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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

| ̈ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number: 000-18980





HQ SUSTAINABLE MARITIME
INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)







|                                                         |  |                                                      |  |                         
|-------------------------------------------------------- |  | ---------------------------------------------------- |  | ------------------------
|Delaware                                                 |  | 000-18980                                            |  | 62-1407522              
|(State or jurisdiction of Incorporation or organization) |  | (Primary Std. Industrial Classification Code Number) |  | (IRS Employer ID Number)



|                                                  |  |           
|------------------------------------------------- |  | ----------
|1511 Third Avenue, Suite 788, Seattle, Washington |  | 98101     
|(Address of principal executive offices)          |  | (Zip Code)

Registrants telephone number, including area code: (206) 621-9888





Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.001 par value per share

(Title of Class)





Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  | x  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange
Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                               |  |                                  
|------------------------------ |  | ---------------------------------
|Class                          |  | Outstanding at September 30, 2008
|Common stock, $0.001 par value |  | 12,085,846                       









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|                               |  |                                                                                   |  |                                                                      |  |  
|------------------------------ |  | --------------------------------------------------------------------------------- |  | -------------------------------------------------------------------- |  | -
|                               |  | PageNumbers                                                                      
|PART I - FINANCIAL INFORMATION |  |                                                                                  
|                               |  |                                                                                  
|Item 1.                        |  | Condensed Consolidated Financial Statements (unaudited)                           |  |                                                                     
|                               |  |                                                                                   | 
|                               |  |                                                                                   |  | Condensed Consolidated Balance Sheets                                |  | 3
|                               |  |                                                                                   | 
|                               |  |                                                                                   |  | Condensed Consolidated Statements of Income and Comprehensive Income |  | 5
|                               |  |                                                                                   | 
|                               |  |                                                                                   |  | Condensed Consolidated Statements of Cash Flows                      |  | 6
|                               |  |                                                                                  
|                               |  | Notes to Condensed Consolidated Financial Statements                              |  | 7                                                                   
|                               |  |                                                                                  
|Item 2.                        |  | Management Discussion & Analysis of Financial Condition and Results of Operations |  | 14                                                                  
|                               |  |                                                                                  
|Item 3                         |  | Quantitative and Qualitative Disclosures About Market Risk                        |  | 19                                                                  
|                               |  |                                                                                  
|Item 4.                        |  | Controls and Procedures                                                           |  | 19                                                                  
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                  
|                               |  |                                                                                  
|Item 1.                        |  | Legal Proceedings                                                                 |  | 20                                                                  
|                               |  |                                                                                  
|Item 1A                        |  | Risk Factors                                                                      |  | 20                                                                  
|                               |  |                                                                                  
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                       |  | 21                                                                  
|                               |  |                                                                                  
|Item 3.                        |  | Defaults Upon Senior Securities                                                   |  | 21                                                                  
|                               |  |                                                                                  
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                               |  | 21                                                                  
|                               |  |                                                                                  
|Item 5                         |  | Other information                                                                 |  | 21                                                                  
|                               |  |                                                                                  
|Item 6.                        |  | Exhibits                                                                          |  | 21                                                                  



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                     |  |                               |            |                            |   |           
|------------------------------------ |  | ----------------------------- | ---------- | -------------------------- | - | ----------
|                                     |  | September 30, 2008(Unaudited) |            | December 31, 2007(Audited)
|ASSETS                               |  |                               |            |                            |   |           
|CURRENT ASSETS                       |  |                               |            |                            |   |           
|Cash and cash equivalents            |  | $                             | 49,962,250 |                            | $ | 46,959,908
|Trade receivables, net of provisions |  |                               | 26,823,440 |                            |   | 25,234,502
|Inventories                          |  |                               | 2,509,522  |                            |   | 877,716   
|Prepayments                          |  |                               | 517,242    |                            |   | 350,116   
|Future income taxes                  |  |                               | 26,097     |                            |   | 26,097    
|                                     |  |                               |            |                            |   |           
|TOTAL CURRENT ASSETS                 |  |                               | 79,838,551 |                            |   | 73,448,339
|                                     |  |                               |            |                            |   |           
|OTHER ASSETS                         |  |                               |            |                            |   |           
|Deferred taxes                       |  |                               | 932,390    |                            |   | 873,865   
|Deferred expenses                    |  |                               | 24,395     |                            |   | 84,317    
|                                     |  |                               |            |                            |   |           
|                                     |  |                               | 956,785    |                            |   | 958,182   
|                                     |  |                               |            |                            |   |           
|PROPERTY, PLANT AND EQUIPMENT, NET   |  |                               | 8,604,107  |                            |   | 7,716,615 
|CONSTRUCTION IN PROGRESS             |  |                               | 3,145,602  |                            |   | 949,728   
|INTANGIBLE ASSETS                    |  |                               | 1,433,553  |                            |   | 1,254,002 
|                                     |  |                               |            |                            |   |           
|TOTAL ASSETS                         |  | $                             | 93,978,598 |                            | $ | 84,326,866
|                                     |  |                               |            |                            |   |           

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                   |  |                               |            |                            |   |           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | -------------------------- | - | ----------
|                                                                                                                                                                                   |  | September 30, 2008(Unaudited) |            | December 31, 2007(Audited)
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                               |  |                               |            |                            |   |           
|CURRENT LIABILITIES                                                                                                                                                                |  |                               |            |                            |   |           
|Accounts payable and accrued liabilities                                                                                                                                           |  | $                             | 5,452,976  |                            | $ | 8,935,928 
|Tax payable                                                                                                                                                                        |  |                               | 853,211    |                            |   | 956,289   
|Due to directors                                                                                                                                                                   |  |                               | 1,985,064  |                            |   | 1,544,350 
|Current portion of promissory notes                                                                                                                                                |  |                               | 475,284    |                            |   | 461,284   
|                                                                                                                                                                                   |  |                               |            |                            |   |           
|TOTAL CURRENT LIABILITIES                                                                                                                                                          |  |                               | 8,766,535  |                            |   | 11,897,851
|                                                                                                                                                                                   |  |                               |            |                            |   |           
|OTHER LIABILITIES                                                                                                                                                                  |  |                               |            |                            |   |           
|Convertible promissory notes, net of discount                                                                                                                                      |  |                               | 4,009,815  |                            |   | 3,653,352 
|                                                                                                                                                                                   |  |                               |            |                            |   |           
|TOTAL LIABILITIES                                                                                                                                                                  |  |                               | 12,776,350 |                            |   | 15,551,203
|                                                                                                                                                                                   |  |                               |            |                            |   |           
|SHAREHOLDERS EQUITY                                                                                                                                                               |  |                               |            |                            |   |           
|Preferred stock, $0.001 par value, 10,000,000 shares authorized, 100,000 shares issued and outstanding                                                                             |  |                               | 100        |                            |   | 100       
|Common stock, $0.001 par value, 200,000,000 shares authorized, 12,085,846 and 11,511,317 shares issued and outstanding as of
September 30, 2008 and December 31, 2007 respectively |  |                               | 12,086     |                            |   | 11,511    
|Additional paid-in capital                                                                                                                                                         |  |                               | 61,614,860 |                            |   | 57,142,204
|Accumulated other comprehensive income                                                                                                                                             |  |                               | 8,949,435  |                            |   | 4,590,060 
|Retained earnings                                                                                                                                                                  |  |                               | 4,924,553  |                            |   | 2,373,825 
|Appropriation of retained earnings (reserves)                                                                                                                                      |  |                               | 5,701,214  |                            |   | 4,657,963 
|                                                                                                                                                                                   |  |                               |            |                            |   |           
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                         |  |                               | 81,202,248 |                            |   | 68,775,663
|                                                                                                                                                                                   |  |                               |            |                            |   |           
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  | $                             | 93,978,598 |                            | $ | 84,326,866
|                                                                                                                                                                                   |  |                               |            |                            |   |           

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|----------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | ----------------- |  | ----------------- | ---------- |  | - | ----------
|                                                |  | Three Months Ended |            |   | Nine Months Ended
|                                                |  | September 30,2008  |            |   | September 30,2007 |   |            | September 30,2008 |  | September 30,2007
|SALES                                           |  | $                  | 22,470,184 |   |                   | $ | 15,779,385 |                   |  | $                 | 46,212,161 |  | $ | 37,289,813
|COST OF SALES                                   |  |                    | 12,936,090 |   |                   |   | 8,039,461  |                   |  |                   | 27,819,402 |  |   | 20,434,110
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|GROSS PROFIT                                    |  |                    | 9,534,094  |   |                   |   | 7,739,924  |                   |  |                   | 18,392,759 |  |   | 16,855,703
|SELLING AND DISTRIBUTION EXPENSES               |  |                    | 557,763    |   |                   |   | 222,402    |                   |  |                   | 1,111,871  |  |   | 567,381   
|MARKETING AND ADVERTISING                       |  |                    | 724,511    |   |                   |   | 1,307,498  |                   |  |                   | 3,175,561  |  |   | 3,815,475 
|GENERAL AND ADMINISTRATIVE EXPENSES             |  |                    | 1,466,174  |   |                   |   | 1,056,224  |                   |  |                   | 4,862,649  |  |   | 3,373,154 
|DEPRECIATION AND AMORTIZATION                   |  |                    | 554,741    |   |                   |   | 333,300    |                   |  |                   | 1,257,004  |  |   | 941,382   
|(RECOVERY OF) / PROVISION FOR DOUBTFUL ACCOUNTS |  |                    | (296,655   | ) |                   |   | (414,144   | )                 |  |                   | 585,197    |  |   | 92,097    
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|INCOME FROM OPERATIONS                          |  |                    | 6,527,560  |   |                   |   | 5,234,644  |                   |  |                   | 7,400,477  |  |   | 8,066,214 
|FINANCE COSTS                                   |  |                    | 60,240     |   |                   |   | 897,452    |                   |  |                   | 2,502,864  |  |   | 3,711,054 
|OTHER EXPENSES                                  |  |                    |           |   |                   |   | 25,431     |                   |  |                   | 1,765      |  |   | 11,384    
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|INCOME BEFORE INCOME TAXES                      |  |                    | 6,467,320  |   |                   |   | 4,311,761  |                   |  |                   | 4,895,848  |  |   | 4,343,776 
|INCOME TAXES                                    |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|CURRENT                                         |  |                    | 852,638    |   |                   |   | 857,955    |                   |  |                   | 1,304,047  |  |   | 1,624,384 
|DEFERRED                                        |  |                    |           |   |                   |   |           |                   |  |                   |           |  |   |          
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|NET INCOME ATTRIBUTABLE TO SHAREHOLDERS         |  |                    | 5,614,682  |   |                   |   | 3,453,806  |                   |  |                   | 3,591,801  |  |   | 2,719,392 
|OTHER COMPREHENSIVE INCOME                      |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|FOREIGN CURRENCY TRANSLATION GAIN               |  |                    | 37,053     |   |                   |   | 712,729    |                   |  |                   | 4,359,375  |  |   | 1,575,226 
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|COMPREHENSIVE INCOME                            |  | $                  | 5,651,735  |   |                   | $ | 4,166,535  |                   |  | $                 | 7,951,176  |  | $ | 4,294,618 
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|NET INCOME PER SHARE                            |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|BASIC                                           |  | $                  | 0.4658     |   |                   | $ | 0.4360     |                   |  | $                 | 0.3032     |  | $ | 0.3680    
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|DILUTED                                         |  | $                  | 0.4268     |   |                   | $ | 0.3784     |                   |  | $                 | 0.2914     |  | $ | 0.3376    
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|WEIGHTED AVERAGE COMMON SHARE OUTSTANDING       |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|BASIC                                           |  |                    | 12,052,075 |   |                   |   | 7,921,034  |                   |  |                   | 11,844,792 |  |   | 7,390,169 
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           
|DILUTED                                         |  |                    | 13,345,883 |   |                   |   | 9,343,753  |                   |  |                   | 13,162,048 |  |   | 8,777,222 
|                                                |  |                    |            |   |                   |   |            |                   |  |                   |            |  |   |           

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
2007



|                                                                        |  |      |            |   |      |   |            |  
|----------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                        |  | 2008 |            |   | 2007 |  
|OPERATING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Net income                                                              |  | $    | 3,591,801  |   |      | $ | 2,719,392  |  
|Non-cash items:                                                         |  |      |            |   |      |   |            |  
|Depreciation and amortization                                           |  |      | 1,257,004  |   |      |   | 941,382    |  
|Loss on disposal of fixed assets                                        |  |      | 1,765      |   |      |   | 41,938     |  
|Financial and other non-cash services                                   |  |      | 2,981,411  |   |      |   | 2,833,329  |  
|Change in non-cash working capital items:                               |  |      |            |   |      |   |            |  
|Inventories                                                             |  |      | (1,631,806 | ) |      |   | (944,359   | )
|Trade receivables, net of provisions                                    |  |      | (1,588,938 | ) |      |   | (4,998,619 | )
|Prepayments                                                             |  |      | (167,126   | ) |      |   | (13,535    | )
|Accounts payables and accrued liabilities                               |  |      | (1,533,785 | ) |      |   | 2,863,371  |  
|Taxes (recoverable)/payable                                             |  |      | (103,078   | ) |      |   | 675,179    |  
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow from operating activities                                     |  |      | 2,807,248  |   |      |   | 4,118,078  |  
|                                                                        |  |      |            |   |      |   |            |  
|INVESTING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Acquisition of property, plant and equipment                            |  |      | (1,286,623 | ) |      |   | (851,116   | )
|Sales proceeds of disposal of fixed assets                              |  |      | 2,375      |   |      |   |           |  
|Construction in progress                                                |  |      | (2,195,874 | ) |      |   | (456,784   | )
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow used in investing activities                                  |  |      | (3,480,122 | ) |      |   | (1,307,900 | )
|                                                                        |  |      |            |   |      |   |            |  
|FINANCING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Cash proceeds from issuance of common stock                             |  |      | 137,536    |   |      |   | 4,075,000  |  
|Advances from directors                                                 |  |      | 440,714    |   |      |   | 204,676    |  
|Repayment to related parties                                            |  |      |           |   |      |   | (173,966   | )
|Bank loan repayments                                                    |  |      |           |   |      |   | (82,808    | )
|Deferred expenses                                                       |  |      |           |   |      |   | 438,261    |  
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow from financing activities                                     |  |      | 578,250    |   |      |   | 4,461,163  |  
|                                                                        |  |      |            |   |      |   |            |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |  |      | (94,624    | ) |      |   | 7,271,341  |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  |      | 3,096,966  |   |      |   | 332,586    |  
|Cash and cash equivalents, beginning of period                          |  |      | 46,959,908 |   |      |   | 11,389,375 |  
|                                                                        |  |      |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                |  | $    | 49,962,250 |   |      | $ | 18,993,302 |  
|                                                                        |  |      |            |   |      |   |            |  
|SUPPLEMENTARY CASH FLOWS DISCLOSURES                                    |  |      |            |   |      |   |            |  
|Interest paid                                                           |  | $    |           |   |      | $ | 141,164    |  
|                                                                        |  |      |            |   |      |   |            |  
|Taxes paid                                                              |  | $    | 1,009,545  |   |      | $ | 959,313    |  
|                                                                        |  |      |            |   |      |   |            |  
|SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |  |      |            |   |      |   |            |  
|Common shares issued for services                                       |  | $    | 4,425,432  |   |      | $ | 58,219     |  
|                                                                        |  |      |            |   |      |   |            |  

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



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HQ SUSTAINABLE MARTIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2008

NOTE 1 - BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of HQ Sustainable Maritime
Industries, Inc., (HQS), have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by accounting principles generally accepted in United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal
year. The condensed consolidated balance sheet information as of December 31, 2007 was derived from the audited consolidated financial statements included in the Companys Annual Report Form 10K. These interim financial statements
should be read in conjunction with that report.

NOTE 2 - NATURE OF COMPANY

HQ Sustainable Maritime Industries, Inc. (HQS) was initially incorporated as Sharon Capital Corporation, or Sharon, on September 21, 1989 under the laws of the State of Nevada. Sharon was a
blind pool/blank check corporation organized for the purpose of purchasing, merging with or acquiring a business or assets from another company. In July 1990, Sharon was changed to PEI, Inc., which was subsequently changed to Process
Equipment, Inc. in November 1990. On March 17, 2004, Process Equipment, Inc., Process Equipment Acquisition Corporation, a Nevada corporation and whollyowned subsidiary of Process Equipment, Inc., or PEAC, and Jade Profit Investment
Limited, or Jade, a British Virgin Islands limited liability corporation, entered into an agreement and plan of merger. Pursuant to that agreement, Process Equipment, Inc., through PEAC, acquired Jade, and 84.42% ownership in Jades subsidiary
Hainan Quebec Ocean Fishing Co. Ltd, a Peoples Republic of China, limited liability corporation, which we refer to as HQOF. As a result of that transaction, HQOF became our main operating subsidiary. In April of 2004, pursuant to the above
agreement and plan of merger, the board of directors of Process Equipment, Inc. and a majority of the stockholders approved a name change and change of domicile of that company to Delaware via a merger with the newly formed whollyowned
Delaware subsidiary, HQS. The name change, change of domicile and merger became effective on May 19, 2004, with HQSB being the surviving entity in the merger and acquiring all the assets and liabilities of Process Equipment, Inc. On
August 17, 2004, we have entered into a Purchase Agreement with SinoSult Canada (S.S.C.) Limited, a Canadian limited liability corporation (SSC), whereby we acquired Sealink Wealth Limited (Sealink), SSCs
wholly owned subsidiary incorporated in the British Virgin Islands. That purchase agreement has been filed as an exhibit to our current report on Form 8K filed with the Commission on August 18, 2004. Sealink is the sole owner of Hainan Jiahua
Marine BioProducts Co. Ltd., a limited liability company existing in China (Jiahua Marine) which is primarily engaged in the production and sales of marine bioproducts and healthcare products in the PRC, as described in more
detail in the above current report. Also as previously disclosed, in the same current report, SSC is owned by three of our current directors and executive officers who are also, together, indirect beneficial owners of the majority of our capital
stock.

Further, as previously disclosed in the above current report, effective August 17, 2004, HQS caused Jade Profit Investment Limited, its
whollyowned subsidiary, to acquire the minority equity interest equal to 15.58% that Jade did not already own in HQOF, HQSs principal operating subsidiary. This purchase was effected by Jade pursuant to the Purchase Agreement, dated as
of August 17, 2004, between Jade and Hainan Fuyuan Investment Company Limited, the holder of the minority equity interest of HQOF being acquired by Jade. Jade has previously obtained all requisite governmental approvals in the PRC in order to
consummate this transaction.

HQS is principally engaged in the vertically integrated business of aquaculture through cooperative supply agreements,
ocean product harvesting, and processing and sales of farmbred and ocean harvested aquatic products. The principal products of HQOF are crossbred hybrid of tilapia and whitelegged shrimp exporting, directly and indirectly, to the
United States, Canada, Japan and European countries. The major market is for export.

The Group has also engaged in the production and sales of marine
bioproducts and healthcare products in the PRC. The principal products of Hainan Jiahua Marine BioProduct Company Limited (100% hold subsidiary of Sealink) is Shark Cartilage Capsule, Shark Liver Oil and Shark Liver (Soft gel). The major
market is domestic in the PRC.



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NOTE 3 - USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results when ultimately realized could differ from those
estimates.

NOTE 4 - EARNINGS PER SHARE

Basic earnings
per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were diluted.

NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of
financial instruments including cash and cash equivalents, receivables, accounts payable and accrued expenses and debt, approximates their fair value at September 30, 2008 and December 31, 2007 due to the relatively short-term nature of
these instruments.

NOTE 6 - INVENTORIES

Inventories
are stated at the lower of cost and net realizable value. Cost is calculated on the weighted average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. We evaluate
the net realizable value of inventories on a regular basis and record a provision for loss to reduce the computed weighted average cost if it exceeds the net realizable value.

The inventories at September 30, 2008 and December 31, 2007 are summarized as follows:



|                 |  |                   |           |                  |   |        
|---------------- |  | ----------------- | --------- | ---------------- | - | -------
|                 |  | September 30,2008 |           | December 31,2007
|Raw materials    |  | $                 | 228,145   |                  | $ | 288,656
|Work-in-progress |  |                   | 187,434   |                  |   | 106,756
|Finished goods   |  |                   | 2,093,943 |                  |   | 482,304
|                 |  |                   |           |                  |   |        
|                 |  | $                 | 2,509,522 |                  | $ | 877,716
|                 |  |                   |           |                  |   |        

NOTE 7 - FOREIGN CURRENCY TRANSLATION

We follow SFAS No. 52, Foreign Currency Translation, for both the translation and re-measurement of balance sheet and income statement items into U.S. dollars. Resulting translation adjustments are
reported as a separate component of accumulated comprehensive income (loss) in shareholders equity.

Our wholly owned Chinese subsidiaries maintain
their books in Renminbi (RMB), the PRCs currency, being the functional currency. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates.
Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date.

On January 1, 1994, the PRC government introduced a single rate of exchange as quoted daily by the Peoples Bank of China (the Unified Exchange Rate). The quotation of the exchange rates does not imply free
convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the
Peoples Bank of China. Approval of foreign currency payments by the Bank of China or other institutions requires submitting a payment application form together with suppliers invoices, shipping documents and signed contracts.



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NOTE 8 - INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

The Companys subsidiaries registered in the PRC are subject to state and local income taxes within the PRC at the applicable tax rates on the taxable income as
reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign enterprises. HQOF and Jiahua Marine were subject to a tax rate of 0% and 18%, respectively during this quarter, in accordance
with new tax laws in the PRC effective January 2008.

Income taxes are calculated on a separate entity basis. Currently there is no tax benefit or burden
recorded for the United States.



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NOTE 9 - CONVERTIBLE PROMISSORY NOTES AND WARRANTS

Effective January 25, 2006, the Company completed a financing transaction with a group of private investors for an amount of $5,225,000. After deducting commissions and other costs of the offering of $522,500,
the Company received net proceeds of $4,702,500. The Notes were due and totally repaid on January 25, 2008. The Notes were convertible into shares of the Companys Common Stock at a per share conversion price at the rate of $6.00 per share
of Common Stock. The Company follows EITF 0027, the issue 985 model in recording the convertible notes and warrants in its financial statements. The Notes were accruing interest on the principal amount at a rate per annum of eight
percent (8%) from January 25, 2006 payable in arrears, subject to the terms and conditions of the Notes, together with principal amount payments, up to January 25, 2008.

One Class A Warrant and one Class B Warrant were issued for each two shares of Common Stock which would be issued on the Closing Date assuming the complete conversion of the Note issued on the Closing Date at the
rate of $6.00 per share of Common Stock. The exercise price to acquire a share of Common Stock upon exercise of a Class A or B Warrant shall be $6.00. The Class A Warrants shall be exercisable until January 25, 2009 (three
(3) years after the closing of the financing). The Class B Warrants shall be exercisable until January 25, 2011 (five (5) years after the closing of the financing). The Company also issued certain Finders Warrants to purchase
87,083 shares of Common Stock similar to and carrying the same rights as the Class B Warrants issuable to the Investors. The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a
public offering, as set forth in Rule 506 promulgated under the Securities Act of 1933, as amended (the Securities Act) and in Section 4(2) and Section 4(6) of the Securities Act and/or Rule 506 of Regulation D.

The Company evaluated the convertible debt and warrants under the guide EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and potentially
Settled in, a Companys Own Stock, with regards to the control over the form of ultimate settlement of the instruments. The Company classified the warrants as equity under the guide EITF 00-19. The related registration statement became
effective on June 15, 2006.

Furthermore, effective November 7, 2006, the Company
completed another financing transaction with a group of private investors for an amount of $5,000,000, bearing interest at 6.5% per annum. The financing consisted of two components: (a) promissory notes of the Company, in the principal
aggregate amount of $5,000,000 due November 1, 2009 and (b) warrants registered in the name of each Investor to purchase an aggregate of up to 200,000 shares of our Common Stock. The Notes are convertible into shares of the Companys
$0.001 par value Common Stock at a conversion price of $5.00 per share. The Warrants expire on the fifth (5th) anniversary of the effective date
of the reverse stock split. The exercise price to acquire a share of Common Stock is equal to the Conversion Price under the Notes, currently at the rate of $5.00 per share of Common Stock.



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NOTE 10 - SEGMENTS

No geographical segment analysis is provided for the three months and nine months ended September 30, 2008 and 2007, respectively, as less than 10% of consolidated revenues and less than 10% of consolidated income from operations is
attributable to the segment other than the Mainland China.

Business segment for the three months ended September 30, 2008



|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|----------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ---------------- |  | - | ------------- | - |  | - | ---------- | -
|                                    |  | AquacultureProduct |            |   | Health andBio-product |   |            | UnallocatedItems |  |   | Consolidation |  
|Sales to external customers         |  | $                  | 15,112,565 |   |                       | $ | 7,357,619  |                  |  | $ |              |   |  | $ | 22,470,184 |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|Selling and distribution expenses   |  |                    | 357,160    |   |                       |   | 200,603    |                  |  |   |              |   |  |   | 557,763    |  
|Marketing and advertising           |  |                    |           |   |                       |   | 724,511    |                  |  |   |              |   |  |   | 724,511    |  
|General and administrative expenses |  |                    | 189,477    |   |                       |   | 117,451    |                  |  |   | 1,159,246     |   |  |   | 1,466,174  |  
|Depreciation and amortization       |  |                    | 206,489    |   |                       |   | 282,691    |                  |  |   | 65,561        |   |  |   | 554,741    |  
|Provision of doubtful accounts      |  |                    | 332,373    |   |                       |   | (629,028   | )                |  |   |              |   |  |   | (296,655   | )
|Finance costs                       |  |                    | (1,299     | ) |                       |   | (83,758    | )                |  |   | 145,297       |   |  |   | 60,240     |  
|Income/(loss) before taxes          |  |                    | 2,666,762  |   |                       |   | 5,351,306  |                  |  |   | (1,550,748    | ) |  |   | 6,467,320  |  
|Income taxes                        |  |                    |           |   |                       |   | 852,638    |                  |  |   |              |   |  |   | 852,638    |  
|Net Income/(loss) for the period    |  |                    | 2,666,762  |   |                       |   | 4,498,668  |                  |  |   | (1,550,748    | ) |  |   | 5,614,682  |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|Segment assets                      |  | $                  | 43,985,490 |   |                       | $ | 32,664,101 |                  |  | $ | 17,329,007    |   |  | $ | 93,978,598 |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|Segment liabilities                 |  | $                  | 2,608,165  |   |                       | $ | 2,184,690  |                  |  | $ | 7,983,495     |   |  | $ | 12,776,350 |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  

Business segment for the three months ended September 30, 2007



|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|----------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ---------------- |  | - | ------------- | - |  | - | ---------- | -
|                                    |  | AquacultureProduct |            |   | Health andBio-product |   |            | UnallocatedItems |  |   | Consolidation |  
|Sales to external customers         |  | $                  | 10,268,845 |   |                       | $ | 5,510,540  |                  |  | $ |              |   |  | $ | 15,779,385 |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|Selling and distribution expenses   |  |                    | 98,782     |   |                       |   | 123,620    |                  |  |   |              |   |  |   | 222,402    |  
|Marketing and advertising           |  |                    |           |   |                       |   | 1,307,498  |                  |  |   |              |   |  |   | 1,307,498  |  
|General and administrative expenses |  |                    | 238,904    |   |                       |   | 59,142     |                  |  |   | 758,178       |   |  |   | 1,056,224  |  
|Depreciation and amortization       |  |                    | 175,444    |   |                       |   | 102,813    |                  |  |   | 55,043        |   |  |   | 333,300    |  
|Provision of doubtful accounts      |  |                    | 13,379     |   |                       |   | (427,523   | )                |  |   |              |   |  |   | (414,144   | )
|Finance costs                       |  |                    | (17,658    | ) |                       |   | 15,019     |                  |  |   | 900,091       |   |  |   | 897,452    |  
|Income/(loss) before taxes          |  |                    | 2,604,216  |   |                       |   | 3,426,471  |                  |  |   | (1,718,926    | ) |  |   | 4,311,761  |  
|Income taxes                        |  |                    | 405,776    |   |                       |   | 452,179    |                  |  |   |              |   |  |   | 857,955    |  
|Net income (loss) for the period    |  |                    | 2,198,440  |   |                       |   | 2,974,292  |                  |  |   | (1,717,160    | ) |  |   | 3,453,806  |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|Segment assets                      |  | $                  | 31,479,120 |   |                       | $ | 22,277,560 |                  |  | $ | 1,875,538     |   |  | $ | 55,632,218 |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  
|Segment liabilities                 |  | $                  | 3,989,163  |   |                       | $ | 2,810,330  |                  |  | $ | 7,736,193     |   |  | $ | 14,535,686 |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |            |  



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Business segment for the nine months ended September 30, 2008



|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |           
|----------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ---------------- |  | - | ------------- | - |  | - | ----------
|                                    |  | AquacultureProduct |            |   | Health andBio-product |   |            | UnallocatedItems |  |   | Consolidation
|Sales to external customers         |  | $                  | 31,242,097 |   |                       | $ | 14,970,064 |                  |  | $ |              |   |  | $ | 46,212,161
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |           
|Selling and distribution expenses   |  |                    | 651,165    |   |                       |   | 460,706    |                  |  |   |              |   |  |   | 1,111,871 
|Marketing and advertising           |  |                    |           |   |                       |   | 3,175,561  |                  |  |   |              |   |  |   | 3,175,561 
|General and administrative expenses |  |                    | 630,617    |   |                       |   | 445,566    |                  |  |   | 3,786,466     |   |  |   | 4,862,649 
|Depreciation and amortization       |  |                    | 567,873    |   |                       |   | 497,206    |                  |  |   | 191,925       |   |  |   | 1,257,004 
|Provision of doubtful accounts      |  |                    | 583,544    |   |                       |   | 1,653      |                  |  |   |              |   |  |   | 585,197   
|Finance costs                       |  |                    | (20,737    | ) |                       |   | (124,289   | )                |  |   | 2,647,890     |   |  |   | 2,502,864 
|Income/(loss) before taxes          |  |                    | 4,579,139  |   |                       |   | 7,101,116  |                  |  |   | (6,784,407    | ) |  |   | 4,895,848 
|Income taxes                        |  |                    |           |   |                       |   | 1,304,047  |                  |  |   |              |   |  |   | 1,304,047 
|Net Income/(loss) for the period    |  |                    | 4,579,139  |   |                       |   | 5,797,069  |                  |  |   | (6,784,407    | ) |  |   | 3,591,801 
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |           
|Segment assets                      |  | $                  | 43,985,490 |   |                       | $ | 32,664,101 |                  |  | $ | 17,329,007    |   |  | $ | 93,978,598
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |           
|Segment liabilities                 |  | $                  | 2,608,165  |   |                       | $ | 2,184,690  |                  |  | $ | 7,983,495     |   |  | $ | 12,776,350
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |           

Business segment for the nine months ended September 30, 2007



|                                    |  |                    |            |   |                       |   |                  |  |   |               |   |  |   |           
|----------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------------- |  | - | ------------- | - |  | - | ----------
|                                    |  | AquacultureProduct |            |   | Health andBio-product |   | UnallocatedItems |  |   | Consolidation
|Sales to external customers         |  | $                  | 24,736,746 |   |                       | $ | 12,553,067       |  | $ |              |   |  | $ | 37,289,813
|                                    |  |                    |            |   |                       |   |                  |  |   |               |   |  |   |           
|Selling and distribution expenses   |  |                    | 256,309    |   |                       |   | 311,072          |  |   |              |   |  |   | 567,381   
|Marketing and advertising           |  |                    |           |   |                       |   | 3,815,475        |  |   |              |   |  |   | 3,815,475 
|General and administrative expenses |  |                    | 515,259    |   |                       |   | 183,784          |  |   | 2,674,111     |   |  |   | 3,373,154 
|Depreciation and amortization       |  |                    | 509,027    |   |                       |   | 271,086          |  |   | 161,269       |   |  |   | 941,382   
|Provision of doubtful accounts      |  |                    | 18,464     |   |                       |   | 73,633           |  |   |              |   |  |   | 92,097    
|Finance costs                       |  |                    | (24,614    | ) |                       |   | 41,000           |  |   | 3,694,668     |   |  |   | 3,711,054 
|Income/(loss) before taxes          |  |                    | 5,118,306  |   |                       |   | 5,845,919        |  |   | (6,620,449    | ) |  |   | 4,343,776 
|Income taxes                        |  |                    | 747,186    |   |                       |   | 891,070          |  |   | (13,872       | ) |  |   | 1,624,384 
|Net income (loss) for the period    |  |                    | 4,371,120  |   |                       |   | 4,954,849        |  |   | (6,606,577    | ) |  |   | 2,719,392 
|                                    |  |                    |            |   |                       |   |                  |  |   |               |   |  |   |           
|Segment assets                      |  | $                  | 31,479,120 |   |                       | $ | 22,277,560       |  | $ | 1,875,538     |   |  | $ | 55,632,218
|                                    |  |                    |            |   |                       |   |                  |  |   |               |   |  |   |           
|Segment liabilities                 |  | $                  | 3,989,163  |   |                       | $ | 2,810,330        |  | $ | 7,736,193     |   |  | $ | 14,535,686
|                                    |  |                    |            |   |                       |   |                  |  |   |               |   |  |   |           

NOTE 11 - CAPITAL COMMITMENT

A. CAPITAL COMMITMENTS

As of September 30, 2008, there were capital commitments amounting to $5,821,000, mostly
related to the construction work of the feed mill and machinery purchase for the aquaculture product factory.

B. LEASE COMMITMENTS

The Company has entered into operating leases, for rental of office space and other services, which expire on different dates. The minimum future payments under these
commitments for the next five years are as follows:



|      |  |   |        
|----- |  | - | -------
|2008  |  | $ | 64,448 
|2009  |  |   | 64,448 
|2010  |  |   | 64,448 
|2011  |  |   | 64,448 
|2012  |  |   | 24,977 
|      |  |   |        
|Total |  | $ | 282,769

NOTE 12 - RECENT PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. This Statement applies
to all entities, including not-for-profit organizations. SFAS 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. As such, the Company is required to adopt these provisions at the
beginning of the fiscal year ended December 31, 2008. The Company is currently evaluating the impact of SFAS 159 on its consolidated financial statements.



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##### Table of Contents

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard
(SFAS) No. 141(R), Business Combinations. SFAS 141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, an any non controlling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS 141(R) on its consolidated financial statements but does not expect it to have a material
effect.

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements but does not expect it to have a material effect.

NOTE 13 - LEGAL PROCEEDINGS

With the exception of the proceeding described below, we are currently not involved in
any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency,
selfregulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our
companys or our companys subsidiaries officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

On July 30, 2007, First Cosmos Investments Limited, Sunny Future Group Limited and Newluck International Limited filed suit against HQ Sustainable Maritime Industries, Inc., Jade Profit Investment Limited, Red
Coral Group Limited, Harry Wang, Lillian Wang and Norbert Sporns in the Court of Chancery of the State of Delaware. The suit asserts claims against all of the defendants for alleged breaches of certain Subscription Agreements and Stamped Agreements
entered into by the defendants, and accuses Harry Wang, Lillian Wang and Norbert Sporns of various alleged breaches of fiduciary duty. The plaintiffs are seeking compensable, general and consequential damages in an unspecified sum. We have reviewed
the complaint and believe that there is neither procedural nor substantive merit to the lawsuit. We believe that the lawsuit is subject to dismissal for lack of personal and subject matter jurisdiction, for failure to state a claim upon which relief
may be granted, and for failure to assert the claims in a timely manner. The Court dismissed the case without prejudice in September 2008.



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|ITEM 2. | MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
|------- | --------------------------------------------------------

GENERAL OVERVIEW

We are a leader in toxin free integrated aquaculture and aquatic product processing, with processing facilities located in
Hainan, PRC. We market our products in Asia, America and Europe. We have two processing plants in Hainan, one that processes aquatic products providing toxinfree tilapia and other aquatic products, and the other one that processes marine bio
and healthcare products. We seek to expand our operations through additional processing facilities in China and marketing efforts throughout North America and Europe.

Recently, we announced that we had entered into a conditional agreement with the government of Tayang Town in the Province of Hainan, PRC, in order to work with the cooperative farms capable of producing some 20,000
tonnes of live weight tilapia. We expect this agreement to result in doubling the farming capacity available to us. This agreement is conditional on the completion of a financing for the construction of a new feed mill and processing plant in the
immediate vicinity of the farms.

Furthermore, we also announced that we enhanced our sales force in the United States by recruiting Mr. Trond
Ringstad as our Executive Vice-President Sales and Distribution and, recently, Mr. Bryan Gent as our Vice-President of Product Development. We believe, that their combined experiences in servicing the fish industry will impact significantly on
the demand for our products.

In addition, from the first quarter of 2004, following our reverse merger with Process Equipment, Inc., we have been
operating under the name of HQS. At that time, we owned 84.4% of HQOF, currently our principal operating subsidiary that processes our seafood products; in August 2004 we acquired the remaining ownership interest that we did not already own in HQOF.
In August 2004, we acquired 100% interest in our other current wholly-subsidiary Jiahua Marine which operates a marine bio and healthcare plant, including nutraceuticals, in Hainan Province, China.

The following Managements Discussion and Analysis (MD&A) is intended to help the reader understand our Group. MD&A is provided as a supplement
to, and should be read in conjunction with, our financial statements and the accompanying notes (Notes).

Our principal executive office is
located at 1511, Third Avenue, Suite 788, Seattle, Washington, and our telephone number is (206) 621 9888. The URL for our website is http://www.hqfish.com.

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

You should read the following discussion of our financial condition and operations in
conjunction with the consolidated financial statements and the related notes included elsewhere in this quarterly report. This quarterly report contains forwardlooking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as anticipate, expect, intend, plan,
will, we believe, our company believes, management believes and similar language. The forwardlooking statements are based on our current expectations and are subject to certain risks,
uncertainties and assumptions, including our ability to (1) obtain sufficient capital or a strategic business arrangement to fund our expansion plans; (2) build the management and human resources infrastructure necessary to support the
growth of our business; (3) competitive factors and developments beyond our control; and (4) those other risk factors, uncertainties and assumptions that are set forth in the discussion under the headings captioned Business,
Risk Factors, and Managements Discussion and Analysis. Our actual results may differ materially from results anticipated in these forwardlooking statements. We base the forwardlooking statements on
information currently available to us, and we assume no obligation to update or revise them, whether as a result of new information, future events or otherwise. In addition, our historical financial performance is not necessarily indicative of the
results that may be expected in the future and we believe that such comparisons cannot be relied upon as indicators of future performance.

The following
discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our
consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the
estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of
different assumptions or conditions.

The following critical accounting policies affect the more significant judgments and estimates used in the
preparation of the Companys consolidated financial statements.



Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is calculated on the weighted average basis and
includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to
reduce the computed weighted average cost if it exceeds the net realizable value.

Income Taxes

Taxes are calculated in accordance with taxation principles currently effective in the PRC. The Company accounts for income taxes under the provision of Statements of
Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company
accounts for income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not
expected to be realized.



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Related Parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also
considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

Revenue Recognition

In accordance with the provisions of Staff Accounting Bulletin No. 103, revenue is recognized when merchandise is
shipped and title passes to the customer and collectibility is reasonably assured.

Concentration of Credit Risk

Financial instruments that potentially subject our company to significant concentrations of credit risk consist primarily of trade accounts receivable. We perform ongoing
credit evaluations with respect to the financial condition of its creditors, but do not require collateral. In order to determine the value of our accounts receivable, we record a provision for doubtful accounts to cover probable credit losses. Our
management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable.

Recent developments

On January 1, 2008, a new PRC Enterprise Income Tax Law (EIT) became effective. That new
Law provides, amongst other issues, that income derived from processing of fishery products and processing of agricultural products will be exempt from EIT taxes. Accordingly, our existing fish processing unit and our new feed mill (which is under
construction) will both benefit from a 0% tax rate in 2008 and after. With regards to our neutraceutical unit, the income tax rate increased from 15% in 2007 to 18% in 2008, and will increase yearly until it reaches 25% in 2012.

In January 2008, the Company received Chinese government Organic certification for its tilapia production, processing, labeling, marketing and
management system.

In February 2008, the Company participated in the International Boston Seafood Show, and the Companys CEO was a
panelist on Improving the Safety of Farmed Seafood, part of the conference program.

In April 2008, the Company presented its range of recently
certified organic tilapia products at the All Things Organic & US Food Export Showcase in Chicago, Illinois.

In April 2008, the
Company presented its line of products that meet Aquaculture Certification Council (ACC) Best Aquaculture Practices (BAP) for tilapia aquaculture operations at the European Seafood Exposition.

Results of Operations  Three Months Ended September 30, 2008 as Compared to Three Months Ended September 30, 2007

Total sales for the three months period ended September 30, 2008 increased by 42%, from $15,779,385 in 2007 to
$22,470,184 in 2008, The gross profit for the three months period ended September 30, 2008 increased by 23% to $9,534,094 when compared to the same period of 2007. The overall gross profit ratio went from 49% for the three months period ended
in September 30, 2007 to 42% for the corresponding 2008 period; that represents a significant improvement from the three months period ended in June 30th2008 where the gross profit ratio stood at 34% during that period. That reduction in the gross profit ratio in the third quarter of 2008 compared to the third quarter of 2007originates mostly from increased
manufacturing costs in the aquatic product segment combined to a different sales mix in the healthcare products segment. Income from operations for the three months period ended September 30th increased from $5,234,644 in 2007 to $6,527,560 in
2008. Income from operations improved in the current period, when compared to 2007, mostly due to an increase of sales and related gross profit. Net income increased substantially to $5,614,682 in the current period, from net income of $3,453,806 in
the corresponding period of 2007. The increased income from operations as indicated above, added to a reduction of total finance costs to give effect to the gradual phasing out of the non-cash costs relating to warrants amortization costs and
embedded conversion option on the promissory notes issued in 2006, which are recognized in accordance with FAS 123R and EITF 00-27, are the major components of the increased profitability experienced in the current three months period of 2008.

By Segments

Manufacturing and Selling of
aquatic products

Hainan Quebec Ocean Fishing Co. Ltd (HQOF), is engaged in the manufacturing
and selling of aquatic products. The sales contributed by this segment increased to $15,112,565 for the three months period ended September 30, 2008 compared to $10,268,845 for the corresponding period of 2007, an improvement of 47%. The
related gross profit ratio of this segment went from 31% in 2007 to 24% for the three months ended September 30, 2008; that represents a significant improvement from the three months period ended in June 30th, 2008 where the gross profit ratio stood at 15% during that period. The reduction in gross profit in the third quarter of 2008 compared to the third quarter
of 2007 is due to increased raw material costs of our fish in 2008 added to increased labor and manufacturing costs. This segment contributed $2,666,762 to our net income in the three months period ended September 30, 2008, as compared to a net
income of $2,198,440 for the corresponding period of 2007, an increase of 21%. The increase in activity of this segment in 2008, together with reduction of tax rate to 0% in the aquaculture products led to an improvement in the profitability in the
third quarter of 2008 compared to the same period of 2007.

Manufacturing and Selling of Marine Bio and Healthcare products

Our other manufacturing subsidiary, Jiahua Marine is engaged in the manufacturing and selling of healthcare and
bio-products. During the three months periods ended September 30, 2008 and 2007, Jiahua Marine realized sales of $7,357,619 and $5,510,540 respectively, an increase of 34%. The gross profit ratio from this segment fell from 84% in the three
months period of 2007 to 80% for the three months ended September 30, 2008; that represents a significant improvement from the three months period ended June 30th, 2008 where the gross profit ratio stood at 72% during that period. That reduction in the gross profit ratio in the third quarter of 2008 compared to the third quarter of 2007 is due to a different sales mix that
occurred in 2008, as higher level of products carrying lesser gross profit were sold in 2008. The net income contributed by this segment was $4,498,668 for the three months period ended September 30, 2008, compared to $2,974,292 for the
corresponding period of 2007, an increase of 51%. The improvement in net income was mostly due to the increased sales in 2008 added to lower marketing and advertising expenses in the 2008 period compared to 2007.



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By Operations

Sales. For the three months ended September 30, 2008 sales increased by $6,690,799 or 42,4% to $22,470,184. This improvement in sales resulted from a better performance of both segments in 2008, mostly the
aquaculture product segment which experienced an increase of $4,843,720 or 47% compared to the same period of 2008. The health and bioproduct segment improved its sales by $1,847,079 or 34% in the third quarter of 2008 compared to the same
period of 2007.

Cost of Sales and Gross Profit. Cost of sales increased by
$4,896,629 or 61% to $12,936,090 from $8,039,461 for the three months ended September 30, 2008, as compared to the corresponding period of the prior year. Increases in the manufacturing costs in the aquaculture products segment, more
importantly the cost of raw materials and manpower, was the major cause of increased costs. The gross profit ratio fell from 49% for the three months period ended September 30th, 2007 to 42% for the corresponding period of 2008, mostly due to lesser profitability of sales in the aquatic segment, added to a disadvantageous sales mix in the health and
bio-products segment. That indicates a significant increase from the three months period ended in June 30th2008 where the gross profit ratio
stood at 34% during that period.

Selling and Distribution Expenses. Selling and distribution expenses increased by $335,361 or 151%
to $557,763 for the three months ended September 30, 2008, as compared to the corresponding period of the previous year. The increase originated mostly from higher volume of sales in the aquaculture product segment realized in the current
period.

Marketing and Advertising Expenses. Marketing and advertising expenses decreased by $582,987 or 45% from $1,307,498 as
compared to the corresponding period of prior year. The reduction in those expenses is mostly due to a winding down of publicity programs for those products which have been marketed for many years.

General and Administrative Expenses. General and administrative expenses increased by $409,950 or 39% to $1,466,174 from $1,056,224 as compared to the
corresponding period of the previous year. The majority of the increase is the result of brandingrelated expenses, investors relations and other head office expenses.

Depreciation and Amortization. Depreciation and amortization increased by $221,441 to $554,741 in the current quarter when compared to the same quarter of 2007, mainly as a result of acquisition of fixed
assets in 2008, which triggered additional depreciation in the current three month period ended in September 30, 2008.

(Recovery of)Provision
for Doubtful Accounts.Recovery of doubtful accounts amounted to $296,655 for the three months ended September 30, 2008 compared to $414,144 for the corresponding period of 2007. The recovery originates mainly from a reversal of
collection credit risks provided in previous quarters in the health and bio-product segment for an amount of $629,028.

Income from
Operations. Income from operations for the three months period ending September 30 went from $5,234,644 in 2007 to $6,527,560 in the corresponding period of 2008. The improvement in income from operations in the three months period
ending September 30, 2008 when compared to 2007 was mostly the result of increased sales and related gross profit from both segments, added to a reduction of marketing and advertising expenses in the health and bio-products segment.

Finance Costs. Finance costs decreased to $60,240 from $897,452 for the three months ended September 30, 2008 as compared to the
corresponding period of the previous year. The decrease is due to a combination of reduced amortization of future conversion of warrants (non-cash) and embedded conversion option (also non-cash) on the promissory notes issued in 2006, as some notes
matured in the first quarter of 2008. Those amortization costs were recognized in accordance with FAS 123R and EITF 00-27.

Other
Expenses. For the three months ended September 30, 2008, other expenses were nil while they amounted to $25,431 for the three months period ended September 30, 2007.

Income before Income Taxes. In the three months period ending September 30, 2008, we realized an income before taxes of $6,467,320 compared to
an income before taxes of $4,311,761 in the corresponding period of 2007. That significant improvement was the result of increased income from operations as described above coupled with reduced finance costs in the current period of 2008.

Current Income Taxes. Current income taxes decreased by $5,317 to $852,638 in the current three months period of 2008, from $857,955
in the corresponding period of 2007. Although the taxable income increased substantially in the current 2008 quarterly period, the reduction in the income tax rate since January 2008 to 0% in the aquaculture product segment brought down the overall
tax rate at a significantly lower level in 2008 compared to the corresponding period of 2007.

Deferred Income Taxes. There was no
deferred income tax recognized in both periods as there was no material timing differences to justify recognition of such deferred tax expenses.

Net
Income Attributable to Shareholders. In the three months period ending September 30, 2008, we realized a net income of $5,614,682 compared to a net income of $3,453,806 in the corresponding period of 2007. As described above, the
increase in gross profit from both our segments in the current 2008 period added to the reduction in marketing and advertising and finance costs were the most important factors justifying the increase in net income in 2008.

Results of Operations  Nine Months Ended September 30, 2008 as Compared to Nine Months Ended September 30, 2007

Total sales for the nine months ended September 30, 2008 increased by 24%, from $37,289,813 in 2007 to $46,212,161 in 2008. About 73% of the increase in sales
originates from the aquaculture product segment. Gross profit for the nine months period ended September 30, 2008 increased by 9% to $18,392,759 when compared to the corresponding period of 2007. The gross profit ratio for the nine months
period ended September 30, fell from 45% in 2007 to 40% in 2008. That reduction in the gross profit ratio in 2008 originates from both segments: the aquatic product segment experiencing increased raw materials and manpower costs while the
healthcare products segment experienced a different mix of sales in 2008 compared to 2007. Income from operations for the current nine months period decreased from $8,066,214 in September 2007 down to $7,400,477 in September 2008. Although the
overall gross profit increased in the current 2008 period when compared to the corresponding period of 2007, the increase in overheads related to product branding, bad debts and other plants and head office general and administrative expenses where
the major contributors to the reduction in income from operations in 2008. Net income increased from $2,719,392 in the nine months period ended September 30, 2007 to $3,591,801 in the corresponding period of 2008. The increased net income of
2008 was the result of reduced income from operations as described above, which was mostly offset by reduced finance costs and income taxes. The reduction in finance costs in 2008 is the result of the gradual phasing out of the amortization of
non-cash costs relating to the warrants amortization and embedded conversion option on the promissory notes issued in 2006 which are recognized in accordance with FAS 123R and EITF 00-27. The reduction of income taxes is the result of a new tax
legislation effective from January 1, 2008, which reduced our tax rate to 0% in our aquaculture product segment.



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Segments

Manufacturing and Selling of aquatic products

Hainan Quebec Ocean Fishing Co. Ltd (HQOF) is engaged in the manufacturing and selling
of aquatic products. The revenue contributed by this segment increased by $6,505,351 or 26% to $31,242,097 for the nine months ended September 30, 2008 compared to $24,736,746 for the corresponding period of 2007. The related gross profit ratio
of this segment went from 26% for the nine months period ending in September 2007 compared to 22% in the corresponding period of 2008. The reduction in the gross profit ratio in 2008 originates mostly from increased manufacturing costs experienced
in 2008. This segment contributed $4,579,139 to our net income in the first nine months of 2008, as compared to net income of $4,371,120 for the corresponding period of 2007. That increase is mostly due to the combination of increased sales and
gross profit experienced in 2008 added to the reduction in income taxes related to a new tax legislation becoming effective January 1, 2008 which reduced our tax rate to 0% in our aquaculture product segment.

Manufacturing and Selling of Marine Bio and Healthcare products

Our other manufacturing subsidiary, Jiahua Marine, is engaged in the manufacturing and selling of healthcare and bio-products. During the nine months period ended September 30, 2008 and 2007, Jiahua Marine realized sales of $14,970,064
and $12,553,067 respectively, an increase of $2,416,997 or 19%. The gross profit ratio from this segment went from 84% in the nine months period ended September 2007 compared to 77% in the corresponding period of 2008. That reduction in the gross
profit ratio experienced in 2008 is due to a different sales mix that occurred in 2008, as higher sales of products with lesser contributions were made. The major expense of this segment continues to be marketing and advertising, corresponding to
21% and 30% of revenues for the nine months ended September 30, 2008 and 2007 respectively. The net income contributed by this segment was $5,797,069 and $4,954,849 for the nine months ended September 30, 2008 and 2007, respectively. The
increase in net income in 2008 was mostly due to the combination of increased sales and gross profit in 2008 added to decreased marketing and advertising expenses for the same period.

Operations

Sales. For the nine months ended September 30, 2008 sales increased by
$8,922,348 or 24% to $46,212,161. This improvement in sales resulted from increased activities of both segments in 2008, mostly the aquaculture product segment which experienced an increase of $6,505,351 or 26%, while the sales from the health and
bio product segment increased by $2,416,997 or 19% in the first nine months of 2008 compared to the corresponding period of 2007.

Cost of Sales and
Gross Profit. Cost of sales increased by $7,385,292, or 36% to $27,819,402 from $20,434,110 for the nine months ended September 30, 2008, as compared to the corresponding period of the prior year. The combination of increased
volume of sales and increased manufacturing costs in the aquaculture product segment was the major cause of the increase in cost of sales. The gross profit ratio reduced from 45.2% for the nine months ended September 30, 2007 to 39.8% for the
same period of 2008. The overall gross profit ratio reduction in the current nine months period of 2008 originates from both our segments: the aquaculture product segment which suffered an increase in processing costs, and the health and bio-product
segment which experienced a different mix of products sold.

Selling and Distribution Expenses. Selling and distribution expenses
increased by $544,490 or 96% from $567,381 to $1,111,871 for the nine months ended September 30, 2008, as compared to the corresponding period of the prior year. The increase was the result of higher volume of sales realized in the current
period, leading to higher transportation costs in the first nine months of 2008, as compared to that of the corresponding period of 2007.

Marketing
and Advertising Expenses. Marketing and advertising expenses decreased by $639,914 or 17% from $3,815,475, to $3,175,561 as compared to the corresponding period of prior year. Those expenses correspond to approximately 21% of the health and
bio-product sales of 2008 sales compared to 30% of sales of 2007. The reduction in those expenses is mostly due to a winding down of publicity programs for those products which have been marketed for many years. Those advertising expenses for the
promotion of our health and bio-products to achieve customer recognition are consistent with industry practices

General and Administrative
Expenses. General and administrative expenses increased by $1,489,495 or 44% to $4,862,649 from $3,373,154 as compared to the corresponding period of the previous year. The majority of the increase results from additional branding-related
expenses, franchise taxes and other head office expenses while the rest of the increase originates from additional general and administrative expenses in the subsidiaries where additional activity was created in 2008 compared to 2007.

Depreciation and Amortization. Depreciation and amortization increased by $315,622 or 34% to $1,257,004 as compared to the corresponding period of
prior year, mainly as a result of acquisition of fixed assets in 2008, which triggered additional depreciation during the current period.

Provision
for Doubtful Accounts. Provision for doubtful accounts amounted to $585,197 for the nine months ended September 30, 2008 compared to $92,097 for the corresponding period of 2007. The increase in the 2008 provision, originating
mostly from our aquaculture segment, was set up in order to provide for potential losses in our receivables which did not materialize to date.

Income from Operations. Income from operations for the nine months period ending September 2008 decreased from $8,066,214 in 2007 to $7,400,477 in the corresponding period of 2008, a reduction of $665,737. That reduction in
2008 is mostly the result of a general increase in overhead expenses due to increased activities from both of our segments as described above.

Finance Costs. Finance costs decreased to $2,502,864 from $3,711,054 for the nine months period ended September 30, 2008 when compared to the corresponding period of the prior year, a reduction of $1,208,190.
Included in the 2008 financing costs are the carrying interests on the promissory notes issued in 2006 added to the continued combination of amortization of the future conversion of warrants (noncash) attributed to investors on those
convertible promissory notes, and the amortization of the embedded conversion option (also noncash) related to the same notes. Those noncash related financial costs were recognized in accordance with FAS 123R and EITF 0027. Such
amortization will be repeated quarterly, on a prorata basis, until maturity of the underlying notes. Furthermore, included in the 2008 finance costs are non-recurring costs of $702,000 corresponding to the balance of costs we had to recognize
during the second quarter of 2008, following the final judgement on the Westminster Securities and John OShea claims against the Company. Finally, the 2008 finance costs also include non-recurring penalties on late filing of the registration
statement relating to the underlying shares of the convertible notes issued in November 2006; that filing document is effective since July 7, 2008.

Other Expenses.Other expenses fell from $11,384 for the nine months ended September 30, 2007 to $1,765 for the nine months ended September 30, 2008.

Income Before Income Taxes. For the nine months period ended September 30, 2008, income before income taxes increased to $4,895,848, from an
income of $4,343,776 for the corresponding period of 2007. That increase experienced in 2008 was the result of decreased income from operations as described above which was offset by a reduction in finance costs in the same period.

Current Income Taxes. Current income taxes decreased by $320,337 to $1,304,047 from $1,624,384 in the first nine months of 2008. That reduction in
current income taxes is mostly due to a new tax legislation that became effective on January 1, 2008 which reduced the income tax rate to 0% in our aquaculture products segment.

Deferred Income Taxes. There was no deferred income tax recognized in both periods as there was no material timing differences to justify recognition of such deferred tax expenses.

Net Income Attributable To Shareholders. The net income attributable to shareholders increased by $872,409 to $3,591,801 for the nine months ended
September 30, 2008. Both segments experienced an increase in gross profit in the first nine months of 2008 when compared to 2007. A general increase in overhead expenses in 2008, offset by a decrease in marketing and advertising and finance
costs explain the balance of the increase in net income experienced in the first nine months of 2008.



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LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents increased by $3,002,342 or 6%, to $49,962,250 at September 30, 2008, from $46,959,908 at December 31, 2007. As of September 30, 2008, working capital was $71,072,016
compared to $61,550,488 at December 31, 2007. The funds generated by the operating activities during 2008 were used mainly to support the increase in our business volume, more specifically our receivables and inventories levels.

Total assets increased by $9,651,732, or 11%, to $93,978,598 at September 30, 2008, from $84,326,866 as of December 31, 2007. Shareholders equity increased by
$12,426,585, or 18%, to $81,202,248 at September 30, 2008, from $68,775,663 as of December 31, 2007.

To date, we have financed our operations
through the combination of our operating revenues, equity and debt financing (in connection with which we have at times incurred significant costs), short-term bank loans, and the use of shares of our common stock issued as payment for services
rendered to us by third parties. In the past, we issued shares of our common stock and warrants in private placement transactions to help finance our operations, and to pay for professional services (such as financial consulting, market development,
legal services and public relations services). We recognized these services on our books as operating or deferred expenses and amortized over their estimated useful life. The number of shares we issued for these purposes were determined as of the
dates of invoices relating to such services, and the shares were valued at their market prices on those respective dates. In addition, as required by PRC laws, we establish yearly reserves shown in the shareholders equity section of our
balance sheet. Those reserves, which are created by a transfer from the retained earnings account, limit our capacity to pay dividends to shareholders until the retained earnings become positive. As we are in an expansion phase, we do not intend to
pay dividends to shareholders in the foreseeable future. To date, we have not paid any dividends.

We completed a financing in January 2006, in which we
issued to a group of twenty one investors, in a private placement, (1) convertible secured promissory notes bearing interest at 8% per year which matured on January 25, 2008, in the aggregate principal amount of $5,225,000;
(2) Class A warrants, with each warrant giving the right to the holder to purchase one share of our common stock at the exercise price of $6.00 until January 2009; and (3) Class B warrants, with each warrant giving the right to the
holder to purchase one share of our common stock at the exercise price of $6.00 until January 2011. The net proceeds of this financing to us were $4,702,500, after deducting commissions and other costs of this transaction equal to $522,500. As of
September 30, 2008, that financing was totally repaid.

We completed another financing in
November 2006, in which we issued to two investors, in a private placement, (1) convertible promissory notes bearing interest at 6.5% and maturing in November 1, 2009, in the principal aggregate amount of $5,000,000 with the conversion
price of $5.00 after reverse split and (2) warrants registered in the name of each investor to purchase an aggregate of up to 200,000 of our common stock, after reverse split, with each warrant giving the right to the holder to purchase one
share of our common stock at the exercise price of $5.00 until the fifth anniversary of the effective date of the reverse stock split effectuated. As of September 30t2008, 170,000 shares underlying exercised warrants were issued. The net proceed of this financing to us were $4,932,500, after deducting commissions and other costs of this transaction equal to $67,500. The
notes are due on November 1, 2009.

In December 2007, we completed a follow-on offering by issuing 3,450,000 new shares of Common Stock to two
underwriters (including the over-allotment of 450,000 shares) for a total gross consideration of $26,910,000 (corresponding to a net proceeds of approximately $23,800,000). The Company intends to use this financing for the purpose of completing its
new feed plant expected to be in operation in the second half of 2008, to build a new processing plant expected to be in operation in the second half of 2009 and to use the balance for general working capital purposes.

We are currently in the process of examining various financing opportunities to obtain additional liquidities to help finance our operations, as well as support our
additional cash requirements related to volume increases that we anticipate might occur in the future, specifically in the inventory and receivables build-up.

At present, over 38% of our consolidated sales are derived from our five largest clients, and our results of operations therefore depend on a small number of clients. As part of our short and medium-term business plan, including our current
efforts to raise funds to support the anticipated expansion of our operations, we intend to invest in our infrastructure to construct a new processing plant and our own organic feed mill. We expect that this will allow us to meet forecasted
incremental demand for our products in the United States and Europe. As a result, we plan to develop and serve new clients, which should reduce our dependence on individual clients to more acceptable levels.

In order to ensure sufficient funds to meet our future needs for capital, management believes that, from time to time, we will continue to evaluate opportunities to
raise financing through some combination of commercial bank borrowings, the private or public sale of equity, or issuance of debt securities. However, future equity or debt financing may not be available to us at all, or if available, may not be on
terms acceptable to us. If we are unable to obtain financing in the future, we will continue to develop our business on a reduced scale based on our existing capital resources.

The ratio of current assets to current liabilities increased to 9.1 times ($79,838,551/$8,766,535) at September 30, 2008, from 6.2 times ($73,448,339/$11,897,851) at December 31, 2007.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We do
not hold any derivative instruments and do not engage in any hedging activities. Because most of our purchases and sales are made in RMB, any exchange rate change affecting the value of the RMB relative to the U.S. dollar could have an effect on our
financial results as reported in U.S. dollars. If the RMB were to depreciate against the U.S. dollar, amounts reported in U.S. dollars would be correspondingly reduced. If the RMB were to appreciate against the U.S. dollar, amounts reported in U.S.
dollars would be correspondingly increased.



|ITEM 4. | CONTROL AND PROCEDURES.
|------- | -----------------------

a) Evaluation of Disclosure Controls and
Procedures.

Management, which includes our Chief Executive Officer and Chief Financial Officer , is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized
control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published inInternal Control-Integrated Framework , is known as the COSO Report. Our Management has chosen the COSO
framework on which to base its assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of September 30, 2008.

The Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q for the Quarter ended
September 30, 2008. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this quarterly
report on Form 10-Q. There were no changes in internal control over financial reporting (as defined in Rule 13a-15(e) under the Exchange Act) that occurred during the period covered by this quarterly report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

It should be noted that any system
of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the
likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

(b) Changes in Internal Control over Financial Reporting.

During the Quarter ended September 30, 2008, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.



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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

With the exception of the proceedings described below, we
are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries
or of our companys or our companys subsidiaries officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

On July 30, 2007, First Cosmos Investments Limited, Sunny Future Group Limited and Newluck International Limited filed suit against HQ Sustainable Maritime Industries, Inc., Jade Profit Investment Limited, Red
Coral Group Limited, Harry Wang, Lillian Wang and Norbert Sporns in the Court of Chancery of the State of Delaware. The suit asserts claims against all of the defendants for alleged breaches of certain Subscription Agreements and Stamped Agreements
entered into by the defendants, and accuses Harry Wang, Lillian Wang and Norbert Sporns of various alleged breaches of fiduciary duty. The plaintiffs are seeking compensable, general and consequential damages in an unspecified sum. We have reviewed
the complaint and believed that there is neither procedural nor substantive merit to the lawsuit. We believe that the lawsuit is subject to dismissal for lack of personal and subject matter jurisdiction, for failure to state a claim upon which
relief may be granted, and for failure to assert the claims in a timely manner. The Court dismissed the case without prejudice in September 2008.

ITEM 1A - Risk Factors

We have updated the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10K
for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission on March 31, 2008 (the Fiscal 2007 10K). We believe there are no changes that constitute material changes from the risk
factors previously disclosed in the Fiscal 2007 10K.



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ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 25, 2008, we issued 45,432 common shares as a result of exercise of warrants to Tail Wind Fund Limited, one of our investors.

On September 5, 2008, we issued 6,468 shares to our four independent non-executive directors, Fred Bild, Daniel Too, Joseph I. Emas and Andrew Intrater to satisfy
our obligations to pay each such director their remuneration in shares of our common stock pursuant to our independent non-executive director agreements with them. All of these shares were issued pursuant to the exemption provided by Section 4
(2) under the Securities Act for a transaction not involving a public offering.

ITEM 3 - DEFAULTS UPON SENIOR
SECURITIES

There have been no material defaults.

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

No matters have been submitted to a vote of security holders during the period
covered by this report.

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS



|     |  |                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.                   
|     | 
|31.2 |  | Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
|     | 
|32.1 |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.                   
|     | 
|32.2 |  | Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, Washington.

Dated : November 10, 2008



|                                         |  |                                           
|---------------------------------------- |  | ------------------------------------------
|HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
|                                         | 
|By:                                      |  | /s/ Norbert Sporns                        
|Name:                                    |  | Norbert Sporns                            
|Title:                                   |  | Chief Executive Officer and President     
|                                         | 
|By:                                      |  | /s/ Jean-Pierre Dallaire                  
|Name:                                    |  | Jean-Pierre Dallaire,                     
|Title:                                   |  | Principal Financial and Accounting Officer



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##### Table of Contents

Exhibit Index



|              |  |                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                   
|31.1          |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.                   
|              | 
|31.2          |  | Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
|              | 
|32.1          |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.                   
|              | 
|32.2          |  | Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.



23