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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

OR

Commission file number: 000-18980





HQ SUSTAINABLE MARITIME
INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)







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



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

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





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

None

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

Common Stock, $0.001 par value per share

(Title of Class)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).  Yes   ̈    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         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

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

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



|                               |  |                              
|------------------------------ |  | -----------------------------
|Class                          |  | Outstanding at August 7, 2009
|Common stock, $0.001 par value |  | 13,633,907                   









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|                                      |  |                                                                                     |  |             
|------------------------------------- |  | ----------------------------------------------------------------------------------- |  | ------------
|                                      |  |                                                                                     |  | Page Numbers
|PART I - FINANCIAL INFORMATION        |  |                                                                                    
|Item 1.                               |  | Condensed Consolidated Financial Statements                                         |  | 3           
|Item 2.                               |  | Management Discussion and Analysis of Financial Condition and Results of Operations |  | 11          
|Item 3                                |  | Quantitative and Qualitative Disclosures about Market Risk                          |  | 16          
|Item 4.                               |  | Control and Procedures                                                              |  | 16          
|PART II - OTHER INFORMATION           |  |                                                                                    
|Item 1.                               |  | Legal Proceedings                                                                   |  | 16          
|Item 1A                               |  | Risk Factors                                                                        |  | 16          
|Item 2.                               |  | Unregistered Sales of Equity Securities and Use of Proceeds                         |  | 16          
|Item 3.                               |  | Defaults Upon Senior Securities                                                     |  | 16          
|Item 4.                               |  | Submission of Matters to a Vote of Security Holders                                 |  | 17          
|Item 5                                |  | Other Information                                                                   |  | 17          
|Item 6.                               |  | Exhibits                                                                            |  | 17          
|                                      | 
|SIGNATURES                            |  | 18                                                                                 
|                                      | 
|CERTIFICATIONS                        |  |                                                                                    
|                                      | 
|Exhibit 31  Management certification |  |                                                                                    
|                                      | 
|Exhibit 32  Sarbanes-Oxley Act       |  |                                                                                    



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                     |  |                          |             |                            |   |            
|------------------------------------ |  | ------------------------ | ----------- | -------------------------- | - | -----------
|                                     |  | June 30, 2009(Unaudited) |             | December 31, 2008(Audited)
|ASSETS                               |  |                          |             |                            |   |            
|CURRENT ASSETS:                      |  |                          |             |                            |   |            
|Cash and cash equivalents            |  | $                        | 63,089,398  |                            | $ | 54,920,548 
|Trade receivables, net of provisions |  |                          | 28,265,727  |                            |   | 27,689,410 
|Inventories                          |  |                          | 1,389,704   |                            |   | 1,041,628  
|Prepayments                          |  |                          | 752,715     |                            |   | 464,919    
|                                     |  |                          |             |                            |   |            
|TOTAL CURRENT ASSETS                 |  |                          | 93,497,544  |                            |   | 84,116,505 
|                                     |  |                          |             |                            |   |            
|PROPERTY, PLANT AND EQUIPMENT, NET   |  |                          | 7,759,864   |                            |   | 8,315,593  
|CONSTRUCTION IN PROGRESS             |  |                          | 11,998,235  |                            |   | 6,622,501  
|INTANGIBLE ASSETS                    |  |                          | 991,980     |                            |   | 1,112,904  
|OTHER ASSETS                         |  |                          |             |                            |   |            
|Deferred expense                     |  |                          | 7,520       |                            |   | 18,770     
|                                     |  |                          |             |                            |   |            
|TOTAL ASSETS                         |  | $                        | 114,255,143 |                            | $ | 100,186,273
|                                     |  |                          |             |                            |   |            

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                              |  |                          |             |                            |   |            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | -------------------------- | - | -----------
|                                                                                                                                                                              |  | June 30, 2009(Unaudited) |             | December 31, 2008(Audited)
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                          |  |                          |             |                            |   |            
|CURRENT LIABILITIES:                                                                                                                                                          |  |                          |             |                            |   |            
|Accounts payable and accrued expenses                                                                                                                                         |  | $                        | 6,360,531   |                            | $ | 5,787,514  
|Tax payable                                                                                                                                                                   |  |                          | 556,455     |                            |   | 823,382    
|Due to directors                                                                                                                                                              |  |                          | 240,573     |                            |   | 698,429    
|Derivative liabilities                                                                                                                                                        |  |                          | 4,583,020   |                            |   |           
|Current portion of promissory notes                                                                                                                                           |  |                          | 4,841,562   |                            |   | 4,603,920  
|                                                                                                                                                                              |  |                          |             |                            |   |            
|TOTAL CURRENT LIABILITIES                                                                                                                                                     |  |                          | 16,582,141  |                            |   | 11,913,245 
|                                                                                                                                                                              |  |                          |             |                            |   |            
|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, 13,601,407 and 12,085,846 shares issued and outstanding as of June 30,
2009 and December 31, 2008 respectively |  |                          | 13,601      |                            |   | 12,086     
|Additional paid-in capital                                                                                                                                                    |  |                          | 70,682,086  |                            |   | 61,572,410 
|Accumulated other comprehensive income                                                                                                                                        |  |                          | 9,563,555   |                            |   | 9,615,956  
|Retained earnings                                                                                                                                                             |  |                          | 10,399,196  |                            |   | 10,510,961 
|Appropriation of retained earnings (Reserves)                                                                                                                                 |  |                          | 7,014,464   |                            |   | 6,561,515  
|                                                                                                                                                                              |  |                          |             |                            |   |            
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                    |  |                          | 97,673,002  |                            |   | 88,273,028 
|                                                                                                                                                                              |  |                          |             |                            |   |            
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                    |  | $                        | 114,255,143 |                            | $ | 100,186,273
|                                                                                                                                                                              |  |                          |             |                            |   |            

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|----------------------------------------------------- |  | ------------------ | ---------- | - | ---------------- | - | ---------- | ------------ |  | - | ------------ | - |  | - | ---------- | -
|                                                      |  | Three Months Ended |            |   | Six Months Ended |  
|                                                      |  | June 30,2009       |            |   | June 30,2008     |   |            | June 30,2009 |  |   | June 30,2008 |  
|SALES                                                 |  | $                  | 16,009,757 |   |                  | $ | 14,531,487 |              |  | $ | 26,850,578   |   |  | $ | 23,741,977 |  
|COST OF SALES                                         |  |                    | 9,197,821  |   |                  |   | 9,572,610  |              |  |   | 15,285,329   |   |  |   | 14,883,312 |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|GROSS PROFIT                                          |  |                    | 6,811,936  |   |                  |   | 4,958,877  |              |  |   | 11,565,249   |   |  |   | 8,858,665  |  
|SELLING AND DISTRIBUTION EXPENSES                     |  |                    | 290,150    |   |                  |   | 324,932    |              |  |   | 544,302      |   |  |   | 554,108    |  
|MARKETING AND ADVERTISING                             |  |                    | 1,338,860  |   |                  |   | 1,286,532  |              |  |   | 2,765,485    |   |  |   | 2,451,050  |  
|GENERAL AND ADMINISTRATIVE EXPENSES                   |  |                    | 2,023,593  |   |                  |   | 1,943,675  |              |  |   | 3,629,965    |   |  |   | 3,396,475  |  
|DEPRECIATION AND AMORTIZATION                         |  |                    | 340,180    |   |                  |   | 362,508    |              |  |   | 767,291      |   |  |   | 702,263    |  
|(RECOVERY OF)/DOUBTFUL ACCOUNTS                       |  |                    | (12,379    | ) |                  |   | 892,390    |              |  |   | 19,187       |   |  |   | 881,852    |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|INCOME FROM OPERATIONS                                |  |                    | 2,831,532  |   |                  |   | 148,840    |              |  |   | 3,839,019    |   |  |   | 872,917    |  
|FINANCE COSTS                                         |  |                    | 166,780    |   |                  |   | 803,219    |              |  |   | 685,225      |   |  |   | 2,442,624  |  
|FAIR VALUE CHANGE IN DERIVATIVE FINANCIAL INSTRUMENTS |  |                    | 1,055,869  |   |                  |   |           |              |  |   | 229,998      |   |  |   |           |  
|OTHER (INCOME)/EXPENSES                               |  |                    | (11,754    | ) |                  |   |           |              |  |   | (38,765      | ) |  |   | 1,765      |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|INCOME/(LOSS) BEFORE INCOME TAXES                     |  |                    | 1,620,637  |   |                  |   | (654,379   | )            |  |   | 2,962,561    |   |  |   | (1,571,472 | )
|INCOME TAXES                                          |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|CURRENT                                               |  |                    | 535,901    |   |                  |   | 339,059    |              |  |   | 762,470      |   |  |   | 451,409    |  
|DEFERRED                                              |  |                    |           |   |                  |   |           |              |  |   |             |   |  |   |           |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|NET INCOME/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS        |  |                    | 1,084,736  |   |                  |   | (993,438   | )            |  |   | 2,200,091    |   |  |   | (2,022,881 | )
|OTHER COMPREHENSIVE INCOME                            |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|FOREIGN CURRENCY TRANSLATION GAIN/(LOSS)              |  |                    | 158,346    |   |                  |   | 1,632,587  |              |  |   | (52,400      | ) |  |   | 4,396,430  |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|COMPREHENSIVE INCOME                                  |  | $                  | 1,243,082  |   |                  | $ | 639,149    |              |  | $ | 2,147,691    |   |  | $ | 2,373,549  |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|NET INCOME/(LOSS) PER SHARE                           |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|BASIC                                                 |  | $                  | 0.088      |   |                  | $ | (0.083     | )            |  | $ | 0.180        |   |  | $ | (0.172     | )
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|DILUTED                                               |  | $                  | 0.086      |   |                  | $ | (0.083     | )            |  | $ | 0.176        |   |  | $ | (0.172     | )
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|WEIGHTED AVERAGE COMMON SHARE OUTSTANDING             |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|BASIC                                                 |  |                    | 12,357,334 |   |                  |   | 11,908,183 |              |  |   | 12,248,272   |   |  |   | 11,740,012 |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  
|DILUTED                                               |  |                    | 12,613,361 |   |                  |   | 11,908,183 |              |  |   | 12,491,289   |   |  |   | 11,740,012 |  
|                                                      |  |                    |            |   |                  |   |            |              |  |   |              |   |  |   |            |  

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008



|                                                                        |  |      |            |   |      |   |            |  
|----------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                        |  | 2009 |            |   | 2008 |  
|OPERATING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Net income/(loss)                                                       |  | $    | 2,200,091  |   |      | $ | (2,022,881 | )
|Non-cash items:                                                         |  |      |            |   |      |   |            |  
|Depreciation and amortization                                           |  |      | 767,291    |   |      |   | 702,263    |  
|Loss of disposal of fixed assets                                        |  |      |           |   |      |   | 1,765      |  
|Fair value change in derivative financial instruments                   |  |      | 229,998    |   |      |   |           |  
|Financial and other non-cash services                                   |  |      | 910,125    |   |      |   | 2,735,109  |  
|Change in noncash working capital items:                               |  |      |            |   |      |   |            |  
|Inventories                                                             |  |      | (348,076   | ) |      |   | (1,681,529 | )
|Trade receivables, net of provisions                                    |  |      | (576,317   | ) |      |   | (3,843,826 | )
|Prepayments                                                             |  |      | (287,797   | ) |      |   | (174,980   | )
|Accounts payables and accrued expenses                                  |  |      | 573,016    |   |      |   | 247,550    |  
|Tax payable                                                             |  |      | (266,927   | ) |      |   | (613,343   | )
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow generated from (used in) operating activities                 |  |      | 3,201,404  |   |      |   | (4,649,872 | )
|                                                                        |  |      |            |   |      |   |            |  
|INVESTING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Acquisition of property, plant and equipment                            |  |      | (100,868   | ) |      |   | (1,423,812 | )
|Sales proceeds of disposal of fixed assets                              |  |      |           |   |      |   | 2,375      |  
|Construction in progress                                                |  |      | (5,385,961 | ) |      |   | (1,535,563 | )
|Acquisition of intangible assets                                        |  |      |            |   |      |   |           |  
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow used in investing activities                                  |  |      | (5,486,829 | ) |      |   | (2,957,000 | )
|                                                                        |  |      |            |   |      |   |            |  
|FINANCING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Cash proceeds from issuance of common stock                             |  |      | 10,850,679 |   |      |   | 137,536    |  
|Due to directors                                                        |  |      | (433,604   | ) |      |   | (400,696   | )
|                                                                        |  |      |            |   |      |   |            |  
|Cash flow from (used) in financing activities                           |  |      | 10,417,075 |   |      |   | (263,160   | )
|                                                                        |  |      |            |   |      |   |            |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |  |      | 8,131,650  |   |      |   | (7,870,032 | )
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  |      | 37,200     |   |      |   | 3,772,667  |  
|Cash and cash equivalents, beginning of period                          |  |      | 54,920,548 |   |      |   | 46,959,908 |  
|                                                                        |  |      |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                |  | $    | 63,089,398 |   |      | $ | 42,862,543 |  
|                                                                        |  |      |            |   |      |   |            |  
|SUPPLEMENTARY CASH FLOWS DISCLOSURES                                    |  |      |            |   |      |   |            |  
|Interest paid                                                           |  | $    |           |   |      | $ |           |  
|                                                                        |  |      |            |   |      |   |            |  
|Taxes paid                                                              |  | $    | 1,220,068  |   |      | $ | 1,064,752  |  
|                                                                        |  |      |            |   |      |   |            |  
|SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |  |      |            |   |      |   |            |  
|Common shares issued for services                                       |  | $    | 295,784    |   |      | $ | 4,375,432  |  
|                                                                        |  |      |            |   |      |   |            |  

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



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HQ SUSTAINABLE MARTIME INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2009

NOTE
1BASIS OF PRESENTATION

The consolidated financial statements include the accounts of HQS and all its subsidiaries (The
Group). All material inter-company accounts and transactions have been eliminated. The consolidated financial statements are prepared in accordance with generally accepted accounting principles used in the United States of America.

NOTE 2ORGANIZATION AND PRINCIPAL ACTIVITIES

Our company was initially incorporated on September 21, 1989 under the laws of the State of Nevada. 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 with us. Pursuant to that agreement, Process Equipment,
Inc., through PEAC, acquired Jade, and 84.42 percent ownership in Jades subsidiary Hainan Quebec Ocean Fishing Co. Ltd, a Peoples Republic of China, limited liability corporation, which we refer to as HQOF. As a result of that
transaction, HQOF became our main operating subsidiary. In April of 2004, pursuant to the above agreement and plan of merger, the board of directors of Process Equipment, Inc. and a majority of the stockholders approved a name change and change of
domicile of that company to Delaware via a merger with the newly formed wholly-owned Delaware subsidiary, HQS. The name change, change of domicile and merger became effective on May 19, 2004, with HQS being the surviving entity in the merger
and acquiring all the assets and liabilities of Process Equipment, Inc. On August 17, 2004, we 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. 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.

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

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

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

NOTE 3USE OF ESTIMATES

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

NOTE 4EARNINGS PER SHARE

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

NOTE 5FAIR VALUE OF FINANCIAL INSTRUMENTS

The
carrying amounts of certain financial instruments, including cash and cash equivalents, receivables, accounts payable and accrued expenses and debt, approximates their fair value at June 30, 2009 and December 31, 2008 due to the relatively
short-term maturity of these instruments

NOTE 6INVENTORIES

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

The inventories as at June 30, 2009 and December 31, 2008 are summarized as follows:



|                 |  |              |           |                  |   |          
|---------------- |  | ------------ | --------- | ---------------- | - | ---------
|                 |  | June 30,2009 |           | December 31,2008
|Raw materials    |  | $            | 137,587   |                  | $ | 183,232  
|Work-in-progress |  |              | 165,687   |                  |   | 156,416  
|Finished goods   |  |              | 1,086,430 |                  |   | 701,980  
|                 |  |              |           |                  |   |          
|                 |  | $            | 1,389,704 |                  | $ | 1,041,628
|                 |  |              |           |                  |   |          



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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 year



|                                    |  |        |  |       
|----------------------------------- |  | ------ |  | ------
|                                    |  | 2009   |  | 2008  
|Quarter-end RMB : US$ exchange rate |  | 6.8315 |  | 6.8240
|Average RMB : US$ exchange rate     |  | 6.8323 |  | 7.0643

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. On March 17,
2007, a new PRC Enterprise Income Tax Law (EIT) was promulgated and introduced a new uniform tax regime in the PRC. The EIT became effective on January 1, 2008. That new Law provides, amongst other issues, that income derived from processing of
fishery products and processing of agricultural products will be exempt from the EIT tax rate. Starting in 2008, HQOF benefits from a 0 percent tax rate. Jiahua Marine is subject to a 20% tax rate in 2009 under the new law, which will
gradually increase until it reaches 25% in year 2012.

The statutory income tax rate in the PRC for 2009, for our segments, is as follows:



|                             |  |      |   |  |               |  
|---------------------------- |  | ---- | - |  | ------------- | -
|                             |  | HQOF |   |  | Jiahua Marine |  
|Statutory tax rate           |  | 0    | % |  | 20            | %
|Tax holidays and concessions |  |     |   |  |              |  
|                             |  |      |   |  |               |  
|Effective tax rate           |  | 0    | % |  | 20            | %

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

NOTE 9CONVERTIBLE PROMISSORY NOTES AND WARRANTS

Effective January 25, 2006, the Company completed a financing transaction with a group of private investors for an amount of $5,225,000, bearing an
annual interest rate of 8%. After deducting commissions and other costs of the offering of $522,500, the Company received net proceeds of $4,702,500. The Notes were due and totally repaid by January 25, 2008. The Notes were convertible into
shares of the Companys Common Stock at a per share conversion price at the rate of $6.00 per share of Common Stock. The Company followed EITF 0027, the issue 985 model in recording the convertible notes and warrants in its
financial statements.

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 Notes 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 Warrants
was established at $6.00. The final portion of the Class A Warrants were exercised in January 2009. The Class B Warrants shall be exercisable until January 25, 2011 (five (5) years after the closing of the financing). The offer
and sale of these securities 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 in November, 2009 and (b) warrants registered in the name of each Investor to purchase an aggregate of up to 200,000 shares of our Common Stock. The Notes are convertible into shares of the Companys $0.001 par value Common Stock at a
conversion price of $5.00 per share. The Warrants expire on the fifth 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. At June 30, 2009, there were 30,000 such warrants still unexercised,



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NOTE 10SEGMENTS

No geographical segment analysis is provided for the three months ended June 30, 2009 and 2008, 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 June 30, 2009



|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  
|----------------------------------------------------- |  | ------------------ | - |  | --------------------- | - |  | ---------------- | - |  | ------------- | -
|                                                      |  | AquacultureProduct |   |  | Health andBio-product |   |  | UnallocatedItems |   |  | Consolidation |  
|Sales to external customers                           |  | 10,500,483         |   |  | 5,509,274             |   |  |                 |   |  | 16,009,757    |  
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Selling and distribution expenses                     |  | 158,632            |   |  | 131,518               |   |  |                 |   |  | 290,150       |  
|Marketing and advertising                             |  |                   |   |  | 1,338,860             |   |  |                 |   |  | 1,338,860     |  
|General and administrative expenses                   |  | 210,299            |   |  | 313,054               |   |  | 1,500,240        |   |  | 2,023,593     |  
|Depreciation and amortization                         |  | 210,787            |   |  | 47,783                |   |  | 81,610           |   |  | 340,180       |  
|(Recovery of)/Doubtful accounts                       |  | (7,706             | ) |  | (4,673                | ) |  |                 |   |  | (12,379       | )
|Finance costs                                         |  | (17,920            | ) |  | (20,001               | ) |  | 204,701          |   |  | 166,780       |  
|Fair value change in derivative financial instruments |  |                   |   |  |                      |   |  | 1,055,869        |   |  | 1,055,869     |  
|Income/(loss) before income taxes                     |  | 2,057,805          |   |  | 2,486,592             |   |  | (2,923,760       | ) |  | 1,620,637     |  
|Income taxes                                          |  |                   |   |  | 535,901               |   |  |                 |   |  | 535,901       |  
|Net Income/(loss) for the period                      |  | 2,057,805          |   |  | 1,950,691             |   |  | (2,923,760       | ) |  | 1,084,736     |  
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment assets                                        |  | 51,758,686         |   |  | 38,021,331            |   |  | 24,475,126       |   |  | 114,255,143   |  
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment liabilities                                   |  | 1,959,441          |   |  | 1,679,093             |   |  | 12,943,607       |   |  | 16,582,141    |  
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |               |  

Business segment for the three months ended June 30, 2008



|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|----------------------------------- |  | ------------------ | - |  | --------------------- | - |  | ---------------- | - |  | ------------- | -
|                                    |  | AquacultureProduct |   |  | Health andBio-product |   |  | UnallocatedItems |   |  | Consolidation |  
|Sales to external customers         |  | 9,602,065          |   |  | 4,929,422             |   |  |                 |   |  | 14,531,487    |  
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Selling and distribution expenses   |  | 171,094            |   |  | 153,838               |   |  |                 |   |  | 324,932       |  
|Marketing and advertising           |  |                   |   |  | 1,286,532             |   |  |                 |   |  | 1,286,532     |  
|General and administrative expenses |  | 294,854            |   |  | 185,643               |   |  | 1,463,178        |   |  | 1,943,675     |  
|Depreciation and amortization       |  | 187,507            |   |  | 111,275               |   |  | 63,726           |   |  | 362,508       |  
|Doubtful accounts                   |  | 244,095            |   |  | 648,295               |   |  |                 |   |  | 892,390       |  
|Finance costs                       |  | (924               | ) |  | (22,491               | ) |  | 826,634          |   |  | 803,219       |  
|Income/(loss) before income taxes   |  | 592,984            |   |  | 1,200,560             |   |  | (2,447,923       | ) |  | (654,379      | )
|Income taxes                        |  |                   |   |  | 339,059               |   |  |                 |   |  | 339,059       |  
|Net income (loss) for the period    |  | 592,984            |   |  | 861,501               |   |  | (2,447,923       | ) |  | (993,438      | )
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment assets                      |  | 41,991,927         |   |  | 27,458,037            |   |  | 19,209,667       |   |  | 88,659,631    |  
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment liabilities                 |  | 2,875,274          |   |  | 1,472,352             |   |  | 8,739,563        |   |  | 13,087,189    |  
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  

Business segment for the six months ended June 30, 2009



|                                                      |  |                    |   |  |                       |   |  |                  |   |  |              
|----------------------------------------------------- |  | ------------------ | - |  | --------------------- | - |  | ---------------- | - |  | -------------
|                                                      |  | AquacultureProduct |   |  | Health andBio-product |   |  | UnallocatedItems |   |  | Consolidation
|Sales to external customers                           |  | 17,810,719         |   |  | 9,039,859             |   |  |                 |   |  | 26,850,578   
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |              
|Selling and distribution expenses                     |  | 312,292            |   |  | 232,010               |   |  |                 |   |  | 544,302      
|Marketing and advertising                             |  |                   |   |  | 2,763,880             |   |  | 1,605            |   |  | 2,765,485    
|General and administrative expenses                   |  | 349,914            |   |  | 482,596               |   |  | 2,797,455        |   |  | 3,629,965    
|Depreciation and amortization                         |  | 424,428            |   |  | 195,015               |   |  | 147,848          |   |  | 767,291      
|(Recovery of)/Doubtful accounts                       |  | 22,451             |   |  | (3,264                | ) |  |                 |   |  | 19,187       
|Finance costs                                         |  | (31,436            | ) |  | (38,451               | ) |  | 755,112          |   |  | 685,225      
|Fair value change in derivative financial instruments |  |                   |   |  |                      |   |  | 229,998          |   |  | 229,998      
|Income/(loss) before income taxes                     |  | 3,599,571          |   |  | 3,370,845             |   |  | (4,007,855       | ) |  | 2,962,561    
|Income taxes                                          |  |                   |   |  | 762,470               |   |  |                 |   |  | 762,470      
|Net income (loss) for the period                      |  | 3,599,571          |   |  | 2,608,375             |   |  | (4,007,855       | ) |  | 2,200,091    
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |              
|Segment assets                                        |  | 51,758,686         |   |  | 38,021,331            |   |  | 24,475,126       |   |  | 114,255,143  
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |              
|Segment liabilities                                   |  | 1,959,441          |   |  | 1,679,093             |   |  | 12,943,607       |   |  | 16,582,141   
|                                                      |  |                    |   |  |                       |   |  |                  |   |  |              



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Business segment for the six months ended June 30, 2008



|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|----------------------------------- |  | ------------------ | - |  | --------------------- | - |  | ---------------- | - |  | ------------- | -
|                                    |  | AquacultureProduct |   |  | Health andBio-product |   |  | UnallocatedItems |   |  | Consolidation |  
|Sales to external customers         |  | 16,129,532         |   |  | 7,612,445             |   |  |                 |   |  | 23,741,977    |  
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Selling and distribution expenses   |  | 294,005            |   |  | 260,103               |   |  |                 |   |  | 554,108       |  
|Marketing and advertising           |  |                   |   |  | 2,451,050             |   |  |                 |   |  | 2,451,050     |  
|General and administrative expenses |  | 441,140            |   |  | 328,115               |   |  | 2,627,220        |   |  | 3,396,475     |  
|Depreciation and amortization       |  | 361,384            |   |  | 214,515               |   |  | 126,364          |   |  | 702,263       |  
|Doubtful accounts                   |  | 251,171            |   |  | 630,681               |   |  |                 |   |  | 881,852       |  
|Finance costs                       |  | (19,438            | ) |  | (40,531               | ) |  | 2,502,593        |   |  | 2,442,624     |  
|Income/(loss) before income taxes   |  | 1,912,378          |   |  | 1,749,810             |   |  | (5,233,660       | ) |  | (1,571,472    | )
|Income taxes                        |  |                   |   |  | 451,409               |   |  |                 |   |  | 451,409       |  
|Net income (loss) for the period    |  | 1,912,378          |   |  | 1,298,401             |   |  | (5,233,660       | ) |  | (2,022,881    | )
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment assets                      |  | 41,991,927         |   |  | 27,458,037            |   |  | 19,209,667       |   |  | 88,659,631    |  
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  
|Segment liabilities                 |  | 2,875,274          |   |  | 1,472,352             |   |  | 8,739,563        |   |  | 13,087,189    |  
|                                    |  |                    |   |  |                       |   |  |                  |   |  |               |  

NOTE 11: CAPITAL COMMITMENT

A. CAPITAL COMMITMENTS

As of June 30, 2009, there were capital commitments amounting to $562,636,
mostly related to the construction work of the feed mill.

B. LEASE COMMITMENTS

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



|           |  |   |        
|---------- |  | - | -------
|2009       |  | $ | 62,216 
|2010       |  |   | 124,432
|2011       |  |   | 41,032 
|2012       |  |   | 41,032 
|2013       |  |   | 41,032 
|Thereafter |  |   | 430,832
|           |  |   |        
|Total      |  | $ | 740,576
|           |  |   |        

NOTE 12RECENT PRONOUNCEMENTS

Effective January 1, 2009, the Company adopted the provisions of Emerging Issues Task Force (EITF) EITF 07-05, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entitys Own Stock, (EITF 07-05). EITF 07-05 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and to any freestanding financial instruments that are potentially settled in an entitys own common stock. As of January 1, 2009, as a result of adopting EITF
07-05, warrants to purchase 409,358 shares of our common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. As such, effective January 1, 2009, the Company reclassified
the fair value of these warrants to purchase common stock, which had exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue. Furthermore, since the
promissory notes in the liabilities carry an embedded conversion feature, these notes were also recognized as derivative instruments under EITF 07-05. On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative
effect adjustment, $1,953,746 to beginning retained earnings and $4,403,239 to common stock warrant liability to recognize the fair value of such warrants on such date and the embedded conversion feature of the outstanding notes. The fair value of
these financial instruments increased to $4,583,020 as of June 30, 2009. As such, we recognized a $1,055,869 non-cash expense to operations from the change in fair value of these warrants for the three months ended June 30, 2009.

Effective June 30, 2009, the company adopted Statement of Financial Accounting Standards No. 165, Subsequent Events
(SFAS No. 165). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the date the financial statements are issued or available to be issued. SFAS
No. 165 requires companies to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance-sheet date. Subsequent events that provide evidence about conditions that
arose after the balance-sheet date should be disclosed if the financial statements would otherwise be misleading. Disclosures should include the nature of the event and either an estimate of its financial effect or a statement that an estimate
cannot be made. No disclosure was required for this report.

In June 2009, the FASB issued Statement of Financial Accounting Standards
No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (the Codification), which will be effective for financial statements
issued for interim and annual reporting periods ending after September 15, 2009. The Codification is not expected to change U.S. generally accepted accounting principles but combines all nongovernmental authoritative standards into a
comprehensive, topically organized online database. All other accounting literature excluded from the Codification will be considered nonauthoritative. The company will adopt the use of the Codification for the quarter ending September 30,
2009. The company is currently evaluating the effect on its financial statement disclosures since all future references to authoritative accounting literature will be references in accordance with the Codification.

NOTE 13LEGAL PROCEEDINGS

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



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In this Quarterly Report on Form 10-Q, Company, our company, us, and our
refer to HQ Sustainable Maritimes Industries, Inc., a Delaware corporation, and our subsidiaries, unless the context requires otherwise.

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is managements
discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of
our current management. This report includes forward-looking statements. Generally, the words believes, anticipates, may, will, should, expect, intend,
estimate, continue, and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the
matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not
be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

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.

GENERAL OVERVIEW

We are a leader in
all natural vertically 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 all natural tilapia and other aquatic products, and the other processes marine bio and healthcare products. We seek to expand our operations through providing additional processing facilities (e.g. the construction of our third
facility in early 2009, which will process extruded feed) in China and marketing efforts throughout North America and Europe.

In addition,
you should consider the following information as you read the below results of operations discussion and our financial statements and related notes included elsewhere in this report. From the first quarter of 2004, following our reverse merger with
Process Equipment, Inc., we have been operating under the name of HQS. At that time, we owned 84.4 percent of HQ Ocean Fishing Co. Ltd (HQOF), currently our principal operating subsidiary that processes our seafood products; in August
2004 we acquired the remaining ownership interest that we did not already own in HQOF. The fiscal year-end of Process Equipment was changed from April 30 to December 31 following the reverse merger. In August 2004, we acquired a 100
percent interest in our current subsidiary Jiahua Marine which operates a marine bio and healthcare plant, including nutraceuticals, in Hainan Province, China.

Our business operations consist of two segments, the marine bio and healthcare product segment and the aquaculture product segment. Since the acquisition of Jiahua Marine, which represents the marine bio and
healthcare product segment, that segment represented a significant contribution to our net income and currently provides higher profit margins than our aquaculture products segment. Our management expects, but cannot guarantee, the sales and
contribution to net income to continue during the next year in similar proportions. However, as the marketing efforts increase in connection with the aquaculture product segment and the investment in the feed mill plant and equipment for new
processing capacity of extruded feed are completed in 2009, our management expects that the aquaculture product segment will begin to contribute a greater portion of net income in 2009 and beyond.

The following Managements Discussion and Analysis (MD&A) is intended to provide the readers with an insight of HQS and subsidiaries
(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.

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

The Company recognizes revenue when the significant risks and rewards of
ownership have been transferred to the customer, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectibility is probable. The Company recognizes
sales when the merchandise is shipped, title has passed to the customers 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

The Agriculture Department of Hainan
Province issued on July 27, 2009 a certificate allowing our feed mill to begin production. This marks an important event for the Company since in virtue of the new food safety laws of China, such certificates are no longer issued with only
Provincial approval and deploying best efforts. Current laws require Federal certification and an obligation of result is imposed on the inspectors. The feed must meet food safety requirements or the inspectors will be held personally responsible.
Against this backdrop for the Company to receive so quickly the certification is a reflection of the high quality demonstrated to the inspectors of the equipment, the management and the formulas deployed to feed Tilapia and other species of fish.

Results of Operations  Three Months Ended June 30, 2009 as Compared to Three Months Ended June 30, 2008

Total sales for the three months period ended June 30, 2009 increased by 10%, from $14,531,487 for the three months period ended June 30, 2008 to $16,009,757
for the three months period ended June 30, 2009. The gross profit for the three months period ended June 30, 2009 increased by 37% to $6,811,936 when compared to the corresponding period of 2008. That increase in the gross profit in 2009
was the result of higher sales from both segments in the current quarter when compared to the corresponding quarter of 2008. The overall gross profit ratio improved in the current three months of 2009 to 43% from 34% in the same period of 2008,
coming from both segments. Income from operations for the three months period ended June 30, 2009 increased by $2,682,692 when compared to the same period of 2008 mostly as a result of improved gross profit realized during the current period.
Net income for the three months period ended June 30, 2009 increased by $2,078,174 mostly due to increased activity and related gross profit from both segments, added to a reduction in financing costs in the amount of $636,439 in 2009, and
offset by a loss in fair value of derivative financial instruments amounting to $1,055,869, also in the first three months of 2009. For the three months period ended June 30, 2008, financing costs were materially affected by the result of a
final settlement amounting to approximately $699,000 from the American Arbitration Association in relation with financial fees payable to one of our financial service suppliers.

By Segments

Manufacturing and Selling of aquatic products

HQ Ocean Fishing Co. Ltd (HQOF) is engaged in the manufacturing and selling of aquatic products. The sales contributed by this segment increased to
$10,500,483 for the three months period ended June 30, 2009 compared to $9,602,065 for the corresponding period of 2008, an improvement of 9%. That increase is mostly related to increased volumes in 2009 as the average market prices of our
products remained relatively stable in the current quarter of 2009, compared to the corresponding period of 2008. The related gross profit ratio of this segment was 24% and 15% for the three months period ended June 30, 2009 and 2008
respectively. The 2008 lower than usual margins were mostly the result of higher raw materials costs due to the reduced supply of fish in China following an unusually cold winter; our increased costs in 2008 could not be transferred to our clients
at that time, triggering margin reductions. This segment contributed $2,057,805 and $592,984 to net income for the three months period ended June 30, 2009 and 2008 respectively, an improvement of 247%. Return on sales from this segment more
than trippled in 2009 as a result of increased gross profit in the current three months period of 2009, compared to the same period in 2008.

Manufacturing and Selling of Marine Bio and Healthcare products

Our other wholly-owned subsidiary, Jiahua Marine, is engaged in the
manufacturing and selling of Marine Bio and Healthcare products. During the three months period ended June 30, 2009 and 2008, Jiahua Marine recorded sales of $5,509,274 and $4,929,422 respectively, an increase of 12%. The gross profit ratio
from this segment was 78% and 72% for the three months ended June 30, 2009 and 2008 respectively. The increase in the gross profit margin in 2009 was mostly related to an average reduction in the cost of raw materials. Furthermore, the major
expense of this segment continues to be marketing and advertising, corresponding to 24% and 26% of revenues for the three months ended June 30, 2009 and 2008, respectively. The net income contributed by this segment was $1,950,691 for the three
months period ended June 30, 2009, an improvement of 126% when compared to the net income of $861,501 for the three months period ended June 30, 2008. The increase in net income in 2009 was mostly due to higher sales and related gross
profit, added to a lower doubtful account expense.

By Operations

Sales. For the three months period ended June 30, 2009, sales increased by $1,478,270 to $16,009,757 or 10% when compared to the same period of 2008. This improvement in sales resulted from a
better performance from both segments in 2009. The health and bio-product segment contributed to an increase in sales of $579,852, or 12% compared to the corresponding period of 2008, mostly due to new products having been put on market during the
period. The aquatic products segment improved its sales by $898,418, or 9% in the first quarter of 2009 compared to the same period of 2008 mostly as a result of increased volumes.

Cost of sales. Cost of sales decreased by $374,789 or 4% to $9,197,821 from $9,572,610 for the three months ended June 30, 2009, as compared to the corresponding period of the prior year. The
reduction in the cost of sales in 2009, when compared to 2008, was mostly the results of normalized manufacturing costs in 2009, as the unusually cold winter in 2008 impacted significantly our costs in 2008. The overall gross profit ratio increased
from 34% for the three months period ended June 30, 2008 to 43% for the corresponding period of 2009. The improvement in the gross profit margin in 2009 was the result of a mix of increased volumes with reduced manufacturing costs experienced
in 2009, from both our segments.



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Selling and distribution expenses. Selling and distribution expenses decreased by $34,782 to
$290,150 for the three months period ended June 30, 2009, as compared to the corresponding period of the previous year. As a percentage of sales, the selling and distribution expenses remained relatively stable at approximately 2% of sales in
the current quarter of 2009, as compared to the corresponding quarter of 2008.

Marketing and advertising expenses. Marketing and
advertising expenses increased by $52,328 or 4% from $1,286,532 to $1,338,860 as compared to the corresponding period of the previous year. As a percentage of sales, this expense continues to be the most important expense of the health and
bio-product segment, corresponding to 24% of sales in 2009 and 26% in the same period of 2008. Those advertising expenditures for the promotion of our health and bio-products to achieve customer recognition are consistent with industry practices.

General and administrative expenses. General and administrative expenses increased by $79,918, or 4%, to $2,023,593 in the current
three months period ended June 30, 2009, from $1,943,675 in the corresponding period of 2008. Most of the increase in the current three months period of 2009, when compared to the same period of 2008 was the results of branding-related
expenses, liability insurance, rental costs, and other U.S. head office expenses.

Depreciation and amortization. Depreciation and
amortization decreased by $22,328 to $340,180 in the current quarter when compared to the same quarter of 2008. In the three months period ended June 30, 2009, depreciation of newly acquired fixed assets in the second portion of 2008 and the
first half of 2009 was offset by the effect of fully depreciated fixed assets.

(Recovery of)/Doubtful accounts.Recovery of doubtful
accounts in the current three months period of 2009 amounted to $12,379, compared to an expense of $892,390 in the corresponding period of 2008. The improvement in 2009, which originated from both segments, was the result of a better aging of our
receivables in 2009 than in 2008, which triggered a reduced doubtful account provision in the current period.

Income from operations.
Income from operations increased to $2,831,532 in the current quarter of 2009 from $148,840 in the corresponding quarter of the previous year. The substantial increase experienced in 2009 was mainly the result of increased sales from both segments
with related gross profit ratio of 43%, in comparison to a 34% gross profit ratio in 2008 as explained above, added to more favorable doubtful account expense.

Finance costs. Finance costs substantially decreased to $166,780 in the current three months period of 2009 from $803,219 for the corresponding period of 2008. In 2008, finance costs were mostly affected by the result
of a final settlement amounting to approximately $699,000 from the American Arbitration Association in relation with financial fees payable to one of our financial service suppliers. In 2008 as in 2009, financing costs also included recognition of
the carrying interests on the promissory notes issued in November 2006 (November 2006 Notes) added to the continued combination of amortization of the future conversion of warrants (noncash) attributed to investors on those
November 2006 Notes of $5,000,000, added to the amortization of the embedded conversion option (noncash) related to the same notes. Those non-cash financing costs were recognized in accordance with FAS 123R and EITF 00-27. Such amortization
will be repeated, on a pro-rata basis, until maturity of the underlying notes in November 2009.

Fair value change in derivative financial
instruments. Effective January 01, 2009, in recognition of new accounting standards related to the fair value of our outstanding warrants and embedded conversion feature of our promissory notes in accordance with EITF No.07-05
and FAS No.133, we recognized in our income statement the change in value (mark-to-market) from January 1, 2009 to June 30, 2009 of those two items included in our current liabilities. In the second quarter of 2009, we
recognized an expense of $1,055,869 corresponding to the increase in the fair value of those two financial instruments between April 1, 2009 and June 30, 2009. This fair value change will continue to be evaluated quarterly until expiration
of the warrants and the promissory notes, and the corresponding change will be charged or credited to our income in the corresponding period.

Income/ (loss) before income taxes. Income before income taxes showed an improvement of $2,275,016 in the current three months of 2009, when compared to the same period of 2008. That significant improvement was the
result of higher income from operations recognized in the current three months of 2009 as indicated above, added to the reduction of finance costs, and offset by the increase in value of our derivative financial instruments.

Current income taxes. In the current three months period ended June 30, 2009, current income taxes increased by $196,842 to $535,901 from
$339,059 in the corresponding period of 2008. The increase was mostly due to the combination of increased taxable income in 2009 added to higher income tax rate in the same period from the health and bio-product segment, since the new tax
legislation was promulgated in 2008. The health and bio product segment income tax rate is to be increased yearly until it reaches 25% in year 2012.

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

Net income/ (loss) attributable to shareholders. In the current three months period of 2009, the Company realized a net income of $1,084,736
compared to a net loss of $993,438 in the corresponding period of 2008. As indicated above, increased sales with related gross profit margins from both our segments, coupled with reduced finance costs and offset by the increased fair value in our
derivative financial instruments resulted in better net income to shareholders in the current quarter of 2009 than the corresponding period of 2008.

Results of Operations  Six Months Ended June 30, 2009 as Compared to Six Months Ended June 30, 2008

Total sales for the six
months period ended June 30, 2009 increased by 13%, from $23,741,977 in 2008 to $26,850,578 in 2009. Approximately 54% of the increase in sales originates from the aquaculture product segment and 46% from the health and bio-product segment.
Gross profit for the six months period ended June 30, 2009 increased by 30% to $11,565,249 when compared to the same period of 2008. The gross profit ratio for the six months period ended June 30 increased from 37% in 2008 to 43% in 2009.
That improvement in the gross profit ratio in the first six months of 2009 compared to the corresponding 2008 period originates mostly from the aquatic product segment which saw a substantial increase the gross profit ratio (26% in 2009 compared to
20% in 2008). Income from operations for the current six months period of 2009 increased from $872,917 in June 2008 to $3,839,019 in June 2009. That improvement in income from operations experienced in 2009 was mostly the result of increased sales
and related gross profit from both segments. Net income increased from a net loss of $2,022,881 in the six months period ended June 30, 2008 to a net income of $2,200,091 in the corresponding period of 2009. The increased net income of 2009 was
the result of increased income from operations as described above, coupled with a substantial reduction of finance costs. In the first six months of 2008, finance costs were affected by penalties for late filing of the registration statement of the
underlying shares related to those convertible notes issued in November 2006 (approximately $1,621,000), added to the result of a final settlement amounting to approximately $699,000 from the American Arbitration Association in relation with
financial fees payable to one of our financial service suppliers.



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Segments

Manufacturing and Selling of aquatic products

HQ Ocean Fishing Co. Ltd (HQOF) is engaged in the manufacturing and
selling of aquatic products. The revenue contributed by this segment increased by $1,681,187 or 10.4% to $17,810,719 for the six months period ended June 30, 2009 compared to $16,129,532 for the corresponding period of 2008. The related gross
profit ratio of this segment went from 20% for the six months period ending in June 2008 compared to 26% in the corresponding period of 2009. The increase in the gross profit ratio in 2009 originates mostly from lower manufacturing costs (mostly raw
materials) experienced in the second quarter of 2009, compared to the second quarter of 2008. This segment contributed $3,599,571 to our net income in the first six months of 2009, as compared to net income of $1,912,378 for the corresponding period
of 2008, an improvement of 88%. That improvement is mostly due to the 6% increase in the gross profit ratio experienced in the first six months period of 2009, compared to the corresponding period of 2008.

Manufacturing and Selling of Marine Bio and Healthcare products

Our other manufacturing subsidiary, Jihua Marine, is engaged in the manufacturing and selling of Marine Bio and Health-care products. During the six months period ended June 30, 2009 and 2008, Jiahua Marine realized sales of $9,039,859
and $7,612,445 respectively, an increase of $1,427,414 or 19%. The gross profit ratio from this segment went from 74% in the six months period ended June 2008 compared to 77% in the corresponding period of 2009. That improvement in the gross profit
ratio experienced in 2009 is due to different sales mix in 2009 compared to 2008, including the effect of new products marketed in 2009. The major expense of this segment continues to be marketing and advertising, corresponding to 31% and 32% of
revenues for the six months ended June 30, 2009 and 2008 respectively. The net income contributed by this segment was $2,608,375 and $1,298,401 for the six months period ended June 30, 2009 and 2008 respectively, an improvement of 101%.
The increase in net income was mostly due to the combination of improved sales and related gross profit in 2009 added to a reduced provision for doubtful accounts of approximately $633,945 to adjust to an improved aging of our receivables.

Operations

Sales. For the six
months period ended June 30, 2009, sales increased by $3,108,601 or 13% to $26,850,578. This improvement in sales resulted from increased activities of both segments in 2009, mostly the aquaculture product segment which experienced an increase
of $1,681,187 or 10% (mostly related to increased volumes), while the sales from the health and bio product segment increased by $1,427,414 or 19% in the first six months period of 2009 (mostly related to new products marketed during that period)
compared to the corresponding period of 2008.

Cost of sales. Cost of sales increased by $402,017 or 3% to $15,285,329 from
$14,883,312 for the six months period ended June 30, 2009, as compared to the corresponding period of the prior year. The lower manufacturing costs (including the cost of raw materials) in the aquaculture product segment experienced in the
second quarter of 2009 was the major cause of the decrease in cost of sales. The gross profit ratio increased from 37% for the six months period ended June 30, 2008 to 43% for the same period of 2009. The overall gross profit ratio improvement
in the current six months period of 2009 originates from both our segments: the reduction of manufacturing costs of both our aquaculture product segment and our health and bio-product segment and a different mix of products marketed in those
periods.

Selling and distribution expenses. Selling and distribution expenses decreased by $9,806 or 2% from $554,108 to $544,302 for
the six months period ended June 30, 2009, as compared to the corresponding period of the prior year. As a percentage of sales, the selling and distribution expenses remained relatively stable at approximately 2% of sales in the current six
months period of 2009, as compared to the corresponding period of 2008.

Marketing and advertising expenses. Marketing and advertising
expenses increased by $314,435 or 13% from $2,451,050, to $2,765,485, as compared to the corresponding period of prior year. They correspond to approximately 31% of our bio-products sales of 2009 and 32% in 2008. Those advertising expenditures for
the promotion of our health and bio-products to achieve customer recognition are consistent with industry practices.

General and administrative
expenses. General and administrative expenses increased by $233,490 or 6.9% to $3,629,965 from $3,396,475 as compared to the corresponding period of the previous year. The increase originates mostly from additional general and
administrative expenses in the subsidiaries where additional activity was created in 2009 compared to 2008.

Depreciation and
amortization. Depreciation and amortization increased by $65,028 or 9.26% to $767,291 as compared to the corresponding period of prior year, mainly as a result of acquisition of fixed assets in the second half of 2008 and the first
half of 2009, which triggered additional depreciation during the current period.

Doubtful accounts.Doubtful accounts expense
amounted to $19,187 for the six months period ended June 30, 2009 compared to $881,852 for the corresponding period of 2008. The decrease in the 2009 provision, originating from both segments, was to recognize a better aging of our receivables
at June 30, 2009 compared to June 30, 2008.

Income from operations. Income from operations for the six months period ending
June 2009 increased from $872,917 in 2008 to $3,839,019 in the corresponding period of 2008, an increase of $2,966,102. That increase in 2009 is the result of an improvement of approximately $2,707,000 in gross profit contribution from both segments
added to the reduced bad debt (approximately $863,000), and offset mostly by increased marketing and advertising expenses (approximately $314,000) and general and administrative expenses (approximately $233,000).

Finance costs. Finance costs substantially decreased to $685,225 from $2,442,624 for the six months period ended June 30, 2009 when compared to
the corresponding period of the prior year, a reduction of $1,757,399. In the first six months of 2008, finance costs were affected by penalties for late filing of the registration statement of the underlying shares related to those convertible
notes issued in November 2006 (approximately $1,621,000), added to the result of a final settlement amounting to approximately $699,000 from the American Arbitration Association in relation with financial fees payable to one of our financial service
suppliers. Such one time costs did not occur in 2009. In 2008 as in 2009, financing costs also included recognition of the carrying interests on the promissory notes issued in November 2006 added to the continued combination of amortization of the
future conversion of warrants (noncash) attributed to investors on those November 2006 notes of $5,000,000, added to the amortization of the embedded conversion option (noncash) related to the same notes. Those non-cash financing costs
were recognized in accordance with FAS 123R and EITF 00-27. Such amortization will be repeated, on a pro-rata basis, until maturity of the underlying notes in November 2009. Finally, in the first six months of 2009, in order to avoid the costs in
time and expenses of an arbitration proceeding, the Company reduced the exercise price of certain warrants convertible into shares of the Companys $0.001 par value Common Stock to a conversion price of $5.00 per share, provided such warrants
were immediately exercised; that transaction generated a loss of approximately $365,000 in the first quarter of 2009.

Income/ (loss) before income
taxes. For the six months period ended June 30, 2009, income before income taxes amounted to $2,962,561, from a loss of $1,571,472 for the corresponding period of 2008. That significant improvement of $4,534,033 experienced in
2009 was the result of increased income from operations of $2,966,102 described above coupled mostly with a reduction in finance costs.



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Current income taxes. Current income taxes increased by $311,061 to $762,470 in the first half of
2009, from $451,409 in the corresponding period of 2008. The increase in current income taxes is mostly due to the combination of increased taxable income in 2009 added to higher income tax rate in the same period from the health and bio-product
segment, since the new tax legislation was promulgated in 2008. The health and bio-product segment actual income tax rete will increase yearly until it reaches 25% in year 2012.

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

Net income/ (loss) attributable to shareholders. The net income attributable to shareholders improved from net loss $2,022,881 for the six months
period ended June 30, 2008, to a net income of $2,200,091 for the corresponding period of 2009. As indicated above, increased sales and related gross profit in the first six months of 2009 from both segments, coupled mostly with a reduction in
financial expenses in the same period are the major factors supporting the improved results of 2009, when compared to the corresponding period of 2008.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents remain solid at $63,089,398 at June 30, 2009, as compared to $54,920,548
at December 31, 2008. As of June 30, 2009, working capital was $76,915,405 compared to $72,203,260 at December 31, 2008. The funds generated by the operating activities during the first half of 2009 were used mainly to support our
investment in the new feed plant to be in operation in the second half of this year.

Total assets increased by $14,068,870, or 14%, to $114,255,143 at
June 30, 2009, compared to $100,186,273 as of December 31, 2008. Shareholders equity increased by $9,399,974 or 10.7%, to $97,673,002 at June 30, 2009, from $88,273,028 as of December 31, 2008.

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 lives. 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 which matured on January 25, 2008, in the aggregate principal amount of $5,225,000; (2) Class A warrants, with each warrant giving the right to the holder to purchase one share of our common
stock at the exercise price of $6.00 until January 25, 2009 (totally exercised since that date); and (3) Class B warrants, with each warrant giving the right to the holder to purchase one share of our common stock at the exercise price of
$6.00 until January 25, 2011. The net proceeds of this financing to us were $4,702,500, after deducting commissions and other costs of this transaction equal to $522,500. The Class A and Class B warrants can be exercised pursuant to a
cashless exercise. Under the terms of the warrants, the holders thereof have agreed not to elect for a period of one (1) year a cashless exercise of the warrants and also agreed not to elect a cashless exercise so long as there is an effective
registration statement for the shares underlying the respective warrants. As of June 30 2009, all the Class A warrants have been exercised and there were outstanding Class B warrants to purchase up to [114,583] shares of common stock

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. As of June 30, 2009,
there were outstanding notes convertible into an estimated 1,000,000 shares of our common stock and there is still 30,000 such warrants unexercised.

In
December 2007, we completed a follow-on offering by issuing 3,450,000 new shares of our common stock to two underwriters (including the over-allotment of 450,000 shares) for a total gross consideration of $26,910,000 (corresponding to net proceeds
of approximately $23,800,000). We have allocated this financing as follows: Completing its new feed plant expected to be in operation in 2009; Build a new processing plant expected to be in operation in the second half of 2010 and; Use the balance
for general working capital purposes.

In June 2009, we completed another public offering by issuing 1,408,750 new shares of our common stock (including
the over-allotment of 183,750 shares) for a total gross consideration of $11,974,000 (corresponding to net proceeds of approximately $10,851,000). We have allocated this financing to general corporate purposes, including investments in long-term
assets to complete our integration objective in line with our business plan.

At June 30, 2009, about 41% 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 (to be in operation in the later portion of 2010) and our own organic feed mill (to be in operation in the later portion of 2009). 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. 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. However, future equity
or debt financing may not be available to us at all, or if available, may not be on terms acceptable to us. If we are unable to obtain financing in the future, we will continue to develop our business on a reduced scale based on our existing capital
resources.

The ratio of current assets to current liabilities decreased to 5.64 times ($93,497,544/$16,582,141) at June 30, 2009, from and 7.06 times
($84,116,505/$11,913,245) at December 31, 2008.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We hold 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. There has been no material change in the companys assessment of its sensitivity to market risk since its disclosure in its
Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

ITEM 4. CONTROL AND PROCEDURES.

a) Evaluation of Disclosure Controls and Procedures.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management is required to base its assessment of the effectiveness
of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published inInternal Control-Integrated
Framework, is known as the COSO Report. Our Management has chosen the COSO framework on which to base its assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of
June 30, 2009.

The Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of
the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q for
the period ended June 30, 2009. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this
quarterly report on Form 10-Q. There were no changes in internal control over financial reporting (as defined in Rule 13a-15(e) under the Exchange Act) that occurred during the period covered by this quarterly report on Form 10-Q that have
materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

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

b) Changes in Internal Control over Financial Reporting.

During the Quarter ended June 30, 2009, 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.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

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

ITEM 1A - Risk Factors

We have updated the risk factors previously disclosed in Part I,
Item 1A of our Annual Report on Form 10K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission on March 12, 2009 (the Fiscal 2008 10K). We believe there are no
changes that constitute material changes from the risk factors previously disclosed in the Fiscal 2008 10K.

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

On January 7, 2009, we issued 32,500 shares of our Common Stock to two investors,
namely the Tail Wind Fund Ltd and Solomon Strategic Holdings, Inc in relation to the payment of interests on the notes issued to those two investors in November 2006. Those shares were issued pursuant to the exemption provided by Section 4(2)
under the Securities Act of 1933, for a transaction not involving a public offering.

On January 7, 2009, we issued 5,256 shares of our Common Stock
to our four independent non-executive directors, Andrew Intrater, Fred Bild, Daniel Too and Joseph I. Emas, 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 those shares were issued pursuant to the exemption provided by Section 4(2) under the Securities Act for a transaction not involving a public offering.

On January 20, 2009, we issued 16,004 shares of our Common Stock to Lucky Ventures Limited in consideration of financial consulting services rendered to us by that
company. All of those shares were issued pursuant to the exemption provided by Section 4(2) under the Securities Act for a transaction not involving a public offering.

From January 27 through January 29, 2009, we issued a total of 7,050 shares of our Common Stock to seven investors in our Company in respect of the January 2006 financing. Those shares were issued pursuant
the cashless exercise of certain warrants issued to such investors had in connection with the January 2006 financing. 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.

From June 9 through June 15, 2009, we issued a total of 46,001 shares of our Common Stock to seven investors in
our Company arising from the April 2004 financing. Those shares were issued pursuant a cashless exercise of certain Series C common stock purchase warrants and Series D common stock purchase warrants issued to such investors in connection with the
April 2004 financing. All of these shares were issued pursuant to the exemption provided by Section 4(2) under the Securities Act for a transaction not involving a public offering.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

There have been no material defaults.



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

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

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS



|     |  |                                                                                                           
|---- |  | ----------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.               
|     | 
|31.2 |  | Certification of Chief 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 Chief 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: August 10, 2009



|                                         |  |                                       
|---------------------------------------- |  | --------------------------------------
|HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
|                                         | 
|By:                                      |  | /s/ Norbert Sporns                    
|Name:                                    |  | Norbert Sporns                        
|Title:                                   |  | Chief Executive Officer and President 
|                                         | 
|By:                                      |  | /s/ Jean-Pierre Dallaire              
|Name:                                    |  | Jean-Pierre Dallaire,                 
|Title:                                   |  | Chief 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 Chief Financial 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 Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.



19