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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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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 SEPTEMBER 30, 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: (917) 291-3679



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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
September 30, 2006, there were 123,130,467 shares of the registrants common stock outstanding.

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



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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     |  | 6-12 
|Item 2.                        |  | Management Discussion & Analysis                            |  | 13-18
|Item 3.                        |  | Controls and Procedures                                     |  | 19   
|PART II - OTHER INFORMATION    |  |                                                            
|Item 1.                        |  | Legal Proceedings                                           |  | 20   
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 20   
|Item 3.                        |  | Defaults Upon Senior Securities                             |  | 20   
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders         |  | 20   
|Item 5                         |  | Other Information                                           |  | 20   
|Item 6.                        |  | Exhibits and Reports on Form 8-K                            |  | 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 (Unaudited)

ASSETS



|                                           |  |                               |            |                            |   |           
|------------------------------------------ |  | ----------------------------- | ---------- | -------------------------- | - | ----------
|                                           |  | September 30, 2006(Unaudited) |            | December 31, 2005(Audited)
|CURRENT ASSETS                             |  |                               |            |                            |   |           
|Cash and cash equivalents                  |  | $                             | 7,809,640  |                            | $ | 5,140,159 
|Trade receivables, net of provision        |  |                               | 14,417,883 |                            |   | 8,423,127 
|Inventory                                  |  |                               | 896,696    |                            |   | 557,464   
|Prepayments                                |  |                               | 292,825    |                            |   | 131,864   
|Due from related parties, net of provision |  |                               |           |                            |   | 526,195   
|Advance to employees                       |  |                               |           |                            |   | 127,231   
|Tax recoverable                            |  |                               |           |                            |   | 83,514    
|                                           |  |                               |            |                            |   |           
|TOTAL CURRENT ASSETS                       |  |                               | 23,417,044 |                            |   | 14,989,554
|                                           |  |                               |            |                            |   |           
|OTHER ASSETS                               |  |                               |            |                            |   |           
|Deferred taxes                             |  |                               | 842,889    |                            |   | 926,623   
|Deferred expenses                          |  |                               | 1,188,458  |                            |   | 500,000   
|                                           |  |                               |            |                            |   |           
|                                           |  |                               | 2,031,347  |                            |   | 1,426,623 
|                                           |  |                              
|PROPERTY, PLANT AND EQUIPMENT, NET         |  |                               | 7,619,634  |                            |   | 8,000,503 
|                                           |  |                               |            |                            |   |           
|CONSTRUCTION IN PROGRESS                   |  |                               | 75,866     |                            |   |          
|                                           |  |                               |            |                            |   |           
|INTANGIBLE ASSETS                          |  |                               | 519,000    |                            |   |          
|                                           |  |                               |            |                            |   |           
|TOTAL ASSETS                               |  | $                             | 33,662,891 |                            | $ | 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 (Unaudited)

LIABILITIES AND SHAREHOLDERS EQUITY



|                                                |  |                               |            |   |                            |   |            |  
|----------------------------------------------- |  | ----------------------------- | ---------- | - | -------------------------- | - | ---------- | -
|                                                |  | September 30, 2006(Unaudited) |            |   | December 31, 2005(Audited) |  
|CURRENT LIABILITIES                             |  |                               |            |   |                            |   |            |  
|Accounts payable and accrued expenses           |  | $                             | 3,407,047  |   |                            | $ | 2,617,446  |  
|Bank loans                                      |  |                               | 1,239,138  |   |                            |   | 1,726,264  |  
|Tax payable                                     |  |                               | 290,712    |   |                            |   | 73,245     |  
|Due to related parties                          |  |                               |           |   |                            |   | 787,716    |  
|Due to directors                                |  |                               | 1,471,567  |   |                            |   | 1,350,539  |  
|Current portion of convertible promissory notes |  |                               | 655,215    |   |                            |   |           |  
|                                                |  |                               |            |   |                            |   |            |  
|TOTAL CURRENT LIABILITIES                       |  |                               | 7,063,679  |   |                            |   | 6,555,210  |  
|                                                |  |                               |            |   |                            |   |            |  
|OTHER LIABILITIES                               |  |                               |            |   |                            |   |            |  
|Convertible promissory notes, net of discount   |  |                               | 736,627    |   |                            |   |           |  
|                                                |  |                               |            |   |                            |   |            |  
|TOTAL LIABILITIES                               |  |                               | 7,800,306  |   |                            |   | 6,555,210  |  
|                                                |  |                               |            |   |                            |   |            |  
|SHAREHOLDERS EQUITY                            |  |                               |            |   |                            |   |            |  
|Preferred stock                                 |  |                               | 100        |   |                            |   | 100        |  
|Common stock                                    |  |                               | 123,130    |   |                            |   | 116,105    |  
|Additional paid-in capital                      |  |                               | 22,887,622 |   |                            |   | 15,574,752 |  
|Accumulated other comprehensive income          |  |                               | 1,081,081  |   |                            |   | 499,251    |  
|Retained earnings (deficit)                     |  |                               | (1,228,002 | ) |                            |   | (314,583   | )
|Appropriation of retained earnings (reserves)   |  |                               | 2,998,654  |   |                            |   | 1,985,845  |  
|                                                |  |                               |            |   |                            |   |            |  
|TOTAL SHAREHOLDERS EQUITY                      |  |                               | 25,862,585 |   |                            |   | 17,861,470 |  
|                                                |  |                               |            |   |                            |   |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY      |  | $                             | 33,662,891 |   |                            | $ | 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 |             | Nine Months Ended
|                                               |  | September 30,2006  |             |                   | September 30,2005 |   | September 30,2006 |  |   | September 30,2005
|SALES                                          |  | $                  | 10,528,996  |                   |                   | $ | 8,512,981         |  | $ | 26,988,417        |   |  | $ | 18,045,622 
|                                               |  |                    |             |                  
|COST OF SALES                                  |  |                    | 5,910,484   |                   |                   |   | 5,065,821         |  |   | 15,193,573        |   |  |   | 10,085,144 
|                                               |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|GROSS PROFIT                                   |  |                    | 4,618,512   |                   |                   |   | 3,447,160         |  |   | 11,794,844        |   |  |   | 7,960,478  
|                                               |  |                    |             |                  
|SELLING AND DISTRIBUTION EXPENSES              |  |                    | 183,004     |                   |                   |   | 51,862            |  |   | 391,832           |   |  |   | 158,247    
|                                               |  |                    |             |                  
|MARKETING AND ADVERTISING                      |  |                    | 1,190,813   |                   |                   |   | 845,960           |  |   | 3,371,238         |   |  |   | 2,676,962  
|                                               |  |                    |             |                  
|GENERAL AND ADMINISTRATIVE EXPENSES            |  |                    | 881,708     |                   |                   |   | 497,576           |  |   | 2,788,945         |   |  |   | 1,654,630  
|                                               |  |                    |             |                  
|DEPRECIATION AND AMORTIZATION                  |  |                    | 262,882     |                   |                   |   | 238,593           |  |   | 736,278           |   |  |   | 719,635    
|                                               |  |                    |             |                  
|(RECOVERY)/PROVISION FOR DOUBTFUL ACCOUNTS     |  |                    | (154,869    | )                 |                   |   | 197,226           |  |   | (236,844          | ) |  |   | 26,594     
|                                               |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|PROFIT FROM OPERATIONS                         |  |                    | 2,254,974   |                   |                   |   | 1,615,943         |  |   | 4,743,395         |   |  |   | 2,724,410  
|                                               |  |                    |             |                  
|FINANCE COSTS                                  |  |                    | 1,337,395   |                   |                   |   | 96,474            |  |   | 3,944,696         |   |  |   | 278,457    
|                                               |  |                    |             |                  
|OTHER (INCOME)/EXPENSES                        |  |                    | (1,262      | )                 |                   |   | 25,268            |  |   | 41,627            |   |  |   | 145,147    
|                                               |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|INCOME BEFORE INCOME TAXES                     |  |                    | 918,841     |                   |                   |   | 1,494,201         |  |   | 757,072           |   |  |   | 2,300,806  
|                                               |  |                    |             |                  
|INCOME TAXES                                   |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|CURRENT                                        |  |                    | 290,712     |                   |                   |   | 138,360           |  |   | 660,595           |   |  |   | 268,558    
|DEFERRED                                       |  |                    | 35,773      |                   |                   |   | 17,241            |  |   | 106,056           |   |  |   | 51,327     
|                                               |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|NET INCOME/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS |  | $                  | 592,356     |                   |                   | $ | 1,338,600         |  | $ | (9,579            | ) |  | $ | 1,980,921  
|                                               |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|NET INCOME PER SHARE                           |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|BASIC AND DILUTED                              |  | $                  | 0.005       |                   |                   | $ | 0.010             |  | $ | (0.0001           | ) |  | $ | 0.020      
|                                               |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|WEIGHTED AVERAGE COMMON SHARE OUTSTANDING      |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|BASIC                                          |  |                    | 120,578,697 |                   |                   |   | 100,874,941       |  |   | 118,527,618       |   |  |   | 99,332,094 
|                                               |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            
|DILUTED                                        |  |                    | 120,746,493 |                   |                   |   | 102,693,123       |  |   | 118,426,253       |   |  |   | 101,150,276
|                                               |  |                    |             |                   |                   |   |                   |  |   |                   |   |  |   |            

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 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(Unaudited)



|                                                                                  |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                  |  | 2006 |            |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |      |            |   |      |   |            |  
|Net (loss)/income                                                                 |  | $    | (9,579     | ) |      | $ | 1,980,921  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |            |   |      |   |            |  
|Loss on disposal of property, plant and equipment                                 |  |      | 2,316      |   |      |   |           |  
|Depreciation and amortization                                                     |  |      | 736,278    |   |      |   | 719,634    |  
|Financial and other non-cash services                                             |  |      | 3,816,979  |   |      |   |           |  
|(Increase)/decrease in assets:                                                    |  |      |            |   |      |   |            |  
|Inventory                                                                         |  |      | (339,232   | ) |      |   | (805,262   | )
|Trade receivables, net of provisions                                              |  |      | (5,994,757 | ) |      |   | (3,439,243 | )
|Prepayment                                                                        |  |      | (160,961   | ) |      |   | (74,028    | )
|Advance to employees                                                              |  |      | 127,231    |   |      |   | (102,386   | )
|Deferred taxes                                                                    |  |      | 83,734     |   |      |   | 23,986     |  
|Increase/(decrease) in liabilities:                                               |  |      |            |   |      |   |            |  
|Accounts payables and accrued expenses                                            |  |      | 789,602    |   |      |   | (231,378   | )
|Deposit received from customers                                                   |  |      |           |   |      |   | 271,317    |  
|Taxes payable                                                                     |  |      | 300,981    |   |      |   |           |  
|                                                                                  |  |      |            |   |      |   |            |  
|Net cash by operating activities                                                  |  |      | (647,408   | ) |      |   | (1,656,439 | )
|                                                                                  |  |      |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |      |            |   |      |   |            |  
|Acquisition of property, plant and equipment                                      |  |      | (131,838   | ) |      |   |           |  
|Construction in progress                                                          |  |      | (75,866    | ) |      |   |           |  
|Acquisition of intangible assets                                                  |  |      | (550,000   | ) |      |   |           |  
|                                                                                  |  |      |            |   |      |   |            |  
|Net cash by investing activities                                                  |  |      | (757,704   | ) |      |   |           |  
|                                                                                  |  |      |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |      |            |   |      |   |            |  
|Proceeds from issuance of common stock                                            |  |      |           |   |      |   | 923,278    |  
|Issuance of convertible promissory notes, net of cash repayments                  |  |      | 4,206,300  |   |      |   |           |  
|Advances from/(to) directors                                                      |  |      | 121,028    |   |      |   | (110,755   | )
|(Repayment)/receipts from related parties                                         |  |      | (261,521   | ) |      |   | 399,047    |  
|Bank loan (repayment)/inception                                                   |  |      | (487,126   | ) |      |   | 104,438    |  
|Deferred guarantee costs for future financing                                     |  |      |           |   |      |   | (180,000   | )
|                                                                                  |  |      |            |   |      |   |            |  
|Net cash from financing activities                                                |  |      | 3,578,681  |   |      |   | 1,136,008  |  
|                                                                                  |  |      |            |   |      |   |            |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                           |  |      | 2,173,569  |   |      |   | (520,431   | )
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                      |  |      | 495,912    |   |      |   | 234,296    |  
|Cash and cash equivalents, beginning of period                                    |  |      | 5,140,159  |   |      |   | 4,551,505  |  
|                                                                                  |  |      |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                          |  | $    | 7,809,640  |   |      | $ | 4,265,370  |  
|                                                                                  |  |      |            |   |      |   |            |  
|SUPPLEMENTARY CASH FLOWS DISCLOSURES                                              |  |      |            |   |      |   |            |  
|Interest paid                                                                     |  | $    | 17,670     |   |      | $ | 256,578    |  
|                                                                                  |  |      |            |   |      |   |            |  
|Taxes paid                                                                        |  | $    | 272,721    |   |      | $ |           |  
|                                                                                  |  |      |            |   |      |   |            |  
|SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES           |  |      |            |   |      |   |            |  
|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)

SEPTEMBER 30, 2006

NOTE 1 - 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 2 - 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 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.



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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 3  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 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, 2006 and December 31, 2005 due to the relatively short-term nature of
these instruments.



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NOTE 6 - 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 7 - INCOME TAXES

Taxes are calculated in accordance with taxation rates 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.

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 8  BANK LOAN

The
outstanding bank loan is renewed until April 2007 and bears interest at a rate of approximately 5.6%

NOTE 9 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) 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.



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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, in arrears, subject to the terms and conditions of the Notes, together with principal amount payments, on 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 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.

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.

NOTE 10  SEGMENTS

No geographical segment analysis is provided for the three months and six months ended September 30, 2006 and 2005, 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, 2006



|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  
|------------------------------------------ |  | ------------------ | - |  | --------------------- | - |  | ---------------- | - |  | ------------- | -
|                                           |  | AquacultureProduct |   |  | Health andBio-product |   |  | UnallocatedItems |   |  | Consolidation |  
|Sales to external customers                |  | 6,428,092          |   |  | 4,100,904             |   |  |                 |   |  | 10,528,996    |  
|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  
|General and administrative expenses        |  | 146,283            |   |  | 32,401                |   |  | 703,024          |   |  | 881,708       |  
|Depreciation and amortization              |  | 159,142            |   |  | 68,141                |   |  | 35,599           |   |  | 262,882       |  
|Selling and distribution expenses          |  | 59,436             |   |  | 123,568               |   |  |                 |   |  | 183,004       |  
|Marketing and advertising                  |  |                   |   |  | 1,190,813             |   |  |                 |   |  | 1,190,813     |  
|Finance costs                              |  | (4,172             | ) |  | 12,905                |   |  | 1,328,662        |   |  | 1,337,395     |  
|Provision/(Recovery) for doubtful accounts |  | 5,345              |   |  | (160,214              | ) |  |                 |   |  | (154,869      | )
|Income (Loss) before taxation              |  | 731,700            |   |  | 2,254,417             |   |  | (2,067,276       | ) |  | 918,841       |  
|Income taxes                               |  | 168,564            |   |  | 157,921               |   |  |                 |   |  | 326,485       |  
|Net Income/(Loss) for the period           |  | 563,136            |   |  | 2,096,496             |   |  | (2,067,276       | ) |  | 592,356       |  
|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment assets                             |  | 23,598,891         |   |  | 14,209,022            |   |  | (4,145,022       | ) |  | 33,662,891    |  
|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment liabilities                        |  | 2,794,959          |   |  | 2,322,726             |   |  | 2,682,621        |   |  | 7,800,306     |  
|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  



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Business segment for the three months ended September 30, 2005



|                                    |  |                     |  |                        |  |                  |   |  |              
|----------------------------------- |  | ------------------- |  | ---------------------- |  | ---------------- | - |  | -------------
|                                    |  | Aquaculture Product |  | Health and Bio-product |  | UnallocatedItems |   |  | Consolidation
|Sales to external customers         |  | 5,919,597           |  | 2,593,384              |  |                 |   |  | 8,512,981    
|                                    |  |                     |  |                        |  |                  |   |  |              
|General and administrative expenses |  | 71,702              |  | 21,228                 |  | 404,646          |   |  | 497,576      
|Depreciation and amortization       |  | 161,026             |  | 76,161                 |  | 1,406            |   |  | 238,593      
|Selling and distribution expenses   |  | 36,449              |  | 15,413                 |  |                 |   |  | 51,862       
|Marketing and advertising           |  |                    |  | 845,960                |  |                 |   |  | 845,960      
|Finance costs                       |  | 65,463              |  | 30,673                 |  | 338              |   |  | 96,474       
|Provision for doubtful accounts     |  |                    |  | 197,226                |  |                 |   |  | 197,226      
|Income (Loss) before taxation       |  | 860,607             |  | 1,023,963              |  | (390,369         | ) |  | 1,494,201    
|Income taxes                        |  | 78,802              |  | 76,799                 |  |                 |   |  | 155,601      
|Net income (loss) for the period    |  | 781,805             |  | 947,164                |  | (390,369         | ) |  | 1,338,600    
|                                    |  |                     |  |                        |  |                  |   |  |              
|Segment assets                      |  | 14,360,429          |  | 9,566,388              |  | 578,006          |   |  | 24,504,823   
|                                    |  |                     |  |                        |  |                  |   |  |              
|Segment liabilities                 |  | 5,711,106           |  | 2,527,907              |  | 1,555,891        |   |  | 9,794,904    
|                                    |  |                     |  |                        |  |                  |   |  |              

Business segment for the nine months ended September 30, 2006



|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  
|------------------------------------------ |  | ------------------ | - |  | --------------------- | - |  | ---------------- | - |  | ------------- | -
|                                           |  | AquacultureProduct |   |  | Health andBio-product |   |  | UnallocatedItems |   |  | Consolidation |  
|Sales to external customers                |  | 16,731,652         |   |  | 10,256,765            |   |  |                 |   |  | 26,988,417    |  
|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  
|General and administrative expenses        |  | 512,568            |   |  | 250,207               |   |  | 2,026,170        |   |  | 2,788,945     |  
|Depreciation and amortization              |  | 469,735            |   |  | 224,611               |   |  | 41,932           |   |  | 736,278       |  
|Selling and distribution expenses          |  | 162,522            |   |  | 229,310               |   |  |                 |   |  | 391,832       |  
|Marketing and advertising                  |  |                   |   |  | 3,371,238             |   |  |                 |   |  | 3,371,238     |  
|Finance costs                              |  | (3,356             | ) |  | 60,888                |   |  | 3,887,164        |   |  | 3,944,696     |  
|Provision (Recovery) for doubtful accounts |  | 167,198            |   |  | (404,042              | ) |  |                 |   |  | (236,844      | )
|Income (Loss) before taxation              |  | 1,640,432          |   |  | 5,071,875             |   |  | (5,955,235       | ) |  | 757,072       |  
|Income taxes                               |  | 403,873            |   |  | 352,778               |   |  | 10,000           |   |  | 766,651       |  
|Net income (loss) for the period           |  | 1,236,559          |   |  | 4,719,097             |   |  | (5,965,235       | ) |  | (9,579        | )
|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment assets                             |  | 23,598,891         |   |  | 14,209,022            |   |  | (4,145,022       | ) |  | 33,662,891    |  
|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment liabilities                        |  | 2,794,959          |   |  | 2,322,726             |   |  | 2,682,621        |   |  | 7,800,306     |  
|                                           |  |                    |   |  |                       |   |  |                  |   |  |               |  



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Business segment for the nine months ended September 30, 2005



|                                           |  |                     |  |                        |  |                  |   |  |              
|------------------------------------------ |  | ------------------- |  | ---------------------- |  | ---------------- | - |  | -------------
|                                           |  | Aquaculture Product |  | Health and Bio-product |  | UnallocatedItems |   |  | Consolidation
|Sales to external customers                |  | 11,076,907          |  | 6,968,715              |  |                 |   |  | 18,045,622   
|                                           |  |                     |  |                        |  |                  |   |  |              
|General and administrative expenses        |  | 318,368             |  | 74,010                 |  | 1,262,252        |   |  | 1,654,630    
|Depreciation and amortization              |  | 488,674             |  | 226,783                |  | 4,178            |   |  | 719,635      
|Selling and distribution expenses          |  | 105,566             |  | 52,681                 |  | (1               | ) |  | 158,247      
|Marketing and advertising                  |  |                    |  | 2,676,962              |  |                 |   |  | 2,676,962    
|Finance costs                              |  | 181,947             |  | 92,703                 |  | 3,807            |   |  | 278,457      
|Provision (Recovery) for doubtful accounts |  |                    |  | 26,594                 |  |                 |   |  | 26,594       
|Income (Loss) before taxation              |  | 801,008             |  | 2,758,439              |  | (1,258,641       | ) |  | 2,300,806    
|Income taxes                               |  | 112,888             |  | 206,997                |  |                 |   |  | 319,885      
|Income (Loss) for the period               |  | 688,120             |  | 2,551,442              |  | (1,258,641       | ) |  | 1,980,921    
|                                           |  |                     |  |                        |  |                  |   |  |              
|Segment assets                             |  | 14,360,429          |  | 9,566,388              |  | 578,006          |   |  | 24,504,823   
|                                           |  |                     |  |                        |  |                  |   |  |              
|Segment liabilities                        |  | 5,711,106           |  | 2,527,907              |  | 1,555,891        |   |  | 9,794,904    
|                                           |  |                     |  |                        |  |                  |   |  |              

NOTE 11  CAPITAL COMMITMENT

As at September 30, 2006,, Jiahua Marine Bio-product Company Ltd., one of the subsidiaries in the Group, has made a capital commitment of approximately $287,000 for a factory renovation project.

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 September 30, 2006.

In December 2004, the FASB issued
SFAS No. 153, Exchange 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 September 30, 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 September 30, 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.



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In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective as of the
beginning of the 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 157 on its consolidated financial statements

NOTE 13  LEGAL PROCEEDINGS

The Company has been named as a co-defendant in a lawsuit that has been brought by a debtor and its trustees against certain affiliates of the Company. The amount claimed is $1.5 million. The Company is vigorously
defending this claim as it believes it is without merit. Consequently, no provision has been made in the financial statements.

NOTE 14 
SUBSEQUENT EVENT

In November 2006, the Company issued convertible notes in the amount of US$5,000,000, maturing November 2009, to a group of private
investors. After deducting commissions and other costs, the Company received net proceeds of $4,932,500. Those notes are convertible into shares of the Companys common stock at a per share conversion price of $0.25. The notes shall accrue
interest at 6.5% yearly, payable in December and June of each year. The capital is repayable at maturity only. Attached to those notes are 4,000,000 warrants in the name of the investors to purchase 4,000,000 shares of the Companys Common
Stock at a price of $0.25 per share.



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

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).

We are a leader in toxin free
integrated aquaculture and aquatic product processing, with processing facilities located in the Province of 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.

We have announced recently that we are strengthening our sales force in the United States. During the quarter ended
in September 2006, we recruited Mr. Trong Ringstad as our Executive Vice-President Sales and Distribution and Mr. Robert Emel as our retail Sales Manager, to oversee our retail and value-added sales and branding. We expect that their
experience in servicing the fish industry will impact significantly on the demand of our aquaculture products.

Furthermore, in September 2006, we
announced that we filed our application for listing on the American Stock Exchange. We believe that initiative will give our Company a higher profile in the investment community. Given the Companys growth rate, we feel our shareholders
interests will be best served by upgrading our listing.

We also announced recently 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 feedmill and processing plant in the immediate vicinity of the farms.

Our financial operations consist of two segments: the aquaculture product segment and the health and bio-product segment. For the nine months period ended September 30, 2006, the aquaculture product segment saw its sales increase by
more than 51% over the same period of 2005. During the same 2006 period, the health and bio-product segment saw its sales increase by more than 47% from 2005. Profit from operations increased by 74% to $4,743,395 during the 2006 nine months period
compared to the same period of 2005, due essentially to the growth in volume. The growth experienced by our Company in 2006 was affected mainly by non-cash financing costs related to the convertible notes issued in January 2006, whereby accounting
rules require to recognize as financing costs the costs related to the warrants attached to the above notes and to amortize those warrants related costs over the life of the notes; in addition, because of the conversion feature included in
those notes, we also have to recognize in our financing costs the embedded derivative value of that conversion element over the life of the notes. Those non-cash items, which are temporary in nature, amount to approximately $3,740,000
for the nine months period ended in September 2006. For the nine months period ended in September 2006, we experienced a net loss of $9,579. The net income that would have been realized during the nine months period ended September 30, 2006 ,
without those temporary and non-cash financing costs, would have grown by more than 88% compared the corresponding period of 2005.

For the three months
period ended September 30, 2006, the aquaculture product segment saw its sales increase by 8.5% over the same period of 2005, while the health and bio-product segment saw its sales increase by more than 58%. Profit from operations improved by
more than 39% during that period when compared to the corresponding period of 2005, due to increased volume in both segments. As described above, the financing costs related to the notes issued in January 2006 (amounting to approximately $1,250,000
during the current quarter) brought down net income by the same amount. The net income that would have been realized during the three months period ended September 30, 2006, without those temporary and non-cash financing costs, would have grown
by more than 37% compared to the corresponding period of 2005.

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 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.

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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##### Table of Contents

Results of Operations  Three Months Ended September 30, 2006 as Compared to Three Months Ended
September 30, 2005

Total sales for the three months ended September 30, 2006 increased by 24%, when compared to the same period of 2005. The
profit from operations for the three months ended September 30, 2006 increased by 40%, when compared the corresponding period of 2005. Net income was affected in the three months period ending September 30, 2006 by financing cost of
$1,337,395, an increase of $1,240,921 over the corresponding period of 2005. That significant increase in financing costs is mostly related to the warrants amortization costs (non-cash) related to the convertible secured promissory notes we issued
in January 2006, added to amortization of the embedded conversion option related to the same notes (also non-cash), which must be recognized as such in accordance with FAS 123R and EITF 00-27.

Segments

Manufacturing and
Selling of Marine Bio and Healthcare products

Jiahua Marine is engaged in the manufacturing and selling of Marine Bio and
Healthcare products. During the three months ended September 30, 2006 and 2005, Jiahua Marine realized sales of $4,100,904 and $2,593,384 respectively, an increase of 58%. The gross profit ratio from this segment was 86% and 85% for the three
months ended September 30, 2006 and 2005, respectively, and the major expense was advertising, corresponding to 29% and 33% of revenues for the three months ended September 30, 2006 and 2005, respectively. The net income contributed by
this segment was $2,096,496 and $947,164 for the three months ended September 30, 2006 and 2005 respectively, mostly attributable to an increase in volume and gross profit margin.

Manufacturing and Selling of aquatic products

Our other subsidiary, HQOF, is engaged in the manufacturing and selling of aquatic products. The revenue contributed by this segment increased to $6,428,092 for the three months ended September 30, 2006 compared
to $5,919,597 for the corresponding period of 2005, an improvement of 8.6%. The related gross profit ratio of this segment was 17% in 2006, as compared to 21% for the three months ended September 30, 2005. This segment contributed $563,136 to
net income in the three months period ending September 30,2006, as compared to a net income of $781,805 for the corresponding period of 2005. The 4% reduction in the gross profit margin in the three months period ending in September 2006 was
caused by implementation of an equipment maintenance program which slowed down operations in the current quarter.

Operations

Sales.For the three months ended September 30, 2006 revenue increased by $2,016,015 or 24% to $10,528,996. This improvement in
sales resulted from a better performance of both segments in 2006. The sales from the health and bio-product segment increased by $1,507,520 in the third quarter of 2006 compared to 2005, while the sales from the aquatic segment improved by $508,495
in the same comparative period.

Cost of Sales.Cost of sales increased by $844,663 or 17% to $5,910,484 from $5,065,821 for the
three months ended September 30, 2006, as compared to the corresponding period of the prior year. Approximately 77% of the increase was due to the increased activities in the aquaculture product segment. The gross profit ratio increased from
40.4% for the three months ended September 30, 2005 to 43.8% for the same period of 2006. The overall gross profit ratio improvement is the result of a better performance from the health and bio-product segment.

Selling and Distribution Expenses.Selling and distribution expenses increased by $131,142 or 253% to $183,004 for the three months ended
September 30, 2006, as compared to the corresponding period of the previous year. The increase originates mostly from higher sales realized in the current period in the health and bio-products segment.

Marketing and advertising Expenses.Marketing and advertising expenses increased by $344,853 or 41% from $845,960, to $1,190,813, as compared to
the corresponding period of prior year. The primary factor responsible for the increase in the current quarter of 2006 is that Jiahua Marine posted more advertisements to attract more customers for higher sales; the sales of this particular segment
increased by 58% in the current quarter of 2006 compared to the same period of 2005.

General and Administrative Expenses.General
and administrative expenses increased by $384,132 or 77% to $881,708 as compared to the corresponding period of the previous year. About half of the increase results from additional traveling, branding-related expenses, investors relations and
U.S. headquarters expenses while the rest of the increase originates from additional general and administrative expenses in the subsidiaries where additional activity was created in 2006 compared to 2005.

Depreciation and amortization.Depreciation and amortization increased by $24,289 to $262,882 in the current quarter when compared to the same
quarter of 2005, mainly as a result of the goodwill amortization related to the purchase of a U.S. distribution network in the current 2006 quarter.

(Recovery)/Provision for Doubtful Accounts.Doubtful accounts contributed an amount of $154,869 of recovery for the three months period ended September 30, 2006 compared to a provision of $197,226 for the
corresponding period of 2005. The improvement was mainly from the settlement of payments on outstanding invoices of debtors in the Marine Bio and Healthcare product segment during the current quarter.

Profit From Operations.Profit from operations increased to $2,254,974 for the three months ended September 30, 2006 from $1,615,943 for the
corresponding period of previous year, a 40% improvement. That performance of 2006 was the result of increased sales and gross profit margins contributed by the health and bio-product segment.

Finance Costs.Finance costs increased to $1.337,395 from $96,474 for the three months ended September 30, 2006 as compared to the
corresponding period of the previous year, an increase of $1,240,921. That significant increase was due mostly to the combination of amortization of the future conversion of warrants (non-cash) attributed to investors on the convertible promissory
notes of $5,225,000 issued during the first quarter of 2006, added to the amortization of the embedded conversion option (also non-cash) related to the same notes. Those two non-cash related financial costs, amounting to approximately $1,100,000 in
the current three months period were recognized in accordance with FAS 123R and EITF 00-27. Such amortization will be repeated quarterly, on a pro-rata basis, until the first quarter of 2008. Finally, carrying interests on those notes, amounting to
approximately $150,000 were incurred during the same current period. No such warrants amortization costs, embedded conversion option amortization and carrying interests were incurred in 2005.



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##### Table of Contents

Other(Income)/Expenses. For the three months ended September 30, 2006, $1,262 was reported as
other income while there was other expenses of $25,268 for the corresponding period of 2005.

Income Before Income Taxes.Income
before income taxes decreased to $918,841 in the third quarter of 2006, compared to $1,494,201 for the corresponding period of 2005. Because of the additional financing costs incurred in the current quarter of 2006, the significant increase in
profit from operations of $639,031 was offset by $1,240,921 of additional financing costs in the same period, which are temporary and mostly non-cash as described above.

Current Income Taxes.Current income taxes increased by $152,352 to $290,712 from $138,360 in the current three months of 2006. During the current period, the aquatic product segment was profitable and taxable
at a rate of 15% while it suffered a loss in the corresponding period of 2005.

Deferred Income Taxes.Deferred income tax increased
by $18,532 from $17,241 to $35,773 in the current period ended September 30, 2006. The increase was due to the income tax rate of the aquatic product segment that went from 7.5% to 15.0% after expiration of the tax holiday and concession
periods.

Net Income Attributable to Shareholders.The net income attributable to shareholders decreased from $1,338,600 for the
three months ended September 30, 2005 to $592,356 for the three months ended September 30, 2006. Although we improved our sales and gross profit margins in the first half of 2006, thus generating a 40% improvement in profit from
operations, that profit was offset by much higher financing costs which are temporary and mostly non cash, as described above.

Results of Operations
 Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005

Total sales for the nine months ended
September 30, 2006 increased by 50%, when compared to the same period of 2005. Profit from operations for the nine months ended September 30, 2006 increased by 74%, when compared the corresponding period of 2005. Net income was affected in
the nine months period ending September 30, 2006 by financing costs of $3,944,696, an increase of $3,666,239 over the corresponding period of 2005. That significant increase in financing costs is mostly related to the warrants amortization
costs (non-cash) related to the convertible secured promissory notes issued in January 2006, added to amortization of the embedded conversion option related to the same notes (also non-cash), which must be recognized as such in accordance with FAS
123R and EITF 00-27.

Segments

Manufacturing and Selling of Marine Bio and Healthcare products

Jiahua Marine is engaged in the manufacturing and
selling of Marine Bio and Healthcare products. During the nine months ended September 30, 2006 and 2005, Jiahua Marine realized sales of $10,256,765 and $6,968,715 respectively, an increase of 47%. The gross profit ratio from this segment was
86% and 85% for the nine months ended September 30, 2006 and 2005, respectively, and the major expense was advertising, corresponding to 33% and 38% of revenues for the nine months ended September 30, 2006 and 2005, respectively. The net
income contributed by this segment was $4,719,097 and $2,551,442 for the nine months ended September 30, 2006 and 2005, respectively. The improvement is mostly attributable to an increase in volume and better gross profit margins.

Manufacturing and Selling of aquatic products

Our other subsidiary, HQOF, is engaged in the manufacturing and selling of aquatic products. The revenue contributed by this segment increased by 51% to $16,731,652 for the nine months ended September 30, 2006
compared to $11,076,907 for the corresponding period of 2005. The related gross profit ratio of this segment remained stable at 18% in 2006 and 2005. This segment contributed $1,236,559 to net income in the first nine months of 2006, as compared to
net income of $688,120 for the corresponding period of 2005. The increased activity of this segment in 2006 resulted in the improved profitability in that period of 2006 compared to the same period of 2005.

Operations

Sales.For the
nine months ended September 30, 2006 revenue increased by $8,942,795 or 50% to $26,988,417. This improvement in sales resulted from a better performance of both segments in 2006. The sales from the health and bio product segment increased by
$3,288,050 in the first nine months of 2006 compared to 2005, while the sales from the aquatic segment improved by $5,654,745 in the same comparative period.

Cost of Sales.Cost of sales increased by $5,108,429 or 51% to $15,193,573 from $10,085,144 for the nine months ended September 30, 2006, as compared to the corresponding period of the prior year.
Approximately 92% of the increase was due to the increased activities in the aquaculture product segment. The gross profit ratio reduced from 44.1% for the nine months ended September 30, 2005 to 43.7% for the same period of 2006. The overall
gross profit ratio reduction in the current period is due to the mix of much higher volume from the aquaculture product segment (with lesser percentage of gross profit than the other segment) compared to less additional volume from the Marine Bio
and Healthcare product segment.



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##### Table of Contents

Selling and Distribution Expenses.Selling and distribution expenses increased by $233,585 or 148%
to $391,832 for the nine months ended September 30, 2006, as compared to the corresponding period of the previous year. The increase was the result of higher volumes realized in the current period, leading to higher transportation costs in the
first nine months of 2006, as compared to that of the corresponding period of 2005.

Marketing and advertising Expenses.Marketing
and advertising expenses increased by $694,276 or 26% from $2,676,962, to $3,371,238, as compared to the corresponding period of prior year. The primary factor responsible for the increase in the first nine months of 2006 was that Jiahua Marine
posted more advertisements to attract more customers for higher sales; the sales of this particular segment increased by 47% in the first nine months of 2006 compared to the same period of 2005.

General and Administrative Expenses.General and administrative expenses increased by $1,134,315 or 69% to $2,788,945 as compared to the
corresponding period of the previous year. About two third of the increase results from additional traveling, branding-related expenses, investors relations and U.S. headquarters expenses while the rest of the increase originates from
additional general and administrative expenses in the subsidiaries where additional activity was created in 2006 compared to 2005.

Depreciation and amortization.Depreciation and amortization increased by $16,643 or 2% to $736,278 as compared to the corresponding period of prior year, mainly as a result of the goodwill amortization related to the purchase of a
U.S. distribution network in the current 2006 quarter.

(Recovery)/Provision for Doubtful Accounts.Doubtful accounts contributed an
amount of $236,844 of recovery for the nine months ended September 30, 2006 compared to a provision of $26,594 for the corresponding period of 2005. The improvement was mainly from the settlement of payments on outstanding invoices of debtors
in the Marine Bio and Healthcare product segment during the current period.



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##### Table of Contents

Profit From Operations.Profit from operations increased to $4,743,395 for the nine months ended
September 30, 2006 from $2,724,410 for the corresponding period of previous year, a 74% improvement. That significant performance was the result of increased sales and better gross profit margins from both segments during the nine months period
of 2006.

Finance Costs.Finance costs increased to $3,944,696 from $278,457 for the nine months ended September 30, 2006 as
compared to the corresponding period of the previous year, an increase of $3,666,239. That significant increase was due mostly to the combination of amortization of the future conversion of warrants (non-cash) attributed to investors on the
convertible promissory notes of $5,225,000 issued during the first quarter of 2006, added to the amortization of the embedded conversion option (also non-cash) related to the same notes. Those non-cash related financial costs, amounting to
approximately $3,400,000 in the current nine months period were recognized in accordance with FAS 123R and EITF 00-27. Such amortization will be repeated quarterly, on a pro-rata basis, until the first quarter of 2008. Finally, carrying interests on
those notes, amounting to approximately $340,000 were incurred during the same current period. No such warrants amortization costs, embedded conversion option amortization and carrying interests were incurred in 2005.

Other Expenses. Other expenses decreased from $145,147 for the nine months ended September 30, 2005, to $41,627 for the same period of 2005,
a 71% or $103,520 decrease. That reduction in the current period was the result of insurance and manpower being reduced on the vessels.

Income before income taxes.Income before income taxes decreased to $757,072 in the first nine months of 2006, from an income of $2,300,806 for the corresponding period of 2005. Because of the additional financing costs incurred in
2006, the significant increase in profit from operations of $2,018,985 for the first nine months of 2006 was offset by the $3,666,239 of additional financing costs in the same period which are temporary and mostly non-cash, as described above.

Current Income Taxes.Current income taxes increased by $392,037 to $660,595 from $268,558 in the first nine months of 2006. During
the current period, the aquatic product segment was profitable and taxable at a rate of 15%.

Deferred Income Taxes.Deferred income
tax increased by $54,729 from $51,327 to $106,056 for the nine months ended September 30, 2006. The increase was due to the income tax rate of the aquatic product segment that went from 7.5% to 15.0% after expiration of the tax holiday and
concession periods.

Net income attributable to shareholders.The net income attributable to shareholders decreased from $1,980,921
for the nine months ended September 30, 2005, to a net loss of $9,579 for the corresponding period of 2006. Although we improved our sales and gross profit margins in the first nine months of 2006 in both segments, thus generating a 74%
increase in profit from operations, that profit was offset by much higher financing costs which are temporary and mostly non-cash, as described above.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

Our cash and cash equivalents increased by $2,669,481, or 52%, to $7,809,640 at September 30, 2006, from $5,140,159 at December 21, 2005. As of
September 30, 2006, working capital (before short term bank loans) was $17,592,503, compared to $10,160,608 at December 31, 2005. These increases primarily resulted from our operating activities and convertible promissory notes financing
that occurred in the first half of 2006, described below. The funds generated by operating and financing activities in the first nine months of 2006 were mainly used to support the increase of our business volume, more specifically, our receivables
and inventories during that period.

Total assets increased by $9,246,211, or 38%, to $33,662,891 at September 30, 2006, from
$24,416,680 as of December 31, 2005. Shareholders equity increased by $8,001,115, or 45%, to $25,862,585 at September 30, 2006, from $17,861,470 as of December 31, 2005.

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 also 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 and maturing 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 $0.35 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 $0.40 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. At September 30, 2006, the balance due to those investors amounted to $3,760,508 . Under the terms of the convertible
secured promissory notes, we must repay these notes on a monthly basis until January 25, 2008. We have the option of repaying the notes in cash or in shares of our common stock. As of September 30, 2006, six monthly repayments have been
made, repaying 28.03% of the originally issued convertible secured promissory notes. The first two repayments were made in cash, and the other ones were made in shares of our common stock.

We are currently in the process of examining various opportunities to obtain additional credit facilities to help finance our operations, as well as support our
additional liquidity requirements related to volume increases that we anticipate might occur in the future, specifically in the inventory and receivables build-up. As of September 30, 2006, we had a loan from a bank in the outstanding principal
amount of $1,239,138 bearing an interest rate of 5.58% per annum. We extended the maturity of this loan to April 30, 2007. The loan is secured by a pledge of certain fixed assets held by us and our subsidiaries and is used to support
working capital items related to production in China. No assurances can be given that additional debt or equity financing we may require will be available to us or, even if available, that such financing will be on terms favorable to us.

At present, over 60% 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 current ratio increased at 3.3 times ($23,417,044/$7,063,679) at September 30, 2006, from and 2.3 times ($14,989,554/6,555,210) at
December 31, 2005.



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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 September 30, 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

A complaint was filed in the Superior Court (Commercial Division) in Quebec, Canada requesting
that the transfer of the assets of Upsilon International Commerce Marine (Suci Marine) Inc. to Hainan Fuyan Industrial Investments Company Ltd. and then to Jade Profit Investment Ltd. be voided (In the Matter of the Bankruptcy of: Upsilon
International Commerce Marine (Suci Marine) Inc. (Debtor) and Andrew Dalgleish & Associates Inc. (Trustee), and Bank of China (Canada) (Creditor) v. Hainan Fuyan Industrial Investments Company Ltd., Jade Profit Investment Ltd. , Norbert
Sporns, Lillian Wang, Hua Wang, HQ Sustainable Maritime Industries, Inc. and the United States Securities and Exchange Commission (impleded); Province of Quebec, Superior Court, District of Quebec, No. 500-11-021796-038). The Company believes
that the case is without merit and shall be seeking damages in a counter suit.

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 registration requirements of the Securities Act of 1933, as amended (the Securities Act).

On July 27 and 28, 2006, we issued 98,388 shares of our common stock to our three independent non-executive directors Jacques Vallée, Fred Bild and Daniel
Too in consideration for management services provided by them, per contractual agreement, and amounting to $30,000. All of those shares were issued pursuant to the exemption provided by Section 4(2) of the Securities Act.

On July 28, 2006, we issued 170,370 shares of our common stock to Proactive Computer Services Inc.in consideration of financial consulting services provided,
amounting to $46,000. All of those shares were issued pursuant to the exemption provided by Section 4(2) of the Securities Act.

On July 31,
2006, we issued 176,600 shares of our common stock to Lucky Ventures Resources Limited.in consideration of financial consulting services provided by that firm and valued at $42,384. All of those shares were issued pursuant to the exemption provided
by Section 4(2) of the Securities Act.

ITEM 3 - DEFAULTS UPON SENIOR SECURITES

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.



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##### Table of Contents

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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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 August 11, 2006

Dated: November 13, 2006



HQ SUSTAINABLE MARITIME INDUSTRIES, INC.By:

/s/ Norbert SpornsName:

Norbert SpornsTitle:

Chief Executive Officer and President




/s/ Jean-Pierre DallaireJean-Pierre Dallaire,Principal Financial and Accounting Officer




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Exhibit Index



|               |  |                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | 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.



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