kingham - 4,000 shares; Boyd and Kathy Matsuyama - - 8,000
shares; Dwight and Taina Matsuyama - 8,000 shares; Mark K. and Marina K. Stickel
- - 40,000 shares; Stephen J. and Jamie K. Herbert - 16,000 shares; and Henry F.
and Sri Mulyani Hills - 44,000 shares. No underwriters were used. This offering
was made in reliance on the exemption provided under Section 4(2) of the
Securities Act.

In October 1995, the Company issued an aggregate of 127,875 shares at
$0.0625 to the following persons for prior services rendered to the Company:
Alejandro Gonzales - 40,000 shares; Alexander Leonard - 25,000 shares; Georgia
Malan - 20,000 shares; and Mountain Vista Consulting - 42,875 shares. No
underwriters were used. This offering was made under Section 4(2) of the
Securities Act.

In October 1995, the Company issued 5,000 shares of Common Stock at $0.16
per share to John Emerick, the Company's Vice President of Operations, for
services rendered to the Company. No underwriter was used. This offering was
made pursuant to the exemption provided under Section 4(2) of the Securities
Act.

In September 1995, the Company sold an aggregate of 2,712,500 shares of
Common Stock at $0.08 per share to the following persons in a private placement
under Section 4(2) of the Securities Act: Tana Alcalay - 125,000 shares; Jeff
Barber - 62,500 shares; Edward Brill - 62,500 shares; California Progressions -
125,000 shares; Gary Davidson - 125,000 shares; Joanne Gioia - 125,000 shares;
Marvin Gutlove - 250,000 shares; Mark Huntley - 62,500 shares; Kenneth Koock -
125,000 shares; Joel Marcus - 362,500 shares; James Miller - 100,000 shares;
Charles Mullecker - 625,000 shares; Peter Niiler - 125,000 shares; Mark Shefts -
312,500 shares; Rocco Vezza - 625,000 shares; and Rod Wood - 625,000 shares. No
underwriters were used.

II-4
<PAGE>

In August 1995, the Company returned to Mark E. Huntley, Ph.D., the
Company's President and Chief Executive Officer, 1,320,000 shares of Common
Stock out of the 4,635,575 shares of Common Stock gifted to the Company by Dr.
Huntley in 1989. The closing bid price of the Company's Common Stock on the
date the 1,320,000 shares were returned to Dr. Huntley was $0.15 per share. No
underwriters were used. This offering was made to Dr. Huntley under Section
4(2) of the Securities Act.

In July 1995, the Company sold an aggregate of 3,200,000 shares of Common
Stock at $0.0625 per share to QueQui, Ltd. under Regulation S under the
Securities Act. The total proceeds to the Company from this transaction were
$200,000. No underwriters were used.

In June 1995, the Company issued 50,000 shares of Common Stock at $0.10 per
share to Robert Bidigare, Ph.D., for services rendered in connection with the
analysis of scientific data from feed trials with Cultor. No underwriters were
used. These shares were issued to Dr. Bidigare without registration pursuant to
the exemption provided under Section 4(2) of the Securities Act.

In March 1995, the Company sold an aggregate of 1,710,000 shares of Common
Stock at $0.10 per share to the following persons in a private placement under
Section 4(2) of the Securities Act: Tana Alcalay - 50,000 shares; Joan Antflick
- - 10,000 shares; Scott Brownson - 25,000 shares; David Cook - 50,000 shares;
Gary Davidson - 50,000 shares; Joan Davidson - 25,000 shares; Stanley Feldman -
50,000 shares; Frederick Fields - 50,000 shares; Robert Forcey - 100,000 shares;
Michael Freed - 5,000 shares; Paulette & Steve Freed - 45,000 shares; Bobbi
Goldblum - 25,000 shares; Mark Huntley - 50,000 shares; Sam Iler - 100,000
shares; Carl Jensen - 100,000 shares; Mahlon Kennicut - 50,000 shares, Kenneth
Koock - 50,000 shares; Joel Marcus - 50,000 shares; Marianne May - 50,000
shares; Robert Nichols - 50,000 shares; Eric Niiler - 100,000 shares; Pearn
Niiler - 50,000 shares; Viiu Niiler - 100,000 shares; Walter Nordhausen - 50,000
shares; Donald Redalje - 50,000 shares; Ken Richter - 50,000 shares; Eric
Saltsberg - 50,000 shares; Satlantic, Inc. - 50,000 shares; Niklas Schneider -
50,000 shares; Michael C.B. Smith - 50,000 shares; Craig Steede - 50,000 shares;
Henry White - 50,000 shares; and Leroy Young - 25,000 shares. No underwriters
were used. The total proceeds to the Company were $171,000.

In June 1994, the Company issued an aggregate of 250,000 shares of Common
Stock at $0.08 per share to the following persons for prior services rendered to
the Company: Michael C.B. Smith - 170,000 shares; Alejandro Gonzales - 40,000
shares; and Glenna Thompson - 40,000 shares. No underwriters were used. This
offering was made under Section 4(2) of the Securities Act.

In May 1994, the Company issued an aggregate of 775,000 shares of Common
Stock at $0.08 per share to the following persons for prior services rendered to
the Company: Mark Huntley - 400,000 shares; Tana Alcalay - 250,000 shares; and
Peter Niiler - 125,000 shares. No underwriters were used. This offering was
made under Section 4(2) of the Securities Act.

In January 1994, the Company sold 250,000 shares of Common Stock at $0.03
per share to J. McGonigle in a private placement under Section 4(2) of the
Securities Act. No underwriters were used. The total proceeds to the Company
were $7,500.

ITEM 27. EXHIBITS
<TABLE>
<S> <C>

3.1* Articles of Incorporation of Registrant
3.2* By-laws of Registrant
4.1+ Form of Bridge Loan Note
4.2+ Form of 1997 Warrant
4.3++ Form of 1998 Convertible Note
4.4++ Form of 1998 Warrant
4.5++ Form of 1998 Note and Warrant Purchase Agreement
5.1 Opinion of Wilson Sonsini Goodrich & Rosati dated 9/29/98
</TABLE>

II-5
<PAGE>

<TABLE>
<S> <C>
10.2# Stock Subscription Agreement between Cultor Ltd. and Aquasearch,
Inc., dated May 14, 1996
10.3+ The Amended Keahole Point Facilities Use Agreement dated August
22, 1996 by and between The National Energy Laboratory of Hawaii
Authority and the Registrant
10.4$ Letter of Intent between C. Brewer and Company Limited and the
Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Johnson, Holscher & Company, P.C.
23.3** Consent of Wilson Sonsini Goodrich & Rosati, P.C.
</TABLE>

* Incorporated by reference to the exhibit filed with Registrant's Annual
Report on Form 10-KSB filed October 31, 1995.

# Incorporated by reference to the exhibit filed with Registrant's Current
Report on Form 8-K filed September 13, 1996.

+ Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended October 31, 1996.

$ Incorporated by reference to the Registrant's Current Report on Form 8-K
dated November 13, 1996.

++ To be filed by amendment to this Registration Statement.

** Included in Exhibit 5.1 filed herewith.

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) File during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in a form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of the Registration Fee" table in
the effective registration statement; and

(iii) Include any additional or changed material information on the
plan of distribution.

II-6
<PAGE>

(2) For purposes of determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
bona fide offering.

(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.

II-7
<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
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Honolulu, State of Hawaii, on this
29th day of September, 1998.

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
- ----------------------------------
(Pearn P. Niiler) Director

/s/ EDWARD E. DAVID
- ----------------------------------
(Edward E. David, Ph.D.) Director

/s/ EARL S. FUSATO Director and Chief Financial
- ---------------------------------- Officer (Chief Accounting
(Earl S. Fusato) Officer)

II-8
<PAGE>

INDEX TO EXHIBITS

Exhibits
<S> <C> <C>

3.1 Articles of Incorporation of Registrant . . . . . . . . . . . . (A)
3.2 By-laws of Registrant . . . . . . . . . . . . . . . . . . . . . (A)
4.1 Form of Bridge Loan Note . . . . . . . . . . . . . . . . . . . (B)
4.2 Form of 1997 Warrant . . . . . . . . . . . . . . . . . . . . . (B)
4.3 Form of 1998 Convertible Note . . . . . . . . . . . . . . . . . (E)
4.4 Form of 1998 Warrant . . . . . . . . . . . . . . . . . . . . . (E)
4.5 Form of 1998 Note and Warrant Purchase Agreement . . . . . . . (E)
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.,
dated September 29, 1998 . . . . . . . . . . . . . . . . . . . (F)
10.2 Stock Subscription Agreement between Cultor Ltd. and Aquasearch,
Inc., dated May 14, 1996 . . . . . . . . . . . . . . . . . . . (C)
10.3 The Amended Keahole Point Facilities Use Agreement dated
August 22, 1996 by and between National Energy Laboratory of
Hawaii and the Registrant . . . . . . . . . . . . . . . . . . (B)
10.4 Letter of Intent between C. Brewer and Company Limited and the
Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . (D)
23.1 Consent of Ernst & Young LLP . . . . . . . . . . . . . . . . . (F)
23.2 Consent of Johnson, Holscher & Company, P.C. . . . . . . . . . (F)
23.3 Consent of Wilson Sonsini Goodrich & Rosati, P.C. . . . . . . . (G)
</TABLE>

(A) Incorporated by reference to the exhibit filed with Registrant's Annual
Report on Form 10-KSB filed October 31, 1995.
(B) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended October 31, 1996.
(C) Incorporated by reference to the exhibit filed with Registrant's Current
Report on Form 8-K filed September 13, 1996.
(D) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated November 13, 1996.
(E) To be filed by amendment to this Registration Statement.
(F) Attached as an Exhibit hereto.
(G) Included in Exhibit 5.1 filed herewith.

<PAGE>
Exhibit 5.1

WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION

September 29, 1998

Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Hwy.
Suite 110
Kailua-Kona, HI 96740

Re: Registration Statement on Form SB-2

Ladies and Gentlemen:

We have examined the Registration Statement on Form SB-2 to be filed
with the Securities and Exchange Commission (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of the continuous offering of 20,075,648 shares of your Common Stock (the
"Shares") and the exercise of Warrants to Purchase Common Stock (the
"Warrants"). As your counsel, we have examined the proceedings proposed to be
taken in connection with the sale and issuance of the above-referenced
securities.

In our opinion, the Shares, and the issuance of the shares of your
Common Stock upon the exercise of the Warrants, will be legally and validly
issued, fully paid and nonassessable.

We consent to the use of this opinion as an exhibit to the
Registration Statement, and further consent to the use of our name wherever
appearing in the Registration Statement, including the Prospectus constituting a
part thereof, and any amendment thereto.

Very truly yours,

WILSON SONSINI GOODRICH & ROSATI
Professional Corporation

<PAGE>
Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated January 31, 1998, in the Registration
Statement (Form SB-2) dated September 30, 1998 and related Prospectus of
Aquasearch, Inc. for the registration of 23,494,361 shares of its Common
Stock.

/s/ Ernst & Young LLP

Honolulu, Hawaii
September 30, 1998

<PAGE>
Exhibit 23.2

[JOHNSON, HOLSCHER & COMPANY LETTERHEAD]

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 5 dated January 26, 1996 and Note 8 dated April 6,
1997, in the Registration Statement on Form SB-2 (No. 333-______) and the
related Prospectus of Aquasearch, Inc. for the registration of 23,494,361 shares
of its Common Stock.

/s/ JOHNSON, HOLSCHER & CO.
Professional Corporation

Englewood, Colorado
September 30, 1998