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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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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, 2007

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.

(Exact name of Registrant as specified in its charter)



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



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

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



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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a
nonaccelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈NonAccelerated filer  x

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

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



|                               |  |                                
|------------------------------ |  | -------------------------------
|Class                          |  | Outstanding at October 31, 2007
|Common stock, $0.001 par value |  | 8,049,295                      



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|                               |  |                                                                                   |  |             
|------------------------------ |  | --------------------------------------------------------------------------------- |  | ------------
|                               |  |                                                                                   |  | Page Numbers
|PART I - FINANCIAL INFORMATION |  |                                                                                  
|Item 1.                        |  | Condensed Consolidated Financial Statements (unaudited)                           |  |             
|                               |  | Condensed Consolidated Balance Sheets                                             |  | 3           
|                               |  | Condensed Consolidated Statements of Income and Comprehensive Income              |  | 5           
|                               |  | Condensed Consolidated Statements of Cash Flows                                   |  | 6           
|                               |  | Notes to Condensed Consolidated Financial Statements                              |  | 7           
|Item 2.                        |  | Management Discussion & Analysis of Financial Condition and Results of Operations |  | 12          
|Item 3                         |  | Quantitative and Qualitative Disclosures About Market Risk                        |  | 16          
|Item 4.                        |  | Controls and Procedures                                                           |  | 16          
|PART II - OTHER INFORMATION    |  |                                                                                  
|Item 1.                        |  | Legal Proceedings                                                                 |  | 18          
|Item 1A                        |  | Risk Factors                                                                      |  | 18          
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                       |  | 18          
|Item 3.                        |  | Defaults Upon Senior Securities                                                   |  | 18          
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                               |  | 18          
|Item 5                         |  | Other information                                                                 |  | 18          
|Item 6.                        |  | Exhibits                                                                          |  | 18          



2



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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)



|                                     |  |                                |            |                             |   |           
|------------------------------------ |  | ------------------------------ | ---------- | --------------------------- | - | ----------
|                                     |  | September 30, 2007 (Unaudited) |            | December 31, 2006 (Audited)
|ASSETS                               |  |                                |            |                             |   |           
|CURRENT ASSETS                       |  |                                |            |                             |   |           
|Cash and cash equivalents            |  | $                              | 18,993,302 |                             | $ | 11,389,375
|Trade receivables, net of provisions |  |                                | 22,956,140 |                             |   | 17,957,521
|Inventories                          |  |                                | 1,653,217  |                             |   | 708,858   
|Prepayments                          |  |                                | 398,228    |                             |   | 384,693   
|Current tax asset                    |  |                                | 13,872     |                             |   |          
|                                     |  |                                |            |                             |   |           
|TOTAL CURRENT ASSETS                 |  |                                | 44,014,759 |                             |   | 30,440,447
|                                     |  |                                |            |                             |   |           
|OTHER ASSETS                         |  |                                |            |                             |   |           
|Deferred taxes                       |  |                                | 850,417    |                             |   | 817,577   
|Deferred expenses                    |  |                                | 866,936    |                             |   | 1,305,197 
|                                     |  |                                |            |                             |   |           
|                                     |  |                                | 1,717,353  |                             |   | 2,122,774 
|PROPERTY, PLANT AND EQUIPMENT, NET   |  |                                | 7,911,069  |                             |   | 7,619,606 
|                                     |  |                                |            |                             |   |           
|CONSTRUCTION IN PROGRESS             |  |                                | 715,101    |                             |   | 1,196,453 
|                                     |  |                                |            |                             |   |           
|INTANGIBLE ASSETS                    |  |                                | 1,273,936  |                             |   | 473,200   
|                                     |  |                                |            |                             |   |           
|TOTAL ASSETS                         |  | $                              | 55,632,218 |                             | $ | 41,852,480
|                                     |  |                                |            |                             |   |           

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



3



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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)



|                                                                                                                                                                                 |  |                               |            |                            |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | -------------------------- | - | ---------- | -
|                                                                                                                                                                                 |  | September 30, 2007(Unaudited) |            | December 31, 2006(Audited) |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                             |  |                               |            |                            |   |            |  
|CURRENT LIABILITIES                                                                                                                                                              |  |                               |            |                            |   |            |  
|Accounts payable and accrued expenses                                                                                                                                            |  | $                             | 6,685,881  |                            | $ | 3,822,510  |  
|Bank loans                                                                                                                                                                       |  |                               | 1,172,395  |                            |   | 1,255,203  |  
|Tax payable                                                                                                                                                                      |  |                               | 864,211    |                            |   | 175,160    |  
|Due to related parties                                                                                                                                                           |  |                               | 24,587     |                            |   | 198,553    |  
|Due to directors                                                                                                                                                                 |  |                               | 1,902,941  |                            |   | 1,698,265  |  
|Current portion of promissory notes                                                                                                                                              |  |                               | 50,022     |                            |   | 1,227,672  |  
|                                                                                                                                                                                 |  |                               |            |                            |   |            |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                        |  |                               | 10,700,037 |                            |   | 8,377,363  |  
|                                                                                                                                                                                 |  |                               |            |                            |   |            |  
|OTHER LIABILITIES                                                                                                                                                                |  |                               |            |                            |   |            |  
|Convertible promissory notes, net of discount                                                                                                                                    |  |                               | 3,835,649  |                            |   | 3,869,382  |  
|                                                                                                                                                                                 |  |                               |            |                            |   |            |  
|TOTAL LIABILITIES                                                                                                                                                                |  |                               | 14,535,686 |                            |   | 12,246,745 |  
|                                                                                                                                                                                 |  |                               |            |                            |   |            |  
|SHAREHOLDERS EQUITY                                                                                                                                                             |  |                               |            |                            |   |            |  
|Preferred stock, $0.001 par value, 10,000,000 shares authorized, 100,000 shares issued and outstanding                                                                           |  |                               | 100        |                            |   | 100        |  
|Common stock, $0.001 par value, 200,000,000 shares authorized, 8,041,786 and 6,416,856 shares issued and outstanding as of September 30,
2007 and December 31, 2006 respectively |  |                               | 8,042      |                            |   | 6,417      |  
|Additional paid-in capital                                                                                                                                                       |  |                               | 32,636,179 |                            |   | 25,441,626 |  
|Accumulated other comprehensive income                                                                                                                                           |  |                               | 3,187,592  |                            |   | 1,612,366  |  
|Retained earnings / (deficit)                                                                                                                                                    |  |                               | 1,100,595  |                            |   | (683,846   | )
|Appropriation of retained earnings (reserves)                                                                                                                                    |  |                               | 4,164,024  |                            |   | 3,229,072  |  
|                                                                                                                                                                                 |  |                               |            |                            |   |            |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                       |  |                               | 41,096,532 |                            |   | 29,605,735 |  
|                                                                                                                                                                                 |  |                               |            |                            |   |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                       |  | $                             | 55,632,218 |                            | $ | 41,852,480 |  
|                                                                                                                                                                                 |  |                               |            |                            |   |            |  

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



4



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH
LIMITED LIABILITY)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)



|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|---------------------------------------------- |  | ------------------ | ---------- | - | ------------------ | - | ---------- | ------------------ |  | ------------------ | ---------- |  | - | ---------- | -
|                                               |  | Three Months Ended |            |   | Nine Months Ended  |  
|                                               |  | September 30, 2007 |            |   | September 30, 2006 |   |            | September 30, 2007 |  | September 30, 2006 |           
|SALES                                          |  | $                  | 15,779,385 |   |                    | $ | 10,528,996 |                    |  | $                  | 37,289,813 |  | $ | 26,988,417 |  
|COST OF SALES                                  |  |                    | 8,039,461  |   |                    |   | 5,910,484  |                    |  |                    | 20,434,110 |  |   | 15,193,573 |  
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|GROSS PROFIT                                   |  |                    | 7,739,924  |   |                    |   | 4,618,512  |                    |  |                    | 16,855,703 |  |   | 11,794,844 |  
|SELLING AND DISTRIBUTION EXPENSES              |  |                    | 222,402    |   |                    |   | 183,004    |                    |  |                    | 567,381    |  |   | 391,832    |  
|MARKETING AND ADVERTISING                      |  |                    | 1,307,498  |   |                    |   | 1,190,813  |                    |  |                    | 3,815,475  |  |   | 3,371,238  |  
|GENERAL AND ADMINISTRATIVE EXPENSES            |  |                    | 1,056,224  |   |                    |   | 881,708    |                    |  |                    | 3,373,154  |  |   | 2,788,945  |  
|DEPRECIATION AND AMORTIZATION                  |  |                    | 333,300    |   |                    |   | 262,882    |                    |  |                    | 941,382    |  |   | 736,278    |  
|(RECOVERY OF) DOUBTFUL ACCOUNTS                |  |                    | (414,144   | ) |                    |   | (154,869   | )                  |  |                    | 92,097     |  |   | (236,844   | )
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|INCOME FROM OPERATIONS                         |  |                    | 5,234,644  |   |                    |   | 2,254,974  |                    |  |                    | 8,066,214  |  |   | 4,743,395  |  
|FINANCE COSTS                                  |  |                    | 897,452    |   |                    |   | 1,337,395  |                    |  |                    | 3,711,054  |  |   | 3,944,696  |  
|OTHER (INCOME)/EXPENSES                        |  |                    | 25,431     |   |                    |   | (1,262     | )                  |  |                    | 11,384     |  |   | 41,627     |  
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|INCOME BEFORE INCOME TAXES                     |  |                    | 4,311,761  |   |                    |   | 918,841    |                    |  |                    | 4,343,776  |  |   | 757,072    |  
|INCOME TAXES                                   |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|CURRENT                                        |  |                    | 857,955    |   |                    |   | 290,712    |                    |  |                    | 1,624,384  |  |   | 660,595    |  
|DEFERRED                                       |  |                    |           |   |                    |   | 35,773     |                    |  |                    |           |  |   | 106,056    |  
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|NET INCOME/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS |  |                    | 3,453,806  |   |                    |   | 592,356    |                    |  |                    | 2,719,392  |  |   | (9,579     | )
|OTHER COMPREHENSIVE INCOME                     |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|FOREIGN CURRENCY TRANSLATION INCOME ( LOSS)    |  |                    | 712,729    |   |                    |   | 191,536    |                    |  |                    | 1,575,226  |  |   | (913,419   | )
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|COMPREHENSIVE INCOME (LOSS)                    |  | $                  | 4,166,535  |   |                    | $ | 783,892    |                    |  | $                  | 4,294,618  |  | $ | (922,998   | )
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|NET INCOME/(LOSS) PER SHARE                    |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|BASIC (AFTER REVERSE SPLIT)                    |  | $                  | 0.4360     |   |                    | $ | 0.098      |                    |  | $                  | 0.3680     |  | $ | (0.0016    | )
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|DILUTED (AFTER REVERSE SPLIT)                  |  | $                  | 0.3784     |   |                    | $ | 0.098      |                    |  | $                  | 0.3376     |  | $ | (0.0016    | )
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|WEIGHTED AVERAGE COMMON SHARE OUTSTANDING      |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|BASIC (AFTER REVERSE SPLIT)                    |  |                    | 7,921,034  |   |                    |   | 6,028,935  |                    |  |                    | 7,390,169  |  |   | 5,926,381  |  
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  
|DILUTED (AFTER REVERSE SPLIT)                  |  |                    | 9,343,753  |   |                    |   | 6,037,325  |                    |  |                    | 8,777,222  |  |   | 5,921,313  |  
|                                               |  |                    |            |   |                    |   |            |                    |  |                    |            |  |   |            |  

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



5



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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, 2007 AND 2006

(Unaudited)



|                                                                                             |  |      |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                             |  | 2007 |            |   | 2006 |  
|OPERATING ACTIVITIES                                                                         |  |      |            |   |      |   |            |  
|Net income (loss)                                                                            |  | $    | 2,719,392  |   |      | $ | (9,579     | )
|Non-cash items :                                                                             |  |      |            |   |      |   |            |  
|Depreciation and amortization                                                                |  |      | 941,382    |   |      |   | 736,278    |  
|                                                                                             |  |     
|Loss on disposal of fixed assets                                                             |  |      | 41,938     |   |      |   | 2,316      |  
|Financial and other non-cash services                                                        |  |      | 2,833,329  |   |      |   | 3,816,979  |  
|Change in noncash working capital items:                                                    |  |      |            |   |      |   |            |  
|Inventories                                                                                  |  |      | (944,359   | ) |      |   | (339,232   | )
|Trade receivables, net of provisions                                                         |  |      | (4,998,619 | ) |      |   | (5,867,526 | )
|Prepayments                                                                                  |  |      | (13,535    | ) |      |   | (160,961   | )
|Deferred taxes                                                                               |  |      |            |   |      |   | 83,734     |  
|Accounts payables and accrued expenses                                                       |  |      | 2,863,371  |   |      |   | 789,602    |  
|Taxes (recoverable)/payable                                                                  |  |      | 675,179    |   |      |   | 300,981    |  
|                                                                                             |  |      |            |   |      |   |            |  
|Cash flow used in operating activities                                                       |  |      | 4,118,078  |   |      |   | (647,408   | )
|                                                                                             |  |      |            |   |      |   |            |  
|INVESTING ACTIVITIES                                                                         |  |      |            |   |      |   |            |  
|Acquisition of property, plant and equipment                                                 |  |      | (851,116   | ) |      |   | (131,838   | )
|Construction in progress                                                                     |  |      | (456,784   | ) |      |   | (75,866    | )
|Acquisition of intangible assets                                                             |  |      |           |   |      |   | (550,000   | )
|                                                                                             |  |      |            |   |      |   |            |  
|Cash flow used in investing activities                                                       |  |      | (1,307,900 | ) |      |   | (757,704   | )
|                                                                                             |  |      |            |   |      |   |            |  
|FINANCING ACTIVITIES                                                                         |  |      |            |   |      |   |            |  
|Cash proceeds from issuance of common stock                                                  |  |      | 4,075,000  |   |      |   |           |  
|Convertible promissory notes issued, net of cash repayments                                  |  |      |           |   |      |   | 4,206,300  |  
|Due from directors                                                                           |  |      | 204,676    |   |      |   | 121,028    |  
|Repayment to related parties                                                                 |  |      | (173,966   | ) |      |   | (261,521   | )
|Bank loan repayments                                                                         |  |      | (82,808    | ) |      |   | (487,126   | )
|Deferred expenses                                                                            |  |      | 438,261    |   |      |   |           |  
|                                                                                             |  |      |            |   |      |   |            |  
|Cash flow from financing activities                                                          |  |      | 4,461,163  |   |      |   | 3,578,681  |  
|                                                                                             |  |      |            |   |      |   |            |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                      |  |      | 7,271,341  |   |      |   | 2,173,569  |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                 |  |      | 332,586    |   |      |   | 495,912    |  
|Cash and cash equivalents, beginning of period                                               |  |      | 11,389,375 |   |      |   | 5,140,159  |  
|                                                                                             |  |      |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                                     |  | $    | 18,993,302 |   |      | $ | 7,809,640  |  
|                                                                                             |  |      |            |   |      |   |            |  
|SUPPLEMENTARY CASH FLOWS DISCLOSURES                                                         |  |      |            |   |      |   |            |  
|Interest paid                                                                                |  | $    | 141,164    |   |      | $ | 17,670     |  
|                                                                                             |  |      |            |   |      |   |            |  
|Taxes paid                                                                                   |  | $    | 959,313    |   |      | $ | 272,721    |  
|                                                                                             |  |      |            |   |      |   |            |  
|NON-CASH TRANSACTION DISCLOSURE: Transfer from construction in progress to intangible assets |  | $    | 938,136    |   |      |   |           |  
|                                                                                             |  |      |            |   |      |   |            |  
|SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                      |  |      |            |   |      |   |            |  
|Common shares issued for services                                                            |  | $    | 58,219     |   |      | $ |           |  
|                                                                                             |  |      |            |   |      |   |            |  

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



6



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2007

NOTE 1 - BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of HQ Sustainable Maritime Industries, Inc., (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Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in United States
of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim
periods. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The condensed consolidated balance sheet information as of December 31, 2006 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 HQSB being the
surviving entity in the merger and acquiring all the assets and liabilities of Process Equipment, Inc. On August 17, 2004, we have entered into a Purchase Agreement with SinoSult Canada (S.S.C.) Limited, a Canadian limited liability
corporation (SSC), whereby we acquired Sealink Wealth Limited (Sealink), SSCs wholly owned subsidiary incorporated in the British Virgin Islands. That purchase agreement has been filed as an exhibit to our current
report on Form 8K filed with the Commission on August 18, 2004. Sealink is the sole owner of Hainan Jiahua Marine BioProducts Co. Ltd., a limited liability company existing in China (Jiahua Marine) which is primarily engaged
in the production and sales of marine bioproducts and healthcare products in the PRC, as described in more detail in the above current report. Also as previously disclosed, in the same current report, SSC is owned by three of our current
directors and executive officers who are also, together, indirect beneficial owners of the majority of our capital stock.

Further, as previously disclosed
in the above current report, effective August 17, 2004, 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 sale 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 sale of marine bioproducts and healthcare products in the PRC. The principal products of Hainan Jiahua Marine
BioProduct Company Limited (100% hold subsidiary of Sealink) is Shark Cartilage Capsule, Shark Liver Oil and Shark Liver (Soft gel). The major market is domestic in the PRC.

NOTE 3 - USE OF ESTIMATES

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

NOTE 4 - EARNINGS PER SHARE

Basic earnings per share are computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed by adjusting the weighted average common shares outstanding assuming conversion of all potentially dilutive convertible securities.

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, 2007 and December 31, 2006 due to the relatively
short-term nature of these instruments.

NOTE 6 - INVENTORIES

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



7



---

HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2007 (continued)

The inventories at September 30, 2007 and December 31, 2006 are summarized as follows:



|                 |  |                    |           |                   |   |        
|---------------- |  | ------------------ | --------- | ----------------- | - | -------
|                 |  | September 30, 2007 |           | December 31, 2006
|Raw materials    |  | $                  | 193,710   |                   | $ | 62,560 
|Work-in-progress |  |                    | 137,413   |                   |   | 109,859
|Finished goods   |  |                    | 1,322,094 |                   |   | 536,439
|                 |  |                    |           |                   |   |        
|                 |  | $                  | 1,653,217 |                   | $ | 708,858
|                 |  |                    |           |                   |   |        

NOTE 7 - FOREIGN CURRENCY TRANSLATION

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

The Group maintains its books and accounting
records in Renminbi (RMB), the PRCs currency, being the functional currency. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates.
Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date. Any translation gains (losses) are recorded in exchange reserve as a component of
shareholders equity. Income and expenditures are translated at the average exchange rate of the quarter.



|                                          |  |        |  |       
|----------------------------------------- |  | ------ |  | ------
|                                          |  | 2007   |  | 2006  
|Quarter end RMB : US$ exchange rate       |  | 7.5060 |  | 7.9925
|Average quarterly RMB : US$ exchange rate |  | 7.5607 |  | 7.9925

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

Commencing from July 21, 2005, China has
adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. The exchange rate of the US dollar against the RMB was adjusted from approximately RMB 8.28 per US dollar to
approximately RMB 8.11 per US dollar on July 21, 2005. Since then, the PBOC administers and regulates the exchange rate of US dollar against RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and
financial conditions.

NOTE 8 - INCOME TAXES

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

The Companys subsidiaries registered in the PRC are subject to state and local income taxes within the PRC at the applicable tax rates on the taxable income as
reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign enterprises. Both HQOF and Jiahua Marine were subject to a tax rate of 15% during this quarter. HQOF and Jiahua Marine were
entitled to a twoyear tax exemption 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 |  |     |   |  |              |  
|                             |  |      |   |  |               |  
|Effective tax rate           |  | 15.0 | % |  | 15.0          | %
|                             |  |      |   |  |               |  

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

NOTE 9 - BANK LOANS

The
outstanding bank loan is renewed until April 18, 2008, at a rate of approximately 6.4% per annum. The loans were secured by the pledge of certain fixed assets held by the Group and its subsidiaries.



8



---

HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2007 (continued)

NOTE 10 - CONVERTIBLE PROMISSORY NOTES AND WARRANTS

Effective January 25, 2006, the Company closed on a financing transaction with a
group of private investors for an amount of $5,225,000. After deducting commissions and other costs of the offering of $522,500, the Company received net proceeds of $4,702,500.

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 $6.00 per share of Common Stock. The Company follows
EITF 0027, the issue 985 model in recording the convertible notes and warrants in its financial statements. The Notes are accruing interest on the principal amount at a rate per annum of eight percent (8%) from January 25, 2006
payable in arrears, subject to the terms and conditions of the Notes, together with principal amount payments, up to January 25, 2008.

One
Class A Warrant and one Class B Warrant were issued for each two shares of Common Stock which would be issued on the Closing Date assuming the complete conversion of the Note issued on the Closing Date at the rate of $6.00 per share of Common
Stock. The exercise price to acquire a share of Common Stock upon exercise of a Class A or B Warrant shall be $6.00 . The Class A Warrants shall be exercisable until January 25, 2009 (three (3) years after the closing of the
financing). The Class B Warrants shall be exercisable until January 25, 2011 (five (5) years after the closing of the financing). The Company also issued certain Finders Warrants to purchase 87,083 shares of Common Stock similar to
and carrying the same rights as the Class B Warrants issuable to the Investors.

The offer and sale of the securities above were effected in reliance on
the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act of 1933, as amended (the Securities Act) and in Section 4(2) and Section 4(6) of the
Securities Act and/or Rule 506 of Regulation D.

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

Furthermore, effective November 8, 2006, the Company completed another financing transaction with a group of private investors for an amount of $5,000,000, bearing interest at 6.5% per annum. The financing consisted of two
components: (a) promissory notes of the Company, in the principal aggregate amount of $5,000,000 due November 1, 2009 and (b) warrants registered in the name of each Investor to purchase an aggregate of up to 200,000 shares of our
Common Stock. The Notes are convertible into shares of the Companys $0.001 par value Common Stock at a per share conversion price of $5.00 per share. The Warrants expire on the fifth (5th) anniversary of the effective date of the reverse stock split. The exercise price to acquire a share of Common Stock is equal to the Conversion Price under the Notes, currently at
the rate of $5.00 per share of Common Stock.

NOTE 11 - SEGMENTS

No geographical segment analysis is provided for the three months and nine months ended September 30, 2007 and 2006, 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,
2007



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

Business segment for the three months ended September 30, 2006



|                                    |  |                     |            |   |                        |   |            |                   |  |   |               |   |  |   |            |  
|----------------------------------- |  | ------------------- | ---------- | - | ---------------------- | - | ---------- | ----------------- |  | - | ------------- | - |  | - | ---------- | -
|                                    |  | Aquaculture Product |            |   | Health and Bio-product |   |            | Unallocated Items |  |   | Consolidation |  
|Sales                               |  | $                   | 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  |  
|(Recovery of) Doubtful accounts     |  |                     | 5,345      |   |                        |   | (160,214   | )                 |  |   |              |   |  |   | (154,869   | )
|Income/(loss) before taxes          |  |                     | 733,150    |   |                        |   | 2,254,417  |                   |  |   | (2,068,726    | ) |  |   | 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  |  
|                                    |  |                     |            |   |                        |   |            |                   |  |   |               |   |  |   |            |  



9



---

HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2007 (continued)

Business segment for the nine months ended September 30, 2007



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

Business segment for the nine months ended September 30, 2006



|                                    |  |                     |            |   |                        |   |            |                   |  |   |               |   |  |   |            |  
|----------------------------------- |  | ------------------- | ---------- | - | ---------------------- | - | ---------- | ----------------- |  | - | ------------- | - |  | - | ---------- | -
|                                    |  | Aquaculture Product |            |   | Health and Bio-product |   |            | Unallocated Items |  |   | Consolidation |  
|Sales                               |  | $                   | 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  |  
|(Recovery of) Doubtful accounts     |  |                     | 167,198    |   |                        |   | (404,042   | )                 |  |   |              |   |  |   | (236,844   | )
|Income/(loss) before taxes          |  |                     | 1,658,024  |   |                        |   | 5,071,875  |                   |  |   | (5,972,827    | ) |  |   | 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  |  
|                                    |  |                     |            |   |                        |   |            |                   |  |   |               |   |  |   |            |  

NOTE 12 - CAPITAL COMMITMENT

As of September 30, 2007, there were capital commitments amounting to $980,475 which were mainly related to the construction work of the feedmill.

NOTE 13 - RECENT PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements
(SFAS No. 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 will be effective for the Company beginning January 1, 2008.
We are currently in the process of assessing the provisions of SFAS No. 157 and determining how this framework for measuring fair value will affect our current accounting policies and procedures and our financial statements. We have not
determined whether the adoption of SFAS No. 157 will have a material impact on our consolidated financial statements.

In September 2006, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an
amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as
an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 is effective for an employer with publicly traded equity
securities as of the end of the first fiscal year ending after December 15, 2006. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its yearend statement of financial position, effective for
fiscal years ending after December 15, 2008. As such, the Company is required to recognize the funded status of its defined benefit postretirement plan and to provide the required disclosures at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS 158 on its financial statements.

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



10



---

HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 2007 (continued)

NOTE 14 - LEGAL PROCEEDINGS

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

On
June 1, 2006, a complaint was filed by Bank of China in the Superior Court (Commercial Division) in Quebec, Canada, against certain affiliates of our company in which we were named as a co-defendant. This complaint has been dismissed by
an Agreement of receipt, mutual release and discharge signed on May 14, 2007, which was filed with the Superior Court (Commercial Division) in Quebec, Canada. This lawsuit was settled and dismissed for a monetary amount that
the Directors of the Company believe has no material impact on the Company.

Furthermore, on February 22, 2007 Stag Management Canada Ltd. served an
action for recovery of consulting fees against HQ Sustainable Maritime Industries Inc, based upon a service agreement. The action was filed in the Quebec Superior Court. The claim is for the sum of US$ 4.75 Million. We will vigorously
defend this action as management believes it is without merit. Consequently, no provision has been made in the financial statements in that respect.

The
company is also in an arbitration proceeding with an advisor of one of its subsidiaries for a dispute over certain expenses reimbursements, and fees.



11



---

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

The
accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position,
results of operations, cash flow, and stockholders deficit in conformity with generally accepted accounting principles in the United States of America. Except as disclosed herein, there has been no material change in the information disclosed
in the notes to the consolidated financial statements included in the Companys annual report on Form 10-KSB for the year ended December 31, 2006. In the opinion of management, all adjustments considered necessary for a fair presentation
of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the quarter ended September 30, 2007 are not necessarily indicative of the results that can
be expected for the year ended December 31, 2007.

GENERAL OVERVIEW

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

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

In addition, from the first quarter of 2004, following our reverse merger with Process Equipment, Inc., we have been operating under the name of HQ Sustainable Maritime Industries, Inc.

At that time, we owned 84.4% of Hainan Quebec Ocean Fishing Co. Ltd., a company organized in PRC (HQOF), currently our principal operating subsidiary that
processes our seafood products; in August 2004 we acquired the remaining ownership interest in HQOF. The fiscal yearend of Process Equipment prior to the reverse merger was April 30, which was changed to December 31 following the
reverse merger. In August 2004, we acquired 100% interest in our current subsidiary Jiahua Marine which operates a marine bio and healthcare plant, including nutraceuticals, in Hainan Province, China.

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

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

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Inventories

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

Income Taxes

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



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Related Parties

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

Revenue Recognition

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

Concentration of Credit Risk

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

Recent developments

On January 31, 2007, we completed a 1for20 reverse stock split. Furthermore,
since May 2007, the Company is listed on the American Stock Exchange.

On February 12, 2007, HQSM announced that it will begin and actually began
direct sales of its TiLoveYa(TM) toxinfree brand through the internet. Ultimate Entrée is a leader in direct marketing through the internet of superior seafood and meat products. The success as an event
food Headquarters, as seen through their recent Super Bowl Special, works well with the sale of tailgate party marketed products such as HQs TailGate TiLoveYa,(TM) a skinon boneless TiLoveYa
toxinfree product sold by HQSM, ideally suited for barbecue. Regular 1 pound and 1.5 pound bags of HQSMs boneless skinless fillet will also be marketed on the site and available directly online to Ultimate Entrées and
HQSMs clients.

On February 13, 2007, HQSM agreed to work with the Beijing division of
Newly Weds® Foods, Inc. to introduce an exclusive, innovative line of battered and breaded flavored TiLoveYa(TM) fillet products to Chinese consumers. The new product line will use the vast
international taste technology of Newly Weds ® Foods, Inc., as developed in its China operations, to manufacture valueadded breaded TiLoveYa(TM) toxinfree fillet products to
consumers in China. Most breaded valueadded fish products currently marketed in China and the West suffer in quality from multiple rounds of freezing, deteriorating the taste, juiciness, texture and quality of the product.

On April 2, 2007 HQSM signed an agreement with Grocery Outlet to commence sales of its branded TiLoveYa(TM) products to its nearly 150 stores on the
West Coast. The Grocery Outlet chain (See http://www.groceryoutlets.com/home.aspx) is headquartered in Berkeley, California, and has annual revenues exceeding $600 million. The agreement allows The Grocery Outlet to sell HQs brand of
frozen fillets within its chain of stores in the states of California, Washington, Oregon, Nevada, Idaho and Hawaii.

On Monday April 23, HQSM signed
an agreement with Sams Club to commence online sales of various formats of its branded TiLoveYa(TM) tilapia products on the Sams Club website. Sams Club is a division of Wal-Mart Stores, Inc. and ranks as one of the
nations largest warehouse clubs with more than 47 million U.S. members. The first Sams Club opened its doors in Midwest City, Oklahoma in 1983. Sams Club offers exceptional values on merchandise and services for business
owners and consumers. Online merchandise and Club information is available at www.samsclub.com.

In May 2007, we commenced sales of our
TiLoveYa(TM) brand of frozen fillets through the QFC chain of the Kroger Company within its chain of stores in the states of Washington and Oregon. Headquartered in Cincinnati, Ohio, Kroger is one of the nations largest grocery
retailers.

Results of Operations  Three Months Ended September 30, 2007 as Compared to Three Months Ended September 30, 2006

Total sales for the three months ended September 30, 2007 increased by 50% to $15,779,385, when compared to the same period of 2006, generating an
increase of gross profit of 68%. That increase in volume originates mostly from the aquaculture segment, showing higher demand for our products. Income from operations for the three months ended September 30, 2007 increased by 132% to
$5,234,644 from $2,254,974 for the corresponding period of 2006; the current three months period was favorably affected by an improvement of 5% in the gross profit margin , from 44% to 49%. In addition to improved gross profit margin from the
aquaculture segment in the current three months period, income from operations improved due to a bad debt recovery of $414,144, mostly attributed to the health and bio-product segment. Finance costs have reduced by 33% to $897,452 as compared to
$1,337,395 for the comparative period of 2006. The finance costs were mainly attributable to a non-recurring provision for liquidated damages on late filing of the registration statement covering the underlying shares related to the convertible
secured promissory notes issued in November 2006. The warrants amortization costs (noncash) related to the promissory notes and the amortization of the related embedded conversion option (also noncash), make-up the major part of the
balance of financial costs and are recognized as such in accordance with FAS 123R and EITF 0027. Net income increased substantially to $3,453,806 in the current period, corresponding to more than five times the net income recorded in the
corresponding period of 2006.

By Segments

Manufacturing and Selling of Marine Bio and Healthcare products

Jiahua Marine is engaged in the manufacturing and selling of Marine
Bio and Health-care products. During the three months ended September 30, 2007 and 2006, Jiahua Marine realized sales of $5,510,540 and $ 4,100,904 respectively, an increase of 34%. The gross profit ratio for this segment was 84% and 86% for
the three months ended September 30, 2007 and 2006, respectively. Furthermore, the major expense of this segment remains to be advertising, corresponding to 24% and 29% of revenues for the three months ended September 30, 2007 and 2006,
respectively. The net income contributed by this segment was $2,974,292 and $2,096,496 for the three months ended September 30, 2007 and 2006 respectively. The net income improved mostly because of increased activities and related gross profit
in the current period coupled to the recovery of doubtful accounts of $427,523, compared to the same period of 2006.

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 $10,268,845 for the three months ended September 30, 2007 compared to $6,428,092 for the corresponding period of 2006, an improvement of 60%. The related gross profit ratio of this segment improved significantly from 17% to
31% in the current period. due to the combination of unit selling price increase of our tilapia products of 6% to 9% and the sales volume increasing by about 60%. This segment contributed $2,198,440 to net income in the three months period ended
September 30, 2007, as compared to a net income of $563,136 for the corresponding period of 2006. The sharp increase in activity of this segment in 2007, together with increased margin led to a substantial improvement in the profitability in
the third quarter of 2007 compared to the same period of 2006.



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By Operations

Sales. For the three months ended September 30, 2007, sales increased by $5,250,389 or 50% to $15,779,385. This improvement in sales resulted from a better performance of both segments in 2007, mostly the aquatic
product segment which experienced an increase of $3,840,753 or 60% compared to the same period of 2006. The health and bioproduct segment also improved its sales by $1,409,636 or 34% in the third quarter of 2007 compared to the same period of
2006.

Cost of Sales. Cost of sales increased by $2,128,977 or 36% to $8,039,461 from $5,910,484 for the three months ended
September 30, 2007, as compared to the corresponding period of the prior year. The increase was mainly due to the increase in sales especially in the aquatic segment during the three months ended September 30, 2007. The overall gross
profit ratio was 49% in the current 2007 period compared to 44% for the same period of 2006,, mostly originating from the aquaculture segment in relation with sales price increases and higher sales volumes during the current 2007 period.

Selling and Distribution Expenses. Selling and distribution expenses increased by $39,398 or 22% to $222,402 from $183,004 for the three months
ended September 30, 2007, as compared to the corresponding period of the previous year. The increase originated mostly from higher volume of sales realized in the current period from the aquaculture product segment.

Marketing and Advertising Expenses. Marketing and advertising expenses increased by $116,685 or 10% from $1,190,813 to $1,307,498 as compared to the
corresponding period of prior year. The primary factor contributing to that increase in the current quarter of 2007 was that Jiahua Marine maintained this level of advertising in order to sustain its market share in its highly competitive and
developed market. Furthermore, heavy advertising expenditures for the promotion of our bioproducts to achieve customer recognition are consistent with industry practices.

General and Administrative Expenses. General and administrative expenses increased by $174,516 or 20% to $1,056,224 from $881,708 as compared to the corresponding period of the previous year. Most of the
increase is the result of 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 2007 compared to 2006.

Depreciation and Amortization. Depreciation and amortization increased by $70,418 to $333,300
in the current quarter when compared to the same quarter of 2006. Acquisition of fixed assets in the second quarter of 2007 was the major reason for the additional depreciation.

Doubtful Accounts (Recovery).Recovery of doubtful accounts amounted to $414,144 for the three months ended September 30, 2007 compared to $154,869 for the corresponding period of 2006. The
recovery originates mainly from a reversal of collection credit risks provided in previous quarters in the health and bioproduct segment for the amount of $427,523.

Income from Operations. Income from operations increased to $5,234,644 in the third quarter of 2007 from $2,254,974 in the corresponding quarter of the prior year, an increase of $2,979,670 or 132%. That
significant improvement was the result of increased sales and gross profit from both segments in the current period of 2007 as described above, coupled with a bad debt recovery originating from the health and bio-product segment in the same period.

Finance Costs. Finance costs decreased to $897,452 from $1,337,395 for the three months ended September 30, 2007 as compared to
the corresponding period of the previous year, a decrease of $439,943 or 33%. Included in the 2007 finance costs were the carrying interests on the notes added to the continued 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 and of $5,000,000 issued in the last quarter of 2006, added to the amortization of the embedded conversion option (also
noncash) related to the same notes. The reduction in finance costs in the current period is the result of the above non-cash financing costs on the convertible notes being amortized to a lesser value in the current quarter, offset by a
non-recurring $200,000 provision for liquidated damages on late filing of the registration of the underlying shares related to the promissory notes issued in November 2006.

Other (Income)/Expenses.For the three months ended September 30, 2007, $25,431 was reported as other expenses while other income of $1,262 was recorded for the three months ended
September 30, 2006.

Income before Income Taxes. Income before income taxes increased by $3,392,920 or 368% to $4,311,761 in the
third quarter of 2007, compared to $918,841 for the corresponding period of 2006. That significant increase was the result of increased volume and gross profit from both segments experienced during the current quarter of 2007, added to bad debt
recovery and the reduction in finance costs as described above.

Current Income Taxes. Current income taxes increased by $567,243 to
$857,955 from $290,712 in the current three months of 2007. The increase was mainly due to higher taxable income experienced in the current period, as described above, and to the termination of the tax rate holiday period in the health and
bio-product segment as of December 31, 2006. The actual tax rate for that segment is 15% in 2007 and was 7.5% for the corresponding period of 2006.

Deferred Income Taxes. Deferred income tax decreased from $35,773 to zero in the current period ended September 30, 2007 when compared with the same period of prior year. There was no material timing differences
during the period to justify recognition of deferred tax expenses.

The Net Income Attributable to Shareholders. The net income attributable
to shareholders increased from $592,356 in the third quarter of 2006 to $3,453,806 in the corresponding period of 2007. The increased activity and gross profit from both segments in the third quarter of 2007 compared to 2006, added to bad debt
recovery in the health and bio-product segment and the finance cost reduction in the current period contributed for such significant growth in 2007.

Results of Operations  Nine Months Ended September 30, 2007 as Compared to Nine Months Ended September 30, 2006

Total sales
for the nine months ended September 30, 2007 increased by $10,301,396 or 38% from $26,988,417 to $37,289,813, when compared to the same period of 2006. That increase in sales originates mainly from the aquaculture segment, showing higher demand
for our products. Income from operations improved by $3,322,819 or 70% from $4,743,395 to $8,066,214 for the current nine months period when compared to the corresponding period of 2006; that improvement was the result of higher gross profit from
both of our segments. The finance costs decreased slightly from $3,944,696 to $3,711,054 or a decrease of 6% for the nine months ended September 30,2007. That reduction in finance costs was mostly attributable to the reduction of non-cash
financing costs related to the promissory notes issued in 2006 offset by non-recurring provision for liquidated damages on late filing of the registration statement covering the underlying shares related to the convertible secured promissory notes
issued in November 2006. The warrants amortization costs (noncash) related to the convertible secured promissory notes issued in 2006, added to amortization of the embedded conversion option related to the same notes (also noncash), and
related interests on those notes make up the major part of the balance of financial fees, and are recognized as such in accordance with FAS 123R and EITF 0027. Net income increased substantially to $2,719,392 in the current nine months period,
mostly as a result of increased activity and gross profit in the current 2007 period.



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Segments

Manufacturing and Selling of Marine Bio and Healthcare products

One of our subsidiaries, Jiahua Marine, is engaged in the
manufacturing and selling of marine bio and health-care products. During the nine months ended September 30, 2007 and 2006, Jiahua Marine realized sales of $12,553,067 and $10,256,765 respectively, an increase of $2,296,302 or 22%. The gross
profit ratio from this segment was 84% and 86% for the nine months ended September 30, 2007 and 2006, respectively, and the major expense was advertising, corresponding to 30% and 33% of revenue for the nine months ended September 30, 2007
and 2006, respectively. For the nine months period ended in September 2007, that segment suffered a bad debt provision of $73,633 while it recovered bad debts in the corresponding period of 2006 for $404,042. The net income contributed by this
segment was $4,954,849 and $4,719,097 for the nine months ended September 30, 2007 and 2006, respectively. That improvement was the result of higher activity and gross profit, offset partially by increased marketing and advertising and
increased income tax rate in 2007 related to the termination of the tax holiday period in December 2006.

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 $8,005,094 or 48% to $24,736,746 for the nine months ended September 30, 2007 compared to $16,731,652 for the corresponding period of 2006. The related gross profit ratio of this segment was 26% and 18% for the nine months ended
September 30, 2007 and 2006, respectively. The significant increase of gross profit ratio is due to a combination of overall unit selling price increases of our tilapia products in 2007 added to sales volume increase generating average costs
reductions. This segment contributed $4,371,120 to net income in the first nine months of 2007, as compared to net income of $1,236,559 for the corresponding period of 2006. The increased activity of this segment in 2007, together with the increased
margin resulted in the improved profitability in the period of 2007 compared to the same period of 2006.

Operations

Sales. For the nine months ended September 30, 2007 revenue increased by $10,301396 or 38% to $37,289,813. This improvement in sales resulted
from increased activities of both segments in 2007. The sales from the health and bio product segment increased by $2,296,302 or 22% in the first nine months of 2007 compared to 2006, while the sales from the aquatic segment improved by $8,005,094
or 48% in the same comparative period.

Cost of Sales. Cost of sales increased by $5,240,537 or 34% to $20,434,110 from $15,193,573
for the nine months ended September 30, 2007, as compared to the corresponding period of the prior year. The gross profit margin slightly increased by about 1% to 45% for the nine months ended September 30, 2007, mainly due to improvement
in the aquaculture product segment.

Selling and Distribution Expenses. Selling and distribution expenses increased by $175,549 or 45%
from $391,832 to $567,381 for the nine months ended September 30, 2007, as compared to the corresponding period of the prior year. The increase was the result of higher sales volumes realized in the current period.

Marketing and Advertising Expenses. Marketing and advertising expenses increased by $444,237 or 13% to $3,815,475 from $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 2007 was that the health and bio-product segment posted more advertisements to attract more customers for higher sales. Sales in this
segment increased by 22% during the current period, compared to corresponding 2006 period.

General and Administrative Expenses. General and
administrative expenses increased by $584,209 or 21% to $3,373,154 from $2,788,945 as compared to the corresponding period of the previous year. Most of the increase results from additional 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 2007 compared to 2006.

Depreciation and Amortization. Depreciation and amortization increased by $205,104 or 28% to $941,382 as compared to the corresponding period of
prior year, mainly as a result of the amortization of intangible assets related to the purchase of a U.S. distribution network in the third quarter of 2006. Furthermore, acquisition of fixed assets during the current period of 2007 triggered
additional depreciation.

Doubtful Accounts (Recovery).Doubtful accounts amounted to $92,097 for the nine months ended
September 30, 2007 as compared to a recovery of doubtful accounts for $236,844 for the corresponding period of 2006. The recovery of 2006 was experienced in the health and bioproduct segment.

Income from Operations. Income from operations increased to $8,066,214 for the nine months ended September 30, 2007 from $4,743,395 for the
corresponding period of prior year, a 70% improvement. The improvement in the current period was the result of increased sales and gross profit from both segments, mainly the aquaculture product segment, partially offset by increased advertising and
administrative expenses.

Finance Costs. Finance costs decreased to $3,711,054 from $3,944,696 for the nine months period ended
September 30, 2007 as compared to the corresponding period of the prior year, a decrease of $233,642 or 6%. Included in the 2007 financing costs are the carrying interests on the promissory notes issued in 2006 added to the continued
combination of amortization of the future conversion of warrants (noncash) attributed to investors on those convertible promissory notes, and the amortization of the embedded conversion option (also noncash) related to the same notes.
Those noncash related financial costs were recognized in accordance with FAS 123R and EITF 0027. Such amortization will be repeated quarterly, on a prorata basis, until maturity of the underlying notes. The effect of those non-cash
finance costs was diminishing when compared with the same period of prior year. Furthermore, in the 2007 period, the Company provided for a non-recurring $600,000 provision for liquidated damages on late filing of the registration of the underlying
shares related to the promissory notes issued in November 2006. That amount will continue to grow until approval by the authorities of that registration statement.

Other Expenses. For the nine months ended September 30, 2007, $11,384 was reported as other expenses and $41,627 was in the corresponding period of 2006, resulting in a decrease of $30,243.

Income Before Income Taxes.Income before income taxes reached $4,343,776 in the first nine months of 2007 compared to $757,072 in the corresponding
period of 2006. This significant improvement was due to the increase in sales and gross profit from both segments in 2007, as explained above.

Current Income Taxes. Current income taxes increased by $963,789 to $1,624,384 from $660,595 in the first nine months of 2007. During the current period, both the aquatic product segment and health bio-product segment
were more profitable and taxable at a rate of 15%, while the tax rate for both segments was 15% and 7.5%, respectively, in the corresponding period of 2006.

Deferred Income Taxes. Deferred income tax which was solely incurred in the aquaculture product segment decreased from $106,056 to zero in the current period ended September 30, 2007. There was no material timing
differences during the period to justify recognition of deferred tax expenses.

Net (Loss)/Income Attributable To Shareholders.Net
income attributable to shareholders reached $2,719,392 for the nine months ended September 30, 2007 compared to a net loss of $9,579 for the same corresponding period of 2006. The Company realized higher sales and gross profit from both
segments in the current period which were partially offset by additional administrative expenses, advertising costs and income taxes in the same period.



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LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents increased by $7,603,927 or 67%, to $18,993,302 at September 30, 2007, from $11,389,375 at December 31, 2006. As at September 30, 2007, working capital was $33,314,722
compared to $22,063,084 at December 31, 2006. The funds generated by the operating and financing activities during 2007 were used mainly to support the increase in our business volume, more specifically our receivables and inventories levels.

Total assets increased by $13,779,738, or 33%, to $55,632,218 at September 30, 2007, from $41,852,480 as of December 31, 2006. During the
current period, an amount of $938,000 was reclassified from construction in progress to intangible assets to recognize the land use right acquired. Shareholders equity increased by $11,490,797, or 39%, to $41,096,532 at September 30, 2007, from
$29,605,735 as of December 31, 2006.

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 (repriced @ $0.30); 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 (repriced @ $0.30). 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, 2007, the balance due to those investors amounted to $50,022. 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, 2007, the monthly repayments have been made, along with note conversions repaying 99%
of the originally issued convertible secured promissory notes.

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

We are currently in the process of examining various financing opportunities to obtain additional liquidities to help
finance our operations, as well as support our additional cash requirements related to volume increases that we anticipate might occur in the future, specifically in the inventory and receivables buildup. As of September 30, 2007, we had
a loan from a bank in the outstanding principal amount of $1,172,395 bearing an interest rate of 6.4% per annum. We extended the maturity of the outstanding loan balance to April 18, 2008. 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 38% of our consolidated sales are derived from our five largest clients, and our
results of operations therefore depend on a small number of clients. As part of our short and mediumterm business plan, including our current efforts to raise funds to support the anticipated expansion of our operations, we intend to invest in
our infrastructure to construct a new processing plant and our own organic feed mill. We expect that this will allow us to meet forecasted incremental demand for our products in the United States and Europe. As a result, we plan to develop and serve
new clients, which should reduce our dependence on individual clients to more acceptable levels.

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

The current ratio improved to 4.1 times ($44,014,759/$10,700,037) at September 30, 2007, from and 3.6
times ($30,440,447/$8,377,363) at December 31, 2006.



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

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



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

a) Evaluation of Disclosure Controls and
Procedures.

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.



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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, 2007, there was no change in our internal control over financial reporting
(as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

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

On February 22, 2007, Stag Management Canada Ltd. served an action for recovery of consulting fees against HQ Sustainable Maritime Industries, Inc., based upon a service agreement. The action was filed in the Quebec Superior
Court. The claim as stated by the plaintiff is for the sum of US $4.75 Million. We will vigorously defend this action as being without merit, as no compensation was earned by Stag Management Canada Ltd. We consider this lawsuit to be without merit.

On February 7, 2006, Westminster Securities Corp. (Westminster) and John OShea (OShea) filed a claim against us with
the American Arbitration Association. Westminster claims we violated an exclusivity provision of the letter agreement between Westminster and us which purportedly required us to use Westminster as our investment banking firm for all transactions for
a period of three years. Westminster seeks an award of damages in the amount of approximately $1.75 million and 4.6 million warrants, plus nominal damages of $1 and unspecified punitive damages. Westminster also seeks reimbursement of expenses of
$45,754.41. Mr. OShea, the President and Chief Executive Officer of Westminster, alleged damages for a claimed breach of an April 2004 stock purchase agreement by our issuance of S-8 shares to certain other people. We have vigorously
defended the arbitration and asserted several defenses. The arbitration panel has not yet rendered a decision and we cannot predict the outcome of any matter submitted to an arbitrator for determination.

On July 30, 2007, First Cosmos Investments Limited, Sunny Future Group Limited and Newluck International Limited filed suit against HQ Sustainable Maritime Industries,
Inc., Jade Profit Investment Limited, Red Coral Group Limited, Harry Wang, Lillian Wang and Norbert Sporns in the Court of Chancery of the State of Delaware. The suit asserts claims against all of the defendants for alleged breaches of certain
Subscription Agreements and Stamped Agreements entered into by the defendants, and accuses Harry Wang, Lillian Wang and Norbert Sporns of various alleged breaches of fiduciary duty. The plaintiffs are seeking compensable, general and consequential
damages in an unspecified sum. We have reviewed the complaint and believed that there is neither procedural nor substantive merit to the lawsuit. We believe that the lawsuit is subject to dismissal for lack of personal and subject matter
jurisdiction, for failure to state a claim upon which relief may be granted, and for failure to assert the claims in a timely manner.

ITEM 1A - Risk Factors

We have updated the risk factors previously disclosed in Part II, Item 6 of
our Annual Report on Form 10KSB for the year ended December 31, 2006, which was filed with the Securities and Exchange Commission on March 20, 2007 (the Fiscal 2006 10KSB). The information below provides updates to
the previously disclosed risk factors and should be read in conjunction with the risk factors and information disclosed in the Fiscal 2006 10-KSB.

We depend on the availability of additional human resources for future growth.

We are currently experiencing a
period of significant growth in our sales volume. We believe that continued expansion is essential for us to remain competitive and to capitalize on the growth potential of our business. Such expansion may place a significant strain on our
management and operations and financial resources. As our operations continue to grow, we will have to continually improve our management, operational and financial systems, procedures and controls, and other resources infrastructure, and expand our
workforce. There can be no assurance that our existing or future management, operating and financial systems, procedures and controls will be adequate to support our operations, or that we will be able to recruit, retain and motivate our personnel.
Further, there can be no assurance that we will be able to establish, develop or maintain the business relationships beneficial to our operations, or to do so or to implement any of the above activities in a timely manner. Failure to manage our
growth effectively could have a material adverse effect on our business and the results of our operations and financial condition.

We may be unable
to continue to take advantage of the seasonal pricing fluctuation in sales of our products, and we may be adversely affected by the seasonal fluctuation in the prices we earn for our products.

We have experienced seasonal fluctuation in the prices we earn for our products, generally in the range of 15 to 20%. Pricing fluctuation occurs during
the winter season when fish farms in the northern part of the PRC suspend production due to cold weather conditions. These weather related disruptions in supply permit us to increase the sales prices of our tilapia products. However, there can be no
assurance that such premium pricing, benefiting our profitability, can be maintained in the future. Other factors, such as an increase in the cost of feed, might adversely impact on the cost of fish and lessen our margins and profitability.

U.S. Food and Drug Administration report may adversely impact our business

In June 2007, the U.S. Food and Drug Administration issued an alert report regarding the sale of five types of farm-raised seafood from China in the
United States because of unapproved chemical residues. The five types of farm-raised seafood are shrimp, catfish, eel, basa and dace. As a result, the seafood can be sold in the United States providing importers provide independent
testing that shows the seafood does not contain the unapproved residues. Although tilapia is not included in the list and we believe our main seafood product, which is tilapia, does not contain any of the unapproved residues, it is possible
that our business may be adversely impacted as a result of the recent negative public reports on seafood imported from China.

There can be no
assurance that the intended investment in our aquaculture product segment will result in a significant increase in our profitability or significantly increase our net income for that segment when compared to the marine bio and healthcare product
segment.

To date, the marine bio and healthcare product segment has generated significantly greater yearly net income than the
aquaculture product segment on a smaller amount of sales to external customers. In the financial years ended December 31, 2006 and 2005, the marine bio and healthcare product segment had sales of $15,302,713 and $9,772,762, respectively,
compared to sales for the aquaculture product segment of $23,792,690 and $17,780,268, respectively. On those sales, however, for the financial years ended December 31, 2006 and 2005, the marine bio and healthcare product segment had net income
of $7,339,374 and $4,116,398, respectively, compared to net income for the aquaculture product segment of $1,273,290 and $1,003,857, respectively, excluding unallocated items. Therefore, the marine bio and healthcare product segment contributed
approximately 85% of the yearly net income in 2006 and 80% in 2005, before unallocated items, in both periods. For the nine months period ended September 30, 2007, the marine bio and healthcare segment and the aquaculture product segment had
sales of $12,553,067 and $24,736,746, respectively, and net income of $4,954,849 and $4,371,120, respectively, excluding unallocated items. We expect the yearly sales and contribution to net income from the marine bio and healthcare segment to
continue during 2007 in a similar ratio as 2006 and 2005. The greater part of the proceeds of this offering, however, are intended to further develop the aquaculture product segment through increasing processing capacity, construction of a large
scale organic feed mill and marketing our tilapia products. Over the longer term, the company plans to focus much of its economic and other resources on the aquaculture product segment under the belief that it will generate greater amounts of sales
and result in higher profit margins. It is not anticipated that a change in the contribution to net income will be apparent between the segments until the 2008 fiscal year when the new processing plant and other aspects of the aquaculture expansion
will be competed and operational. There can be no assurance given to investors that the investment in plant and equipment and the marketing expansion efforts for the aquaculture product segment will increase the sales to external customers, the
profit margin and net income of this segment as anticipated.

We may be required to pay a significant amount of liquidated damages to the investors
in the note financing effected during November 2006.

We are obligated to pay liquidated damages in an amount equal to 2% of the sum
of the aggregate principal amount then outstanding under the 6.5% convertible notes issued in November 2006 for each month (or portion thereof) starting from April 2007 until a registration statement covering the sale to the public of the shares of
our common stock issuable upon conversion of the 6.5% senior convertible notes and upon exercise of the warrants we issued in November 2006 becomes effective. Such liquidated damages are accruing at the rate of $100,000 per month, payable half in
cash and half in shares of our common stock valued at average market price during the period we are obligated to pay liquidated damages. As of November 2, 2007, we are obligated to pay to the investors in the 2006 November Financing approximately
$700,000, payable half in cash and half in shares of our common stock, as liquidated damages since the registration statement was not timely filed and has not been declared effective, and we will be liable to pay additional liquidated damages until
an appropriate registration statement is declared effective.

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

On May 16, 2007, we issued 813 shares to each
of our three independent non-executive directors, Jacques Vallee, Fred Bild and Daniel Too, to satisfy our obligations to pay each such director an annual bonus in shares of our common stock pursuant to our independent non-executive director
agreements with them. All of these shares were issued pursuant to the exemption provided by Section 4 (2) under the Securities Act for a transaction not involving a public offering.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities during the period ended
September 30, 2007.

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

There were no matters submitted to the vote of securities
holders during the quarter ended September 30, 2007.

ITEM 5 - OTHER INFORMATION

There is no information with respect to which information is not otherwise called for by this
form.

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.

Dated : November 14, 2007



HQ SUSTAINABLE MARITIME INDUSTRIES, INC.By:

/s/ Norbert SpornsName:

Norbert SpornsTitle:

Chief Executive Officer and PresidentBy:

/s/ Jean-Pierre DallaireName:

Jean-Pierre Dallaire,Title:

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.