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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB/A



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(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

OR



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

Commission file number: 000-18980



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

(Name of small business issuer in its charter)



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|                                                         |  |                                                      |  |                         
|-------------------------------------------------------- |  | ---------------------------------------------------- |  | ------------------------
|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



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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)



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Check whether the issuer: (i) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and
(ii) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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

As of March 31, 2006, there were 117,095,225 shares of the registrants common stock outstanding.

Transitional Small Business Disclosure Format (Check one):    Yes ̈No  x



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EXPLANATORY NOTE

The financial statements for the three months period ended March 31, 2006 have been restated to reflect the methodology correction for the embedded conversion option of the convertible promissory notes that the Company issued in
January 2006. The effective conversion price has been used to measure the intrinsic value of the embedded conversion option under EITF 00-27, the issue 98-5 model.



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TABLE OF CONTENTS



|                                                                    |  |             
|------------------------------------------------------------------- |  | ------------
|                                                                    |  | Page Numbers
|PART I - FINANCIAL INFORMATION                                      |  |             
|                                                                    | 
|Item 1. Financial Statements.                                       |  |             
|x       
Condensed Consolidated Balance Sheets                      |  | 2-3         
|x       
Condensed Consolidated Statements of Income                |  | 4           
|x       
Condensed Consolidated Statements of Cash Flows            |  | 5           
|x       
Notes to Condensed Consolidated Financial Statements       |  | 6-11        
|Item 2.
Management Discussion & Analysis or Plan of Operations.     |  | 12-16       
|Item 3.
Controls and Procedures                                     |  | 17          
|                                                                    | 
|PART II - OTHER INFORMATION                                         |  |             
|                                                                    | 
|Item 1.
Legal Proceedings                                           |  | 18          
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds |  | 18          
|Item 3.
Defaults Upon Senior Securities                             |  | 18          
|Item 4.
Submission of Matters to a Vote of Security Holders         |  | 18          
|Item 5 
Other Information                                           |  | 18          
|Item 6.
Exhibits and Reports on Form 8-K                            |  | 18          



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE

WITH LIMITED LIABILITY)

CONDENSED
CONSOLIDATED BALANCE SHEETS

ASSETS



|                                           |  |                                       |            |                             |   |           
|------------------------------------------ |  | ------------------------------------- | ---------- | --------------------------- | - | ----------
|                                           |  | March 31, 2006 (Unaudited) (Restated) |            | December 31, 2005 (Audited)
|CURRENT ASSETS                             |  |                                       |            |                             |   |           
|Cash and cash equivalents                  |  | $                                     | 9,040,421  |                             | $ | 5,140,159 
|Trade receivables, net of provision        |  |                                       | 7,539,335  |                             |   | 8,423,127 
|Inventory                                  |  |                                       | 1,000,613  |                             |   | 557,464   
|Prepayments                                |  |                                       | 377,630    |                             |   | 131,864   
|Due from related parties, net of provision |  |                                       | 655,885    |                             |   | 526,195   
|Advance to employees                       |  |                                       | 43,475     |                             |   | 127,231   
|Tax recoverable                            |  |                                       | 46,661     |                             |   | 83,514    
|                                           |  |                                       |            |                             |   |           
|TOTAL CURRENT ASSETS                       |  |                                       | 18,704,020 |                             |   | 14,989,554
|                                           |  |                                       |            |                             |   |           
|OTHER ASSETS                               |  |                                       |            |                             |   |           
|Deferred taxes                             |  |                                       | 891,738    |                             |   | 926,623   
|Deferred cost                              |  |                                       | 1,399,562  |                             |   | 500,000   
|                                           |  |                                       |            |                             |   |           
|TOTAL OTHER ASSETS                         |  |                                       | 2,291,300  |                             |   | 1,426,623 
|                                           |  |                                       |            |                             |   |           
|PROPERTY, PLANT AND EQUIPMENT, NET         |  |                                       | 7,795,505  |                             |   | 8,000,503 
|                                           |  |                                       |            |                             |   |           
|TOTAL ASSETS                               |  | $                                     | 28,790,825 |                             | $ | 24,416,680
|                                           |  |                                       |            |                             |   |           

The accompanying notes are in 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

LIABILITIES AND SHAREHOLDERS EQUITY



|                                              |  |                                       |            |   |                             |   |            |  
|--------------------------------------------- |  | ------------------------------------- | ---------- | - | --------------------------- | - | ---------- | -
|                                              |  | March 31, 2006 (Unaudited) (Restated) |            |   | December 31, 2005 (Audited) |  
|CURRENT LIABILITIES                           |  |                                       |            |   |                             |   |            |  
|Accounts payable and accrued expenses         |  | $                                     | 1,832,554  |   |                             | $ | 2,617,446  |  
|Bank loans                                    |  |                                       | 1,208,385  |   |                             |   | 1,726,264  |  
|Tax payable                                   |  |                                       | 46,532     |   |                             |   | 73,245     |  
|Due to related parties                        |  |                                       | 746,542    |   |                             |   | 787,716    |  
|Due to directors                              |  |                                       | 1,544,997  |   |                             |   | 1,350,539  |  
|                                              |  |                                       |            |   |                             |   |            |  
|TOTAL CURRENT LIABILITIES                     |  |                                       | 5,379,010  |   |                             |   | 6,555,210  |  
|                                              |  |                                       |            |   |                             |   |            |  
|LONG TERM LIABILITIES                         |  |                                       |            |   |                             |   |            |  
|Convertible promissory notes                  |  |                                       | 816,813    |   |                             |   |           |  
|                                              |  |                                       |            |   |                             |   |            |  
|TOTAL LIABILITIES                             |  |                                       | 6,195,823  |   |                             |   | 6,555,210  |  
|                                              |  |                                       |            |   |                             |   |            |  
|SHAREHOLDERS EQUITY                          |  |                                       |            |   |                             |   |            |  
|Preferred stock                               |  |                                       | 100        |   |                             |   | 100        |  
|Common stock                                  |  |                                       | 117,095    |   |                             |   | 116,105    |  
|Additional paid-in capital                    |  |                                       | 21,560,970 |   |                             |   | 15,574,752 |  
|Accumulated Other Comprehensive Income        |  |                                       | 443,342    |   |                             |   | 499,251    |  
|Retained Earnings (Deficit)                   |  |                                       | (1,643,979 | ) |                             |   | (314,583   | )
|Appropriation of Retained Earnings (Reserves) |  |                                       | 2,117,474  |   |                             |   | 1,985,845  |  
|                                              |  |                                       |            |   |                             |   |            |  
|TOTAL SHAREHOLDERS EQUITY                    |  |                                       | 22,595,002 |   |                             |   | 17,861,470 |  
|                                              |  |                                       |            |   |                             |   |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY    |  | $                                     | 28,790,825 |   |                             | $ | 24,416,680 |  
|                                              |  |                                       |            |   |                             |   |            |  

The accompanying notes are in 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

(UNAUDITED)



|                                          |  |                          |             |   |                |   |            |  
|----------------------------------------- |  | ------------------------ | ----------- | - | -------------- | - | ---------- | -
|                                          |  | Three Months Ended       |            
|                                          |  | March 31, 2006(Restated) |             |   | March 31, 2005 |  
|SALES                                     |  | $                        | 6,885,340   |   |                | $ | 3,016,886  |  
|COST OF SALES                             |  |                          | 4,353,455   |   |                |   | 1,299,166  |  
|                                          |  |                          |             |   |                |   |            |  
|GROSS PROFIT                              |  |                          | 2,531,885   |   |                |   | 1,717,720  |  
|SELLING AND DISTRIBUTION EXPENSES         |  |                          | 69,168      |   |                |   | 40,608     |  
|ADVERTISING                               |  |                          | 1,112,735   |   |                |   | 1,000,819  |  
|GENERAL AND ADMINISTRATIVE EXPENSES       |  |                          | 1,003,470   |   |                |   | 626,941    |  
|DEPRECIATION                              |  |                          | 234,448     |   |                |   | 240,272    |  
|PROVISION FOR DOUBTFUL ACCOUNTS           |  |                          | 183,930     |   |                |   | 38,352     |  
|                                          |  |                          |             |   |                |   |            |  
|(LOSS) FROM OPERATIONS                    |  |                          | (71,866     | ) |                |   | (229,272   | )
|FINANCE COSTS                             |  |                          | 1,017,000   |   |                |   | 91,708     |  
|OTHER EXPENSES                            |  |                          | 36,167      |   |                |   | 67,126     |  
|                                          |  |                          |             |   |                |   |            |  
|(LOSS) BEFORE INCOME TAXES                |  |                          | (1,125,033  | ) |                |   | (388,106   | )
|INCOME TAXES                              |  |                          |             |   |                |   |            |  
|CURRENT                                   |  |                          | 83,385      |   |                |   | 32,819     |  
|DEFERRED                                  |  |                          | 34,885      |   |                |   | 17,043     |  
|                                          |  |                          |             |   |                |   |            |  
|NET LOSS ATTRIBUTABLE TO SHAREHOLDERS     |  | $                        | (1,243,303  | ) |                |   | (437,968   | )
|                                          |  |                          |             |   |                |   |            |  
|NET PROFIT PER SHARE                      |  | $                        | (0.01       | ) |                |   | (0.00      | )
|                                          |  |                          |             |   |                |   |            |  
|WEIGHTED AVERAGE COMMON SHARE OUTSTANDING |  |                          | 116,803,336 |   |                |   | 96,194,971 |  
|                                          |  |                          |             |   |                |   |            |  

The accompanying notes are in 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 THREE MONTHS ENDED MARCH 31, 2006 AND 2005

(UNAUDITED)



|                                                                                  |  |                |            |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                  |  | 2006(Restated) |            |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                |            |   |      |   |            |  
|Net income(loss)                                                                  |  | $              | (1,243,303 | ) |      | $ | (437,968   | )
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                |            |   |      |   |            |  
|Depreciation                                                                      |  |                | 234,448    |   |      |   | 240,272    |  
|Financing expense                                                                 |  |                | 857,597    |   |      |   |            |  
|(Increase)/decrease in assets:                                                    |  |                |            |   |      |   |            |  
|Inventory                                                                         |  |                | (443,149   | ) |      |   | (8,115     | )
|Trade receivables, net of provisions                                              |  |                | 883,792    |   |      |   | (291,705   | )
|Prepayment                                                                        |  |                | (245,766   | ) |      |   |           |  
|Advance to employee                                                               |  |                | 83,757     |   |      |   | (1,414     | )
|Deferred taxes                                                                    |  |                | 34,885     |   |      |   | 17,044     |  
|Increase/(decrease) in liabilities:                                               |  |                |            |   |      |   |            |  
|Accounts payables and accrued expenses                                            |  |                | (784,892   | ) |      |   | (811,905   | )
|Deposit received from customers                                                   |  |                |           |   |      |   |           |  
|Taxes payable                                                                     |  |                | 10,139     |   |      |   | 32,873     |  
|                                                                                  |  |                |            |   |      |   |            |  
|Net cash from(by)operating activities                                             |  |                | (612,492   | ) |      |   | (1,260,918 | )
|                                                                                  |  |                |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                |            |   |      |   |            |  
|Acquisition of property, plant and equipment and construction in progress         |  |                | (31,692    | ) |      |   |           |  
|                                                                                  |  |                |            |   |      |   |            |  
|Net cash from(by)investing activities                                             |  |                | (31,692    | ) |      |   |           |  
|                                                                                  |  |                |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                |            |   |      |   |            |  
|Proceeds from common stock                                                        |  |                | 272,800    |   |      |   | 408,411    |  
|Convertible promissory notes                                                      |  |                | 5,225,000  |   |      |   |           |  
|Received from directors                                                           |  |                | 194,458    |   |      |   | 2,287      |  
|(Payment)/Receive from related parties                                            |  |                | (170,864   | ) |      |   | 251,533    |  
|Deferred Finders and legal fees                                                   |  |                | (450,938   | ) |      |   |           |  
|Repayment of bank loans                                                           |  |                | (517,879   | ) |      |   |           |  
|                                                                                  |  |                |            |   |      |   |            |  
|Net cash from(by)financing activities                                             |  |                | 4,552,577  |   |      |   | 662,231    |  
|                                                                                  |  |                |            |   |      |   |            |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                           |  |                | 3,908,393  |   |      |   | (598,687   | )
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                      |  |                | (8,130     | ) |      |   |           |  
|Cash and cash equivalents, beginning of period                                    |  |                | 5,140,158  |   |      |   | 4,551,505  |  
|                                                                                  |  |                |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                          |  | $              | 9,040,421  |   |      | $ | 3,952,818  |  
|                                                                                  |  |                |            |   |      |   |            |  
|SUPPLEMENTARY CASH FLOWS DISCLOSURES                                              |  |                |            |   |      |   |            |  
|Interest paid                                                                     |  | $              | 33,351     |   |      | $ | 62,848     |  
|                                                                                  |  |                |            |   |      |   |            |  
|Taxes paid                                                                        |  | $              | 73,245     |   |      | $ |           |  
|                                                                                  |  |                |            |   |      |   |            |  
|SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES           |  |                |            |   |      |   |            |  
|Common shares issued for services                                                 |  | $              | 100,500    |   |      | $ |           |  
|                                                                                  |  |                |            |   |      |   |            |  
|Note payable in connection with acquisition of Jiahua Marine                      |  | $              |           |   |      | $ | 100,000    |  
|                                                                                  |  |                |            |   |      |   |            |  

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



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HQ SUSTAINABLE MARTIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

MARCH 31, 2006
(Restated)

NOTE 1 - RESTATEMENT

The financial
statements for the three months period ended March 31, 2006 have been restated to reflect the methodology correction for the embedded conversion option of the convertible promissory notes that the Company issued in January 2006. The effective
conversion price has been used to measure the intrinsic value of the embedded conversion option under EITF 00-27, the issue 98-5 model. The effect on net income, assets, liabilities and paid in capital is summarized as follows:



|                                           |  |                                                      |   |  |                                                              |   |  |                                           |   |  |                                               
|------------------------------------------ |  | ---------------------------------------------------- | - |  | ------------------------------------------------------------ | - |  | ----------------------------------------- | - |  | ----------------------------------------------
|                                           |  | Net Income (loss)for the quarterended March 31, 2006 |   |  | Earnings (loss)per share, forthe quarter endedMarch 31, 2006 |   |  | Long-termliabilities as of March 31, 2006 |   |  | Additional Paid InCapital as of March 31,
2006
|As previously stated                       |  | (832,180                                             | ) |  | (0.007                                                       | ) |  | 2,995,200                                 |   |  | 18,971,460                                    
|Embedded conversion option (On notes)      |  |                                                      |   |  |                                                              |   |  | (2,589,510                                | ) |  | 2,589,510                                     
|Amortization of embedded conversion option |  | (411,123                                             | ) |  | (0.004                                                       | ) |  | 411,123                                   |   |  |                                               
|                                           |  |                                                      |   |  |                                                              |   |  |                                           |   |  |                                               
|Restated                                   |  | (1,243,303                                           | ) |  | (0.011                                                       | ) |  | 816,813                                   |   |  | 21,560,970                                    
|                                           |  |                                                      |   |  |                                                              |   |  |                                           |   |  |                                               

NOTE 2 - BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of HQ Sustainable Maritime Industries, Inc., or HQSM, have been prepared in accordance with generally accepted accounting principles for interim financial
information and pursuant to the requirements for reporting on Form 10-QSB and Item 310(b) of Regulation S-B. 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, 2005 was derived from the audited
consolidated financial statements included in the Companys Annual Report Form 10-KSB. These interim financial statements should be read in conjunction with that report.

NOTE 3 - NATURE OF COMPANY

HQ Sustainable Maritime Industries, Inc. (HQSM) 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, HQSM. The name change, change of domicile and merger became effective on May 19, 2004, with HQSM 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



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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, HQSM 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, HQSM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.

The Group 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) are Shark
Cartilage Capsule, Shark Liver Oil and Shark Liver (Soft gel). The major market is domestic in the PRC.

NOTE 4 - USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
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 5 - 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 not calculated as
HQSM are suffering loss during the three months ended March 31, 2006 and 2005.

NOTE 6 - 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 March 31, 2006 and December 31, 2005 due to the relatively short-term nature of these instruments.

|
|



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NOTE 7 - FOREIGN CURRENCY CONVERSION

The Companys financial information is presented in US dollars. The Group uses the average exchange rate for the period and the exchange rate at the balance sheet date to translate its operating results and
financial position respectively. Any translation gains and losses are recorded in accumulated other comprehensive income as a component of shareholders equity.

NOTE 8 - INCOME TAXES

Taxes are calculated in accordance with taxation rates currently effective in the PRC. 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.

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 15% and 7.5%,
respectively during this quarter. HQOF and Jiahua Marine were entitled to a two-year tax exempted and three-year half tax rate holiday from 2001 and 2002 commencing with the first profit-making year, respectively.

The reconciliation of the effective income tax rate of the Company to the statutory income tax rate in the PRC for this quarter is as follows:



|                             |  |      |   |  |               |   
|---------------------------- |  | ---- | - |  | ------------- | --
|                             |  | HQOF |   |  | Jiahua Marine |   
|Statutory tax rate           |  | 15.0 | % |  | 15.0          | % 
|Tax holidays and concessions |  |      |   |  | (7.5          | )%
|                             |  |      |   |  |               |   
|Effective tax rate           |  | 15.0 | % |  | 7.5           | % 
|                             |  |      |   |  |               |   

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

NOTE 9  BANK LOAN

As at
March 31, 2006, the Company was in the process of renegotiating the bank loan with its bankers. In April 2006, the bank loan was renewed until April 2007 at interest bearing rate of approximately 7.6%.

NOTE 10 - CONVERTIBLE PROMISSORY NOTES AND WARRANTS

Effective
January 25, 2006, the Company closed on 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
$4,702,500.00. The financing consisted of two components: (a) Convertible promissory notes of the Company, in the principal amount of $5,225,000, due January 25, 2008, such Notes convertible into shares of the Companys common stock,
$0.001 par value (the Common Stock) at a per share conversion price at the rate of $0.30 per share of Common Stock; and (b) Class A and Class B Warrants registered in the name of each Investor.



8



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The Notes are due January 25, 2008. The Notes are convertible into shares of the Companys Common Stock at a
per share conversion price at the rate of $0.30 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 shall accrue interest on the
principal amount at a rate per annum of eight percent (8%) from January 25, 2006 and shall be payable monthly, in arrears, subject to the terms and conditions of the Notes, together with principal amount payments, starting on
April 25, 2006 through January 25, 2008.

One Class A Warrant and one Class B Warrant will be 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 $0.30 per share of Common Stock. The exercise price to acquire a share of Common Stock upon exercise of a Class A
Warrant shall be $0.35. The exercise price to acquire a share of Common Stock upon exercise of a Class B Warrant shall be $0.40. 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 to certain Finders Warrants to purchase 1,741,667 shares of Common Stock
similar to and carrying the same rights as the Class B Warrants issuable to the Investors except that the exercise price shall be $0.35 per Warrant Share.

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.



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The shares of Common Stock underlying the securities sold in this financing transaction will be registered for resale on
a Registration Statement to be filed by the Company in accordance with terms and conditions the subscription agreement. .

NOTE 11 - SEGMENTS

No geographical segment analysis is provided for the three months ended March 31, 2006 and 2005, 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 March 31, 2006



|                                                           |  |                     |   |  |                        |  |                   |   |  |               |  
|---------------------------------------------------------- |  | ------------------- | - |  | ---------------------- |  | ----------------- | - |  | ------------- | -
|                                                           |  | AquacultureProduct  |   |  | Health andBio-product  |  | UnallocatedItems  |   |  | Consolidation |  
|Sales to external customers                                |  | 4,673,498           |   |  | 2,211,842              |  |                  |   |  | 6,885,340     |  
|                                                           |  |                     |   |  |                        |  |                   |   |  |               |  
|General and administrative expenses                        |  | 155,566             |   |  | 22,621                 |  | 825,283           |   |  | 1,003,470     |  
|Depreciation                                               |  | 153,923             |   |  | 77,928                 |  | 2,598             |   |  | 234,448       |  
|Selling expenses                                           |  | 49,507              |   |  | 19,661                 |  |                  |   |  | 69,168        |  
|Advertising                                                |  |                    |   |  | 1,112,735              |  |                  |   |  | 1,112,735     |  
|Finance costs                                              |  | 3,244               |   |  | 30,478                 |  | 983,278           |   |  | 1,017,000     |  
|Provision for doubtful accounts                            |  | 171,958             |   |  | 11,972                 |  |                  |   |  | 183,930       |  
|Profit / (Loss) before taxation                            |  | 79,771              |   |  | 606,333                |  | (1,811,137        | ) |  | (1,125,033    | )
|Income taxes                                               |  | 71,738              |   |  | 46,532                 |  |                  |   |  | 118,270       |  
|Profit / (Loss) for the period                             |  | 8,033               |   |  | 559,801                |  | (1,811,137        | ) |  | (1,243,303    | )
|                                                           |  |                     |   |  |                        |  |                   |   |  |               |  
|Segment assets                                             |  | 14,991,215          |   |  | 9,221,777              |  | 8,986,020         |   |  | 33,199,012    |  
|                                                           |  |                     |   |  |                        |  |                   |   |  |               |  
|Segment liabilities                                        |  | 2,699,070           |   |  | 1,709,294              |  | 6,195,646         |   |  | 10,604,010    |  
|                                                           |  |                     |   |  |                        |  |                   |   |  |               |  
|                                                          
|Business segment for the three months ended March 31, 2005 | 
|                                                           |  |                     |   | 
|                                                           |  | Aquaculture Product |   |  | Health and Bio-product |  | Unallocated Items |   |  | Consolidation |  
|Sales to external customers                                |  | 1,092,495           |   |  | 1,924,391              |  |                  |   |  | 3,016,886     |  
|                                                           |  |                     |   |  |                        |  |                   |   |  |               |  
|General and administrative expenses                        |  | 147,682             |   |  | 36,078                 |  | 443,181           |   |  | 626,941       |  
|Depreciation                                               |  | 163,824             |   |  | 75,311                 |  | 1,137             |   |  | 240,272       |  
|Selling expenses                                           |  | 20,535              |   |  | 20,073                 |  |                  |   |  | 40,608        |  
|Advertising                                                |  |                    |   |  | 1,000,819              |  |                  |   |  | 1,000,819     |  
|Finance costs                                              |  | 57,778              |   |  | 31,220                 |  | 2,710             |   |  | 91,708        |  
|Provision for doubtful accounts                            |  |                    |   |  | 38,352                 |  |                  |   |  | 38,352        |  
|(Loss) / Profit before taxation                            |  | (378,926            | ) |  | 437,585                |  | (446,765          | ) |  | (388,106      | )
|Income taxes                                               |  | 17,043              |   |  | 32,819                 |  |                  |   |  | 49,862        |  
|(Loss) / Profit for the period                             |  | (395,969            | ) |  | 404,766                |  | (446,765          | ) |  | (437,968      | )
|                                                           |  |                     |   |  |                        |  |                   |   |  |               |  
|Segment assets                                             |  | 12,764,745          |   |  | 7,156,065              |  | 245,562           |   |  | 20,166,372    |  
|                                                           |  |                     |   |  |                        |  |                   |   |  |               |  
|Segment liabilities                                        |  | 4,162,120           |   |  | 2,480,794              |  | 1,941,591         |   |  | 8,584,505     |  
|                                                           |  |                     |   |  |                        |  |                   |   |  |               |  



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NOTE 12 - RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 151 Inventory Costs - an amendment of ARB No. 43,
Chapter 4 (SFAS 151). This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the
production facilities. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006. The
Company has adopted SFAS 151 and believes that the impact on its consolidated financial statements is immaterial for the quarter ended March 31, 2006.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets- an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 replaces the exception from fair value measurement in APB Opinion
No. 29 for nonmonetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning
of the fiscal year ended December 31, 2006. The Company has adopted SFAS 153 and believes that the impact on its consolidated financial statements is immaterial for the quarter ended March 31, 2006.

In December 2004, the FASB issued SFAS No. 123 (Revised), Share-based Payment. This statement requires employers to expense costs related to share-based
payment transactions with employees. With limited exceptions, SFAS No. 123 (Revised) requires that the fair value of share-based payments to employees be expensed over the period service is received. SFAS No. 123 (Revised) becomes
effective for annual reporting periods that begin after December 15, 2005. Effective January 1, 2006, the Company adopted this standard using the modified prospective method of transition. SFAS No. 123 (Revised) allows the use of both
closed form models (e.g. Black-Scholes Model) and open form models (e.g. lattice models) to measure the fair value of the share-based payment as long as the model is capable of incorporating all of the substantive characteristics unique to
share-based awards. In accordance with the transition provisions of SFAS No. 123 (Revised), the expense attributable to an award will be measured in accordance with the Companys measurement model of that awards date of grant. The
total expenses of stock based employee compensation recorded in future periods will depend on several variables, including the number of share-based awards that vest and the fair value of those vested awards.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS 154). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. These requirements apply to all voluntary changes and changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for fiscal years beginning after December 15, 2005. As such, the Company is required to adopt these provisions
at the beginning of the fiscal year ended December 31, 2006. The Company has adopted SFAS 154 and believes that the impact on its consolidated financial statements is immaterial for the quarter ended March 31, 2006.

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 155,
Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statement No. 133 and 140 (SFAS 155). SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. As such, the
Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2007. The Company is currently evaluating the impact of SFAS 155 on its consolidated financial statements.

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156,
Accounting for Servicing of Financial Assetsan amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 amends FASB Statement No. 140 with respect to the accounting for separately recognized servicing assets
and servicing liabilities. SFAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practical. SFAS 156 is effective as of the beginning of the first fiscal year that begins
after September 15, 2006. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2007. The Company is currently evaluating the impact of SFAS 156 on its consolidated financial
statements.

NOTE 13  RELATED PARTY TRANSACTIONS

The amounts due to related parties and from related parties are non-interest bearing and are without terms of maturity. They consist mainly of net advances from shareholders of the Company (Sino-Sult Canada (S.S.C.) Limited and Red Coral
Group Limited) and are shown in the current assets and liabilities as management expects these advances to be repaid during the next year. The amounts due to directors consist mainly of unpaid remuneration to some of our directors in regards to
their employment contracts with the Company.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (Restated)

GENERAL OVERVIEW

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).

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-QSB.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company prepares its 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. 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.



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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 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.

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 the Company to significant concentrations of credit risk consist primarily of trade accounts receivable. The Company
performs ongoing credit evaluations with respect to the financial condition of its creditors, but does not require collateral. In order to determine the value of the Companys accounts receivable, the Company records a provision for doubtful
accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable.



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Results of Operations - Three Months Ended March 31, 2006 as Compared to Three Months Ended March 31, 2005

One of our subsidiaries, Jiahua Marine is engaged in the manufacturing and selling of health and bio-products. During the three months ended
March 31, 2006 and 2005, Jiahua Marine realized sales of $2,211,842 and $1,924,391 respectively. The gross profit ratio for this segment stood at 85% and 84% for the three months ended March 31, 2006 and 2005, and the major expense was
advertising, corresponding to 50% and 52% of revenues for the three months ended March 31, 2006 and 2005 respectively. The net income contributed by this segment was $559,801 and $404,766 for the three months ended March 31, 2006 and 2005
respectively., mostly attributable to an increase in volume.

The other principal activity in our Group is the manufacturing and selling of aquatic
products. The revenue contributed by this segment was $4,673,498 in the first quarter of 2006 compared to $1,092,495 for the corresponding quarter of 2005. The related gross profit ratio of this segment was 15% in 2006 compared to 7% for the three
months ended March 31, 2005. This segment contributed $8,033 to net income in the first quarter of 2006 compared to a net loss of $395,969 for the corresponding period of 2005. The increased activity of this segment in 2006, together with
increased margins resulted in the improved profitability in the first quarter of 2006 compared to the same period of 2005.

For the three months ended
March 31, 2006 revenue increased by $3,868,454 or 128% to $6,885,340. This improvement in sales mainly resulted from a better performance of the aquatic product segment in 2006. The sales of that segment increased by $3.6 million in the first
quarter of 2006 compared to 2005 while the balance of the increase came from the health and bio-products segment. In the first quarter of 2005, the Island of Hainan, where the Company holds its processing plants, experienced severe weather
conditions which affected the performance of the aquatic product segment materially.

Cost of sales increased by $3,054,289 or 2.4 times to $4,353,455 from
$1,299,166 for the three months ended March 31, 2006, as compared to the corresponding period of the prior year. Approximately 99% of the increase was due to the increased activities in the aquatic product segment as the turnover of this
segment increased by $3.6 million . The overall gross profit ratio decreased from 57% in the first quarter of 2005 to 37% for the current quarter of 2006. That decrease in the gross profit ratio is due to the mix of increased activity from the
aquatic product segment in 2006 (with less gross margin) and about similar level of activity and margin in the health and bio-products segment. The increased activity in the aquatic product segment is the main contributing factor in the increase of
the gross profit for the current quarter.

Selling and distribution expenses increased by $28,560 or 70% to $69,168 for the three months ended
March 31, 2006, as compared to the corresponding period of the prior year. The increase was the result of higher turnover in the current quarter.

Advertising expenses increased by $111,916 or 11% from $1,000,819 as compared to the corresponding period of prior year. The primary factor responsible for the increase in the current quarter is that Jiahua Marine made more advertisements
to attract customers in order to increase sales; the turnover of this particular segment increased by 15% in the current quarter compared to the same period of 2005.



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General and administrative expenses increased by $376,529 or 60% to $1,003,470 as compared to the corresponding period of
the previous year. The increase results mainly from traveling, marketing and investors relations expenses incurred in the first quarter of 2006 compared to 2005.

Depreciation decreased by $5,824 or 2% to $234,448 as compared to the corresponding period of prior year. The decrease was caused by several assets being fully depreciated, thus requiring less depreciation in 2006
compared to the corresponding period of the 2005.

Doubtful accounts contributed an amount of $145,678 of additional expenses in the first quarter of 2006
from the corresponding quarter of 2005. That was the result of providing conservatively for the slower paying customers in application of our Groups accounting policy.

Financing costs increased to $1,017,000 from $91,708 for the three months ended March 31, 2006 as compared to the corresponding period of the previous year, an increase of $925,292. The increase was mainly due to
a combination of additional financing costs arising from the amortization of the future conversion of warrants attributed to investors on the convertible promissory notes of $5,225,000 issued during the first quarter of 2006, added to the current
quarters amortization of the embedded conversion option included in those notes; those two notes related financing costs (which are non-cash ) amounted to approximately $856,000 and were recognized in accordance with FAS 123R and
EITF 00-27. Such non-cash costs will be repeated quarterly, on a prorata basis, until the first quarter of 2008.

Other expenses decreased from
$67,126 for the three months ended March 31, 2005 to $36,167 for the three months ended March 31, 2006, a 46% or $30,959 decrease. The main reason of the decrease was improvement in cost control by management.

Loss before income taxes increased to $1,125,033 in the first quarter of 2006 from $388,106 in the corresponding quarter of prior year. The increased activity and gross
profit recognized in the first quarter of 2006 compared to the first quarter of 2005 was affected mainly by increased financing costs ($925,292) and bad debts ($145,000) experienced in the current quarter.

Current income taxes increased from $32,819 to $83,385 in the current period. In the first quarter of 2006, the aquatic product segment was profitable and taxable at a
rate of 15% while it suffered a loss in the corresponding quarter of 2005.

Deferred income tax increased by $17,842 from $17,043 to $34,885 for the three
months ended March 31, 2006. The increase was due to the income tax rate of the aquatic product segment which went from 7.5% to 15.0% after expiration of the tax holiday period.

The net loss attributable to shareholders increased from $437,968 to $1,243,033 for the three months ended March 31, 2006. The deterioration, although experiencing increased activity and gross profit in both our
segments in the 2006 quarter compared to 2005, was affected by increased financing costs and bad debts, as described above.



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

The Group has in recent years financed its operations primarily with operating revenues. The Group anticipates that revenues from its operations will be sufficient to
satisfy the Groups cash requirements for operations during the foreseeable future, except to the extent that increasing orders and sales may require temporary borrowings to finance such expansion and related costs of employee compensation and
inventory build-up. No assurance can be given, however, that additional debt or equity financing will not be required or will be available if required.

The current ratio improved from 2.3 times ($14,989,554/$6,555,210) at December 31, 2005 to 3.47 times ($18,704,020/$5,379,010) at March 31, 2006.



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##### Table of Contents

ITEM 3. CONTROL AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Disclosure controls and procedures are the controls and other
procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the Securities and Exchange Commission under the Exchange Act. Based on
this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted
under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial
officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting.

During the Quarter ended March 31, 2006, 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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##### Table of Contents

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

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.

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

During the period covered by this report, we have
sold securities pursuant to the following transactions, all of which were exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act). We plan to use the proceeds of all such issuances for
working capital and general corporate purposes.

On January 10, 2006, Wu Zhi Quan exercised his employee stock option to acquire 500,000 shares of our
common stock, in consideration of $140,000.

On January 24, 2006, Henry S. Krauss exercised his placement agent common stock purchase warrant to
acquire 190,000 shares of our common stock, in consideration of $32,300.

On February 28, 2006 we issued 250,000 shares and 50,000 of our common stock
to Stanley Wunderlick and Joseph I. Emas in consideration of financial services and legal service provided to us by that them, respectively. Those securities were issued in reliance upon the exemption from registration provided in Section 4(2)
of the Securities Act.

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.



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##### Table of Contents

|     |  |                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------
|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,
on October 5, 2006.

Dated: November 3, 2006



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