UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-K





Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.





For the
Fiscal Year Ended August 31, 2008





Commission
File Number 0-50092





EDGEWATER
FOODS INTERNATIONAL, INC.


(Name of
Small Business Issuer in Its Charter)








Nevada
            
            20-3113571(State
      or other jurisdictionof
      incorporation or organization)
            
            (IRS Employer Identification
      No.)






400
      Professional Drive, Suite 310, Gaithersburg, Maryland
            20878(Address
      of Principal Executive Offices)
            (Zip
      Code)





(250)
757-9811


(Issuer’s
Telephone Number, Including Area Code)





Securities
registered pursuant to Section 12(b) of the
Act:   None


Securities
registered pursuant to Section 12(g) of the Act:   Common
Stock




Indicate by check
      mark if the registrant is a well-known seasoned issuer, as defined in Rule
      405 of the Securities Act.
            Yes
            
            No
            X




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.




YES
            
            X
            NO




Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been  subject to such filing  requirement  for the
past 90 days.




X
              YES
              
              
              NO




Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [  X   ]


















Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer,” and smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
accelerated filer
|_|                                                                Accelerated
Filer |_|


Non-accelerated
filer  
|_|                                                                Smaller
reporting company |X|








Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).




YES
              
              X
              NO




The
issuer's revenues for its most recent fiscal year
were:  $1,584,027.





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of November 28, 2008 was $909,052 (computed
by multiplying the closing sales price for our common stock on such date by the
number of shares of common stock held by persons other than officers, directors
or by record holders of 10% or more of the registrant’s outstanding common
stock.  This characterization of officers, directors and 10% or more
beneficial owners as affiliates is for purposes of computation only and is not
an admission for any purposes that such people are affiliates of the
registrant).





The
number of shares of our common stock outstanding on November 28, 2008 was
24,479,150.


2


TABLE OF
CONTENTS





PART
      IItem
      1
            Description
      of Business
            Page
      5Item
      2
            Description
      of Property
            Page
      15Item
      3
            Legal
      Proceedings
            Page
      17Item
      4
            Submission
      of Matter to a Vote of Security Holders
            Page
      17PART
      IIItem
      5
            Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities
            Page
      18Item
      6
            Management's
      Discussion and Analysis or Plan of Operation
            Page
      29Item
      7
            Financial
      Statements
            Page
      F-1Item
      8
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            Page
      72Item
      8A
            Controls
      and Procedures
            Page
      72PART
      IIIItem
      9
            Directors
      and Executive Officers of the Registrant
            Page
      75Item
      10
            Executive
      Compensation
            Page
      80Item
      11
            Security
      Ownership of Certain Beneficial Owners, and Management and Related
      Stockholder Matters
            Page
      84Item
      12
            Certain
      Relationships and Related Transactions
            Page
      87Item
      13
            Exhibit
      List
            Page
      88Item
      14
            Principal
      Accountants Fees and Services
            Page
      89Signatures
            Page
      90


3









PART I.


CAUTIONARY
STATEMENT REGARDING


FORWARD-LOOKING
INFORMATION





From time
to time, we may make written statements that are "forward-looking," including
statements contained in this report and other filings with the Securities and
Exchange Commission, reports to our stockholders and news releases. All
statements that express expectations, estimates, forecasts or projections are
forward-looking statements. In addition, other written or oral statements which
constitute forward-looking statements may be made by us or on our behalf. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "projects," "forecasts," "may," "should," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Important
factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:





(a)
volatility or decline of our stock price;





(b)
potential fluctuation in quarterly results;





(c) our
failure to earn revenues or profits;





(d)
inadequate capital and barriers to raising the additional capital or to
obtaining the financing needed to implement its business plans;





(e)
inadequate capital to continue business;





(f)
changes in demand for our products and services;





(g) rapid
and significant changes in markets;





(h)
litigation with or legal claims and allegations by outside parties;
or





(i)
insufficient revenues to cover operating costs.




There is
no assurance that we will be profitable, we may not be able to successfully
develop, manage or market our products and services, we may not be able to
attract or retain qualified executives and technology personnel, our products
and services may become obsolete, government regulation may hinder our business,
additional dilution in outstanding stock ownership may be incurred due to the
issuance of more shares, warrants and stock options, or the exercise of warrants
and stock options, and other risks inherent in the our businesses.






4






We
undertake no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the factors described in other documents we file from time to
time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-K and Annual Report on Form 10-K and any Current Reports on
Form 8-K filed by us.  All forward-looking statements attributable to
us are expressly qualified in their entirety by the cautionary statement
above.








ITEM
      1.              
      DESCRIPTION OF BUSINESS





Overview





(A)  We were
incorporated under the laws of the State of Nevada on June 12, 2000, with the
name Heritage Management Corporation.  In August 2005, we entered into
a share exchange agreement with Edgewater Foods International, Inc., the parent
company of Island Scallops Ltd. an aquaculture company located in Vancouver
Island, British Columbia. As a result of the Share Exchange, Edgewater became
our wholly owned subsidiary and Edgewater’s shareholders became the owners of
the majority of our voting stock.  Pursuant to the terms of the Share
Exchange Agreement, Edgewater’s officers and directors were appointed as our
officers and directors.  Additionally, we changed our name from
Heritage Management, Inc. to Edgewater Foods International, Inc.





Our
wholly owned subsidiary, Edgewater Foods International Inc., a Nevada
Corporation, is the parent company of Island Scallops Ltd., a Vancouver Island
aquaculture company. Island Scallops was established in 1989 and for over 19
years has successfully operated a scallop farming and marine hatchery business.
Island Scallops is dedicated to the farming, processing and marketing of high
quality, high value marine species: scallops and sablefish.  Scallop
farming is relatively new to North America and Island Scallops is the only
producer of both live-farmed Qualicum Beach scallops and live sablefish (or
blackcod).  Given Island Scallops’ unique hatchery technology and
extensive research and development, we believe that there is currently no
significant competition for these marine species.   Island
Scallops is committed to rapidly expanding production and profits while
continuing to finance the aggressive growth of the company and maintaining a
healthy respect for the marine environment.





Edgewater
acquired Island Scallops in June 2005 through a tax free share exchange. Island
Scallops was established in 1989 to commercialize Canadian government research
on scallop aquaculture.  Island Scallops’ hatchery operations have
diversified to produce other species of shellfish such as mussels, clams,
geoducks and oysters. Island Scallops has also investigated the culture of
halibut, spot prawn, sea urchin and abalone. Island Scallops is the first
hatchery to successfully produce sablefish juveniles for commercial
grow-out.





Currently,
Island Scallops’ primary product is farmed Qualicum Beach scallops for sale in
the west coast of North America.  Island Scallops offers a variety of
other products and services to the industry including aquaculture equipment,
consulting, research and development, and custom processing and
marketing.  Internationally, Island Scallops has collaborated with
both Japanese and Moroccan fisheries interests.












5




On August
30, 2006, we filed a Form 8-A to register our common stock pursuant to Section
12(g) of the Act and we therefore ceased being a voluntary filer.





Key
Corporate Objectives





Our key
business development objectives over the next 36 months are to expand scallop
production using both existing and new infrastructure at our facilities in
Qualicum Beach, move forward possible joint ventures with First Nations1 groups, investigate strategic acquisitions
and/or business opportunities and look for possible partners or additional
strategic investors to enable the company to capitalize on its existing black
cod technology.  In general, we plan on leveraging our existing
hatchery technology and expertise via joint venture and/or acquisitions that
will enable us to reach signicantly increase sales over the next three
years.  Specifically, we plan to expand our business and operations as
follows:








·
            Leverage
      our recently completed $2.0 million order with Fanny Bay Oyster Co., a
      division of Taylor Shellfish Farms of Shelton, Washington (an
      international seafood distributor and the largest shellfish company on the
      West Coast) to expand overall scallops and reduce selling
      costs.  The initial order is for more than 800,000 lbs. of
      Edgewater’s proprietary Qualicum Beach scallops to be delivered to Fanny
      Bay over the next 13 months. The order includes live scallops, fresh
      scallop meat and frozen scallops to be farmed in Edgewater Foods’ Qualicum
      Beach, British Columbia, operation, and packaged and delivered in various
      scallop products (including live in-the-shell, frozen half-shell and fresh
      meat).





·
            Continue
      to move forward with our discussions with various First Nations groups
      about possible partnerships or joint ventures on potential farm sites on
      First Nation owned lands.  This will provide the company with
      additional growing areas for scallops and future joint venture
      revenues.





·
            Investigate
      possible acquisitions of other aquaculture companies, equipment vendors
      and/or seafood distributors.  We plan to initially focus on
      companies that we believe could significantly benefit from our hatchery
      technology and expertise.  As part of this initiative we
      recently established an Acquisition/Business Opportunity Board Committee
      and are currently beginning initial conversions with both North American
      and Chinese based companies.  Aside from the November 2008
      acquisition of Granscal Sea Farms Ltd., a Kanish Bay Company, as of the
      date of this filing, no new definitive agreements have been
      signed.










1






6







·
            Look
      to indentify either new strategic investors and/or possible joint venture
      partners who could help us capitalize on existing sablefish (or blackcod)
      hatchery technology and expertise.   One possible
      arrangement would be for us to license our blackcod hatchery technology
      and expertise to a strategic partner.  As of the date of this
      filing, we have yet to locate either a strategic investor or a joint
      venture of licensing partner.  If we do indentify a suitable
      arrangement,   our goal would be to capitalize on the high
      demand for sablefish in foreign markets by entering into the blackcod
      market in the next 2 to 3 years.





·
            We
      plan to expand current scallop distribution by leveraging our initial
      500,000 piece frozen roe on scallop meat order with European Union seafood
      distributors.  While our arrangement with Taylor Shellfish will
      focus on North America markets, we believe this order could represent an
      important first step towards establish a large European based demand for
      our scallops.








Marketing
and Distribution





Our
marketing and distribution strategy for Island Scallops is focused on developing
and maintaining long-term relationships with distribution channel
members.  Island Scallops also strives to differentiate its products
to achieve consistent supply and quality. Island Scallops believes the scallop
market effectively functions as a commodity market and therefore, relationships
with distributors are important. To develop these relationships, Island Scallops
has identified key purchasing criteria for the distributors: price, quality and
consistent farmed supply. In the short term, Island Scallops intends to adopt a
pricing policy equal to the market wholesale prices. In other words, we do not
intend to set any promotional or premium prices for either the whole or shucked
product, but instead intend to sell our products at the market rate. This would
mean Island Scallops’ products would compete on other factors, such as supply
and consistent quality.





Over the
long term, for the reasons noted below, Island Scallops wants to differentiate
its products so that it can command premium prices. Freshness is an important
factor for scallops since whole scallops only have a shelf life of approximately
7 days while shucked scallops remain fresh for up to 20 days. Due to this short
shelf life, distributors try to offer the freshest products.  Island
Scallops believes it is in a favorable position to supply fresh products to
United States brokers/distributors, especially those located on the west coast
where demand for the product is strong. Currently, these brokers/distributors
are supplied for the most part with east coast North American scallops, which
have several transportation-related delivery delays that decrease
freshness.





Supply is
another key factor where Island Scallops has a distinct advantage. Based on our
planned increase in scallop production, we believe that Island Scallops will
have a large quantity of scallops for sale. Therefore, a distributor would not
have to deal with numerous suppliers, which costs additional time and money.
This makes Island Scallops an attractive source for scallops, since we believe
that we will be able to satisfy the demand of distributors, which will save them
time and money.





Island
Scallops has also developed a unique live holding system for use with our
distribution model.  This system allows Island Scallops to deliver
live product directly to seafood suppliers and individual
restaurants.








7






Traditionally,
as described above, we have sold live scallops within the Pacific Northwest
market.  We recently received a $2.0 million order with Fanny Bay
Oyster Co., a division of Taylor Shellfish Farms of Shelton, Washington (an
international seafood distributor and the largest shellfish company on the West
Coast).  The order includes live scallops, fresh scallop meat and
frozen scallops to be farmed in Edgewater Foods’ Qualicum Beach, British
Columbia, operation, and packaged and delivered in various scallop products
(including live in-the-shell, frozen half-shell and fresh
meat).   As a result of this order, Fanny Bay will become the
effective exclusive distributor of our scallops outside the European
market.  We believe this order will reduce cost and encourage
additional wholesalers within the Taylor network to carry our
scallops.  In addition to the Taylor sales agreement, we also recent
finalize an order to provide frozen scallop meat with roe to the European
market.  We believe that this strategic relationships with enable us
to capitalize on the large European demand for quality seafood
products.





Current
Products





Island
Scallops currently focuses exclusively on aquaculture products and is not
involved in wild fisheries.  All seafood products are produced in
private hatcheries and grown on ocean farm sites. Currently, the Qualicum Beach
Scallop is the only product that Island Scallops produces, grows, processes and
markets, with the exception of limited quantities of sablefish grown as part of
our planned expansion into this market.  In the past however, Island
Scallops produced a variety of other shellfish species including the Pacific
oyster, European flat oyster, Manila clam, eastern blue mussel, Mediterranean
mussel, rock scallop, geoduck clam and sea urchin, which we sold to third party
shellfish farmers. Additionally, our hatchery has produced and is capable of
producing a variety of shellfish seed (for grow-out and sale by our companies)
including mussel, oysters and geoduck as well as scallop seed.





Island
Scallops has been a leader in marine hatchery technology for the past 20
years.  Island Scallops has developed proprietary hatchery techniques
for a number of marine species, most notably the hybridizing of the Qualicum
Beach Scallop and becoming the first company to produce commercial quantities of
sablefish juveniles.   Both of these breakthroughs have required
many years of research and considerable investment.  In the case of
sablefish, which is a cold-water fish that spawns at depths of 800 - 2400 ft, a
variety of techniques were required to successfully mature, spawn, incubate and
rear the larvae.  In addition, there were technical difficulties
associated with egg and yolk sac incubation (as well as larvae rearing and
weaning) that were resolved using proprietary technology developed at Island
Scallops.  We intend to begin significant further commercialization of
sablefish in the next two to three years, provided we are able to finance the
expansion of this product which we estimate will require at least $5.0 million
of capital.





Scallop
Overview





Island
Scallops’ main product is the "Qualicum Beach Scallop", which is a hybrid of the
imported Japanese scallop and the local weathervane scallop.  Between
1993 and 1999, Island Scallops developed this new scallop using Japanese
scallops that were imported under quarantine in the early
1990’s.  This unique scallop is marketed as the Qualicum Beach scallop
and is the largest scallop in the world, reaching sizes of 15 cm and 500
grams.  The scallop species farmed by Island Scallops has a proven
record of being disease resistant, with a 95% survival rate during the grow-out
phase.  We have the necessary farming infrastructure to produce up to
15 million scallops annually and,








8






with an
additional capital investment of approximately $1.0 million we could increase
our annual harvest capacity to 30 million scallops in the near
future.  We hope to fund this expansion via either increasing cash
flow or additional equity or debt financings.    If we are
unable to locate financing or develop positive cash flow, we will not be able to
continue to expand our production capabilities.





The
Qualicum Beach Scallop is sold live in four sizes: medium, large, extra large
and jumbo.  Pricing typically ranged from a low of US$3.95 per pound
to $4.20 per pound for the larger sized scallops.  In the early days
of our business, due to the large demand and high value for live scallops, our
focus was on the sale of live scallops.   However, with the
recent sales agreement with Fanny Bay and new European product line, our average
selling prices are expected to be between $1.00 and $1.20 per
scallop.  Although the average selling price per unit will be slightly
lower than the per unit cost of live in-the-shell scallops (only), we believe
the reduce sales and administrative costs will enable the company to
significantly increase our future margins.





The basis
for our recently completed and possible additional scallop farming production
increase stems from a combination of our tenure expansion, our recent financing,
improved grow-out techniques and our transition to a combination of “pearl nets
and lantern-style” farming methods.  Scallops culture utilizes two
styles of small cages referred to as “pearl nets and lantern
nets.”  Pearl nets are shaped like a pyramid with a 50 by 50 cm square
base and grow small scallops from 2-3 mm to 10mm.  The 10-mm scallops
are grown in cylindrical nets called lantern nets and are 60 cm in diameter and
1.2 meters deep containing 12 layers.  Our Hindoo Creek and Deep Bay
tenures have been approved for expansion and once expansion of our Denman tenure
is approved, which we believe will occur by our next fiscal year, we will be
able to increase capacity to approximately 30,000,000 animals per annum (with
additional funding).  Thereafter, we intend to change our management
plan to include off bottom culture at our Nile Creek farm in late 2007 or 2008,
which would supply us with the capacity to produce an additional 12-24 million
scallops at harvest( depending on the size of nets used).





As the
only hatchery/producer of cultured scallops on the west coast of North America,
Island Scallops has the ability to supply fresh scallops (of a predictable
quality and quantity) throughout the year.  Although the supply of
scallops has fluctuated in the past, consumer demand has always absorbed the
available supply. A primary factor for increased consumption is the increasing
health consciousness among consumers. Scallops are low in saturated fats and
cholesterol and high in protein.  All parts of the scallop body are
edible; however, different parts tend to be consumed in different regions of the
world.  In North America, the adductor muscle is traditionally the
only part eaten, with the rest of the body discarded. In Europe, Australia and
Tasmania, the adductor muscle is usually marketed and eaten with the gonad
attached.  Japan utilizes the whole animal, where most of the product
is cooked in the shell prior to sale.  Marketed scallops generally
take the following product forms:





·
            Whole-live
      (shelf life of seven days);


·
            Whole
      dried;


·
            Eviscerated
      whole;


·
            Shucked
      fresh (shelf life of about 15-20
days);


·
            Shucked
      frozen (shelf life of about a
year);












9






·
            Frozen
      on the half-shell (shelf life of about a year);
  and ·
              Value
      added forms (smoked, breaded,
canned).


The
shucked product form is the most significant form for North American
markets.  A whole-live product form is the most desirable from the
aquaculturist’s point of view, as processing costs are minimal. Previously,
Island Scallops has developed a market for whole live scallops, which exceeds
5,000 lbs. per week into Vancouver.  As described above, our scallop
sales efforts are currently focused on our Fanny Bay (Taylor Seafood) order and
our European orders.  We believe that these strategic relationships
with enable us to capitalize on established selling networks and proven
distributors to capitalize on demand for quality seafood products.




The most
predominant scallop production in North America comes from the offshore fishery
located on the Georgia Band on the east coast. Large American and Canadian
fishing companies dominate the fishery.  The majority of their product
is shucked aboard ship then supplied, primarily frozen, to seafood processors
onshore.   The processors then distribute the product to various
restaurants, retail outlets and seafood brokers.





Sablefish
(Blackcod) Overview





Sablefish
(Anoplopoma fimbria),
often called blackcod although not a member of the cod family, is an elongate
fish with two dorsal fins and an anal fin similar to and opposite the second
dorsal fin.  Adults are black or greenish gray; usually with slightly
paler blotches or chainlike pattern on the upper back.  At 30-61 cm in
size they are often greenish with faint stripes on the back.





Sablefish
inhabit shelf and slope waters in depths of greater than 1,500 meters, from Baja
California to the Aleutian Islands and the Bering Sea.  The larger
populations of sablefish are centered in northern British Columbia and the Gulf
of Alaska.  Adults favor mud bottoms and feed on benthic
invertebrates, squid and numerous fish species.  In turn, they are
prey for halibut, lingcod, hagfishes and marine mammals such as sea
lions.  In addition, killer whales have been known to take sablefish
from long line gear as it is being retrieved.





Sablefish
spawn from January to March along the continental shelf at depths of 800 to 2400
feet.  Fecundity ranges from 60,000-200,000 eggs up to one million
eggs for a 102-cm fish.  Larval sablefish are found in surface waters
over the shelf and slope in April and May.  Juveniles are highly
migratory with significant movement from nursery areas in northern B.C. to the
Gulf of Alaska and the Bering Sea.  Sablefish move to deeper waters as
they mature.  Growth is rapid with sizes at maturity reaching 52-61 cm
for five-year-old males and 58-71 cm for five-to-seven year old
females.  Sablefish growth appears to be rapid for the first
three-to-five years and slow asymptotically thereafter.  Annual
natural mortality of adults has been estimated to be about 10
percent.





Island
Scallops plans to raise sablefish onshore using shallow ponds or above ground
tanks.  This system has been successful in Texas for the culture of
catfish.  Tests have shown that sablefish prove to be very hardy when
grown in ponds and this has the added advantage of causing sablefish to be
parasite free.  Wild sablefish carry a parasite that does not allow
the fish to be eaten raw.   If we are able to located financing,
a strategic partner or license the






10




technology,
we believe that Island Scallops has already demonstrated the feasibility of
onshore sablefish farming and plans to develop a new sablefish facility that
could produce at least 500,000 sablefish within 12 months of
funding.  Furthermore, we believe that production could be increased
by at least 500,000 annually in future years.





Over the
past nine years, Island Scallops has also developed proprietary hatchery
technology for the production of sablefish juveniles. We believe that sablefish
will be the next species, after salmon, for successful large-scale commercial
farming.  Sablefish, which is a premium-quality whitefish with a
delicate texture and moderate flavor, is an ideal substitute for Chilean sea
bass (currently over-fished in all oceans).  To date, Island Scallops
has marketed a limited number of live sablefish into the Vancouver
market.  Initial response was excellent for a small 1-kilogram live
sablefish (~$11/kg).  If we are able to locate suitable funding and/or
partners, Island Scallops will be able to capitalize on our breakthrough
sablefish hatchery technology by constructing a new sablefish hatchery
consisting of the following:





·
            An
      expanded Brood Stock facility with larger capacity to hold the various
      families of selected strains of sablefish.  This new facility
      will incorporate a new state-of-the-art water treatment
      system.





·
            An
      improved incubation and larval rearing facility incorporating proprietary
      improvements in tank design and seawater
  systems.





·
            An
      upgraded zooplankton culture facility with improved handling and
      enrichment techniques.





·
            An
      expanded and improved juvenile rearing facility incorporating proprietary
      recirculation system designs.





As part
of this expansion, we also intend to construct a new onshore tank farm
consisting of large and small ponds and tanks complete with associated
recirculation systems.  This onshore facility will be used to augment
the juvenile rearing area and will house and grow juvenile fish.





At the
present time, worldwide “non-farming” sablefish catches are struggling to meet
the worldwide demand according to DFOWeb, NPFMCWeb and Pacific Fishery
Management Council Website. Currently, there are only two hatchery facilities:
Island Scallops Ltd. and Sablefish Hatcheries Inc. that have produced sablefish
juveniles. Current production is less than 400,000 juveniles per
year.   Based on our analysis of present market conditions,
increasing worldwide hatchery production tenfold (to roughly 1 million 3 kilo
sablefish) would fill less than 10% of the current world demand shortfall. If
Island Scallops’ new sablefish facilities are able to reach a production of 3
million sablefish annually, this will only fill less than 30% of the current
overall shortfall.  The economic potential for sablefish is therefore
considerable. Given these market conditions and opportunities, Island Scallops,
subject to our ability to secure adequate funding, is determined to enter the
market for sablefish in a significant manner within the next two to three
years.






11





Other
Products





In the
pastIsland
Scallops sold a variety of shellfish larvae and seed to both international and
local customers.  Sales included two species of mussels, manila clams,
geoduck clams, oysters, abalone and sea urchins.  Island Scallops has
established suppliers of aquaculture equipment in Japan and China and supplies
nets, ropes, floats, and processing equipment into the British Columbia
industry.  Currently, Island Scallops is focused mainly on expansion
of scallop sales.  However, the Company is also looking to develop
increasing shellfish larvae and seed sales and equipment sales in the near
future.  In addition, we will continue to investigate funding sources
and/or partners for the development of our sablefish operation with a goal of
further commercialization of sablefish in two to three years.





General
Fisheries Market Overview





The
worldwide market for farmed marine species continues to grow. According to
personal communications with the National Marine Fisheries Service, Fisheries
Statistics Division, Silver Spring, MD, in British Columbia alone, farming
production increased from US$44.56 million in 1988 to US$190.24 million in 1998.
Although
significant growth occurred in salmon farming and little or no growth occurred
in shellfish (oyster) farming.  Island Scallops can only benefit from
this recent trend towards shellfish, as training farmers in correct husbandry
would only add another revenue stream.





The
majority of the world’s current scallop production comes from three species of
scallops: the Japanese scallop, the sea scallop and the king
scallop.  The Chinese scallop is also selling well, but FDA
inspections of China facilities found that the conditions and hygiene were
issues as hatcheries were highly polluted.   There has also been
a fishery boom on the east coast of Canada and the United States with the Digby
or sea scallop.





In the
United States, consumption of scallops exceeded 64 million pounds in 2002.  Various communications
between Island Scallops personnel and the National Marine Fisheries Service,
Fisheries Statistics Division, Silver Spring, MD and analysis of data from the
Fisheries Statistics & Economics Division of the National Marine Fisheries
Service (NMFS) website for annual landings of commercial fisheries (http://www.st.nmfs.noaa.gov/st1/commercial/index.html),
tell us that this represented a per capita consumption of 0.22 pounds, with a
dollar value of US$342 million. After shrimp, scallops
represent one of the most popular shellfish products in the United
States.  In general, per capita consumption of seafood in the United
States has remained steady over the last six years ranging from 15.2 to 16.2
pounds per annum.   Based upon Robert Saunders’, our chairman and
president, communications with the National Marine Fisheries Service, Fisheries
Statistics Division of Silver Spring, MD, and personal observations, given
consumers' growing preoccupation with healthier foods and the increasing
availability of seafood (due to the recent successes in aqua farming and
improved distribution channels), we expect per capita consumption to continue to
increase.





Shifts in
North American shellfish market trends from shucked to live in shell products
can be seen in the oyster markets.  Within the last 5 years, we have
seen a significant trend away from shucked oyster meat to live in the shell
product in the Pacific Northwest due to the demand for fresh high quality
products. We believe that once a live in the shell product is readily available
within the scallop market, a shift from frozen scallop meat to fresh in shell
product will also occur.








12






Regulatory
Environment





Effect
of Government Regulation





There are
a limited number of regulations that restrict the fishing, distributing or
purchase of scallops in Canada and the United States.  Therefore, the
country of origin makes little difference for the pricing or demand of
scallops.





A
limitation to market supply is paralytic shellfish poisoning (PSP) or "red
tide". PSP is a toxin generated by plankton (scallops' food) at particular times
of the year.  The toxin is passed to the scallop when plankton is
digested, but the toxin does not harm the shellfish. However, the shellfish
containing the toxin can be harmful to humans who consume it. Although only a
limited number of human deaths caused by red-tide poisoning have been reported,
the public announcement of red tide has a devastating effect on most shellfish
sales. The exception is scallop meat, because the adductor muscle of the scallop
does not concentrate the toxin; shucked scallops are safe to eat at any time of
the year. Nevertheless, public perception could still influence demand over
short periods of time. To monitor for PSP, the federal Fisheries Inspection
Branch constantly monitors samples of shellfish production and wild shellfish
populations.   In the summer of 2008 Island Scallops experience a
prolonged PSP out break and was able to continue processing fresh shucked
scallop meat throughout this period with little effect on sales.





Tenure
Expansion and Compliance with Environmental Laws





Our
planned tenure expansions will require that we undergo an environmental
screening from Transports Canada pursuant to Canadian Environmental Assessment
Act, which includes a review of factors such as the environmental effects of the
planned expansions, including the environmental effects of malfunctions or
accidents that may occur in connection with the planned expansions and any
cumulative environmental effects that are likely to result from such planned
expansions; the significance of such environmental effects and any comments from
the public that are received in accordance with the CEA Act and applicable
regulations; and measures that are technically and economically feasible and
that would mitigate any significant adverse environmental effects of the planned
expansions.





Our Deep
Bay and Hindo Creek tenures have received final CEA Act approval, which lasts
for twenty years and which allows us to expand these 2 tenures.  We
also received approval to convert our Bowser tenure (now called  Nile
Creek Farm)to off-bottom growing, which should enable us to accommodate
approximately 20million scallops.  Please see our risk factor, If we are unable to expand our
tenures, our projected production may be delayed.




Competition




Fisheries
Industry in General





Island
Scallops is in the farmed seafood business.  The main concentration of
marine farming in British Columbia has traditionally been in the salmon
sector.  The salmon farming business has developed into a mature
industry






13






dominated
by Norwegian farmers.  The rest of the British Columbia marine farming
sector is in the shellfish industry, mainly in oysters and Manila clams and more
recently mussels.  This sector is rapidly expanding and it accounted
for approximately US$16 million in British Columbia in 2002, according to the
British Columbia Shellfish Growers Association website. Given Island Scallops’
expertise and significant research and development experience, we believe that
there is little or no direct competition in the production of farmed scallops or
farmed sablefish.





Scallops





There are
no significant direct competitors in the scallop farming business in British
Columbia.  The United States will not allow farming this species in
their waters, as this species is considered "exotic".  Although
scallop farming is a very significant industry in Japan and China, only frozen
shucked scallops are currently sold into North America from these countries.
Recent examination by the United States and Canadian Food Inspection authorities
of the growing waters in China resulted in reduced exporting due to high levels
of pollution.





Island
Scallops is the only hatchery, outside of China, that has successfully produced
the Japanese scallop, and the only company that has successfully, hybridized the
weathervane and the Japanese scallop. Island Scallops is uniquely positioned as
the sole producer of live Pacific Scallops in North America. There currently are
no other hatcheries in North America that we are aware of that are capable of
producing this unique breed.  Although a large commercial scallop
fishery exists on the east coast of North America, the majority of the scallops
are shucked at sea with only limited quantities sold live. These scallops are
sold as "Digby” or “Sea” scallops. A number of companies have attempted to grow
the bay scallop and the sea scallop on the east coast, but these companies have
only achieved limited success.





The
primary British Columbia participants in scallop farming are Island Scallops
joint venture farmers or independent scallop farmers, which receive their supply
of seed scallops solely from Island Scallops. These farmers are chronically
underfinanced and production from these growers usually totals less than
1,000,000 scallops per year.  Island Scallops is uniquely positioned
to rapidly expand these farms (up to 10 farms) under an exclusive farming and
marketing contract.





Due to
its large size and small count per pound, the sea scallop is the prime
competitor in the United States market. The fishery for this scallop is located
primarily on the North American east coast, in particular Georges Bank off New
England and the Maritime provinces. This is a limited opportunity fishery, with
actual fishing time being dictated by sea and other environmental
conditions.





Sablefish








14






Island
Scallops is currently only one of two hatcheries to produce quantities of
juvenile sablefish.  These fish were sold to five commercial salmon
farming facilities and the fish have been marketed
successfully.  Little demand for a new species has
materialized.  Although hatcheries have been constructed in British
Columbia, neither has successfully produced large quantities of
sablefish.   The farming of sablefish
is still in its infancy and only limited production has
occurred.





This
limited production is not a matter of biological barriers but rather a lack of
interest by the major producers to venture into a new marine
species.  Alaska sablefish fishermen have expressed interest in
farming sablefish and the Sablefish Association of Alaska has voted unanimously
to start farming sablefish in southern Alaska.  Island Scallops has
been in discussion with this association and has been told that due to
"anti-aquaculture" policy in Alaska, it is very unlikely that any farming will
occur there in the near future.





Washington
State contains two parties interested parties in sablefish
farming.  The first is the Makah Tribe and the second is a private
company, which is trying to obtain farming permits in Port
Angeles.  These parties have made inquiries to Island Scallops for
juvenile sablefish.  However, to date, no orders have been
placed.





Research
and Development





Due to
changes in Canadian Federal Government’s Research and Development tax credits
(SRED) program, which prevents any part of the research to be combined with
commercial production, no Research and Development claims were made in fiscal
2007 and 2008.  Research did continue on the genetic selection of
superior strains of scallops, as did developments in the culture process for
both marine algae and developments in re-circulation
systems.   Island Scallops plans to conduct research and
development under a separate company called RKS Laboratories Ltd., which has no
commercial production and whose primary goal is the genetic improvement in
breeds of the Qualicum Beach Scallops and other marine species.  We
believe that this will allow the continued support from the SRED
program.





Employees





At August
31, 2008, we had 35 full time employees. We anticipate hiring between 10 and 15
temporary workers during the upcoming spring and summer growing
seasons.





None of
our employees are represented by a labor union and we consider our relationships
with our employees to be good.








ITEM
2.               DESCRIPTION
OF PROPERTY





For the
fiscal year ended August 31, 2008, our U.S. corporate office was located at 400
Professional Drive, Suite 310, Gaithersburg, Maryland 20878.  This
space was provided on a rent free basis by one of our shareholders.






15






Island
Scallops’ main office and hatcheries are located on the east side of Vancouver
Island in the town of Qualicum Bay at 5552 West Island Highway, Qualicum Beach,
British Columbia, Canada V9K 2C8.  The shellfish hatchery is housed in
a 930 square meter building.  A 300 square meter shellfish processing
plant is also located at this site. Corporate scallop farms are situated along
the east and west coasts of Vancouver Island.  These facilities
represent the largest private marine research hatchery and the first fully
integrated shellfish producer in Canada.




Island
Scallops has a total of five farm sites for scallops.  These farm
sites are located at Island Scallops held tenures (shellfish tenures are
government-granted rights that allow use of offshore waters to cultivate
shellfish).  Three of those five scallop farms are located in Baynes
Sound, 25 minutes north of the main facility. These farms sites total
approximately 200 acres and can currently accommodate more than 8 million
scallops. Approximately 30% of the farm area is currently being
farmed.  As part of our expansion plans, we are currently adding
additional main lines and plan to increase our capacity at these tenures to more
than 24 million scallops in the near future.  An additional bottom
tenure of 926 acres is located 10 minutes north of the main facility (at Bowser)
and is capable of producing at least 30 million scallops
annually.  The final farm site on the west coast of Vancouver Island
near Tofino is capable of producing at least three million scallops, although
that site is currently under-developed. Baynes Sound, the marine waterway
situated between eastern Vancouver Island and the western shore of Denman
Island, is considered the most productive and highly utilized shellfish growing
area in coastal British Columbia.  The area supports extensive beach
culture (manila clams and oysters) as well as deepwater culture that produces
oysters, scallops and some mussels.











Common
      Site Name
            Lands
      File No.
            Acres
            TypeDenman
            1406063
            38.64
            DeepwaterHindoo
      Creek
            1406664
            123.32
            DeepwaterDeep
      Bay
            1406711
            43
            DeepwaterTofino
            1406061
            9.6
            DeepwaterNile
      Creek
            1407517
            926
            Deepwater





The three
Baynes Sound tenures (Denman, Hindoo Creek and Deep Bay) and the Tofino tenure
offer unique features, which will add additional value to these properties.
These include the split of tenures between east and west shores of Baynes Sound
as well as the east and west coast of Vancouver Island, allowing continual
accessibility to shellfish despite managed closures (harvest restrictions) due
to incidental water quality or Paralytic Shellfish Poisoning (PSP or red tide).
The seasonal closures caused by short-term bacteriological contamination related
to rainfall and upland bacterial sources, are limited to the western shore of
the Baynes Sound and thus to only two of the three tenures retained by Island
Scallops. The result of having operating tenures on both sides of the Baynes
Sound ensures that product can be continually harvested despite closures that
may occur within this management area.  The expanded tenures should
easily accommodate our increasing scallop harvest in 2009 and beyond. At their
current size and with the introduction of sufficient main lines, our tenures
have the capacity to accommodate approximately 13-15 million scallops without
any increase in their footprints.








16





Expansion
of our Deep Bay and Hindo Creek has been approved and such approval does not
need to be renewed for twenty years.  An amended tenure agreement has
been signed with the government of BC to expand the Denman Island
site.    In April 2008, we got approval to convert the
method of farming at the Nile Creek tenure from bottom to off-bottom culture in
one-third of the tenure area; once the conversion is complete, we believe we
will be able to accommodate approximately 20 million scallops.





Island
Scallops’ location is a distinct advantage for producing marine
species.  The waters off British Columbia are pristine and unspoiled
by large populations or major industries.  The close proximity to
major western cities allows us to effectively put our products into the hands of
the consumer within 24 hours.





The
source of our raw material comes from our own hatchery brood
stock.  In the case of the Qualicum Beach Scallop, we have been
selectively breeding this species for superior growth and survival for the past
20 plus years.  The breeding program has produced a vigorous, rapid
growing, disease resistant scallop with exceptional meat yield.  In
the case of sablefish we have been selecting fast growing fish for the past 5
years, these display a high degree of domestication. The spawning season has
been extended for both of these species allowing for juvenile production almost
year round.  This ability to hold seed stock and select superior
strains gives Island Scallops an advantage in the industry.  It also
allows Island Scallops to tailor its production to varying seasonal and market
demands.








ITEM  3.               LEGAL
PROCEEDINGS





In 1998
our wholly owned subsidiary, Island Scallops, entered into an Agreement with two
parties, pursuant to which Island Scallops was to produce and sell geoduck seed
to the two parties. Island Scallops received advance payments from each of the
two parties in 2002 totaling approximately $64,140.  As a result of
breaches of the purchase agreements by the purchasers, it is our position that
we may retain any unused portion of these advance payments.





As of
August 31, 2004, one of the two purchasers had claimed that Island Scallops owed
it amounts totaling $88,925.  Since it is our position that the
purchasers breached their agreements with Island Scallops, we have no intention
of seeking a settlement of this matter at this time.  We are unaware
of any formal proceedings that may have been commenced by either of these two
purchasers in regard to any claims that they may have.





Other
than as set forth herein, we are not a party to any material legal proceeding
and to our knowledge no such proceeding is currently contemplated or
pending.








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





We did
not submit any matters to a vote of our security holders during the fiscal year
covered by this Report.





17


PART
II








ITEM
      5.
            MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES





The
common stock is currently quoted on the over–the-counter Bulletin Board under
the symbol “EDWT.”




The
following table sets forth the quarterly high and low bid prices for the common
stock since the quarter ended August 31, 2006.  The prices set forth
below represent inter-dealer quotations, without retail markup, markdown or
commission and may not be reflective of actual transactions.





High
            
            
            LowQuarter
      ended August 31, 2006
            
            $
            1.70
            
            
            $
            1.20Quarter
      ended November 30, 2006
            
            $
            1.85
            
            
            $
            1.01Quarter
      ended February 28, 2007
            
            $
            1.70
            
            
            $
            1.01Quarter
      ended May 31, 2007
            
            $
            1.70
            
            
            $
            1.01Quarter
      ended August 31, 2007
            
            $
            1.65
            
            
            $
            1.05Quarter
      ended November 30, 2007
            
            $
            1.45
            
            
            $
            0.75Quarter
      ended February 28, 2008
            
            $
            1.45
            
            
            $
            0.70Quarter
      ended May 31, 2008
            
            $
            1.01
            
            
            $
            0.70Quarter
      ended August 31, 2008
            
            $
            1.00
            
            
            $
            0.26





At August
31, 2008, the closing bid price of the common stock was $.25 and we had
approximately 24,479,150 record holders of our common stock, 7,773,998 record
holders of our Series A Preferred Stock, 207 record holders of our Series B
Preferred Stock, 747,870 record holders of our Series C Preferred Stock
and  304,558 record holders of our Series D Preferred Stock issued and
outstanding. This number excludes any estimate by us of the number of beneficial
owners of shares held in street name, the accuracy of which cannot be
guaranteed.




At
November 28, 2008, the closing bid price of the common stock was $.06 and we had
approximately 54 record holders of our common stock, 13 record holders of
our Series A Preferred Stock, 3 record holders of our Series B Preferred
Stock, 2 record holders of our Series C Preferred Stock and 13 record
holders of our Series D Preferred Stock. This number excludes any estimate by us
of the number of beneficial owners of shares held in street name, the accuracy
of which cannot be guaranteed.




Dividends





We have
not paid cash dividends on any class of common equity since formation and we do
not anticipate paying any dividends on our outstanding common stock in the
foreseeable future.





Securities
Authorized for Issuance Under Equity Compensation Plans







18






2005 Equity Incentive
Plan






Our 2005
Equity Incentive Plan is intended to further our growth and financial success by
providing additional incentives to our directors, executives and selected
employees and consultants so that such participants may acquire or increase
their proprietary interest in us.  The term "Corporation" shall
include any parent corporation or subsidiary corporation of Edgewater as those
terms are defined in Section 424(e) and (f) of the Internal Revenue Code of
1986, as amended. Stock options granted under the Plan may be either "Incentive
Stock Options", as defined in Code section 422 and any regulations promulgated
under that Section, or "Nonstatutory Options" at the discretion of our Board of
Directors and as reflected in the respective written stock option agreements
granted pursuant to this Equity Plan. Stock Appreciation Rights, Restricted
Stock, Restricted Stock Unit, Performance Awards, Dividend Equivalents, or Other
Stock-Based Awards may also be granted under the Equity Plan.  The
Board believes that the Equity Plan will maintain the flexibility that Edgewater
needs to keep pace with its competitors and effectively recruit, motivate, and
retain the caliber of employees, directors and consultants essential for
achievement of our success.






Individuals
eligible to receive awards under the Equity Plan include officers, directors,
employees of and consultants to Edgewater and its affiliates.  The
number of shares available under the Equity Plan shall be 5,000,000 shares of
our common stock, as well as the following:  As of January 1 of each
year, commencing with the year 2006 and ending with the year 2008, the aggregate
number of Shares available for granting Awards under the Equity Plan shall
automatically increase by a number of Shares equal to the lesser of (x) 5% of
the total number of Shares then outstanding or (y) 1,000,000.  The
Board may distribute those shares in whatever form of award they so choose
within the Equity Plan’s guidelines.  There are no restrictions on the
amount of any one type of award that may be granted under the Equity
Plan.






As of
August 31, 2008, our Board of Directors had granted 2,992,000 options to
employees, directors and consultants under the Equity Plan.  As of
August 31, 2008, 400,000 of these options had been canceled and 2,592,000 were
outstanding. As of August 31, 2008, there are 7 Directors, 1 executive officers,
1 consultant and approximately 26 employees other than executive officers, who
are eligible to receive awards under the Equity Plan.






The Board
may delegate a Committee to administer the Equity Plan.  The Committee
shall not consist of fewer than two members, each of whom is a member of the
Board and all of whom are disinterested persons, as contemplated by Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended and each of
whom is an outside director for purposes of Section 162(m) of the Code, acting
in accordance with the provisions of Section 3.




Currently,
we do not have any definitive plans for granting further awards under the Equity
Plan and no determination has been made as to the number of awards to be
granted, or the number or identity of recipients of awards.





Amending the
Plan.The Board may amend, alter, suspend, discontinue, or
terminate the Equity Plan, including, without limitation, any amendment,
alteration, suspension, discontinuation, or termination that would impair the
rights of any Participant, or any other holder or beneficiary of any Award
theretofore granted, without the consent of any share owner, Participant, other
holder or beneficiary of an Award, or other Person.  The Board may
also waive any








19






conditions
or rights under, amend any terms of, or amend, alter, suspend, discontinue, or
terminate, any Awards theretofore granted, prospectively or retroactively,
without the consent of any Participant, other holder or beneficiary of an
Award.  Except as provided in the following sentence, the Board is
authorized to make adjustments in the terms and conditions of, and the criteria
included in, Awards in recognition of unusual or nonrecurring events affecting
the Company, any Affiliate, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations, or accounting
principles, whenever the Board determines that such adjustments are appropriate
in order to prevent dilution or enlargement of the benefits or potential
benefits to be made available under the Equity Plan.  In the case of
any Award that is intended to qualify as performance-based compensation for
purposes of Section 162(m) of the Code, the Board will not have authority to
adjust the Award in any manner that would cause the Award to fail to meet the
requirements of Section 162(m).





Options and
Rights.Options and Stock Appreciation Rights may be granted
under the Equity Plan.  The exercise price of options granted shall be
determined by the Board or the Committee; provided, however, that such exercise
price per Share under any Incentive Stock Option shall not be less than 100%
(110% in the case of a "10-percent shareholder as such term is used in Section
422(c)(5) of the Code) of the Fair Market Value of a Share on the date of grant
of such Incentive Stock Option.  The Board or Committee shall fix the
term of each Option, provided that no Incentive Stock Option shall have a term
greater than 10 years (5 years in the case of a "10-percent shareholder” as such
term is used in Section 422(c)(5) of the Code).





A Stock
Appreciation Right granted under the Equity Plan shall confer on the holder
thereof a right to receive, upon exercise thereof, the excess of (1) the
Fair Market Value of one Share on the date of exercise or, if the Board or
Committee shall so determine in the case of any such right other than one
related to any Incentive Stock Option, at any time during a specified period
before or after the date of exercise over (2) the grant price of the right
as specified by the Board or Committee.  Subject to the terms of the
Plan, the grant price, term, methods of exercise, methods of settlement, and any
other terms and conditions of any Stock Appreciation Right shall be as
determined by the Board or the Committee.  The Board and the Committee
may impose such conditions or restrictions on the exercise of any Stock
Appreciation Right as it may deem appropriate.





Federal Income Tax
Consequences.The current federal income tax consequences of
grants under the Equity Plan are generally described below. This description of
tax consequences is not a complete description, and is based on the Internal
Revenue Code as presently in effect, which is subject to change, and is not
intended to be a complete description of the federal income tax aspects of
options and stock awards under the Equity Plan. Accordingly, the discussion does
not deal with all federal income tax consequences that may be relevant to a
particular recipient, or any foreign, state or local tax considerations.
Accordingly, potential recipients are urged to consult their own tax advisors as
to the specific federal, foreign, state and local tax consequences to them as a
result of receiving an Award under the Equity Plan.





Nonqualified Stock
Options. A recipient will
not be subject to federal income tax upon the grant of a nonqualified stock
option. Upon the exercise of a nonqualified stock option, the recipient will
recognize ordinary compensation






20




income in
an amount equal to the excess, if any, of the then fair market value of the
shares acquired over the exercise price. We will generally be able to take a
deduction with respect to this compensation income for federal income tax
purposes. The recipient’s tax basis in the shares acquired will equal the
exercise price plus the amount taxable as compensation to the recipient. Upon a
sale of the shares acquired upon exercise, any gain or loss is generally
long-term or short-term capital gain or loss, depending on how long the shares
are held. The required holding period for long-term capital gain is presently
more than one year. The recipient’s holding period for shares acquired upon
exercise will begin on the date of exercise.





Incentive Stock Options.A
recipient who receives incentive stock options generally incurs no federal
income tax liability at the time of grant or upon exercise of the options.
However, the spread will be an item of tax preference, which may give rise to
alternative minimum tax liability at the time of exercise. If the
recipient/optionee does not dispose of the shares before the date that is two
years from the date of grant and one year from the date of exercise, the
difference between the exercise price and the amount realized upon disposition
of the shares will constitute long-term capital gain or loss, as the case may
be. Assuming both holding periods are satisfied, no deduction will be allowable
to us for federal income tax purposes in connection with the option. If, within
two years of the date of grant or within one year from the date of exercise, the
holder of shares acquired upon exercise of an incentive stock option disposes of
the shares, the recipient/optionee will generally realize ordinary compensation
income at the time of the disposition equal to the difference between the
exercise price and the lesser of the fair market value of the stock on the date
of exercise or the amount realized on the disposition. The amount realized upon
such a disposition will generally be deductible by us for federal income tax
purposes.




Stock Awards.If a recipient receives
an unrestricted stock award, he/she will recognize compensation income upon the
grant of the stock award. If a recipient receives a restricted stock award,
he/she normally will not recognize taxable income upon receipt of the stock
award until the stock is transferable by the recipient or no longer subject to a
substantial risk of forfeiture, whichever occurs earlier. When the stock is
either transferable or no longer subject to a substantial risk of forfeiture,
the recipient will recognize compensation income in an amount equal to the fair
market value of the shares (less any amount paid for such shares) at that time.
A recipient may, however, elect to recognize ordinary compensation income in the
year the stock award is granted in an amount equal to the fair market value of
the shares (less any amount paid for the shares) at that time, determined
without regard to the restrictions. We will generally be entitled to a
corresponding deduction at the same time, and in the same amount, as the
recipient recognizes compensation income with respect to a stock award. Any gain
or loss recognized by the recipient upon subsequent disposition of the shares
will be capital gain or loss.




Tax Deductibility under Section
162(m).Section 162(m) of the Internal Revenue Code disallows
a public company’s deductions for employee compensation exceeding $1,000,000 per
year for the chief executive officer and the four other most highly compensated
executive officers. Section 162(m) contains an exception for performance-based
compensation that meets specific requirements. The Equity Plan is intended to
permit all options to qualify as performance-based compensation at the Board of
Directors or Committee’s discretion.  If an Award is to qualify as
such, it shall clearly state so in the award agreement.








21






Withholding.We
have the right to deduct any taxes required to be withheld with respect to
grants under the Equity Plan. We may require that the participant pay to us the
amount of any required withholding. The Compensation Committee may permit the
participant to elect to have withheld from the shares issuable to him or her
with respect to an option or restricted stock the number of shares with a value
equal to the required tax withholding amount.








The
following table provides information as of August 31, 2008 with respect to
compensation plans (including individual compensation arrangements) under which
our securities are authorized for issuance:






Plan
      Category
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              
              
              
              
              (a)
            Weighted
      average exercise price of outstanding options, warrants and
      rights
              
              
              
              
              (b)
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
              
              
              
              (c)Equity
      Compensation plans approved by security holders
            2,592,000
            $1.23
            5,408,000*Equity
      compensation plans not approved by security holders
            N/A
            N/A
            N/ATotal
            2,592,000
            $1.23
            5,408,000







*As of
January 1 of each year, commencing with the year 2006 and ending with the year
2008, the aggregate number of shares available for granting Awards under the
Equity Plan shall automatically increase by a number of Shares equal to the
lesser of (x) 5% of the total number of Shares then outstanding or (y)
1,000,000.




Recent
Sales of Unregistered Securities




On
January 31, 2006, we issued 400,000 shares of our restricted common stock to
World Wide Mortgage as consideration for agreeing to extend the due date for us
to repay our CDN $1,500,000 loan pursuant to the bridge loan agreement dated
November 9, 2004 and amended on April 15, 2005 between us and World Wide. The
shares have piggy-back registration rights that require us to register the
shares in our next registration statement.  The shares were valued at
$1.30 per share, the closing bid price for shares of our common stock on the
date we issued the shares. The shares were issued in accordance with the
exemption from the registration provisions of the Securities Act of 1933, as
amended, provided by Section 4(2) of such Act for issuances not involving any
public offering.






22






Pursuant
to the financings we closed on April 12, May 30, June 30 and July 11, 2006, we
issued an aggregate of 30,905,619 shares of our preferred stock.  The
shares were issued to 9 accredited investors pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.





On June
30, 2006, we issued 22,860 shares of common stock to the two accredited
investors of our April 12 and May 30, 2006 financings as payment of the
semi-annual dividend (8% per annum) per the terms of the Certificate of
Designation of the Relative Rights and Preferences of the Series A Convertible
Preferred Stock.  The dividend shares were issued to these investors
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving any public offering.





On
December 31, 2006, we issued 138,565 shares of common stock to the investors of
our April 12, May 30, 2006, June 30, 2006 and July 11, 2006 financings as
payment of the semi-annual dividend (8% per annum) per the terms of the
Certificate of Designation of the Relative Rights and Preferences of the Series
A Convertible Preferred Stock.  The dividend shares were issued to
these investors pursuant to the exemption from registration provided by Section
4(2) of the Securities Act for issuances not involving any public
offering.





Pursuant
      to the financing we closed on January 16, 2007, we issued 207 shares of
      our Series B Preferred Stock.  The shares were issued to two
      accredited investors pursuant to the exemption from registration provided
      by Section 4(2) of the Securities Act for issuances not involving any
      public offering.





In
connection with the January 16, 2007 financing, we issued the placement
consultant a placement consultant warrant, exercisable for a period of three
years from the date of issue with an exercise price of $1.15 per share. The
warrant allows the placement consultant to purchase up to (i) 20 shares of
Series B Preferred Stock, and each of the following warrants, which are
identical to the warrants issued to the investors of the financing: (i) Series A
Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series D
Warrant,  (v) Series J Warrant,  (vi) Series E Warrant, and
(vii) Series F Warrant, each to purchase 90,004 shares of common stock, except
for the Series J Warrants, which shall entitle the consultant  to
purchase  180,008  shares of common stock. The shares were
issued in accordance with the exemption from the registration provisions of the
Securities Act of 1933, as amended, provided by Section 4(2) of such Act for
issuances not involving any public offering.





On
February 1, 2007 we issued Kitsilano Capital Corp. four 100,000 options to
purchase our common stock, pursuant to our Consulting Agreement with
them.  The first option vests on May 1, 2007, the second on August 1,
2007, the third on February 1, 2008 and the fourth on June 1, 2008, so long as
Kitsilano continues to provide services to us under the Consulting
Agreement.  Each option is exercisable for a period of three years
from the vesting date and has an exercise price of $1.20, $1.40, $1.60 and $1.80
respectively. The shares underlying the options have piggy-back registration
rights that required us to register the shares in our last registration
statement.  The options and the shares underlying were issued in
accordance with the exemption from the registration provisions of the Securities
Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not
involving any public offering.





23




On April
12, 2007, we issued 88,000 shares of common stock to an investor of our April
12th
financing in connection with the exercise of 88,000 Series J warrants received
by such investor as part of the financing.  We received net proceeds
of approximately $45,600 pursuant to the exercise of these
warrants.  The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.





On April
12, 2007 we issued 1,266,667 shares of common stock to an investor of our April
12th
financing in connection with such investor’s exercise of 1,266,667 Series J
warrants he received as part of the April 12th
financing.  We received net proceeds of approximately $655,500
pursuant to the exercise of these warrants.  The shares were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving any public offering.





On April
12, 2007, we issued 188,800 shares of our Series A Preferred Stock and the
following warrants: (i) Series A Warrant, (ii) Series B Warrant, (iii) Series C
Warrant, (iv) Series D Warrant, (v) Series J Warrant, (vi) Series E Warrant,
(vii) Series F Warrant, (viii) Series G Warrant, and (ix) Series H Warrant, each
to purchase a number of shares of Common Stock equal to 50% of the number of
shares of Series A Preferred Stock purchased, except for the Series J Warrants,
which entitled the investor to purchase a number of shares of our common stock
equal to 100% of the number of shares of Series A Preferred Stock
purchased.  We issued a total of 944,000 Warrants.  Each of
the Warrants has a term of 5 years, except for the Series J Warrants, which have
a term of 1 year.  Each share of the Series A Preferred Stock is
convertible into one fully paid and nonassessable share of our common
stock.  These shares and warrants were issued pursuant to the exercise
of 188,800 placement consultant warrants received as a result of our April 12,
2006 financing.  We received net proceeds of approximately $106,000
pursuant to the exercise of these warrants.  The shares were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving any public offering.





On April
12, 2007, we issued 188,800 shares of common stock to the placement consultant
of our April 12, 2006 financing in connection with the exercise of 188,800
Series J warrants, which the placement consultant received from his exercise of
his placement consultant warrant, as described above.  We received net
proceeds of approximately $106,000 pursuant to the exercise of these
warrants.  The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.





On May 8,
2007 we issued 30,000 shares of our common stock pursuant to a shareholders
conversion of 30,000 shares of our Series A Preferred Stock that he
owned.  We did not receive any proceeds from this
conversion.  The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.





On May
10, 2007 we issued 500,000 shares of our common stock pursuant to a shareholders
conversion of 500,000 shares of our Series A Preferred Stock that he
owned.  We did not receive any proceeds from this
conversion.  The






24




shares
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public
offering.  On August 31, 2007, this shareholder rescinded the
conversion of 430,000 of the 500,000 shares.  As a result, we issued this
shareholder 430,000 shares of our Series A Preferred Stock and cancelled the
430,000 shares of common stock issued on the conversion to
treasury.  The preferred shares were issued pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act for issuances
not involving any public offering.





On May
12, 2007 we issued 70,800 shares of our common stock pursuant to a shareholders
conversion of 70,800 shares of our Series A Preferred Stock that he
owned.  We did not receive any proceeds from this conversion. The
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act for issuances not involving any public
offering.





On June
14, 2007, our board approved issuing a total of 100,000 shares of our common
stock to Pacific Crab Seafood Company, Inc. for the consulting and marketing
services that they will provide to us.  We issued 40,000 shares upon
execution of our agreement with Pacific Crab and the remaining 60,000 will be
issued in twelve (12) equal installments during the term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.





On June
30, 2007, we issued 171,274 shares of common stock to the investors of our 2006
and 2007 financings as payment of the semi-annual dividend per the terms of the
Certificate of Designation of the Relative Rights and Preferences of the Series
A Convertible Preferred Stock and Certificate of Designation of the Relative
Rights and Preferences of the Series B Convertible Preferred
Stock.  The dividend shares were issued to these investors pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
for issuances not involving any public offering.





On August
20, 2007, a holder of our series A preferred stock exercised their right to
convert 65,335 shares of our series A preferred stock into 65,335 shares of
common stock. As such, we issued 65,335 shares of common stock and canceled
65,335 shares of our series A.  The shares were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act for
issuances not involving any public offering.





On
October 31, 2007, we issued 25,000 shares of common stock to Pacific Crab
Seafood Company, Inc. as part of the 100,000 shares of our common stock that our
Board of Directors previously approved for the consulting and marketing services
that they will provide to us.  The remaining 35,000 shares will be
issued in equal monthly installments of 5,000 shares during the remaining term
of the agreement.  The shares were issued in accordance with the
exemption from the registration provisions of the Securities Act of 1933, as
amended, provided by Section 4(2) of such Act for issuances not involving any
public offering.  The 25,000 shares issued were valued at $1.28 per
share, the closing bid of our common stock on the date of
issue.  Therefore, total aggregate value of the transaction recognized
by the company was $32,000. Going forward the cost of these shares will be
expense at current market price as they are issued.






25






On
November 30, 2007 we issued 5,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 30,000 shares will be issued
in equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $1.25 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $6,250.
Going forward the cost of these shares will be expense at current market price
as they are issued.





On
December 31, 2007, we issued 172,750 shares of common stock to the investors of
our April 12, May 30, June 30 and July 11, 2006 financings as payment of the
semi-annual dividend (8% per annum) per the terms of the Certificate of
Designation of the Relative Rights and Preferences of the Series A Convertible
Preferred Stock. The number of shares issued was based on the dividend payment
at a rate of 8% per annum (subject to a pro rata adjustment) of the Liquidation
Preference Amount ($1,416,000 for the April 12 financing, $1,500,000 for the May
30 financing, $1,550,000 for the June 30 financing and $1,450,000 for the July
11 financing) payable in shares equal to 90% of the quotient of (i) the dividend
payment divided by (ii) the average of the VWAP for the 20 trading days
immediately preceding the date the dividend payment is due, but in no event less
than $0.65.  As such, the shares were valued at approximately $233,500
and the total aggregate value of the transaction was recorded as a preferred
stock dividend.





On
December 31, 2007, we issued 45,999 shares of common stock to the investors of
our January 16, 2007 financing as payment of the semi-annual dividend (6% per
annum) per the terms of the Certificate of Designation of the Relative Rights
and Preferences of the Series B Convertible Preferred Stock (The number of
shares issued was based on the dividend payment at a rate of 6% per annum
(subject to a pro rata adjustment) of the Liquidation Preference Amount
($1,416,000) payable in shares equal to 90% of the quotient of (i) the dividend
payment divided by (ii) the average of the VWAP for the 20 trading days
immediately preceding the date the dividend payment is due, but in no event less
than $0.65.  As such, the shares were valued at approximately $63,000
and the total aggregate value of the transaction was recorded as a preferred
stock dividend.





On
December 31, 2007, we issued 17,883 shares of common stock to the investors of
our November 5, 2007 financing as payment of the semi-annual dividend (6% per
annum) per the terms of the Certificate of Designation of the Relative Rights
and Preferences of the Series C Convertible Preferred Stock The number of shares
issued was based on the dividend payment at a rate of 6% per annum (subject to a
pro rata adjustment) of the Liquidation Preference Amount (approximately
$897,000) payable in shares equal to 90% of the quotient of (i) the dividend
payment divided by (ii) the average of the VWAP for the 20 trading days
immediately preceding the date the dividend payment is due, but in no event less
than $0.65.  As such, the shares were valued at approximately $24,000
and the total aggregate value of the transaction was recorded as a preferred
stock dividend.





On
January 1, 2008 we issued 5,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing






26






services
that they will provide to us.  The remaining 25,000 shares will be
issued in equal monthly installments of 5,000 shares during the remaining term
of the agreement.  The shares were issued in accordance with the
exemption from the registration provisions of the Securities Act of 1933, as
amended, provided by Section 4(2) of such Act for issuances not involving any
public offering.  The 5,000 shares issued were valued at $1.35 per
share, the closing bid of our common stock on the date of
issue.  Therefore, total aggregate value of the transaction recognized
by the company was $6,750. Going forward the cost of these shares will be
expense at current market price as they are issued.





On
February 1, 2008 we issued 5,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 20,000 shares will be issued
in equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $0.98 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $4,900.
Going forward the cost of these shares will be expense at current market price
as they are issued.





On March
4, 2008 we issued 5,000 shares of common stock to Pacific Crab Seafood Company,
Inc. as part of the 100,000 shares of our common stock that our Board of
Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 15,000 shares will be issued
in equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $0.95 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $4,750.
Going forward the cost of these shares will be expense at current market price
as they are issued.





On April
1, 2008, we issued 5,000 shares of common stock to Pacific Crab Seafood Company,
Inc. as part of the 100,000 shares of our common stock that our Board of
Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 10,000 shares will be issued
in equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $0.95 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $4,750.
Going forward the cost of these shares will be expense at current market price
as they are issued.





On April
1, 2008, we issued 25,000 shares of common stock to Consulting for Strategic
Growth, Inc. as part of the 25,000 shares of our common stock that our Board of
Directors previously approved for the consulting and investor relations services
that they will provide to us.  The shares were issued in accordance
with the exemption from the registration provisions of the Securities Act of
1933, as amended, provided by Section 4(2) of such Act for issuances






27






not
involving any public offering.  The 25,000 shares issued were valued
at $0.95 per share, the closing bid of our common stock on the date of
issue.  Therefore, total aggregate value of the transaction recognized
by the company was $23,750. Going forward the cost of these shares will be
expense at current market price as they are issued.





On May
19, 2008, we issued 5,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 5,000 shares will be issued in
equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $0.80 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $4,000.
Going forward the cost of these shares will be expense at current market price
as they are issued.





On June
20, 2008, we issued the final 5,000 share installment of common stock to Pacific
Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock
that our Board of Directors previously approved for the consulting and marketing
services that they will provide to us.  The shares were issued in
accordance with the exemption from the registration provisions of the Securities
Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not
involving any public offering.  The 5,000 shares issued were valued at
$0.80 per share, the closing bid of our common stock on the date of
issue.  Therefore, total aggregate value of the transaction recognized
by the company was $4,000. Going forward the cost of these shares will be
expense at current market price as they are issued.





On June
30, 2008, we issued 325,725 shares of common stock to the investors of our April
12, May 30, June 30 and July 11, 2006 financings as payment of the semi-annual
dividend (8% per annum) per the terms of the Certificate of Designation of the
Relative Rights and Preferences of the Series A Convertible Preferred Stock. The
number of shares issued was based on the dividend payment at a rate of 8% per
annum (subject to a pro rata adjustment) of the Liquidation Preference Amount
($1,416,000 for the April 12 financing, $1,500,000 for the May 30 financing,
$1,550,000 for the June 30 financing and $1,450,000 for the July 11 financing)
payable in shares equal to 90% of the quotient of (i) the dividend payment
divided by (ii) the average of the VWAP for the 20 trading days immediately
preceding the date the dividend payment is due, but in no event less than
$0.65.  As such, the shares were valued at approximately $233,500 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.





On June
30, 2008, we issued 86,691 shares of common stock to the investors of our
January 16, 2007 financing as payment of the semi-annual dividend (6% per annum)
per the terms of the Certificate of Designation of the Relative Rights and
Preferences of the Series B Convertible Preferred Stock The number of shares
issued was based on the dividend payment at a rate of 6% per annum (subject to a
pro rata adjustment) of the Liquidation Preference Amount ($1,416,000) payable
in shares equal to 90% of the quotient of (i) the dividend payment divided by
(ii) the average of the VWAP for the 20 trading days immediately preceding the
date the dividend payment is due, but in no event less than $0.65.  As
such, the shares were valued at approximately $62,500 and the total aggregate
value of the transaction was recorded as a preferred stock
dividend.






28






On June
30, 2008, we issued 33,704 shares of common stock to the investors of our
November 5, 2007 financing as payment of the semi-annual dividend (6% per annum)
per the terms of the Certificate of Designation of the Relative Rights and
Preferences of the Series C Convertible Preferred Stock. The number of shares
issued was based on the dividend payment at a rate of 6% per annum (subject to a
pro rata adjustment) of the Liquidation Preference Amount (approximately
$897,000) payable in shares equal to 90% of the quotient of (i) the dividend
payment divided by (ii) the average of the VWAP for the 20 trading days
immediately preceding the date the dividend payment is due, but in no event less
than $0.65.  As such, the shares were valued at approximately $24,000
and the total aggregate value of the transaction was recorded as a preferred
stock dividend.








ITEM
      6.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION





The
following discussion should be read in conjunction with our financial statements
and the notes thereto which appear elsewhere in this report.  The
results shown herein are not necessarily indicative of the results to be
expected in any future periods.  This discussion contains
forward-looking statements based on current expectations, which involve
uncertainties.  Actual results and the timing of events could differ
materially from the forward-looking statements as a result of a number of
factors.  Readers should also carefully review factors set forth in
other reports or documents that we file from time to time with the Securities
and Exchange Commission.





Overview





During
our 2008 fiscal year, we continued the harvesting, processing and sale of our
2004 and 2005 year classes of scallops, continued sorting our 2006 scallop class
and transferring our 2007 year-class scallops (which were still maturing in our
tenured growing sites and on-shore ponds) to larger grow-out nets on our farm
sites.  We also completed the spawning, grow-out in our on-shore
nursery ponds and started transferring our 2008 scallop year class to our farm
sites.  We refer to the year-class of scallops based on when the
scallops were spawned.  Generally, the harvest occurs approximately 22
to 24 months after spawning of the scallops.





During
our 2008 fiscal year, we also continued the new sales and marketing efforts that
began in the later part of our 2007 fiscal year.  Traditionally, we
have sold live scallops within the Pacific Northwest market, but the seafood
sale and distribution consultants that we hired in late 2007 began to introduce
new product lines of fresh meat and a new unique frozen on the half-shell
product that started to generate significant interest.  Despite the
initial success of these efforts, we recently completed a large purchase order
with Fanny Bay Oyster Co., a division of Taylor Shellfish Farms of Shelton,
Washington (an international seafood distributor and the largest shellfish
company on the West Coast).  The order includes live scallops, fresh
scallop meat and frozen scallops that will be packaged and delivered in various
scallop products (including live in-the-shell, frozen half-shell and fresh
meat).   As a result of this order, Fanny Bay will effectively
become the exclusive distributor of our scallops outside the European
market.  We believe this order will reduce cost and encourage
additional wholesalers within the Taylor network to carry our scallops, which we
believe will bring greater value to our shareholders than a continued
relationship with the sale and distribution consultants discussed
above.  In addition to the Taylor sales agreement, we recently
finalized an order to provide frozen scallop meat with roe to the European
market.  We believe that this strategic relationship will enable us to
capitalize on the large European demand for quality seafood
products.








29






Management
believes that these new sales agreements, coupled with the improved processing
plant will yield increased revenues in our 2009 fiscal year and
thereafter.  Management believes that the combination of the Fanny Bay
(Taylor) sales and marketing network and the Island Scallop processing plant and
product will result in both improved sales and margins.  In addition,
recent experience gained from harvesting and sorting scallops on the new
longline systems should allow for greater future harvesting rates. Also, as a
result of the operational review that we completed in the spring of 2008, we
indentified several areas where we can streamline operations while continuing to
grow our revenues.





Additionally,
we plan on generating additional near term revenues via the sale of scallop and
other shellfish seed (including clams and oysters).  We are also
moving forward with our discussions with various First Nations2 groups about possible partnerships or joint
ventures on potential farm sites on First Nation owned
lands.  Management anticipates formalizing our first joint venture
with a first nations group as early as the start of the 2009 calendar
year.  This will provide us with additional growing areas for scallops
and future joint venture revenues.





Despite
the increased revenues in 2008, we were not able to achieve positive operational
cash flows during the fiscal year.  Although Management expects to
achieve positive cash flows in 2009, we have started to investigate acquisitions
of other aquaculture companies, equipment vendors and/or seafood
distributors.  We plan to initially focus on companies that we believe
could significantly benefit from our hatchery technology and
expertise.  Management believes that the combination of our existing
hatchery technology and knowledge, coupled with a company’s existing revenues
and sales and marketing channels could result in significantly improved cash
flows.  As part of this initiative, we recently established an
Acquisition/Business Opportunity Board Committee and are currently beginning
initial conversations with both North American and Chinese based companies. As
of the date of this filing, no definitive agreements have been
signed.





In May
2008, we started the expansion of our Nile Creek  farm (or scallop
growing area).  We installed 25  new “triple” lines that
will have the capacity to handle up to 135,000 scallops per line.  In
the coming months, as funds are available, we will add an additional 58 lines
and continue to outfit these new 300 meter lines with the necessary floats and
netting required for scallop farming.








2 indigenous peoples Canada First Nations governments or bands Canada Ontario British Columbia.




30






During
the continued harvesting of our 2005 class, sorting of our 2006 scallops classes
and transfer of our 2007 scallop classes, we were able to review our mortality
rates and update our class size projections.  Based on this review and
recent sales, we expect to bring the remaining 1.9 million of our 2005 and 2006
year class scallops to market in the beginning of 2009.  Originally,
we believed that our 2006 spawning would yield between 5 and 10 million scallops
at full maturity/harvest.  However, mortality rates were at the higher
end of our projections due to the handling and sorting learning curve associated
with the roll-out of our new longline and anchor
system.  Additionally, problems associated with the timing of moving
scallops to large nets (also known as “ocean timing”) and the density (i.e.
number of scallops per net level) contributed to additional mortality
problems.  We anticipate that survival rates for the future classes,
starting with the 2007 scallop class, will improve due to the addition of more
lines and anchors, better spacing and sorting within each lantern net,
experience gained from the sorting and farming of both the 2005 and 2006 year
classes and lessons learned on ocean timing and scallop density during the
handling of our 2006 scallop class. We noticed gains in animal survival rates
and individual scallop size in the 2007 class as compared to the 2006 class at a
similar point in its development.  As of our most recent review of our
scallop inventory, we currently believe that our 2007 year class should yield up
to 7 million scallops at full maturity/harvest. Although this is lower than
initial estimates, it will still represent our largest year class to
date.





We are
currently transferring the initial portion of our 2008 scallops class from our
hatchery ponds and into the ocean farms.  We originally expected to
produce up to 24 million full-size scallops in this year class, but due to
survival problems associated with our hatchery spawns and funding limitations,
we now expect to produce as few as 3 million full-size
scallops.   Based on our initial review of the hatchery spawn, we
believe the mortality problem were the result of large blooms of toxic marine
algae at the critical stage prior to metamorphosis of approximately 600 million
scallop larvae.   These blooms corresponded to high levels of
Paralytic Shellfish Poisoning in our ocean farms and although it did not harm
any of our juvenile or mature scallops, it is believed that pre-metamorphic
larvae are particularly susceptible. Procedures are now in place to prevent the
introduction of toxic algae into the hatchery system in the coming
years.





As a
result of a recent review of our business plan and sales and marketing efforts
to date, we currently plan to harvest and sell approximately 7 million full-size
2007 scallops over the 12 months ending December 2009.  In addition,
we estimate that our 2008 year class will produce at least 3 million full-size
scallops. The size of our 2009 and 2010 year classes will (in some ways) be
determined by our ability to generate positive cash flows and/or our ability to
locate additional financing.  As a result of our lower than expected
sales and yields, we are still evaluating the cash available for farming and
infrastructure costs related to expanding our future yields.  These
classes will be harvested and sold in subsequent 12 month periods following the
sales our 2007 year class.  Based on our current review of sales and
marketing conditions, we believe our scallops will yield at least $1 of revenue
per scallop.  The yield per scallop could increase significantly if we
are able to sell a greater percentage of live scallops.  We also plan
on generating additional annual revenues via the sale of scallop and other
shellfish seed in the upcoming years.  We anticipate formalizing a
business venture with a first nations group as early as the second quarter of
2009 and believe that such a partnership will begin producing significant new
revenue as early as our 2009 fiscal year.






31






If our
mortality rates are better than our current projections, our yield and revenues
from the 2005, 2006 and 2007 scallop class could be higher; conversely, if our
mortality rates are worse than we anticipate our revenues for this period could
be lower than we anticipate.  In addition, changes in the anticipated
growth rates, projected harvesting cycles and large fluctuations in the price of
scallops or the US-Canadian exchange rate could impact our current
projections.  Furthermore, if we cannot achieve our estimated product
mixture (live/fresh/frozen) than our average sales price per scallop will be
lower.  Alternatively, if we are able to sell a large percentage of
high yield products (live or frozen on the half shells) than our average price
per scallop will be higher.





In fiscal
year 2008, our cost of goods continued to improve relative to our selling price,
however, were still operating at a negative margin.  .  Part
of this problem was associated with operational inefficiencies that were
identified during our recently completed top-down operation
review.  As a result, we expect are cost of goods sold to continue to
improve for our 2006 and 2007 year classes and in the coming years we expect to
see continued  improvements in cost of goods.





We
recently completed a private placement that resulted in net proceeds of $1.46
million.  Based on our current estimates of near-term sales and
capital costs of expanding our farms to increase future crop yields, we will
require additional financings to continue our current rate of
expansion.  As we have yet to raise additional capital and our sales
have increased at a slower than expected pace, we have already scaled back some
of our expansion plans and may have to further scale back the plans outlined
herein.  We originally anticipated that we would need approximately
$1.0 million over the next 14 months in order to continue our originally planned
expansion activities, however, we now plan to align our future expansions with
our ability to generate positive cash flows from our current scallop crops
and/or our ability to locate additional financing.





Liquidity
      and Cash Resources





At August
31, 2008, we had a cash balance of approximately $712,000. Prior to the
completion of our initial Preferred Stock Financing, our initial expansion had
been largely funded by a short term note with a maximum limit of approximately
$1,451,000.  During the year ending August 31, 2007, we completed one
private equity financing  and had investors exercise various warrants
that resulted in net proceeds of approximately $3,075,000.  During the
year ending August 31, 2006, we relied on four private equity financings that
resulted in net proceeds of approximately $5,140,000.  These 2006 and
2007 financings formerly contained warrants, which if fully exercised, could
have raised approximately an additional $49,350,000.  To date, the
exercise of these warrants resulted in net proceeds of roughly $1,200,000;
however, our recently completed financing also resulted in a warrant exchange
that eliminated most of the remaining warrants from the 2006 and 2007
financings.  We have suffered operating losses since inception in our
efforts to establish and execute our business strategy.   After
the completion of the recent Series D preferred financing, management believed
that we had adequate funds to maintain our business operations into our 2009
fiscal year and/or until we become cash flow positive, but we continued to
suffer operational losses in our 2008 fiscal year. Until our operations are able
to demonstrate and maintain positive cash flows, we may require additional
working capital to fund our ongoing operations and execute our business strategy
of expanding our operations.  In fact,   based on our
current estimates of future sales and capital costs of expanding our farms in
order to increase future crop yields, we will require additional financings to
continue expand our operations.  Based on these factors, there is
substantial doubt about our ability to continue as a going concern.






32







(b)  Significant
Accounting Policies




(i)  Principles
of Consolidation




The
accompanying consolidated financial statements include the accounts of the
acquired entities since their respective dates of acquisition.  All
significant inter-company amounts have been eliminated.




Cash
and equivalents





Cash and
equivalents include cash, bank indebtedness, and highly liquid short term market
investments with terms to maturity of three months or less.  We
consider all highly liquid investments with original maturities of 90 days or
less to be cash equivalents.  We maintain our cash balances primarily
in on financial institution, which exceeded federally insured limits by
$1,561,136 at August 31, 2008.  We have not experienced any losses, in
such accounts and we believe that we are not exposed to any significant credit
risk on cash and cash equivalents.





Accounts
receivable





Accounts
receivable is presented net of allowance for doubtful accounts.  The
allowance for doubtful accounts reflects estimates of probable losses in
accounts receivable.  The allowance is determined based on balances
outstanding for over 90 days at the period end date, historical experience and
other current information.





Loans
receivable





Loans
receivable is presented net of an allowance for loan losses, as
necessary.  The loans are written off when collectibility becomes
uncertain.





Inventory





We
maintain inventories of raw materials for our aquaculture products, of biomass
(inventory of live aquaculture product being actively cultivated), and of
finished goods (aquaculture product ready for sale).





Inventories
are reported at the lesser of cost or estimated net realizable value. Biomass
and finished goods includes direct and reasonably attributable indirect
production costs related to hatchery, cultivation, harvesting, and processing
activities.  Carrying costs per unit are determined on a weighted
average basis.








33






Long
term investments





Long term
investments are recorded at cost.  We review our investments
periodically to assess whether there is an “other than temporary” decline in the
carrying value of the investment.  We consider whether there is an
absence of an ability to recover the carrying value of the investment by
reference to projected undiscounted future cash flows for the
investment.  If the projected undiscounted future cash flow is less
than the carrying amount of the asset, the asset is deemed
impaired.  The amount of the impairment is measured as the difference
between the carrying value and the fair value of the asset.





Property,
plant, and equipment





Property
and equipment are carried at cost, less accumulated depreciation.
 Depreciation is calculated by using the straight-line method for financial
reporting and accelerated methods for income tax purposes.  The recovery
classifications for these assets are listed as follows:





YearsHeadend
      Facility and Fiber Infrastructure
            20Manufacturing
      Equipment
            3–7Furniture
      and Fixtures
            2–7Office
      Equipment
            5Leasehold
      Improvements
            Life
      of leaseProperty
      and Equipment
            5Vehicles
            5





Expenditures
for maintenance and repairs are charged against income as incurred whereas major
improvements are capitalized.





Impairment
of long-lived assets





We
monitor the recoverability of long-lived assets, including property and
equipment and intangible assets, based upon estimates using factors such as
expected future asset utilization, business climate, and undiscounted cash flows
resulting from the use of the related assets or to be realized on sale. Our
policy is to write down assets to the estimated net recoverable amount in the
period in which it is determined likely that the carrying amount of the asset
will not be recoverable.





Government
assistance





Government
assistance we receive, such as grants, subsidies, and tax credits, is recorded
as a recovery of the appropriate related expenditure in the period that the
assistance is received.





We have
received government assistance in the form of loans, for which repayment may not
be required if we fail to meet sufficient future revenue levels to repay these
loans based on a percentage of gross sales for certain products over a defined
period of time. If we receive any such assistance, it is initially recorded as a
liability, until such time as all conditions for forgiveness are met, and is
then recognized as other income in that period.






34






Farm
license costs





We must
pay annual license costs in respect to government-granted tenures that we hold,
which give us the right to use certain offshore ocean waters for the purpose of
aquaculture farming. Such license costs are recognized as an expense when
incurred.





Research
and development costs





Development
costs include costs of materials, wages, and reasonably attributable indirect
costs incurred by us which are directly attributable to the development of
hatchery techniques for sablefish and shellfish, these costs are expensed when
incurred.





Research
costs are expensed when incurred.





Income
taxes





We
calculate our provision for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes) (“SPAS
109”), which requires an asset and liability approach to financial accounting
for income taxes. This approach recognizes the amount of taxes payable or
refundable for the current year, as well as deferred tax assets and liabilities
attributable to the future tax consequences of events recognized in the
financial statements and tax returns. Deferred income taxes are adjusted to
reflect the effects of enacted changes in tax laws or tax rates. Deferred income
tax assets are recorded in the financial statements if realization is considered
more likely than not.





Revenue
recognition





We
recognize revenue when it is realized or realizable, and earned.  We
consider revenue realized or realizable and earned when there is persuasive
evidence of a contract, the product has been delivered or the services have been
provided to the customer, the sales price is fixed or determinable, and
collectibility is reasonably assured.





Our
revenue is derived principally from the sale of scallops we produce or purchase
from third parties, and from the sale of seed and farm supplies to other
aquaculture farms.




Cost
of goods




Cost of
goods sold consists primarily of farming, harvesting and processing costs
associated with the growth, transfer and sales preparation of our products
(principally scallops).  These costs consist primarily of salaries and
benefits and allocated overhead costs for consulting and support personnel
engaged in the farming, harvesting and processing of our
products.  All costs are recognized at time of delivery.








35






Financial
instruments





The
carrying amount of our financial instruments, which includes cash, accounts
receivable, loans receivable, bank indebtedness, accounts payable and accrued
liabilities, short term debt and long term debt approximate fair value. It is
management’s opinion that we are not exposed to significant interest, currency
or credit risk arising from these financial instruments unless otherwise
noted.





Derivative
financial instruments





In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.





We
account for all derivatives financial instruments in accordance with SFAS No.
133. Derivative financial instruments are recorded as liabilities in the
consolidated balance sheet, measured at fair value.  When available,
quoted market prices are used in determining fair value.  However, if
quoted market prices are not available, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques.





The identification of, and accounting
for, derivative instruments is complex. Our derivative instrument liabilities
are re-valued at the end of each reporting period, with changes in the fair
value of the derivative liability recorded as charges or credits to income, in
the period in which the changes occur. For options, warrants and bifurcated
embedded derivative features that are accounted for as derivative instrument
liabilities, we estimate fair value using either quoted market prices of
financial instruments with similar characteristics or other valuation
techniques. The valuation techniques require assumptions related to the
remaining term of the instruments and risk-free rates of return, our current
common stock price and expected dividend yield, and the expected volatility of
our common stock price over the life of the option. The identification of, and
accounting for, derivative instruments and the assumptions used to value them
can significantly affect our financial statements.





Derivative
financial instruments that are not designated as hedges or that do not meet the
criteria for hedge accounting under SFAS No. 133 are recorded at fair value,
with gains or losses reported currently in earnings.  All derivative
financial instruments held by us at August 31, 2008 were not designated as
hedges.











Foreign
exchange





The
functional currency of our foreign subsidiaries is the local foreign currency.
All assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at the exchange rate prevailing on the balance sheet date.
Revenues, costs and expenses are translated at average rates of exchange
prevailing during the period. Translation adjustments resulting from translation
of the subsidiaries' accounts are accumulated as a separate component of
shareholders' equity. Gains and losses resulting from foreign currency
transactions are included in the consolidated statements of operations and have
not been significant.






36






Use
of estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses and
disclosure of contingent assets and liabilities. Such estimates include
providing for amortization of property, plant, and equipment, and valuation of
inventory. Actual results could differ from these estimates.





Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our
investors.




Investments
in Tenures as Compared to Estimated Market Value of Tenures




We
currently carry our investment in Island Scallops’ tenures at
$3,578.  This amount represents the initial carrying costs of certain
tenures acquired by Island Scallops’ subsidiary.  These tenures do not
expire until various dates ranging from 2021 – 2024, however, we believe that
they have an indefinite useful life because renewal on expiration is
anticipated.  The area available for shellfish aquaculture within
Baynes Sound is fully subscribed, and as a result new tenures for new companies
are not available through the Canadian Provincial application and review
process.  The shellfish companies within the Sound are also well
established and sales of tenures are quite rare, making the assessment of the
market value for the Island Scallops tenures difficult.  Historical
sales and government auction of tenures have received as much as $300,000 (CDN)
for a small beach tenure (less than 4 acres) and $65,000 CDN) for a small
deepwater tenure without infrastructure.  The few tenures on the
market over the previous 24 months suggest that the current market value is
approximately $10,000 to $25,000 (CDN) per acre.  Based on listings of
tenures on the coast of British Columbia, discussions with local shellfish
growers and individuals from the BC Assets and Land Corporation, and an
independent appraisal (commissioned by Island Scallops) that recently estimated
the value of our roughly 1018 acres of tenures, the  value is
estimated to be approximately $8,600,000.  As a result of the recently
approved tenure expansions, the estimated market value of our overall tenures
has increased to roughly $10,600,000.  The estimated market value is
based on the size, location and whether they are beach or deepwater in
nature.  However, given the variable nature of the shellfish tenures
market, the actual value that we receive from the sale of a tenure or a partial
tenure could vary significantly from these estimated values.




Although
we cannot determine the exact amount we would ultimately receive from the sale
of our tenure(s), based upon the information stated above we expect to receive
more than the carrying cost ($3,578) from such sale.  Accordingly, the
carrying cost of our tenures is not indicative of their actual
value.  This analysis indicates our cash generating capabilities after
considering investments in capital assets necessary to maintain and enhance
existing operations.








37






Comparison
of results for the fiscal year ended August 31, 2008, to the fiscal year ended
August 31, 2007.





Revenues.Revenues
for the fiscal year ended August 31, 2008, were approximately
$1,584,000.  We had revenues of approximately $657,000 for the fiscal
year ended August 31, 2007.  This is an increase of approximately
$927,000 or 141%.  The increase in our revenue was mainly the result
of an increase in the sales of our own scallops.  In fact, sales of
our own scallops increased by more than 93% or roughly $509,000.  If
not for the loss of live scallop sales due to the temporary closing of our
harvest areas due to Red Tide issues, our overall sales may have increased by at
least an additional $100,000.  Prior to 2008, our increase in sales
was the result of an increase in oyster and scallop seed sales and increased
joint venture sales.  As was the case in 2007 and 2006, management
continued its emphasis on the development and production of larger scallop
crops.  Management believes that our emphasis on expansion of future
crops coupled with our new sales agreements will yield increased revenues
starting in 2009 and beyond.





Gross profit (loss).Gross
loss for the year ended August 31, 2008, was approximately $479,000, a increase
of approximately $100,000 as compared to gross loss of roughly $379,000, for the
year ended August 31, 2007. The increase in the amount of gross loss for 2008
(as compared to 2007) was mainly attributable to management’s continued focus on
the expansion and development of larger scallop crops and larger scallop yields
for future years and increased marketing efforts.  Part of this
increase was attributable to increased costs due to higher processing plant and
trucking costs as we began to establish a larger sales effort.  In the
future, as we capitalize on our new sales agreements, we expect our sales to
increase more rapidly that these costs and margins to quickly
improve.  We continued to focus resources on maintaining, developing
and tending to our scallop crops and believe that we have already seen the
initial benefits in increased sales of our own scallops and that we will
continue to see additional benefits from our efforts in developing larger crops
in the first quarter of 2008 and beyond.





General and
administrative.  General and administrative expenses for the
fiscal year ended August 31, 2008, were approximately $3,185,000.  Our
general and administrative expenses were approximately $1,541,000 for the fiscal
year ended August 31, 2007.  This is an increase of approximately
1,644,000 or 107%.  The majority of this increase was directly
attributable to stock option expense of roughly $1,780,000 as compared to
$486,000 for the same period in 2007.  To date, we have already
expensed the majority of the stock option expenses related to the 2,592,000
options that were outstanding as of August 31, 2008.  As such,
management believes general and administrative expenses will drop significantly
in the upcoming fiscal year.     Our increase in
general and administrative expenses for the year ended August 31, 2008, was
attributable to costs associated with establishing, building, and supporting our
infrastructure and included various consulting costs, legal and accounting fees,
compensation paid as result of our recent financing, overhead, realized stock
compensation, stock option expenses and salaries.  We anticipate that
these costs may continue to slightly rise as we continue to expand our
operations.  However, we believe that we now have the necessary
general and administrative staff in place to handle an expansion of up 30
million scallop crops and beyond.





Common stock issued for
services.  During the year ended August 31, 2008, we had stock
compensation expense of approximately $91,000.  The expense was for
outside seafood sale and distribution consultants who we hired to help






38






develop
new sales and marketing programs.  During the year ended August 31,
2007, we had stock compensation expense of approximately $62,000.  The
expense was also for outside seafood sale and distribution consultants who we
hired to help develop new sales and marketing programs. As such, we incurred a
stock compensation expense of approximately $62,000 for year ended August 31,
2007.





Other income (expense),
net.  Interest expense for the year ended August 31, 2008 was
approximately $11,000.  Interest expense for the year ending August
31, 2007 was approximately $16,000.  Other expense for the year ended
August 31, 2008 was approximately $6,000 as opposed to other income of
approximately $167,000 for the year ending August 31, 2007.  The other
income for the year ended August 31, 2007 was mainly the result of a one time
gain of approximately $122,000 related to the forgiveness of a third-party debt
in 2007.  For the year ended August 31, 2007, we recognized a one-time
gain of approximately $5,827,000 which was related to the change in fair value
of warrants issued to 10 institutional and accredited investors in conjunction
with preferred stock on April 12, May 30, June 30, July 11 and January 16,
2007.  As a result of the reclassifying these warrant liabilities on
February 21, 2007, no such gain or loss was recorded for the year ended August
31, 2008.




As a
result, other expense for the year ended August 31, 2008, was approximately
$17,000 as compared to other income of approximately $5,978,000 for the year
ended August 31, 2007.  As described above, the other income for the
year ended August 31, 2007, was mainly a result of one-time gains associated
with the forgiveness of third-party debt and change in fair-value of
warrants.  Without these one-time items, other expense would have been
relatively unchanged at $17,000 (for 2008) as compared to $16,000 (for
2007).





Net profit
(loss).As a result of the above, the net loss for the year
ended August 31, 2008, was approximately $4,575,000 as compared to a net income
of approximately $3,538,000 for the year ended August 31, 2007.




Risk
Factors




You
should carefully consider the risks described below before making an investment
in us.    All of these risks may impair our business operations.
 If any of the following risks actually occurs our business, financial
condition or results of operations could be materially adversely affected.
 In such case, the trading price of our common stock could decline, and you
may lose all or part of your investment.




Risks
      Relating to Aquaculture





We
are subject to a number of biological and environmental risks.





Our
business would be adversely affected if our scallop crop is infected by Perkinsus
Quagwadi.  Perkinsusaffects a variety
of scallops.  In 1992, mortality due to Perkinsus infection was large
and mortality was high, but Island Scallops was able to overcome this disease by
breeding the remaining stock.  Eight years of successfully breeding
hardy individuals resulted in the remaining populations of scallops being Perkinsus-free.  Although
there is a chance that other diseases may occur, the Island Scallops hybrid
scallop has proven resistant to Perkinsusdisease for the
last ten years.






39






Paralytic Shellfish
      Poisoning (PSP or Red Tide) could limit the amount of scallops available
      for sale.





Paralytic
      Shellfish Poisoning (PSP or red tide) is another concern when farming
      scallops.  The adductor muscle can be processed for sale to the
      traditional scallop meat market even when there is a PSP
      closure.  On the other hand, the live animal market is stopped
      by PSP toxicity.  Sewage Contamination (faecal coliform) is also
      monitored by the Canadian Food Inspection Agency (CFIA) to avoid this
      problem.  These types of contaminants do not threaten the crop,
      it only causes a temporary displacement to the marketing of the
      product.  Island Scallops’ aquaculture is not without total
      risk; however, the development program over the last decade has reduced
      the risk of disease and increased the historical grow-out survival rate to
      95% over the past six years.  Despite these advances, however,
      an outbreak of PSP, even if it did not affect Island Scallops’ stock,
      could have a depressive effect on the shellfish market in general, which
      could then adversely affect our
business.





As recent
as this past year, we believe that the mortality rates of our scallops were
affected by high levels of PSP in our ocean farms. Although it did not harm any
of our juvenile or mature scallops, it is believed that pre-metamorphic larvae
are particularly susceptible. Procedures are now in place to prevent the
introduction of toxic algae into the hatchery system in the coming years,
however there can be no assurance that such procedures will forever prevent
future PSP contamination.








Aquaculture
and scallop farming is subject to a variety of general disease
risks.





Bacteria
are almost always associated with mortalities in the larval stages of
growth.  Control of disease outbreaks in the hatchery consists of
regular inspection, growth rates, color and larvae is checked for proper
shape.  Proper hygiene practices within the hatchery minimize problems
with Bacteria.  In general, scallops are harder to handle and
transport and care needs to be taken when moving them.  Scallops can
develop a stress related disease that can be avoided by proper handling
conditions such as temperature, moisture rates and time before getting back in
the water (maximum time being 24 hours).





Boring
sponges and worms can adversely impact our scallop yield.





Boring
sponges and worms are organisms that make holes in the scallop’s shell,
weakening it and requiring the scallop to make repairs.  Secreting
additional layers of shell material to mend these holes directs energy away from
growth and maintenance of the scallop.  In cases of severe
infestation, the adductor muscle may be reduced in weight by up to 50%, and the
meat may be discolored.





Our
business would be adversely affected if our scallop crop is infected by
flatworm.








40





Flatworms
can be devastating, destroying all seed within 2 weeks.  Island
Scallops has managed to minimize this problem and keep mortalities down by
keeping the seeds in the pond a little longer so it becomes larger, making the
time spent in the first net culture less.  We then move the seeds to a
larger mesh net culture, which causes the flatworms to fall off and no longer
pose a problem.  This husbandry technique alleviates the problem to a
large degree.





Scallops
raised in the open ocean are subject to a variety of predators that could
adversely impact crop yield.





Starfish
are a major predator of scallops, particularly in bottom culture.  If
the hanging techniques are far enough from the bottom, even during extreme low
tides, this is not problematic.  Since starfish and crabs have a
free-swimming larval stage as part of their life cycle, it is possible that
these larvae can settle within the “grow-out” nets and settle there and prey on
these scallops.  However, with proper husbandry techniques these
effects can be minimized.





Our
business would be adversely affected if a majority of our scallop crop
experiences fouling.





Fouling
is caused by settlement and growth of several organisms such as macroalgae,
bryozoans, barnacles and mussels on the nets.  Heavy fouling of
culture nets and scallops impedes growth of the scallops.  Since most
fouling occurs in shallower waters, hanging scallops at deeper depths can reduce
fouling. If culture systems are managed properly, fouling is not a
problem.





Aquaculture can be subject to a
variety of growing conditions that can adversely affect product growth and
development.





Certain
growing conditions and sea conditions can affect the quality and quantity of
scallops produced, decreasing the supply of our products and negatively
impacting profitability. Extreme wave actions tend to make scallops
seasick.  In cases of extreme seasickness, scallops stop feeding and
growth is reduced.  This may create mortality by weakening the
scallops and making them susceptible to other problems and
diseases.  Currently, the water leases owned by Island Scallops are
located in areas where this will prove to be less
problematic.  Additionally, if other environmental conditions are
unfavorable, growing conditions in the ocean can greatly inhibit scallop
growth.  Generally this risk is mitigated by year-to-year variations
in growing conditions.  However, we cannot guarantee that we will not
be negatively affected, at least in the short term, if we experience poor
growing conditions.





Increased
mortality rates would adversely impact our business.





In
general, increased mortality rates in juveniles are due to improper feeding and
hatchery husbandry. Once scallops are introduced to the ocean, increased
mortality rates are caused by the above factors as well as fluctuations in
salinity and currents.  Given the location of Island Scallops’ current
farming areas, the salinity and currents should not be
problematic.  Mortality rates can also increase due to overcrowding
problems.  In cases of extreme overcrowding scallops actually bite
each other and their shells become damaged.





If
we are unable to expand our tenures, our projected production may be
delayed.








41






To
increase our production capacity, we must expand our
tenures.  However, expanding tenures requires government approval,
which can be a timely and costly process. Two of our tenures, Hindoo Creek and
Deep Bay, have been approved for expansion.  We received approval to
convert another one of our tenures, our Nile Creek tenure to off-bottom growing,
but we need to complete that construction before we can take full advantage of
the conversion.  Finally, our Denman tenure must be re-zoned before
expansion thereof will be approved. Although we are confident that such approval
will be granted after issues raised by local residents and fisherman, such as
the use of surface floats for our longlines have been addressed, there is no
guarantee that it will be granted.  In the future, we will seek
expansion of our other tenures, which also may not be granted.  If we
do not receive expansion approval for our Denman tenure, it will delay our
proposed expansion.





Business
Risks





We
will require additional capital to fund our current business plan.





Our
success is
dependent   on   future   financings.
The   aquaculture or marine
farming   industry   is a capital-intensive
business, which requires substantial capital expenditures to develop and acquire
farms and to improve or expand current production. Further, the farming of
marine life and acquisition of additional farms may require substantial amounts
of working capital.  We project the need for significant capital
spending and increased working capital requirements over the next several
years.  There can be no assurance that we will be able to secure such
financing on terms, which are acceptable, if at all.  The failure to
secure future financing with favorable terms could have a material adverse
effect on our business and operations.





We
are dependent on certain key existing and future personnel.





Our
success will depend, to a large degree, upon the efforts and abilities of our
officers and key management employees such as Mr. Saunders, Mr. Bruce Evans and
Mr. Brendan Fralick.   The loss of the services of one or more of
these or other key employees could have a material adverse effect on our
operations. We currently maintain key man life insurance on Mr. Saunders for a
value of $1,000,000.  We also had an employment agreement with Mr.
Saunders that expired in June 2008, but are currently operating as if this
employment agreement is still in effect as we discuss the terms of a new
agreement with him.  We do not maintain key man insurance for, nor do
we currently have employment agreements with, any of our other key
employees.  In addition, as our business plan is implemented, we will
need to recruit and retain additional management and key employees in virtually
all phases of our operations.  Key employees will require a strong
background in the marine aquaculture industry.  We cannot assure that
we will be able to successfully attract and retain key personnel.





The
fact that our directors and officers own approximately 28% of our capital stock
and 56% of our voting capital stock may decrease your influence on shareholder
decisions.





Our
executive officers and directors, in the aggregate, beneficially own
approximately 28% of our capital stock and 56% of our voting capital
stock.  As a result, our officers and directors, will have the ability
to influence our management and affairs and the outcome of matters submitted to
shareholders for approval, including the election and removal of directors,
amendments to our bylaws and any merger, consolidation or sale of all or
substantially all of our assets.








42




Our acquisitions and potential
future acquisitions involve a number of risks.





Our
potential future acquisitions involve risks associated with assimilating these
operations into our company; integrating, retaining and motivating key
personnel; integrating and managing geographically-dispersed operations
integrating the technology and infrastructures of disparate entities; and risks
inherent in the husbandry and farming of marine species.





We may have difficulty competing
with larger and better-financed companies in our sector.





In
general, the aquaculture industry is intensely competitive and highly
fragmented. Many of our competitors have greater financial, technical, marketing
and public relations resources than we presently have. Our sales may be harmed
to the extent we are not able to compete successfully against such seafood
producers.





Contamination
of our seafood would harm our business.





Because
our products are designed for human consumption, our business is subject to
certain hazards and liabilities related to food products, such as
contamination.  A discovery of contamination in any of our products,
through tampering or otherwise, could result in a recall of our
products.  Any such recall would significantly damage our reputation
for product quality, which we believe is one of our principal competitive
assets, and could seriously harm our business and sales.  Although we
maintain insurance to protect against such risks, we may not be able to maintain
such insurance on acceptable terms and such insurance may not be adequate to
cover any resulting liability.





We may experience barriers to
conducting business due to potential government regulations.





There are
no hatchery/producer competitors in the scallop farming business in British
Columbia.  The United States will not allow the farming of the species
farmed in their waters, without undergoing an extensive environmental review
which may prove costly and difficult.  If these reviews are successful
and US approval obtained, then this species could be cultured in US waters,
which may provide increased competition for our products in the US.





Our
business may be adversely affected by price volatility.





If market
prices for Island Scallops’ products decrease, we will incur a loss of
profits.  However, our operational costs will increase because we will
have to produce the same quantity to meet the current demand, which will
decrease profit margin.  This form of price volatility would be
detrimental for our business.





Foreign exchange rates
risks, political stability risk, and/or the imposition of adverse
trade regulations could harm our business.






43





We
conduct some of our business in foreign currencies.  Our profitability
depends in part on revenues received in United States dollars as a result of
sales into the United States.  A decline in the value of the United
States dollar against the Canadian dollar would adversely affect earnings from
sales in the United States. As part of our plans to acquire other businesses we
may expand our operations to other countries, operate those businesses in
foreign currencies, and export goods from those countries.   Thus
far, we have not engaged in any financial hedging activities to offset the risk
of exchange rate fluctuations.  We may in the future, on an as-needed
basis, engage in limited financial hedging activities to offset the risk of
exchange rate fluctuations.  There is a risk that a shift in certain
foreign exchange rates or the imposition of unforeseen and adverse political
instability and/or trade regulations could adversely impact the costs of these
items and the liquidity of our assets, and have an adverse impact on our
operating results.  In addition, the imposition of unforeseen and adverse
trade regulations could have an adverse effect on our exported seafood
operations. We expect the volume of international transactions to increase,
which may increase our exposure to future exchange rate
fluctuations.





We
have one major customer and any disagreement with that customer could have a
material adverse affect on our business.





As a
result of our recent sales agreement with Fanny Bay, Fanny Bay has effectively
become the sole distributor of our scallops outside of the European
market.  Such a large customer will account for a significant portion
of our sales and, as a result, any disagreements or problems with Fanny Bay
could have a material adverse effect on our business and
operations.





Our
common stock may be considered a “penny stock” and may be difficult to
sell.





The SEC
has adopted regulations which generally define a “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. The market
price of our common stock is less than $5.00 per share and, therefore, it may be
designated as a “penny stock” according to SEC rules.  This
designation requires any broker or dealer selling these securities to disclose
certain information concerning the transaction, obtain a written agreement from
the purchaser and determine that the purchaser is reasonably suitable to
purchase the securities.  These rules may restrict the ability of
brokers or dealers to sell our common stock and may affect the ability of
investors to sell their shares.








Our
Auditors have given the Company a “Going Concern” opinion, raising substantial
doubt about our ability to continuing to fund our operations.





We have
suffered operating losses since inception in our efforts to establish and
execute our business strategy.  As of August 31, 2008, we had a cash
balance of approximately $712,000.  Although management believes that
we have adequate funds to maintain our business operations into the next fiscal
year and/or until we become cash flow positive, we continued to suffer
operational losses in our 2008 fiscal year. Until our operations are able to
demonstrate and maintain positive cash flows, we may require additional working
capital to fund our ongoing operations and execute our business strategy of
expanding our operations.  Based on these factors, there is
substantial doubt about our ability to continue as a going concern.


44


ITEM
7.      
        FINANCIAL STATEMENTS





Report of Independent
Registered Public Accounting Firm





To the
Board of Directors of


Edgewater
Foods International, Inc.


Qualicum
Beach, British Columbia, Canada








We have
audited the accompanying consolidated balance sheets of Edgewater Foods
International, Inc. (the “Company”) as of August 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years ended August 31, 2008 and 2007. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Edgewater Foods
International, Inc. as of August 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the years ended August 31, 2008 and
2007 in conformity with accounting principles generally accepted in the United
States of America.





As
discussed in Note 18 to the consolidated financial statements, the Company's
absence of significant revenues, recurring losses from operations, and its need
for additional financing in order to fund its projected loss in 2009 raise
substantial doubt about its ability to continue as a going concern. The 2008
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.








/s/  LBB &
Associates Ltd., LLP


LBB &
Associates Ltd., LLP





Houston,
Texas


November
21, 2008







F-1





EDGEWATER FOODS INTERNATIONALCONSOLIDATED
      BALANCE SHEETSAUGUST 31, 2008 and 20072008
              
              
              2007ASSETSCurrent
      assets:Cash
              
              $
              712,298
              
              
              $
              1,656,868Accounts
      receivable, net
              
              
              195,402
              
              
              
              73,423Inventory
              
              
              1,290,702
              
              
              
              1,827,513Other
      current assets
              
              
              80,011
              
              
              
              61,242Total
      current assets
              
              
              2,278,413
              
              
              
              3,619,046Property,
      plant and equipment, net
              
              
              3,982,336
              
              
              
              2,963,234Inventory,
      non-current
              
              
              986,327
              
              
              
              -Loans
      receivable, related party
              
              
              114,079
              
              
              
              82,260Investments
      in other assets
              
              
              3,758
              
              
              
              3,770Total
      assets
              
              $
              7,364,913
              
              
              $
              6,668,310LIABILITIES AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Short
      term debt
              
              $
              109,648
              
              
              $
              110,800Line
      of credit
              
              
              124,766
              
              
              
              -Current
      portion of long term debt
              
              
              396,885
              
              
              
              462,306Accounts
      payable and accrued liabilities
              
              
              991,061
              
              
              
              721,292Total
      current liabilities
              
              
              1,622,360
              
              
              
              1,294,398Long
      term debt, net of current portion
              
              
              548,004
              
              
              
              526,299Total
      liabilities
              
              
              2,170,364
              
              
              
              1,820,697Commitments
      and contingenciesStockholders'
      equitySeries
      A Preferred  stock, par $0.001, 10,000,000
              
              
              7,774
              
              
              
              7,774authorized,
      7,773,998 issued and outstanding at August 31, 2008 and 2007,
      respectivelySeries
      B Preferred  stock, par $0.001, 220
              
              
              -
              
              
              
              -authorized,
      207 and 207 issued and outstanding at August 31, 2008 and 2007,
      respectivelySeries
      C Preferred  stock, par $0.001, 1,000,000
              
              
              748
              
              
              
              -authorized,
      747,870 and 0 issued and outstanding at August 31, 2008 and 2007,
      respectivelySeries
      D Preferred  stock, par $0.001, 380,000
              
              
              305
              
              
              
              -authorized,
      304,558 and 0 issued and outstanding  a August 31, 2008 and
      2007, respectivelyCommon
      stock, par $0.0001, 100,000,000 authorized,
              
              
              2,448
              
              
              
              2,37124,479,150
      and 23,712,700 issued and outstanding at August 31, 2008 and 2007,
      respectivelyAdditional
      paid in capital
              
              
              27,497,781
              
              
              
              22,471,315Accumulated
      deficit
              
              
              (22,103,314
              )
              
              
              (17,528,303
              )Accumulated
      other comprehensive income (loss) -foreign
      exchange adjustment
              
              
              (211,193
              )
              
              
              (105,544
              )Total
      stockholders' equity
              
              
              5,194,549
              
              
              
              4,847,613Total
      liabilities and stockholders' equity
              
              $
              7,364,913
              
              
              $
              6,668,310









See
accompanying summary of accounting policies and notes to financial
statements









F-2







EDGEWATER
      FOODS INTERNATIONALCONSOLIDATED
      STATEMENTS OF OPERATIONSYEARS
      ENDED AUGUST 31, 2008 and 20072008
            
            
            2007Revenue
            
            $
            1,584,027
            
            
            $
            657,065Cost
      of goods sold
            
            
            2,062,758
            
            
            
            1,036,313Gross
      profit (loss)
            
            
            (478,731
            )
            
            
            (379,248
            )Expenses:General
      and administrative expenses
            
            
            3,185,460
            
            
            
            1,541,192Total
      operating expenses
            
            
            (3,185,460
            )
            
            
            (1,541,192
            )Loss
      from operations
            
            
            (3,664,191
            )
            
            
            (1,920,440
            )Other
      income (expense):Interest
      expense, net
            
            
            (10,993
            )
            
            
            (15,876
            )Change
      in fair value of warrants
            
            
            -
            
            
            
            5,826,631Other
      income (expense)
            
            
            (5,938
            )
            
            
            167,144Total
      other income (expense), net
            
            
            (16,931
            )
            
            
            5,977,899Net
      income (loss)
            
            
            (3,681,122
            )
            
            
            4,057,459Dividend
      on preferred stock
            
            
            (630,142
            )
            
            
            (518,900
            )Deemed
      dividend for beneficialconversion
      feature
            
            
            (163,386
            )
            
            
            -Deemed
      dividend for exchange ofwarrants
      for series D preferred
            
            
            (100,360
            )
            
            
            -Net
      income (loss) applicable tocommon
      shareholders
            
            
            (4,575,010
            )
            
            
            3,538,559Foreign
      currency translation
            
            
            (105,649
            )
            
            
            150,776Accumulated
      other comprehensiveincome
      (loss)
            
            $
            (4,680,659
            )
            
            $
            3,689,335Net
      income (loss) per ShareBasic
            
            $
            (0.19
            )
            
            $
            0.16Diluted
            
            $
            (0.19
            )
            
            $
            0.11Weighted
      average shares outstandingBasic
            
            
            23,993,935
            
            
            
            22,228,633Diluted
            
            
            23,993,935
            
            
            
            32,273,888







See
accompanying summary of accounting policies and notes to financial
statements







F-3







EDGEWATER
      FOODS INTERNATIONALCONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY(Deficit)FOR
      THE YEAR ENDED AUGUST 31, 2008 and 2007Other
      ComprehensivePreferred
      Stock
            
            
            
            
            
            
            
            
            
            
            
            
            Additional
            
            
            Income
      -Series
      A
            
            
            Series
      B
            
            
            Series
      C
            
            Series
      D
            
            
            Common
      Stock
            
            
            Paid
      in
            
            
            Foreign
      Exchange
            
            
            AccumulatedNumber
            
            
            Value
            
            
            Number
            
            
            Value
            
            
            Number
            
            
            Value
            
            Number
            
            Value
            
            
            Number
            
            
            Value
            
            
            Capital
            
            
            Adjustment
            
            
            Deficit
            
            
            TotalBalance
      at August 31, 2006
            
            7,887,999
            
            
            $
            7,888
            
            
            
            
            
            $
            -
            
            
            
            
            
            $
            -
            
            
            
            $
            -
            
            
            
            20,983,260
            
            
            $
            2,098
            
            
            
            -
            
            
            $
            (256,320
            )
            
            $
            (19,049,166
            )
            
            $
            (19,295,500
            )Comprehensive
      lossNet
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,057,458
            
            
            
            4,057,458Foreign    
      currency translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            150,776
            
            
            
            
            
            
            
            150,776Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,208,234Conversion
      of Series A Preferred Stock
            
            (302,801
            )
            
            
            (303
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            302,801
            
            
            
            30
            
            
            
            273
            
            
            
            
            
            
            
            -
            
            
            
            -Common
      stock issued for dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            309,839
            
            
            
            31
            
            
            
            518,869
            
            
            
            
            
            
            
            (518,900
            )
            
            
            -Preferred
      Series B Stock issued in connection with financing
            
            
            
            
            
            
            
            
            
            207
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,864,502
            
            
            
            
            
            
            
            
            
            
            
            1,864,502Value
      Assigned to Series B Warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,099,044
            )
            
            
            
            
            
            
            (2,017,695
            )
            
            
            (4,116,739
            )Issue
      of Common and Series A preferred Stock for warrants, net of
      expense
            
            188,800
            
            
            
            189
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,076,800
            
            
            
            208
            
            
            
            1,189,042
            
            
            
            
            
            
            
            
            
            
            
            1,189,439Stock
      Option expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            486,118
            
            
            
            
            
            
            
            -
            
            
            
            486,118Series
      A Warrants reclassification
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            17,364,812
            
            
            
            
            
            
            
            -
            
            
            
            17,364,812Series
      B Warrants reclassification
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,084,747
            
            
            
            
            
            
            
            -
            
            
            
            3,084,747Common
      Stock issues for Services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            40,000
            
            
            
            4
            
            
            
            61,996
            
            
            
            
            
            
            
            -
            
            
            
            62,000Balance
      at August 31, 2007
            
            7,773,998
            
            
            
            7,774
            
            
            
            207
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            
            23,712,700
            
            
            
            2,371
            
            
            
            22,471,315
            
            
            
            (105,544
            )
            
            
            (17,528,303
            )
            
            
            4,847,613Comprehensive
      lossNet
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,681,122
            )
            
            
            (3,681,122
            )Foreign
      currency translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (105,649
            )
            
            
            
            
            
            
            (105,649
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,786,771
            )Stock
      option expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,780,882
            
            
            
            
            
            
            
            
            
            
            
            1,780,882Stock
      Issued for services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            85,000
            
            
            
            9
            
            
            
            90,591
            
            
            
            
            
            
            
            
            
            
            
            90,600Common
      stock issued for dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            681,450
            
            
            
            68
            
            
            
            630,075
            
            
            
            
            
            
            
            (630,143
            )
            
            
            -Preferred
      Series C Stock issued in connection with financing
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            747,870
            
            
            
            748
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            799,900
            
            
            
            
            
            
            
            
            
            
            
            800,648Deemed
      Dividend
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            163,386
            
            
            
            
            
            
            
            (163,386
            )
            
            
            -Preferred
      Series D Stock issued in connection with financing
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            37,500
            
            
            38
            
            
            
            -
            
            
            
            
            
            
            
            1,461,539
            
            
            
            
            
            
            
            
            
            
            
            1,461,577Preferred
      Series D Stock issued in connection with warrant exchange
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            267,058
            
            
            267
            
            
            
            
            
            
            
            
            
            
            
            100,093
            
            
            
            
            
            
            
            (100,360
            )
            
            
            -Balance
      at August 31, 2008
            
            7,773,998
            
            
            $
            7,774
            
            
            
            207
            
            
            $
            -
            
            
            
            747,870
            
            
            $
            748
            
            304,558
            
            $
            305
            
            
            
            24,479,150
            
            
            $
            2,448
            
            
            $
            27,497,781
            
            
            $
            (211,193
            )
            
            $
            (22,103,314
            )
            
            $
            5,194,549








See
accompanying summary of accounting policies and notes to financial
statements





F-4


EDGEWATER
      FOODS INTERNATIONAL, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSYEARS
      ENDED AUGUST 31, 2008 and 20072008
            
            
            2007Cash
      flows from operating activities:Net
      income (loss)
            
            $
            (3,681,122
            )
            
            $
            4,057,458Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            563,456
            
            
            
            351,092Bad
      debt expenseChanges
      in fair value of warrants
            
            
            -
            
            
            
            (5,826,630
            )Stock
      option expense
            
            
            1,780,882
            
            
            
            486,118Common
      stock issued for services
            
            
            90,600
            
            
            
            62,000Gain
      on retirement of debt
            
            
            -
            
            
            
            (158,728
            )Changes
      in current assets and liabilities:Accounts
      receivable
            
            
            (121,979
            )
            
            
            (34,573
            )Other
      current assets
            
            
            (18,769
            )
            
            
            (16,661
            )Loan
      receivables, related party
            
            
            (31,819
            )
            
            
            (59,245
            )Inventory
            
            
            (449,516
            )
            
            
            (575,462
            )Accounts
      payable and accrued liabilities
            
            
            269,769
            
            
            
            33,198Net
      cash used in operating activities
            
            
            (1,598,498
            )
            
            
            (1,681,433
            )Cash
      flows from investing activities:Purchase
      of property, plant and equipment
            
            
            (1,592,581
            )
            
            
            (1,408,247
            )Net
      cash used in investing activities
            
            
            (1,592,581
            )
            
            
            (1,408,247
            )Cash
      flows from financing activities:Net
      proceeds from line of credit
            
            
            131,917
            
            
            
            -Proceeds
      from short term debt
            
            
            -
            
            
            
            4,175Payment
      of short term debt
            
            
            (821
            )
            
            
            (199,384
            )Proceeds
      from long term debt
            
            
            29,798
            
            
            
            237,486Payment
      of long term debt
            
            
            (114,224
            )
            
            
            (259,688
            )Proceeds
      from sale of common stock
            
            
            -
            
            
            
            1,083,239Proceeds
      from sale of preferred stock
            
            
            2,262,225
            
            
            
            1,970,702Net
      cash provided by financing activities
            
            
            2,308,895
            
            
            
            2,836,530Foreign
      currency translation effect
            
            
            (62,386
            )
            
            
            93,276Net
      decrease in cash
            
            
            (944,570
            )
            
            
            (159,874
            )Cash,
      beginning of period
            
            
            1,656,868
            
            
            
            1,816,742Cash,
      end of period
            
            $
            712,298
            
            
            $
            1,656,868Supplemental
      disclosure of cash flow informationNet
      cash paidInterest
            
            $
            42,059
            
            
            $
            31,533Income
      taxes
            
            $
            -
            
            
            $
            -Supplemental
      disclosure of non-cash flow informationIssuance
      of stock for dividends
            
            $
            630,142
            
            
            $
            518,900Warrant
      liability incurred in connection with financing
            
            $
            -
            
            
            $
            4,116,739Reclassification
      of warrant liability
            
            $
            -
            
            
            $
            (20,449,559
            )







See
accompanying summary of accounting policies and notes to financial
statements







F-5







EDGEWATER
FOODS INTERNATIONAL, INC.




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
1.  Basis of Presentation, Organization and Nature of
Operations





Edgewater
Foods International Inc., a Nevada Corporation, is the parent company of Island
Scallops Ltd., a Vancouver Island aquaculture company. Island Scallops was
established in 1989 and for over 19 years has operated a scallop farming and
marine hatchery business. Island Scallops is dedicated to the farming,
processing and marketing of high quality, high value marine species
(scallops).





Note
2.  Significant Accounting Policies





Principles
of Consolidation




The
accompanying consolidated financial statements include the accounts of the
acquired entities since their respective dates of acquisition.  All
significant inter-company amounts have been eliminated.




Cash
and equivalents





Cash and
equivalents include cash, bank indebtedness, and highly liquid short term market
investments with terms to maturity of three months or less.  We
consider all highly liquid investments with original maturities of 90 days or
less to be cash equivalents.  We maintain our cash balances primarily
in a financial institution, which exceeded federally insured limits by $262,298
at August 31, 2008.  We have not experienced any losses, in such
accounts and believe it is not exposed to any significant credit risk on cash
and cash equivalents.





Accounts
receivable





Accounts
receivable is presented  a net of allowance for doubtful
accounts.  The allowance for doubtful accounts reflects estimates of
probable losses in accounts receivable.  The allowance is determined
based on balances outstanding for over 90 days at the period end date,
historical experience and other current information.





Loans
receivable





Loans
receivable is presented a net of an allowance for loan losses, as
necessary.  The loans are written off when collectability becomes
uncertain.





Inventory





Edgewater
maintains inventories of raw materials for its aquaculture products, of biomass
(inventory of live aquaculture product being actively cultivated), and of
finished goods (aquaculture product ready for sale).






F-6





Inventories
are reported at the lesser of cost or estimated net realizable
value.  Biomass and finished goods includes direct and reasonably
attributable indirect production costs related to hatchery, cultivation,
harvesting, and processing activities.  Carrying costs per unit are
determined on a weighted average basis.





At August
31, 2008 and 2007, inventory consisted of the Biomass (Scallops).





Reclassifications





Certain
amounts in the 2007 financial statements have been reclassified to conform to
the 2008 financial statement presentation.





Long
term investments





Long term
investments are recorded at cost.  We review our investments
periodically to assess whether there is an “other than temporary” decline in the
carrying value of the investment.  We consider whether there is an
absence of an ability to recover the carrying value of the investment by
reference to projected undiscounted future cash flows for the
investment.  If the projected undiscounted future cash flow is less
than the carrying amount of the asset, the asset is deemed
impaired.  The amount of the impairment is measured as the difference
between the carrying value and the fair value of the asset.





Property,
plant, and equipment





Property,
plant and equipment are carried at cost, less accumulated depreciation.
 Depreciation is included with general and administrative expenses and in
some cases cost of goods sold in the accompanying statement of operations and
calculated by using the straight-line method for financial reporting and
accelerated methods for income tax purposes.  The recovery classifications
for these assets are listed as follows:





YearsFacility
      and operating plant
            20Manufacturing
      equipment
            3–7Furniture
      and fixtures
            2–7Office
      equipment
            5Leasehold
      improvements
            Life
      of leaseProperty
      and equipment
            5Vehicles
            5





Expenditures
for maintenance and repairs are charged against income as incurred whereas major
improvements are capitalized.






F-7






Change
in Depreciation Method




Effective
September 1, 2006, as a result of management’s evaluation of long-lived
depreciable assets, we adopted the straight-line method of depreciation for all
property, plant and equipment.  Under the new provisions of SFAS No. 154
“Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20
and FASB Statement No. 3,” which becomes effective as of September 1, 2006, a
change in depreciation method is treated as a change in estimate.  The
effect of the change in depreciation method will be reflected on a prospective
basis beginning September 1, 2006, and prior period results will not be
restated.  As the results of management’s evaluation indicated the current
estimated useful lives of our assets were appropriate, the depreciable lives of
property, plant and equipment will not be changed.  We believe that the
change from the declining balance depreciation method to the straight-line
method will better reflect the pattern of consumption of the future benefits to
be derived from those assets being depreciated and will provide a better
matching of costs and revenues over the assets’ estimated useful
lives.




Impairment
of long-lived assets





We
monitor the recoverability of long-lived assets, including property, plant and
equipment and intangible assets, based upon estimates using factors such as
expected future asset utilization, business climate, and undiscounted cash flows
resulting from the use of the related assets or to be realized on sale. Our
policy is to write down assets to the estimated net recoverable amount, in the
period in which it is determined likely that the carrying amount of the asset
will not be recoverable.  At August 31, 2008 no indication of
impairment was present.





Government
assistance





Government
assistance we receive, such as grants, subsidies, and tax credits, is recorded
as a recovery of the appropriate related expenditure in the period that the
assistance is received.





We have
received government assistance in the form of loans, for which repayment may not
be required if we fail to meet sufficient future revenue levels to repay these
loans based on a percentage of gross sales for certain products over a defined
period of time. Such assistance, if  received, is initially recorded
as a liability, until such time as all conditions for forgiveness are met, and
is then recognized as other income in that period.





Farm
license costs





We must
pay annual license costs in respect to government-granted tenures that it holds,
which gives us the right to use certain offshore ocean waters for the purpose of
aquaculture farming. Such license costs are recognized as an expense over the
period of the license.





Research
and development costs





Development
costs include costs of materials, wages, and reasonably attributable indirect
costs incurred by us which are directly attributable to the development of
hatchery techniques for sablefish and shellfish.  These costs are
expensed when incurred.





Research
costs are expensed when incurred.






F-8





Income
taxes





We
calculate our provision for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes) (“SFAS
109”), which requires an asset and liability approach to financial accounting
for income taxes. This approach recognizes the amount of taxes payable or
refundable for the current year, as well as deferred tax assets and liabilities
attributable to the future tax consequences of events recognized in the
financial statements and tax returns. Deferred income taxes are adjusted to
reflect the effects of enacted changes in tax laws or tax rates. Deferred income
tax assets are recorded in the financial statements if realization is considered
more likely than not.





Revenue
recognition





We
recognize revenue when it is realized or realizable, and earned.  We
consider revenue realized or realizable and earned when it has persuasive
evidence of a contract, the product has been delivered or the services have been
provided to the customer, the sales price is fixed or determinable, and
collectability is reasonably assured.





Our
revenue is derived principally from the sale of scallops we produce or purchase
from third parties, and from the sale of seed and farm supplies to other
aquaculture farms.




Cost
of goods






Cost of
goods sold consists primarily of farming, harvesting and processing costs
associated with the growth, transfer and sales preparation of our products
(principally scallops).  These costs consist primarily of salaries and
benefits and allocated overhead costs for consulting and support personnel
engaged in the farming, harvesting and processing of our
products.  All costs are recognized at time of delivery.




Financial
instruments





The
carrying amount of our financial instruments, which includes cash, accounts
receivable, loans receivable, accounts payable and accrued liabilities, short
term debt, shareholder debt, and long term debt, approximate fair value based on
either i) the short-term nature of the instrument or ii) the reasonableness of
the interest rate as compared to market rates for the long-term instruments. It
is management’s opinion that we are not exposed to significant interest,
currency or credit risk arising from these financial instruments unless
otherwise noted.





Derivative
Financial Instruments





In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument
liability.






F-9





We
account for all derivatives financial instruments in accordance with SFAS No.
133. Derivative financial instruments are recorded as liabilities in the
consolidated balance sheet, measured at fair value.  When available,
quoted market prices are used in determining fair value.  However, if
quoted market prices are not available, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques.





The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.





Derivative
financial instruments that are not designated as hedges or that do not meet the
criteria for hedge accounting under SFAS No. 133 are recorded at fair value,
with gains or losses reported currently in earnings.  All derivative
financial instruments we held as of August 31, 2008, were not designated as
hedges.





Foreign
exchange





The
functional currency of our foreign subsidiary is the local foreign currency
(Canadian dollars). All assets and liabilities denominated in foreign currencies
are translated into U.S. dollars at the exchange rate prevailing on the balance
sheet date. Revenues, costs and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments resulting from
translation of the subsidiaries' accounts are accumulated as a separate
component of shareholders' equity. Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of operations
and have not been significant.





Use
of estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses and
disclosure of contingent assets and liabilities. Such estimates include
providing for amortization of property, plant, and equipment, and valuation of
inventory. Actual results could differ from these estimates.





Concentration
of risk





We
operate in the regulated aquaculture industry.  Material changes in
this industry or the applicable regulations could have a significant impact on
our business.






F-10






The
quality and quantity of the aquaculture products we cultivate, harvest and
process could be impacted by biological and environmental risks such as
contamination, parasites, predators, disease and pollution.  These
factors could severely restrict our ability to successfully market our
products.





During
the year ended August 31, 2008, five customers, Sea World Fisheries, Turning
Point, Organic Ocean Seafood, Inc., TriStar Seafood Supply Ltd. And Port Hardy
Seafood Ltd., individually accounted for 12%, 12%, 10%, 9% and 5% or our
revenues respectively, and we therefore are materially dependent upon such
customers. During the year ended August 31, 2007, four customers, Sea World
Fisheries, TriStar Seafood Supply Ltd., Port Hardy Seafood Ltd. and Lobsterman,
individually accounted for 17%, 13%, 12% and 12% or our revenues respectively,
and we therefore are materially dependent upon such customers. Our ongoing
operations are dependent on continued business from these
customers.





Location
risk





Most, if
not all, of our aquaculture are concentrated in one growing region off the coast
of Vancouver Island, British Columbia.  As such, if there were a major
environmental disaster, our ongoing operations could be materially
impacted.





Stock-based
compensation




We
account for stock-based employee compensation arrangements using the fair value
method in accordance with the provisions of the FASB issued Statement of
Financial Accounting Standards No, 123 (revised 2004) (Share-Based Payment)
(“SFAS 123R”). SFAS 123R is a revision of SFAS 123 (Accounting for Stock-Based
Compensation), and supersedes Accounting Principles Beard (“APB”) Opinion No. 25
(Accounting for Stock Issued to Employees). SFAS 123R requires that the fair
value of employees awards issued, modified, repurchased or cancelled after
implementation, under share-based payment arrangements, be measured as of the
date the award is issued, modified, repurchased or cancelled. The resulting cost
is then recognized in the statement of earnings over the service
period.





We
periodically issue common stock for acquisitions and services
rendered.  Common stock issued is valued at the estimated fair market
value, as determined by our management and board of
directors.  Management and the board of directors consider market
price quotations, recent stock offering prices and other factors in determining
fair market value for purposes of valuing the common stock.  The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the various weighted average
assumptions, including dividend yield, expected volatility, average risk-free
interest rate and expected lives.





Basic
and diluted net loss per share




Basic
income or loss per share includes no dilution and is computed by dividing net
income or loss by the weighted-average number of common shares outstanding for
the period.  Diluted income or loss per share includes the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock (using the treasury stock method
for stock options and using the if-converted method for convertible notes), if
dilutive.








F-11





The
following is a reconciliation of the numerators and denominators of the basic
and diluted net income per share computations:








Year
      ending August 31, 2008
            
            
            Year
      ending August 31, 2007Numerator:Net
      income (loss) applicable to
      common    shareholders
            
            $
            (4,575,010
            )
            
            $
            3,538,559Denominator:
            
            
            --
            
            
            
            --Denominator
      for basic net income per share:
            
            
            23,993,935
            
            
            
            22,228,633Weighted
      average dilutive potential common sharesSeries
      A Preferred Stock
            
            
            -
            
            
            
            7,752,699Series
      B Preferred Stock
            
            
            -
            
            
            
            1,114,574Series
      C Preferred Stock
            
            
            -
            
            
            
            -Series
      D Preferred Stock
            
            
            -
            
            
            
            -Options
      and warrants
            
            
            -
            
            
            
            1,177,982Denominator
      for diluted net income per share
            
            
            23,993,935
            
            
            
            32,273,888Basic
      net income (loss) per share
            
            $
            (0.19
            )
            
            $
            0.16Diluted
      net income (loss) per share
            
            $
            (0.19
            )
            
            $
            0.11




The
treasury stock effect of options and warrants to purchase shares of common stock
outstanding at August 31, 2008 has not been included in the calculation of the
net loss per share as such effect would have been anti-dilutive. As a result of
these items, the basic and diluted loss per share for the year ending August 31,
2008 presented are identical.




Recent
accounting pronouncements





In
December 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 110 (“SAB 110”). SAB 110 states that the staff will continue
to accept, under certain circumstances, the use of the simplified method for
estimating the expected term of “plain vanilla” share options in accordance with
SFAS 123(R) beyond December 31, 2007. The Company believes there will be no
material impact on the Company’s financial statements upon adoption of this
standard.








F-12




In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, and an amendment of ARB Statement No. 51.”
SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51, “Consolidated
Financial Statements,” to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS No. 160 clarifies that a non-controlling interest in
a subsidiary, which is sometimes referred to as a minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements.  Among
other requirements, SFAS No. 160 requires consolidated net income to be reported
at amounts that include the amounts attributable to both the parent and the
non-controlling interest.  It also requires disclosure, on the face of
the consolidated income statement, of the amounts of consolidated net income
attributable to the parent and the non-controlling interest. SFAS No. 160 will
be effective for the Company on August 31, 2009, and is not expected to have a
significant impact on the Company’s financial condition or results of
operations.





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations
(Revised)”, to replace SFAS No. 141, “Business Combinations. SFAS No. 141(R)
requires the use of the acquisition method of accounting, defines the acquirer,
establishes the acquisition date and broadens the scope to all transactions and
other events in which one entity obtains control over one or more other
businesses. This statement is effective for business combinations or
transactions entered into for fiscal years beginning on or after December 15,
2008. The Company is evaluating the impact of SFAS No. 141 (R).





Management
has evaluated other recent accounting pronouncements and does not believe that
the adoption of these would have a material impact on our consolidated financial
statements.





Note
3.  Property, Plant and Equipment





Property,
plant and equipment at August 31, 2008, consisted of the following:




Cost
            
            
            Accumulated
      Amortization
            
            
            Net Book
      ValueLand
            
            $
            236,731
            
            
            $
            -
            
            
            $
            236,731Buildings
            
            
            1,161,108
            
            
            
            (294,883
            )
            
            
            866,225Seawater piping and
      tanks
            
            
            641,535
            
            
            
            (339,478
            )
            
            
            302,057Boats and
      barge
            
            
            620,431
            
            
            
            (187,385
            )
            
            
            433,046Field
      equipment
            
            
            3,496,702
            
            
            
            (1,444,566
            )
            
            
            2,052,136Office
      equipment
            
            
            24,348
            
            
            
            (14,960
            )
            
            
            9,388Vehicles
            
            
            100,523
            
            
            
            (49,520
            )
            
            
            51,003Computer
      equipment
            
            
            55,924
            
            
            
            (24,174
            )
            
            
            31,750$
            6,337,302
            
            
            $
            (2,354,966
            )
            
            $
            3,982,336




Depreciation
expense for the years ended August 31, 2008 was approximately
$563,000.






F-13




Property,
plant and equipment at August 31, 2007 consisted of the following:




Cost
              
              
              Accumulated
      Amortization
              
              
              Net Book
      ValueLand
              
              $
              237,534
              
              
              $
              -
              
              
              $
              237,534Buildings
              
              
              953,896
              
              
              
              (256,913
              )
              
              
              696,983Seawater piping and
      tanks
              
              
              630,877
              
              
              
              (308,509
              )
              
              
              322,368Boats and
      barge
              
              
              398,551
              
              
              
              (151,355
              )
              
              
              247,196Field
      equipment
              
              
              2,425,922
              
              
              
              (1,012,682
              )
              
              
              1,413,240Office
      equipment
              
              
              19,556
              
              
              
              (14,044
              )
              
              
              5,512Vehicles
              
              
              66,466
              
              
              
              (39,778
              )
              
              
              26,688Computer
      equipment
              
              
              28,021
              
              
              
              (14,308
              )
              
              
              13,713$
              4,760,823
              
              
              $
              (1,797,589
              )
              
              $
              2,963,234




Depreciation
expense for the year ended August 31, 2007 was approximately
$351,000.




Note
4.  Related Party Transactions





At August
31, 2008, we have five secured notes receivable from RKS Laboratories, Inc., a
Vancouver research and development company that is working towards developing
superior strains of scallops with beneficial traits such as higher meat yield
and rapid growth.  Robert Saunders, our President and CEO, owns 100% of
RKS.  The first  non-interest bearing notes in the combined
amount of $81,982 which are secured by all assets of RKS, were originally due on
or before various dates between June 15, 2007 and August 31, 2008, but were
recently extended to August 31, 2009.  The second non-interest bearing note
in the amount of $5,328, which is also secured by all assets of RKS, is due on
or before November 30, 2008.  The fourth non-interest bearing note in
the amount of $19,486, which is also secured by all assets of RKS, is due on or
before February 28, 2009.  The fourth non-interest bearing note in the
amount of $2,257, which is also secured by all assets of RKS, is due on or
before May 31, 2009.  The fifth non-interest bearing note in the
amount of $5,026, which is also secured by all assets of RKS, is due on or
before August 31, 2009. These amounts are included in assets as loans
receivable.






F-14




Note
5.  Investments in Tenures





Edgewater
carries its Investment in Tenures at $3,758 and $3,770 at August 31, 2008 and
2007, respectively.  This amount represents the carrying costs of
certain shellfish tenures acquired by Island Scallops’ subsidiary, 377332 B.C.
Ltd.  Shellfish tenures are government-granted rights allowing limited
use of offshore waters for the purposes of cultivation of
shellfish.  The granting of shellfish tenure rights are the
responsibility of the Provincial (British Columbia) Government and not the
Canadian Federal Government.  As such, the government assistance that
we receive via loan agreement with various Federal Agencies has no effect on our
ability to renew and/or modify these tenure agreements.  The tenure
held by 377332 B.C. Ltd. has an expiration date of July 10,
2021.  Other shellfish tenures held by Edgewater and our subsidiaries
have expiration dates ranging from 2021 to 2024.





These
tenures are considered to have an indefinite useful life because renewal on
expiration is anticipated, and are not subject to amortization.





Note
6.  Accounts Payable and Accrued Liabilities





Included
in accounts payable and accrued liabilities are balances outstanding related to
credit cards held in the name of one of our shareholders totaling $33,292 and
$25,578 at August 31, 2008 and 2007, respectively.  We used these
credit cards as a means of short term financing and incur interest charges on
such unpaid balances.





Included
in accounts payable and accrued liabilities at August 31, 2008, is an amount of
$131,859 in respect to an agreement to purchase geoduck seed from us (for
additional information see Note 13 – Contingent Liabilities).





Included
in accounts payable and accrued liabilities at August 31, 2008 and 2007, is
$95,065 and $87,869 of principal due and interest accrued in respect to the loan
from the National Research Council of Canada Industrial Research Assistance
Program (see Note 9 – Long Term Debt for additional information).





Note
7.  Short Term Debt





Included
in short-term debt at August 31, 2008, are estimated royalties of $62,522
payable to a third party from whom the former sole shareholder of Island
Scallops originally acquired the shares of Island Scallops.  The 1992
share purchase agreement (for Island Scallops) provided that the third party was
to receive 3% of revenues from Island Scallops as earned, on a quarterly basis,
throughout the period from December 1, 1992 to November 30, 2002.  The
third party holds a first charge (or first lien) over our inventory (including
broodstock) in the amount of $328,793 in support of its royalty
entitlement.  The third party has not taken further action to enforce
payment of the arrears liability.  To date, we have accrued the entire
balance of $62,522 as a current liability and we plan to pay it with available
funds in the near future.




Included
in short-term notes payable at August 31, 2008, is an unsecured non-interest
bearing demand loan payable to an individual with a face value of $47,126 and no
specific terms of repayment.  However, the lender had previously
informally requested that the loan be repaid in full by October 6,
2008.








F-15





Note
8.  Line of Credit





Included
in line of credit at August 31, 2008 are two bank lines of
credit.  The first line is a $78,000 bank line of credit for Island
Scallops.  The interest rate on the line of credit is 7.5% as of
August 31, 2008.  At August 31, 2008, the balance due is $77,795. The
second line is a $50,000 bank line of credit for Island Scallops.  The
interest rate on the line of credit is 6.5% as of August 31, 2008.  At
August 31, 2008, the balance due is $46,971.  This second line of
credit is subject to a personal guarantee by our Chairman and CEO, Robert
Saunders.








Note
9. Long Term Debt





These
consolidated financial statements include a Western Diversification Program
non-interest bearing loan to Island Scallops that requires repayment equal to
12% of gross revenues from our scallop sales, payable semi-annually, with no
specified due date.  The repayment terms have been formally amended
several times.  Most recently, in June 2008, the Western
Diversification Program agreed to allow Island Scallops to suspend repayment of
the roughly $402,000 loan until October 2008.  Starting in October
2008, Island Scallops began repaying the loan at a rate of $9,394 per month for
five months.   Once Island Scallops has completed these five
months of loan payments are completed, the Western Diversification Program
has  agreed to base quarterly repayments on 3% of the gross scallop
sales (as opposed to the originally agreed upon 4%) or $23,485 whichever is
greater.    The company is currently seeking to renegotiate
this new agreement to further extend the repayment terms.  At August
31, 2008, the balance due is $381,286, of which $117,426 is reflected in the
current portion of long term debt and the remaining balance of $284,970 is
reflected as long term debt.





These
consolidated financial statements include Island Scallops’ unsecured loan from
the National Research Council of Canada Industrial Research Assistance Program
which requires quarterly payments commencing March 1, 2003 equal to 3% of gross
revenues of Island Scallops until the earlier of full repayment or December 1,
2012.  If at December 1, 2012, Island Scallops has not earned
sufficient revenues to be required to repay the original loan amount, the
remaining portion of the loan is to be forgiven.  Amounts currently
due at August 31, 2008, bear interest at a rate of 1% per month.  At
August 31, 2008, Island Scallops is in arrears in respect to the payment of
these amounts.  The National Council of Canada Industrial Research
Assistance Program has requested payment of the $95,065 that they claim is owed
under this loan agreement.  As such, at August 31, 2008, $95,065 is
included in accounts payable and accrued liabilities and the remaining full
principal balance of $279,459 is reflected in the current portion of long term
debt. We are seeking to renegotiate the repayment terms.





These
consolidated financial statements include Island Scallop’s mortgage loan
repayable at $2,677 per month (currently interest only calculated at 10.5% per
annum).  The loan is secured by a second charge on the real property
of Island Scallops. At August 31, 2008, the principal due is
$263,034.








F-16




As a
result, at August 31, 2008, we had $944,889 of long-term debt less a current
portion of $396,885 for a balance of $548,004.  Principal payments due
within each of the next five fiscal years and subsequently, in respect to long
term debt are approximately as follows:





2009
            
            $
            396,8852010
            
            
            187,8822011
            
            
            93,9412012
            
            
            3,1472013
            
            
            -2014
      and beyond
            
            $
            263,034$
            944,889







Note
10.  Series C Preferred Stock Financing





We
completed a private equity financing of $897,444 on November 5, 2007, with one
accredited investor.  Net proceeds from the offering are approximately
$801,000.  As part of this financing, the investor returned the Series
J Warrant, Series D Warrant, Series E Warrant and Series F Warrant that they
received as a result of our Series B financing completed on January 16,
2007.  Pursuant to this financing, we issued 747,870 shares of our
Series C Preferred Stock,  par value $0.001 per share and the investor
also received one of each of the following warrants: (i) Series A Warrant, (ii)
Series B Warrant, (iii) Series C Warrant, (iv) Series J Warrant, (v) Series D
Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to purchase a
number of shares of common stock equal to fifty percent (50%) of the number of
shares of common stock issuable upon conversion of the purchaser’s preferred
stock, except for the Series J Warrants, which shall entitle the investor to
purchase a number of shares of our Series C Preferred Stock equal to one hundred
percent (100%) of the number of Series C Preferred Stock it received in the
financing.  Each of the Warrants has a term of 5 years, except for the
Series J Warrants, which have a term of 1 year.  Each share of the
preferred stock is convertible into one fully paid and nonassessable share of
our common stock at an initial conversion price of $1.20, subject to
adjustment.  We are obligated to file a registration statement on or
before December 5, 2007 providing for the resale of the shares of common stock
issuable upon conversion of the preferred stock and the shares of common stock
underlying the Warrants and underlying the preferred stock issuable upon
exercise of the Warrants.  In connection with the financing, our
management agreed not to sell any of our securities owned by them, their
affiliates or anyone they have influence over until the registration statement
has been effective for nine months.    In connection with
the financing, a deemed dividend was recorded for $163,386 based on the relative
fair values of the preferred shares and warrants.




In
connection with this financing, we paid cash compensation to a placement
consultant in the amount of approximately $72,000 and issued him placement
consultant warrants, exercisable for a period of three years from the date of
issue. The placement consultant's warrants allow him to purchase up to (i)
74,787 shares of Series C Preferred Stock, and each of the following warrants,
which are identical to the warrants issued to the investors of the financing:
(i) Series A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series
D Warrant, (v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F
Warrant, each to purchase 37,393 shares of common stock, except for the Series J
Warrants, which shall entitle the Consultant to purchase 74,787 shares of our
Series C Preferred Stock.





The net
proceeds from the financing are to be used for working capital and general
corporate purposes.






F-17




Note
11.  Series D Preferred Stock Financing





On May
29, 2008, we signed a Series D Convertible Preferred Stock Purchase Agreement
with one accredited investor whereby such investor was committed, subject to the
satisfaction of certain closing conditions, to purchase $1,500,000 of our Series
D Preferred Shares.  As part of this financing, we also entered into
an Exchange Agreement with the investor and certain other holders of our
outstanding warrants, whereby the Series J Warrant that the investor received
pursuant to the financing we closed on November 5, 2007, as disclosed in the
Form 8-K filed on November 7, 2007, was cancelled, and the investor and certain
other holders of our outstanding warrants returned to us warrants to purchase an
aggregate of 24,941,605 shares of our common stock, which the investor and such
other warrant holders received pursuant to the financings we closed on: (i)
April 12, 2006, as disclosed in our Form 8-K filed on April 14, 2007; (ii) May
30, 2006, as disclosed in our Form 8-K filed on May 30, 2006; and (iii) November
5, 2007, as disclosed in our Form 8-K filed on November 7, 2007, in exchange for
an aggregate of 267,059 Series D Preferred Shares. The net proceeds from the
financing are to be used for supplies, processing plant upgrades, working
capital and general corporate purposes.  All of the closing conditions
were satisfied and accordingly we completed the private equity financing and
received net proceeds of approximately $1.46 million on June 11, 2008. In
connection with the financing, a deemed dividend was recorded for $100,360 based
on the relative fair values of the preferred shares and exchanged
warrants.








Pursuant
to the financing, we filed a Certificate of Designation of the Relative Rights
and Preferences of our Series D Convertible Preferred Stock on May 29,
2008.  The Certificate of Designation designates 380,000 shares of our
authorized preferred stock as Series D Convertible Preferred Stock, which ranks
junior to our Series A, Series B and Series C Convertible Preferred Stock, but
senior to our common stock.  Except with respect to specified
transactions that may affect the rights, preferences, privileges or voting power
of the Series D Preferred Shares and except as otherwise required by Nevada law,
the Series D Preferred Shares have no voting rights.  At any time on
or after the issuance date, the holder of any Series D Preferred Shares may, at
the holder's option, elect to convert all or any portion of the Series D
Preferred Shares held by such person into a number of fully paid and
nonassessable shares of common stock equal to the quotient of (i) the stated
value ($40.00 per share) of the Series D Preferred Shares being converted
divided by (ii) the conversion price, which initially is $0.80 per share,
subject to certain adjustments.  In the event of our liquidation,
dissolution or winding up, the holders shall receive a liquidation preference
equal to 120% of the stated value per Series D Preferred Share.





Note
12.  Preferred Stock Dividends





On
December 31, 2006, we issued 138,565 shares of common stock to the Series A
Convertible Preferred Stock holders.  The number of shares issued was
based on the Dividend Payment at a rate of 8% per annum (subject to a pro rata
adjustment) of the Liquidation Preference Amount ($1,416,000 for the April 12
financing, $1,500,000 for the May 30 financing, $1,550,000 for the June 30
financing and $1,450,000 for the July 11 financing) payable in shares equal to
90% of the quotient of (i) the Dividend Payment divided by (ii) the average of
the VWAP for the twenty (20) trading days immediately preceding the date the
Dividend Payment is due, but in no event less than $0.65.  As such,
the shares were valued at approximately $234,000 and the total aggregate value
of the transaction was recorded as a preferred stock dividend.






F-18




On June
30, 2007, we issued 137,685 shares of common stock to the investors of our April
12, May 30, June 30 and July 11, 2006 financings as payment of the semi-annual
dividend (8% per annum) per the terms of the Certificate of Designation of the
Relative Rights and Preferences of the Series A Convertible Preferred Stock. The
number of shares issued was based on the dividend payment at a rate of 8% per
annum (subject to a pro rata adjustment) of the Liquidation Preference Amount
($1,416,000 for the April 12 financing, $1,500,000 for the May 30 financing,
$1,550,000 for the June 30 financing and $1,450,000 for the July 11 financing)
payable in shares equal to 90% of the quotient of (i) the dividend payment
divided by (ii) the average of the VWAP for the 20 trading days immediately
preceding the date the dividend payment is due, but in no event less than
$0.65.  As such, the shares were valued at approximately $228,000 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.





On June
30, 2007, we issued 33,589 shares of common stock to the investors of our
January 16, 2007 financing as payment of the semi-annual dividend (6% per annum)
per the terms of the Certificate of Designation of the Relative Rights and
Preferences of the Series B Convertible Preferred Stock (see Note 9 – Series B
Preferred Shares Financing for additional information on the Series B
Convertible Preferred Stock).  The number of shares issued was based
on the dividend payment at a rate of 6% per annum (subject to a pro rata
adjustment) of the Liquidation Preference Amount ($1,416,000) payable in shares
equal to 90% of the quotient of (i) the dividend payment divided by (ii) the
average of the VWAP for the 20 trading days immediately preceding the date the
dividend payment is due, but in no event less than $0.65.  As such,
the shares were valued at approximately $56,000 and the total aggregate value of
the transaction was recorded as a preferred stock dividend.





On
December 31, 2007, we issued 172,750 shares of common stock to the investors of
our April 12, May 30, June 30 and July 11, 2006 financings as payment of the
semi-annual dividend per the terms of the Certificate of Designation of the
Relative Rights and Preferences of the Series A Convertible Preferred Stock. The
number of shares issued was based on the dividend payment at a rate of 8% per
annum (subject to a pro rata adjustment) of the Liquidation Preference Amount
($1,416,000 for the April 12 financing, $1,500,000 for the May 30 financing,
$1,550,000 for the June 30 financing and $1,450,000 for the July 11 financing)
payable in shares equal to 90% of the quotient of (i) the dividend payment
divided by (ii) the average of the VWAP for the 20 trading days immediately
preceding the date the dividend payment is due, but in no event less than
$0.65.  As such, the shares were valued at approximately $233,500 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.




On
December 31, 2007, we issued 45,999 shares of common stock to the investors of
our January 16, 2007 financing as payment of the semi-annual dividend per the
terms of the Certificate of Designation of the Relative Rights and Preferences
of the Series B Convertible Preferred Stock.  The number of shares
issued was based on the dividend payment at a rate of 6% per annum (subject to a
pro rata adjustment) of the Liquidation Preference Amount ($1,416,000) payable
in shares equal to 90% of the quotient of (i) the dividend payment divided by
(ii) the average of the VWAP for the 20 trading days immediately preceding the
date the dividend payment is due, but in no event less than $0.65.  As
such, the shares were valued at approximately $63,000 and the total aggregate
value of the transaction was recorded as a preferred stock
dividend.





On
December 31, 2007, we issued 17,883 shares of common stock to the investors of
our November 5, 2007 financing as payment of the semi-annual dividend per the
terms of the Certificate of Designation of the Relative Rights and Preferences
of the Series C Convertible Preferred Stock The number of shares issued was
based on the dividend payment at a rate of 6% per annum (subject to a pro rata
adjustment) of the Liquidation Preference Amount (approximately $897,000)
payable in shares equal to 90% of the quotient of (i) the dividend payment
divided by (ii) the average of the VWAP for the 20 trading days immediately
preceding the date the dividend payment is due, but in no event less than
$0.65.  As such, the shares were valued at approximately $24,000 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.






F-19




On June
30, 2008, we issued 325,575 shares of common stock to the investors of our April
12, May 30, June 30 and July 11, 2006 financings as payment of the semi-annual
dividend per the terms of the Certificate of Designation of the Relative Rights
and Preferences of the Series A Convertible Preferred Stock. The number of
shares issued was based on the dividend payment at a rate of 8% per annum
(subject to a pro rata adjustment) of the Liquidation Preference Amount
($1,416,000 for the April 12 financing, $1,500,000 for the May 30 financing,
$1,550,000 for the June 30 financing and $1,450,000 for the July 11 financing)
payable in shares equal to 90% of the quotient of (i) the dividend payment
divided by (ii) the average of the VWAP for the 20 trading days immediately
preceding the date the dividend payment is due, but in no event less than
$0.65.  As such, the shares were valued at approximately $233,500 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.





On June
30, 2008, we issued 86,691 shares of common stock to the investors of our
January 16, 2007 financing as payment of the semi-annual dividend per the terms
of the Certificate of Designation of the Relative Rights and Preferences of the
Series B Convertible Preferred Stock.  The number of shares issued was
based on the dividend payment at a rate of 6% per annum (subject to a pro rata
adjustment) of the Liquidation Preference Amount ($1,416,000) payable in shares
equal to 90% of the quotient of (i) the dividend payment divided by (ii) the
average of the VWAP for the 20 trading days immediately preceding the date the
dividend payment is due, but in no event less than $0.65.  As such,
the shares were valued at approximately $62,500 and the total aggregate value of
the transaction was recorded as a preferred stock dividend.





On June
30, 2008, we issued 33,704 shares of common stock to the investors of our
November 5, 2007 financing as payment of the semi-annual dividend per the terms
of the Certificate of Designation of the Relative Rights and Preferences of the
Series C Convertible Preferred Stock.  (See Note10 – Series C
Preferred Shares Financing for additional information on the Series C
Convertible Preferred Stock).  The number of shares issued was based
on the dividend payment at a rate of 6% per annum (subject to a pro rata
adjustment) of the Liquidation Preference Amount (approximately $897,000)
payable in shares equal to 90% of the quotient of (i) the dividend payment
divided by (ii) the average of the VWAP for the 20 trading days immediately
preceding the date the dividend payment is due, but in no event less than
$0.65.  As such, the shares were valued at approximately $24,000 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.





Note
13.  Contingent Liabilities





Our
wholly owned subsidiary, Island Scallops, entered into an agreement in 1998 with
two parties, under which Island Scallops was to produce and sell geoduck seed to
the two parties. Island Scallops received advance payments from each of the two
parties in 2002 of approximately $64,140 and recognized related revenue of
$43,705 in respect to seed delivered in 2002. The balance of the deposits
received (advance payments), net of sales, totaling $131,859, is included in
accounts payable and accrued liabilities.





Management’s
position is that the two parties violated the terms of the agreement and we are
therefore entitled to retain the balance of the deposits.  Per the
terms of the original agreement, Island Scallops was entitled to make up any
shortfall in the product produced in the following year.  Although
product was available and offered by Island Scallops in the following year, the
two parties refused to honor the terms of the agreement and would not accept the
product (to make up the shortfall) in the following year.





As of
August 31, 2004, one of the two parties made claims that Island Scallops owed it
an amount totaling $88,925.   This particular party believed that
the agreement required Island Scallops to deliver the product in year one and
did not allow Island Scallops to make up any shortfall with product produced in
the following year.The
balance included in accounts payable and accrued liabilities related to this
party is $35,228.




Any
additional liability to us, or any reduction of the currently recognized
liability, in respect to these deposits will be recorded at the time a
conclusion to this matter can be determined.


F-20




Neither
we nor our wholly owned subsidiary maintain insurance covering the replacement
of our inventory. Consequently, we are exposed to financial losses or failure as
a result of this risk.





Note
14.  Income Taxes





We did
not provide any current or deferred United States federal, state or foreign
income tax provision or benefit for the period presented because we have
experienced operation losses since inception.  We have provided a full
valuation allowance on the deferred tax asset, consisting primarily of unclaimed
research and development expenditures, because of uncertainty regarding our
ability to realize the benefit.





Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the net
deferred taxes at August 31, 2008 and 2007 are as follows:





August
      31,
            
            
            August
      31,2008
            
            
            2007Deferred
      tax asset attributable to:Net
      operating loss carryover
            
            $
            4,386,000
            
            
            $
            3,541,000Less,
      valuation allowance
            
            
            (4,386,000
            )
            
            
            (3,541,000
            )Total
      net deferred tax asset
            
            $
            -
            
            
            $
            -





We follow
Statement of Financial Accounting Standards Number 109 (SFAS 109), “Accounting
for Income Taxes.” SFAS No. 109 requires a valuation allowance, if any, to
reduce the deferred tax assets reported if, based on the weight of the evidence,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.  Management has determined that a valuation
allowance of approximately $4,386,000 and $3,541,000 at August 31, 2008 and 2007
is necessary to reduce the deferred tax assets to the amount that will more than
likely than not be realized.  The change in valuation allowance for
2008 and 2007 was approximately $845,000 and $1,117,000
respectively.





At August
31, 2008, and 2007 we had net operating loss carryforwards amounting to
approximately $2,336,000 and $6,960,000 for U.S. and Canadian tax purposes,
respectively, that expires in various amounts beginning in 2009 and 2009 in the
U.S. and Canada, respectively.





The
federal statutory tax rate reconciled to the effective tax rate for 2008 and
2007 are as follows:





2008
            
            
            2007Tax
      at U.S. statutory rate
            
            
            34.0
            %
            
            
            34
            %State
      tax rate, net of federal benefits
            
            
            0.0
            
            
            
            0.0Foreign
      tax rate in excess of U.S. statutory rate
            
            
            17.6
            %
            
            
            17.6
            %Change
      in valuation allowance
            
            
            (51.6
            %)
            
            
            (51.6
            %)Effective
      tax rate
            
            
            0.0
            %
            
            
            0.0
            %







F-21




Note
15.  Stock-Compensation and Option Expense





Stock
Compensation





In June
2007, our wholly owned subsidiary, Island Scallops, Ltd. entered into a
Consulting Agreement with Pacific Crab Co., pursuant to which ISL will issue a
total of 100,000 shares of our common stock in exchange for consulting and
marketing services Pacific will provide to ISL.  Pursuant to the
agreement, ISL issued 40,000 of such shares to Pacific when the Agreement was
signed; the remaining 60,000 shares will vest ratably (5,000 shares per month)
at the beginning of each month for each month during the term of the agreement,
which initially is twelve months.  ISL also agreed that if certain
goals are met within the agreed upon timeframe, it will issue 15,000 shares
to Pacific at such time as the goals are reached, in which case the remaining
45,000 shares will continue to vest as described above.  The 40,000
shares issued were valued at $1.55 per share, the closing bid of our common
stock on the date of issue.  Therefore, total aggregate value of the
transaction recognized by the company in 2007 was $62,000. Going forward the
cost of these shares will be expense  at current market price as they
are issued.





On
October 31, 2007, we issued 25,000 shares of common stock to Pacific Crab
Seafood Company, Inc. as part of the 100,000 shares of our common stock that our
Board of Directors previously approved for the consulting and marketing services
that they will provide to us.  The remaining 35,000 shares will be
issued in equal monthly installments of 5,000 shares during the remaining term
of the agreement.  The shares were issued in accordance with the
exemption from the registration provisions of the Securities Act of 1933, as
amended, provided by Section 4(2) of such Act for issuances not involving any
public offering.  The 25,000 shares issued were valued at $1.28 per
share, the closing bid of our common stock on the date of
issue.  Therefore, total aggregate value of the transaction recognized
by the company was $32,000. Going forward the cost of these shares will be
expense at current market price as they are issued.





On
November 30, 2007 we issued 5,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 30,000 shares will be issued
in equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $1.25 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $6,250.
Going forward the cost of these shares will be expense at current market price
as they are issued.




On
January 1, 2008 we issued 5,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 25,000 shares will be issued
in equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $1.35 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $6,750.
Going forward the cost of these shares will be expense at current market price
as they are issued.






F-22




On
February 1, 2008 we issued 5,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 20,000 shares will be issued
in equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $0.98 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $4,900.
Going forward the cost of these shares will be expense at current market price
as they are issued.





On March
4, 2008 we issued 5,000 shares of common stock to Pacific Crab Seafood Company,
Inc. as part of the 100,000 shares of our common stock that our Board of
Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 15,000 shares will be issued
in equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $0.95 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $4,750.
Going forward the cost of these shares will be expense at current market price
as they are issued.





On April
1, 2008, we issued 5,000 shares of common stock to Pacific Crab Seafood Company,
Inc. as part of the 100,000 shares of our common stock that our Board of
Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 10,000 shares will be issued
in equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $0.95 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $4,750.
Going forward the cost of these shares will be expense at current market price
as they are issued.





On April
1, 2008, we issued 25,000 shares of common stock to Consulting for Strategic
Growth, Inc. as part of the 25,000 shares of our common stock that our Board of
Directors previously approved for the consulting and investor relations services
that they will provide to us.  The shares were issued in accordance
with the exemption from the registration provisions of the Securities Act of
1933, as amended, provided by Section 4(2) of such Act for issuances not
involving any public offering.  The 25,000 shares issued were valued
at $0.95 per share, the closing bid of our common stock on the date of
issue.  Therefore, total aggregate value of the transaction recognized
by the company was $23,750. Going forward the cost of these shares will be
expense at current market price as they are issued.





On May
19, 2008, we issued 5,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing services that
they will provide to us.  The remaining 5,000 shares will be issued in
equal monthly installments of 5,000 shares during the remaining term of the
agreement.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 5,000 shares issued were valued at $0.80 per share, the
closing bid of our common stock on the date of issue.  Therefore,
total aggregate value of the transaction recognized by the company was $4,000.
Going forward the cost of these shares will be expense at current market price
as they are issued.





On June
20, 2008, we issued the final 5,000 share installment of common stock to Pacific
Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock
that our Board of Directors previously approved for the consulting and marketing
services that they will provide to us.  The shares were issued in
accordance with the exemption from the registration provisions of the Securities
Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not
involving any public offering.  The 5,000 shares issued were valued at
$0.80 per share, the closing bid of our common stock on the date of
issue.  Therefore, total aggregate value of the transaction recognized
by the company was $4,000. Going forward the cost of these shares will be
expense at current market price as they are issued.








F-23




Stock
Options






In August
2005, our Board of Directors approved the “Edgewater Foods International 2005
Equity Incentive Plan.” The Board of Directors reserved 5,000,000 shares of our
common stock to be issued in the form of incentive and/or non-qualified stock
options for employees, directors and consultants to Edgewater. As of August 31,
2008, our Board of Directors had authorized the issuance of 2,962,000 options to
employees.






During
the years ended August 31, 2008 and 2007, $1,780,882 and $486,118 in stock
option expenses were recognized respectively.  An additional, $6,789
will be recognized in the three month period ending November 30,
2009.






Stock
option activity during the period ending August 31, 2008 and 2007, was as
follows:




Number
      of Shares
            
            
            Weighted
      Average Exercise PriceOutstanding,
      August 31, 2006
            
            
            282,000
            
            
            $
            1.50Granted
            
            
            2,680,000
            
            
            
            1.25Exercised
            
            
            --
            
            
            
            --Forfeited
            
            
            --
            
            
            
            --Expired
            
            
            --
            
            
            
            --Outstanding,
      August 31, 2007
            
            
            2,962,000
            
            
            
            1.26Granted
            
            
            30,000
            
            
            
            1.21Exercised
            
            
            --
            
            
            
            --Forfeited
            
            
            (400,000
            )
            
            
            1.50Expired
            
            
            --
            
            
            
            --Outstanding,
      August 31, 2008
            
            
            2,592,000
            
            
            $
            1.23Exercisable,
      August 31, 2008
            
            
            2,592,000
            
            
            $
            1.23




At August
31, 2008, 62,000 of the exercisable options expire in August 2010, 190,000 of
exercisable options expire in April of 2012, 2,120,000 of the exercisable
options expire in August 2012 with the remaining balance of 220,000 having an
expiration date of August 2015.









F-24




Warrant
activity during the period ending August 31, 2008 and 2007, was as
follows:




Number
      of Warrants
            
            
            Weighted
      Average Exercise PriceOutstanding,
      August 31, 2006
            
            
            22,207,487
            
            
            $
            1.52Granted
            
            
            8,144,365
            
            
            
            1.87Exercised
            
            
            2,265,600
            
            
            
            0.56Forfeited
            
            
            --
            
            
            
            --Expired
            
            
            --
            
            
            
            --Outstanding,
      August 31, 2007
            
            
            28,086,252
            
            
            
            1.75Granted
            
            
            3,028,873
            
            
            
            2.00Exercised
            
            
            --
            
            
            
            --Forfeited
            
            
            --
            
            
            
            --Returned
      and exchanged
            
            
            (29,428,826
            )
            
            
            1.75Expired
            
            
            (304,347
            )
            
            
            1.30Outstanding,
      August 31, 2008
            
            
            1,381,952
            
            
            $
            1.33Exercisable,
      August 31, 2008
            
            
            1,381,952
            
            
            $
            1.33





At August
31, 2008, if all options and warrants were exercised and all shares of preferred
stock were converted, the company would have 65,526,278 shares of common stock
outstanding.





Note
16. Commitments and Contingencies





Corporate
Offices





For the
fiscal year ended August 31, 2008, our U.S. corporate office was located at 400
Professional Drive, Suite 310, Gaithersburg, Maryland 20878.  This
space was provided on a rent free basis by one of our
shareholders.  As a result, we did not recognize rental expense in the
fiscal year.





Employment
Agreements





We
entered into an employment agreement with Mr. Robert Saunders as our Chairman
and President effective on June 29, 2005.  Subsequently in August
2005, Mr. Saunders was appointed CEO by our Board of Directors.  Mr.
Saunders will serve at the pleasure of the Board of Directors.  For
serving as President, Mr. Saunders’ compensation will be US $60,000 per
annum.  Additionally, we agreed to grant Mr. Saunders a signing bonus
of US $150,000 to be paid on closing of at least US $3,500,000 in third party
financing and increase his compensation to $120,000 per annum if we receive at
least US $5,000,000 in outside funding.  After the completion of our
Series A Preferred Stock Financing, Mr. Saunders was due the signing bonus of
$150,000 and a monthly salary of $10,000 per month beginning in August 2006.
However, Mr. Saunders agreed to reduce his monthly salary to $5,000 per month
until such time that we become significantly cash flow positive for its
operations.   As of August 31, 2008 we had paid Mr. Saunders
$100,000 of the $150,000 bonus that was due under the terms of the
agreement.  Additionally, we are currently discussing possible
restructuring/payment terms of the accrued salary of  $190,000 as of
August 31, 2008 until such time that we become significantly cash flow positive
for its operations.  As of August 31, 2008, the term of the initial
employment agreement had expired and we are currently discussing finalizing a
new employment agreement.  Until a new agreement is completed, we will
continue to operate under the terms of this agreement.






F-25




Marketing
Consulting Agreements





In June
2007, our wholly owned subsidiary, Island Scallops, Ltd. (“ISL”) entered into a
Consulting Agreement with Pacific Crab Co. (the “consultant’) to develop new
markets and facilitate the sale and distribution of ISL’s
products.  As compensation for the consultant’s marketing services,
ISL shall pay the consultant $12,500 per month for the next twelve
months.  In addition and pursuant to the terms of the agreement, the
Company will issue a total of 100,000 shares of our common stock (under an
agreed upon schedule) in exchange for consulting and marketing services Pacific
will provide to ISL.  (for additional information on the distribution
schedule see Note 15 – Stock Compensation Expense).  This agreement
expired in June 2008 and we are currently operating without a new marketing
consulting agreement.





Note
17.  Subsequent Events




On
September 8, 2008, our board of directors authorized the issuance of an
aggregate of 100,000 options to purchase our common stock to one of our
directors pursuant to the “Edgewater Foods International 2005 Equity Incentive
Plan.”  The options vest in two equal installments over the next two
years (on September 8, 2009 and 2010).  Each option is exercisable for
a period of five years from the issuance date and has an exercise price of $0.45
respectively.  Pursuant to this option, we  will incur
approximately an additional $43,000 through August 31, 2010. We used the
Black Scholes option-pricing model with the following assumptions: an expected
life equal to the contractual term of the options (five), underlying stock price
of $0.45 per share, no dividends; a risk free rate of 2.96%, which equals the
one, three and six-year yield on Treasury bonds at constant (or fixed) maturity
and volatility of 175%. However, at the date of this Report, we have not yet
issued this option.





In
November 2008, our wholly owned subsidiary – Island Scallops, Ltd., entered into
a Share Exchange Agreement with Granscal Sea Farms Ltd., a Kanish Bay Company
and Granscal’s sole shareholder.  Pursuant to the Agreement,
Granscal’s sole shareholder shall assign and transfer all of his Granscal shares
to Island Scallop in exchange for: (i) 400,000 restricted shares of our common
stock; (ii) a sum equal to 50% of the gross revenue Island Scallops earns on
account of the sale of Granscal’s 2004, 2005 and 2006 brood year inventory
currently in the water – to be paid out as and when Island Scallops receives it;
and (iii) an aggregate cash fee of $30,000.  Pursuant to the
Agreement; Island Scallops also agreed to pay the $35,000 that Granscal owes to
the Bank of Montreal.





The
$30,000 cash fee shall be paid in $5,000 monthly installments beginning on
September 30, 2008 and continuing until the cash fee is fully
paid.  The cash fee is secured by a Promissory Note between Island
Scallop and Granscal’s sole shareholder, who is also Granscal’s Chief Executive
Officer.  The Promissory Note does not contain any interest, but is
immediately due and payable if Island Scallop remains in default of the
Promissory Note after a10 day cure period.  Pursuant to the Promissory
Note, Granscal shall have a security interest in one of Island Scallops
commercial vessels until the Promissory Note is fully repaid.




Note
18.  Going Concern





Prior to
the completion of our initial Preferred Stock Financing, working capital had
been primarily financed with various forms of debt.  We have suffered
operating losses since inception in our efforts to establish and execute our
business strategy.  As of August 31, 2008, we had a cash balance of
approximately $712,000.  After the completion of the recent Series D
preferred financing (see Note 11 – Series D Preferred Stock Financing for
additional information), management believed that we had adequate funds to
maintain our business operations into our 2009 fiscal year and/or until we
become cash flow positive, but we continued to suffer operational losses in our
2008 fiscal year. Until our operations are able to demonstrate and maintain
positive cash flows, we may require additional working capital to fund our
ongoing operations and execute our business strategy of expanding our
operations.  In fact,   based on our current estimates
of future sales and capital costs of expanding our farms in order to increase
future crop yields, we will require additional financings to continue expand our
operations.  Based on these factors, there is substantial doubt about
our ability to continue as a going concern.






F-26




The
financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
we be unable to continue as a going concern.  Our ability to continue
as a going concern is dependent upon our ability to generate sufficient cash
flows to meet our obligations on a timely basis and ultimately to attain
profitability.  Our management intends to obtain working capital
through operations and to seek additional funding through debt and equity
offerings to help fund our operations as we expand.  There is no
assurance that we will be successful in our efforts to raise additional working
capital or achieve profitable operations.  The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.








Note
19.  Foreign Operations





Our share
of net assets held outside the United States totaled approximately $6,653,000
and $5,007,000 at August 31, 2008 and 2007, respectively.





F-27





ITEM
      8.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





We have
had no disagreements with our certified public accountants with respect to
accounting practices or procedures or financial disclosure.








ITEM
      8A.
            CONTROLS
      AND PROCEDURES





Quarterly
Evaluation of Controls




As of the
end of the period covered by this annual report on Form 10-K, the Company
evaluated the effectiveness of the design and operation of (i) their disclosure
controls and procedures, and (ii) their internal control over financial
reporting. The evaluators who performed this evaluation were our Chief Executive
Officer, Robert Saunders and Acting Chief Accounting Officer, Michael Boswell;
their conclusions, based on and as of the date of the Evaluation (i) with
respect to the effectiveness of our Disclosure Controls and (ii) with respect to
any change in our Internal Controls that occurred during the most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect our Internal Controls are presented below.




CEO
and CFO Certifications




Attached
to this annual report, as Exhibits 31.1 and 31.2, are certain certifications of
the CEO and Acting CAO, which are required in accordance with the Exchange Act
and the Commission’s rules implementing such section (the "Rule
13a-14(a)/15d-14(a) Certifications"). This section of the annual report contains
the information concerning the Evaluation referred to in the Rule
13a-14(a)/15d-14(a) Certifications. This information should be read in
conjunction with the Rule 13a-14(a)/15d-14(a) Certifications for a more complete
understanding of the topic presented.





Disclosure
Controls and Internal Controls




Disclosure
Controls are procedures designed with the objective of ensuring that information
required to be disclosed in the Company's reports filed with the Securities and
Exchange Commission under the Securities Exchange Act, such as this annual
report, is recorded, processed, summarized and reported within the time period
specified in the Commission’s rules and forms. Disclosure Controls are also
designed with the objective of ensuring that material information relating to
the Company is made known to the CEO and the Acting CAO by others, particularly
during the period in which the applicable report is being prepared. Internal
Controls, on the other hand, are procedures which are designed with the
objective of providing reasonable assurance that (i) the Company's transactions
are properly authorized, (ii) the Company’s assets are safeguarded against
unauthorized or improper use, and (iii) the Company's transactions are properly
recorded and reported, all to permit the preparation of complete and accurate
financial statements in conformity with accounting principals generally accepted
in the United States.











72




Limitations
on the Effectiveness of Controls




The
Company's management does not expect that their Disclosure Controls or their
Internal Controls will prevent all error and all fraud. A control system, no
matter how well developed and operated, can provide only reasonable, but not
absolute assurance that the objectives of the control system are met. Further,
the design of the control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of a system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated objectives under all
potential future conditions. Over time, control may become inadequate because of
changes in conditions, or because the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.




Scope
of the Evaluation




The CEO
and Acting CAO’s evaluation of the our Disclosure Controls and Internal Controls
included a review of the controls’ (i) objectives, (ii) design, (iii)
implementation, and (iv) the effect of the controls on the information generated
for use in this annual report. In the course of the Evaluation, the CEO and
Acting CAO sought to identify data errors, control problems, acts of fraud, and
they sought to confirm that appropriate corrective action, including process
improvements, was being undertaken. This type of evaluation is done on a
quarterly basis so that the conclusions concerning the effectiveness of our
controls can be reported in our quarterly reports on Form 10-K and annual
reports on Form 10-K. The overall goals of these various evaluation activities
are to monitor our Disclosure Controls and Internal Controls, and to make
modifications if and as necessary. Our external auditors also review Internal
Controls in connection with their audit and review activities. Our intent in
this regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including improvements and
corrections) as conditions warrant.




Among
other matters, the Evaluation was to determine whether there were any
significant deficiencies or material weaknesses in our Internal Controls, which
are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, or whether the Evaluators identified
any acts of fraud, whether or not material, involving management or other
employees who have a significant role in our Internal Controls. This information
was important for both the Evaluation, generally, and because the Rule
13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and Acting CAO
disclose that information to our Board (audit committee), and our independent
auditors, and to report on related matters in this section of the annual report.
In the professional auditing literature, "significant deficiencies" are referred
to as "reportable conditions". These are control issues that could have
significant adverse affect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce, to a relatively low level,
the risk that misstatement cause by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employee in the normal course of performing their
assigned functions. The Evaluators also sought to deal with other controls
matters in the Evaluation, and in each case, if a problem was identified, they
considered what revisions, improvements and/or corrections to make in accordance
with our ongoing procedures.






Conclusions




Based
upon the Evaluation, our disclosure controls and procedures are designed to
provide reasonable assurance of achieving our objectives. Our CEO and Acting CAO
concluded that our disclosure controls and procedures are effective at that
reasonable assurance level to ensure that material information relating to us is
made known to management, including the CEO and Acting CFO, particularly during
the period when our periodic reports are being prepared, and that our Internal
Controls are effective at that assurance level to provide reasonable assurance
that our financial statements are fairly presented inconformity with accounting
principles generally accepted in the United States. Additionally, there has been
no change in our Internal Controls that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to affect, our
Internal Controls.






73











Management’s
Report on Internal Controls Over Financial Reporting





Board of
Directors and Edgewater Foods International, Inc:





The
Management of Edgewater Foods International, Inc is responsible for establishing
and maintaining adequate internal control over financial reporting for the
Company.  The Company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with U. S.
generally accepted accounting principles.  The Company’s internal
control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the Company’s assets,
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U. S. generally
accepted accounting principles, and that  receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; (iii) provide reasonable assurance regarding
prevention of timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the financial
statements, and (iv) provide reasonable assurance that receipts and expenditures
of the Company are being made only in accordance with authorization of
management and directors of the Company.





Internalcontrol over financial
reporting includes the controls themselves, monitoring and internal auditing
practices and actions taken to correct deficiencies as
identified.





Because
of its inherent limitations, internalcontrol over financial reporting, no matter how well designed,
may not prevent or detect misstatements. Accordingly, even effectiveinternalcontrol over financial
reporting can provide only reasonable assurance with respect to financial
statement preparation. Also, the effectiveness ofinternalcontrol over financial
reporting was made as of a specific date. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management
conducted an assessment of the effectiveness of the Company’s internalcontrol over financial
reporting as of August 31, 2008, based on criteria for effectiveinternalcontrol over financial
reporting described in “InternalControl—Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management’s assessment included an evaluation of the design of the Company’sinternalcontrol over financial
reporting and testing of the operational effectiveness of itsinternalcontrol over financial
reporting. Management reviewed the results of its assessment with the Audit
Committee of the Company’s Board of Directors.





Based on
this assessment, management determined that, as of August 31, 2008, Edgewater
Foods International, Inc. maintained effective internalcontrol over financial reporting.





Although
currently we do not identify any material weaknesses in the process of self
assessment, we have recognized significant weaknesses in internal
controls.  Currently we do not have sufficient in-house expertise in
US GAAP reporting.  Instead, we rely very much on the expertise and
knowledge of external financial advisors in US GAAP
conversion.  External financial advisors have helped prepare and
review the consolidated financial statements.  Although we have not
identified any material errors with our financial reporting or any material
weaknesses with our internal controls, no assurances can be given that there are
no such material errors or weaknesses existing.  We are seeking to
recruit experienced professionals to augment and upgrade our financial staff to
address issues of timeliness and completeness in US GAAP financial
reporting.  In addition, we do not believe we have sufficient
documentation with our existing financial processes, risk assessment and
internal controls.  We plan to work closely with external financial
advisors to document the existing financial processes, risk assessment and
internal controls systematically.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.





EDGEWATER
FOODS INTERNATIONAL, INC





/s/ 
Robert Saunders


Robert
Saunders


Chief
Executive Officer








74








PART
III.





ITEM
9.                      DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT





The
following table and text set forth the names and ages of all directors and
executive officers as of November 28, 2008. The Board of Directors is comprised
of only one class. All of the directors will serve until the next annual meeting
of shareholders, which is anticipated to be held in January 12, 2009, and until
their successors are elected and qualified, or until their earlier death,
retirement, resignation or removal. Dr. Kristina Miller, our Chief Scientific
Advisor is the wife of Robert Saunders, our Chairman, CEO and President;
otherwise, there are no family relationships among our directors and executive
officers. Also provided herein are brief descriptions of the business experience
of each director, executive officer and advisor during the past five years and
an indication of directorships held by each director in other companies subject
to the reporting requirements under the Federal securities laws.










Name
            
            Age
            
            PositionRobert
      Saunders
            
            55
            
            Chairman,CEO
      and PresidentDouglas
      C.MacLellan
            
            52
            
            Vice
      ChairmanMark H.
      Elenowitz
            
            38
            
            DirectorJavier
      Idrovo
            
            40
            
            DirectorMichael
      Boswell
            
            39
            
            Director,
      Acting Chief accounting OfficeDarryl
      Horton
            
            58
            
            DirectorVictor
      Bolton
            
            54
            
            Director




Robert Saunders,
Chairman, CEO and President.Mr. Saunders has
directed all research and development efforts at Island Scallops since its
establishment.  After studying for his B.Sc. at the University of
British Columbia in the early 1970's, Mr. Saunders has worked exclusively in the
aquaculture research and development field.  His efforts have
primarily involved designing and implementing innovative culture technology and
methods for new aquaculture species in British Columbia.  Mr. Saunders
has direct experience with managing projects similar to the type proposed, such
as developing the hatchery technology for producing the Japanese scallop and the
development of sablefish aquaculture.





Douglas C.
MacLellan,Vice-Chairman.Since May 1992, Mr. MacLellan has been President and Chief Executive
Officer of the MacLellan Group, Inc., a privately held business incubator and
financial advisory firm.  Mr. MacLellan is currently Chief Executive
Officer and Executive Chairman of AMDL, Inc. (AMEX: ADL), a publicly held
biotechnology firm.  He was previously a member of the board of
directors and chairman of the audit committee of ADML, Inc.  From 2002
until September 2005, Mr. MacLellan was Vice Chairman and a Director of AXM
Pharma, Inc. (AMEX; AXJ).  From March 1998 through October 2000, Mr.
MacLellan was the co-founder and a significant shareholder of Wireless
Electronique, Ltd., a China-based telecommunications company having joint
venture operations with China Unicom (NASDAQ: CHU) in Yunnan, Inner Mongolia and
Ningxia provinces.  He is also a co-founder and, since May 1997, has
been a director of Datalex Corporation, a Canadian-based legacy software
solution provider. From November 1996 to March 1998, Mr. MacLellan was
co-Chairman and an Investment Committee member of the Strategic East European
Fund.  From November 1995 to March 1998, Mr. MacLellan was President,
Chief Executive Officer and a Director of PortaCom Wireless, Inc., a company
engaged as a developer and operator of cellular and wireless telecommunications
ventures in selected developing world markets.  Mr. MacLellan is a
former member of the board of directors and co-founder of FirstCom Corporation
(NASDAQ: FCLX), an international telecommunications company that operates a
competitive access fiber and satellite network in Latin America, which became
AT&T Latin America (NASDAQ: ATTL) in August 2000.  During 1996, he
was also the Vice-Chairman of Asia American Telecommunications (now Metromedia
China Corporation), a majority-owned subsidiary of Metromedia International
Group, Inc. (AMEX: MMG). Mr. MacLellan was educated at the University of
Southern California in economics and finance, with advanced training in
classical economic theory.






75




Mark H.
Elenowitz,Director.Mr.
Elenowitz is a co-founder and managing director of TriPoint Capital Advisors,
LLC. Mr. Elenowitz is responsible for the overall corporate development of the
firm and assisting their clients with high-level financial services and general
business development. In this role he provides high level advice regarding
corporate finance, corporate structure, SOX 404 compliance, employee option
programs and capital market navigation including providing advice as a member of
the board of directors. Mr. Elenowitz integrates a strong, successful
entrepreneurial background with extensive financial services and capital markets
experience.  Mr. Elenowitz has assisted in numerous companies in a
“soup-to-nuts” process of preparing a company for the public markets, bringing
them public and advising on an ongoing basis via board seats and executive
positions to oversee further rounds of financing, strategic acquisitions and a
broader investor market via a listing on “higher” securities exchange or market.
Mr. Elenowitz is also currently a director of Global Growth Acquisition Corp. 1,
a Cayman Islands corporation. From December 2002 to September 2005, Mr.
Elenowitz was a board member of AXM Pharma formerly (AMEX: AXJ) He was also the
senior managing director of Investor Communications Company, LLC (ICC), a
national investor relations firm he founded in 1996. Through ICC, Mr. Elenowitz
has developed ongoing relationships with other investment banking firms, market
makers, and analysts. Mr. Elenowitz has worked with over 50 publicly traded
companies providing the above mentioned financial consulting and strategic
planning services. Mr. Elenowitz holds the Series 24, 82 and 63 licenses and is
also CEO of TriPoint Global Equities, LLC, a FINRA member firm. Mr. Elenowitz is
the recipient of several entrepreneurial awards and has been profiled in
BusinessWeek and CNBC, as well as several other publications. He is a graduate
of the University of Maryland School of Business and Management, with a Bachelor
of Science in Finance.




Javier Idrovo,
Director.Mr. Idrovo has been involved in the food industry since 2001
when he joined Dole Food Company, Inc. as Vice President of Strategy. In 2004,
Mr. Idrovo was promoted to Senior Vice President of Strategy.  In
2005, he became Vice President and CFO of Dole Packaged Foods, one of the
operating divisions of Dole Food Company.  In 2006, he was promoted to
President of Dole Packaged Foods and held that title until March
2008.  Prior to joining Dole, Mr. Idrovo worked as a management
consultant for The Boston Consulting Group, Inc. holding positions of increasing
responsibility from Associate Consultant to Manager.  As a consultant,
Mr. Idrovo worked for clients on projects that focused on strategy issues as
well as organizational effectiveness issues across a number of industries
including, but not limited to, Telecommunications, Retailing, Manufacturing, and
Financial Services.  He received a Bachelor of Science degree in 1989
and a Master of Engineering degree in 1990 both from Harvey Mudd
College.  Mr. Idrovo also received a Master of Business Administration
degree from Harvard Business School in 1995.





Michael
Boswell,Director and
Acting Chief Accounting Officer.Mr. Boswell is a
co-founder and member in TriPoint Capital Advisors, LLC, a boutique merchant
bank focused on small and mid-sized growth companies and a co founder of the
TriPoint family of companies. Mr. Boswell provides high-level financial services
to start-up businesses and small to mid-sized companies. Mr. Boswell is
currently a member of the board of directors and chairman of the audit committee
of AMDL, Inc. (AMEX: ADL), a publicly held biotechnology firm.  Mr.
Boswell is also currently a director of Global Growth Acquisition Corp. 1, a
Cayman Islands corporation. Mr. Boswell holds the Series 24, 82 and 63 licenses
and is also Managing Director and Chief Compliance Officer of TriPoint Global
Equities, LLC, a FINRA member firm.  Prior to the founding of
TriPoint, Mr. Boswell had a number of executive positions focusing on business
development and management consulting. Mr. Boswell also spent eight years as a
senior analyst and/or senior engineer for various branches of the United States
Government. He earned a MBA from John Hopkins University and a BS degree in
Mechanical Engineering from University of Maryland.






76




Darryl Horton,
Director.Mr. Horton has been a businessman successfully
involved in numerous construction and development projects for the past 35
years. He is the President, Manager and a Partner of Abbotsford Development
Corporation and is currently managing a development project in Abbotsford,
British Columbia called Eagle Mountain.  Eagle Mountain is an upscale,
master planned community of single family homes, town homes and commercial
properties covering approximately 60 acres that is expected to be valued, upon
completion, in excess of 200 million dollars. Prior to Eagle Mountain, Mr.
Horton managed, owned and marketed numerous other residential and commercial
projects including the construction of a 30 million dollar multi-function
residential Intermediate Care Facility in LaJolla California. For 15 years Mr.
Horton was a partner in a general contracting company that did various contracts
with an average volume of about 25 million per year.   In the
1970’s, Mr. Horton was the Vice president of Community Builders, the largest
single family developer in British Columbia.   Mr. Horton is also
the director of several other building and development companies in British
Columbia.





Victor Bolton,
Director.Mr. Bolton founded a Mechanical contracting firm
after graduating from college and evolved that firm into all aspects of the
construction industry including building and raw land developing as well as
extensive property management.  Retiring from this business in 2000,
Mr. Bolton now focuses time and energy towards the food manufacturing
field.








Significant
Employees





The
following are employees who are not executive officers, but who are expected to
make significant contributions to our business:





Bruce Evans, Farm
Manager.Mr. Bruce Evans has been involved in shellfish
production since 1985. He successfully established an oyster business, employing
methods of long-line and beach culture production.  That business is
still in operation today, producing 7,000 gals of shucked oysters annually and
employing 3 full time people and 4 part time people.  He moved to
Island Scallops in 1989.  Mr. Evans was responsible for securing the
leases from the Provincial government for this scallop grow-out project. He
built the established long-line systems that currently produce scallops for
Island Scallops.  Mr. Evans worked with a Japanese scallop farmer for
two years in B.C. and spent a month working on highly acclaimed scallop farms in
Japan.  Mr. Evans has BS in Marine Biology from the University of
Victoria.





Dr. Kristina M.
Miller, Chief Scientific Advisor.   Dr. Miller is
currently Head of the Molecular Genetics Section in the Pacific Region for the
Department of Fisheries and Oceans, Canada (DFO).   She has been a
research scientist at DFO since obtaining her PhD in Biological Sciences from
Stanford University in 1992.  The Molecular Genetics section she oversees
contains a staff of 26, including scientists, biologists, computer analysts and
research technicians.  Dr. Miller conducts research on the genetic
composition, adaptation, immunity and physiology of wild and domesticated fish
and shellfish species using both molecular and genomic approaches.  She has
been a leader in the development of molecular technologies to aid in the
conservation and management of aquatic resources.  In the past 10 years,
she has published over 40 scientific peer-reviewed journal manuscripts, and her
group has been the focus of numerous magazine and newspaper articles.  Dr.
Miller brings a strong scientific component to the management of Edgewater
Foods, and she will serve as Chief Scientific Advisor.  In addition to her
PhD, Dr. Miller received a BSc in Zoology from University of California, Davis
in 1983, and a MSc in Biology from University of British Columbia in
1986.  Dr. Miller is Robert Saunders, our Chairman, CEO and
President’s wife.






77





Board
      Committees





We
currently have seven committees appointed by our Board of
Directors:





·
            Acquisition/Business
      Opportunity Committee,which is comprised of Javier Idrovo, Victor
      Bolton and Douglas MacLellon.





·
            Audit Committee, which
      is comprised of Douglas MacLellan (Chair), Javier Idrovo and Darryl
      Horton.  The Board has determined that all of these members are
      independent, as that term is defined in Section 121(A) of the American
      Stock Exchange’s Listing Standards.





·
            Finance Committee,
      which is comprised of Mark Elenowitz (Chair), Douglas MacLellan and Robert
      Saunders.





·
            Compensation Committee,
      which is comprised of Victor Bolton, Darryl Horton and Doug
      MacLellan.





●
            Disclosure Committee,
      which is comprised of Douglas MacLellan (Chair), Robert Saunders and
      Michael Boswell.





●
            Nominating Committee,
      which is comprised of Robert Saunders (Chair) and Douglas MacLellan. The
      Board has determined that Mr. MacLellan are independent, as that term is
      defined in Section 121(A) of the American Stock Exchange’s Listing
      Standards.





·
            Sarbanes-Oxley Steering
      Committee,which is comprised of Douglas MacLellan, Robert
      Saunders, Michael Boswell and Louis Taubman (Louis Taubman is our outside
      corporate and securities counsel).







Audit
Committee and Financial Expert





We have
an Audit Committee as specified in Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended, composed of Douglas MacLellan (Chair), Javier
Idrovo and Darryl Horton.  The Audit Committee focuses its efforts on
assisting our Board of Directors to fulfill its oversight responsibilities with
respect to our:




·
            Quarterly
      and annual consolidated financial statements and financial information
      filed with the Securities and Exchange
  Commission;




·
            System
      of internal controls;




·
            Financial
      accounting principles and policies;




·
            Internal
      and external audit processes; and




·
            Regulatory
      compliance programs.






78






The
committee meets periodically with management to consider the adequacy of our
internal controls and financial reporting process.  It also discusses
these matters with our independent auditors and with appropriate financial
personnel that we employ.  The committee reviews our financial
statements and discusses them with management and our independent auditors
before those financial statements are filed with the Securities and Exchange
Commission.





The
committee has the sole authority to retain and dismiss our independent auditors
and periodically reviews their performance and independence from
management.  The independent auditors have unrestricted access and
report directly to the committee.





Audit
Committee Financial Expert





Douglas
MacLellan is our Audit Committee Financial Expert, as that term is defined in
Item 407 of Regulation S-B and the Board has determined that Mr. MacLellan is
independent, as that term is defined in Section 121 of the American Stock
Exchange’s Listing Standards and Section 10A(m)(3) of the Securities Exchange
Act of 1934.  Mr. MacLellan’s qualifications as an audit committee
financial expert are described in his biography above.





Compliance
with Section 16(a) of the Exchange Act





Section
16(a) of the Exchange Act requires our officers, directors and persons who own
more than 10% of any class of our securities registered under Section 12(g) of
the Exchange Act to file reports of ownership and changes in ownership with the
SEC. Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they
file.





Based on
our review of copies of such reports, we believe that there was compliance with
all filing requirements of Section 16(a) applicable to our officers, directors
and 10% stockholders during fiscal 2008.





Code
of ethics





On August
3, 2005, we adopted a code of ethics that applies to our Chief Executive Officer
and Principal Financial and Accounting Officer.  You may obtain a copy
of any of our codes of ethics at no cost, by written request
to:  Edgewater Foods International, Inc., 5552 West Island Highway,
Qualicum Beach, British Columbia, Canada V9K 2C8; or, by oral request at: (250)
757-9811.











79







ITEM
10.              
EXECUTIVE COMPENSATION





Summary
Compensation Table










Name
      and Principal Position
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
      Awards
              ($)
            Option
      Awards
              ($)(a)
            (b)
            (c)
            (d)
            (e)
            (f)Robert
      Saunders
              Chief
      Executive Officer
            2008
            60,000
      (1)
            0
            0
            227,164
      (3)Robert
      Saunders
              Chief
      Executive Officer
            2007
            60,000
      (1)
            0
            0
            20,651Michael
      Boswell
              Acting
      Chief Accounting Officer
            2008
            0
      (2)
            0
            0
            295,317
      (3)Michael
      Boswell
              Acting
      Chief Accounting Officer
            2007
            0
      (2)
            0
            0
            26,847







Name
      and Principal Position
            Year
            Non-Equity
      Incentive Plan Compensation
              ($)
            Non-Qualified
      Deferred Compensation Earnings
              ($)
            All
      other Compensation
            Total
              ($)(a)
            (b)
            (g)
            (h)
            (i)
            (j)Robert
      Saunders
              Chief
      Executive Officer
            2008
            0
            0
            [  ]
            287,164Robert
      Saunders
              Chief
      Executive Officer
            2007
            0
            0
            0
            80,651Michael
      Boswell
              Acting
      Chief Accounting Officer
            2008
            0
            0
            0
            295,317Michael
      Boswell
              Acting
      Chief Accounting Officer
            2007
            0
            0
            0
            26,847







80







(1)
            In
      June 2005, we entered into an employment agreement with Robert Saunders,
      our Chairman, CEO and President.  Mr. Saunders will serve at the
      pleasure of the Board of Directors.  Pursuant to his employment
      agreement, Mr. Saunders’ compensation will be $60,000 (USD) per annum for
      his services as our President.  Additionally,
      we agreed to grant Mr. Saunders a signing bonus of US $150,000 to be paid
      on closing of at least US $3,500,000 in third party financing and increase
      his compensation to $120,000 per annum if we receive at least US
      $5,000,000 in outside funding.  After the completion of our
      Series A Preferred Stock Financing, Mr. Saunders was due the signing bonus
      of $150,000 and a monthly salary of $10,000 per month beginning in August
      2006. However, Mr. Saunders agreed to reduce his monthly salary to $5,000
      per month until such time that we become significantly cash flow positive
      for its operations. This agreement expired in June 2008 and we are
      currently operating as if this employment agreement is still in effect as
      we discuss a new agreement with Mr. Saunders.  As of August 31,
      2008, we had paid Mr. Saunders $100,000 of the $150,000 bonus that was due
      under the terms of the agreement.  Additionally, we are
      currently  discussing possible restructuring/payment terms of
      the accrued salary of  $190,000 as of August 31, 2008, until
      such time that we become significantly cash flow positive for its
      operations.




(2)
            Mr.
      Boswell served as our President from March to June 2005, at which time Mr.
      Saunders replaced Mr. Boswell as President.  Mr. Boswell has
      served as our Acting Chief Accounting Officer since August
      2005.  Mr. Boswell indirectly owns a minority interest in
      TriPoint Capital Advisors, LLC, a significant shareholder and party with
      which we maintain a consulting agreement.  In August 2006, the
      Board approved the Compensation Committee’s recommendation to pay TriPoint
      $15,000 per month, which includes fees for Mr. Boswell’s services as our
      Acting Chief Accounting during 2005, however TriPoint agreed to reduce
      such fee to $7,000 per month until our cash flow position improves, at
      which time the Committee will reconvene and recommend a return to $15,000
      per month.  In addition, TriPoint has agreed not to accept any
      additional fees, other than expenses, until we are sufficiently funded to
      carry out our business and operations.  According to the above
      reasons, Mr. Boswell did not receive any compensation in 2006 and only
      received the options listed in the table above in
  2007.





(3)
            On
      August 17, 2007, Mr. Saunders and Mr. Boswell were granted five-year
      nonqualified stock options, pursuant to our 2005 Equity Plan, that vested
      on a 1/12 monthly basis over a twelve month period beginning on the grant
      date.  The exercise price of the options is $1.21, which
      represents 110% of the closing price of our common stock on August 17,
      2007. Based on the Black-Scholes option pricing model, the total fair
      value of these options were determined to be $247,815 and $322,159 for Mr.
      Saunders and Mr. Boswell, respectively.  Since these options
      vested monthly, the company incurred a monthly cost of $20,651 and $26,847
      respectively between August 2007 and July 2008.  As of August
      31, 2008, all of these stock options costs had been
    realized.








81







Outstanding
Equity Awards at Fiscal Year-End





Name
            Number
      of Securities Underlying Unexercised Options
              (#)
              Exercisable
            Number
      of Securities Underlying Unexercised Options
              (#)
              Unexercisable
            Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
              (#)
            Option
      Exercise Price
              ($)
            Option
      Expiration Date(a)
            (b)
            (c)
            (d)
            (e)
            (f)Robert
      Saunders
            300,000
      (1)
            0
            0
            1.21
            8-14-2007Michael
      Boswell
            390,000
      (1)
            0
            0
            1.21
            8-14-2007





Name
            Number
      of Shares or Units of Stock That Have Not Vested
              (#)
            Market
      Value of Shares of Units of Stock That Have Not Vested
              ($)
            Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested
              (#)
            Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not Vested(a)
            (g)
            (h)
            (i)
            (j)Robert
      Saunders
            0
            0
            0
            0Michael
      Boswell
            0
            0
            0
            0





(1)
            Pursuant
      to our 2005 Equity Incentive Plan, Mr. Saunders and Mr. Boswell were
      granted five-year nonqualified stock options on August 17, 2007 that vest
      on a 1/12 monthly basis over a twelve month period beginning on the grant
      date.  The exercise price of the options is $1.21, which
      represents 110% of the closing price of our common stock on August 17,
      2007.  As of August 31, 2008 all of these options have
      vested.





Retirement/Resignation
Plans





We do not
have any plans or arrangements in place regarding the payment to any of our
executive officers following such persons retirement or
resignation.





Director
Compensation









Name
            Fees  Earned
      or Paid in Cash
              ($)
            Stock
      Awards
              ($)
            Option
      Awards
              ($)
            Non-Equity
      incentive Plan Compensation
              ($)(a)
            (b)
            (c)
            (d)
            (e)Douglas
      MacLellan
            36,000
            0
            165,210
      (1) (2)
            0Mark
      Elenowitz
            0
            0
            429,546
      (1) (3) (4)
            0Darryl
      Horton
            1,000
            0
            8,260
      (1) (5)
            0Victor
      Bolton
            1,000
            0
            8,260
      (1) (6)
            0Javier
      Idrovo
            0
            0
            0
      (7)
            0










82






Name
            Change
      in Pension Value and Nonqualified Deferred Compensation
      Earnings
            All
      other Compensation
              ($)
            Total
              ($)(a)
            (f)
            (g)
            (h)Douglas
      MacLellan
            0
            0
            201,210Mark
      Elenowitz
            0
            0
            429,546Darryl
      Horton
            0
            0
            9,260Victor
      Bolton
            0
            0
            9,260Javier
      Idrovo
            0
            0
            0





(1)
            At
      the end of the fiscal year, 2,592,000options are
    outstanding.


(2)
            These
      include the five-year incentive stock options granted to such individual
      on August 17, 2007 pursuant to our 2005 Equity Plan.  These
      options vested on a 1/12 monthly basis over a twelve month period
      beginning on the grant date and are exercisable at $1.21, which represents
      110% of the closing price of our common stock on August 17, 2007. Based on
      the Black-Scholes option pricing model, the total fair value of these
      200,000 options were determined to be $165,210.  Since these
      options vested monthly, we incurred a monthly cost of
      $13,768.  As of August 31, 2008, all of these stock options
      costs had been realized.


(3)
            These
      include the five-year incentive stock options granted to such individual
      on August 17, 2007 pursuant to our 2005 Equity Plan.  These
      options vested on a 1/12 monthly basis over a twelve month period
      beginning on the grant date and are exercisable at $1.21, which represents
      110% of the closing price of our common stock on August 17, 2007. Based on
      the Black-Scholes option pricing model, the total fair value of these
      520,000 options were determined to be $429,546.  Since these
      options vested monthly, we incurred a monthly cost of
      $35,795.  As of August 31, 2008, all of these stock options
      costs had been realized.


(4)
            Mr.
      Elenowitz  indirectly owns a minority interest in TriPoint
      Capital Advisors, LLC, a significant shareholder and party with which we
      maintain a consulting agreement.  In August 2006, the Board
      approved the Compensation Committee’s recommendation to pay TriPoint
      $15,000 per month, which includes fees for Mr. Elenowitz’s services as a
      Director; however, TriPoint agreed to reduce such fee to $7,000 per month
      until our cash flow position improves, at which time the Committee will
      reconvene and recommend a return to $15,000 per month.  In
      addition, TriPoint has agreed not to accept any additional fees, other
      than expenses, until we are sufficiently funded to carry out our business
      and operations.


(5)
            These
      include the five-year incentive stock options granted to such individual
      on August 17, 2007 pursuant to our 2005 Equity Plan.  These
      options vested on a 1/12 monthly basis over a twelve month period
      beginning on the grant date and are exercisable at $1.21, which represents
      110% of the closing price of our common stock on August 17, 2007. Based on
      the Black-Scholes option pricing model, the total fair value of these
      10,000 options were determined to be $8,260.  Since these
      options vested monthly, we incurred a monthly cost of $688.  As
      of August 31, 2008, all of these stock options costs had been
      realized.


(6)
            These
      include the five-year incentive stock options granted to such individual
      on August 17, 2007 pursuant to our 2005 Equity Plan.  These
      options vested on a 1/12 monthly basis over a twelve month period
      beginning on the grant date and are exercisable at $1.21, which represents
      110% of the closing price of our common stock on August 17, 2007. Based on
      the Black-Scholes option pricing model, the total fair value of these
      10,000 options were determined to be $8,260.  Since these
      options vested monthly, we incurred a monthly cost of $688.  As
      of August 31, 2008, all of these stock options costs had been
      realized.




(7)
            On
      September 8, 2008, our board of directors authorized the issuance of an
      aggregate of 100,000 options to purchase our common stock pursuant to our
      2005 Equity Plan to Mr. Idrovo.   The options vest in two
      equal installments over the next two years (on September 8, 2009 and
      2010).  Each option is exercisable for a period of five years
      from the issuance date and has an exercise price of $0.45. Based on the
      Black-Scholes option pricing model, we will incur approximately $43,000
      through August 31, 2010 for these options. However, as of August 31, 2008,
      Mr. Idrovo had not yet been granted any options and therefore we have not
      yet incurred any stock option
expense.





Our
directors who are employees do not receive any compensation from us for services
rendered as directors. The Board has created three classes of fees for outside
directors: (1) outside directors who are “independent,” as defined in the
Exchange Act will be paid $500 per meeting, whether telephonic or in person for
director fee – there shall not be any fees for written consents in lieu of board
meetings; (2) outside directors who are not “independent” will not receive any
fees at this time, but once our cash flow position improves, the Compensation
Committee will reconvene and make recommendations; (3) the Vice Chairman will
receive $3,000 per month, which includes $1,500 per month for his role as
Chairman of our Audit Committee.  Additionally, although we do not
currently have an arrangement or agreement to provide stock based compensation
to our outside directors, we may, from time to time, grant outside directors
incentive stock options pursuant to our 2005 Equity Incentive Plan.








83










ITEM
      11.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





Securities authorized for issuance
under equity compensation plans.Please see Part II, Item 5:
“Market for Common Equity and Related Stockholder Matters” above.





Security
Ownership of Certain Beneficial Owners and Management





As used
in this section, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as
consisting of sole or shared voting power (including the power to vote or direct
the vote) and/or sole or shared investment power (including the power to dispose
of or direct the disposition of) with respect to the security through any
contract, arrangement, understanding, relationship or otherwise, subject to
community property laws where applicable.





As
of November 28, 2008, we had a total of 24,479,150 shares of common stock,
7,773,998 shares of Series A Preferred Stock,  207 shares of Series B
Preferred Stock,  747,870 shares of our Series C Preferred Stock
and  304,558 shares of our Series D Preferred Stock issued and
outstanding, which are our only issued and outstanding equity
securities.  However, our preferred stock does not have any voting
rights except with respect to specified transactions that may affect the rights,
preferences, privileges or voting power of such class and except as otherwise
required by Nevada law.  As of the date of this Report, each share of
our Series A Preferred Stock and each share of Series C Preferred Stock is
convertible into one share of common stock; each share of our Series B Preferred
Stock is convertible into a number of fully paid and nonassessable shares of our
common stock equal to the quotient of the liquidation preference amount per
share ($10,000) divided by the conversion price, which initially is $1.15 per
share, subject to certain adjustments, or approximately 8,696 shares of common
for each share of converted Series B Preferred Stock; and each share of our
Series D Preferred Stock is convertible into a number of fully paid and
nonassessable shares of common stock equal to the quotient of (i) the stated
value of per share ($40) divided by (ii) the conversion price, which initially
is $0.80 per share, subject to certain adjustments.





The
following table sets forth, as of November 28, 2008: (a) the names and addresses
of each beneficial owner of more than five percent (5%) of our common stock and
Preferred Stock (taken together as one class) known to us, the number of shares
of common stock and Preferred Stock beneficially owned by each such person, and
the percent of our common stock and Preferred Stock so owned; and (b) the names
and addresses of each director and executive officer, the number of shares our
common stock and Preferred Stock beneficially owned, and the percentage of our
common stock and Preferred Stock so owned, by each such person, and by all of
our directors and executive officers as a group. Each person has sole voting and
investment power with respect to the shares of our common stock and Preferred
Stock, except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock and Preferred Stock, except as otherwise
indicated. Individual beneficial ownership also includes shares of common stock
that a person has the right to acquire within 60 days from November 28,
2008.











84





Name
      and Address
            Amount
      and Nature of Beneficial Ownership
            PercentageOf
      Voting of Securities (1)Robert
      Saunders
              Chairman,
      President and CEO
              10.5552
      West Island Highway
              Qualicum
      Beach, British Columbia
              Canada
      V9K 2C8
            10,200,000
      (2)
            19.82%Douglas
      C. MacLellan
              Vice
      Chairman
              8324
      Delgany Avenue
              Playa
      del Ray, CA 90293
            1,240,000
      (3)
            2.41%Mark
      Elenowitz
              Director
              400
      Professional Drive
              Suite
      310
              Gaithersburg,
      MD 20879
            1,758,000
      (4) (5)
            3.42%Javier
      Idrovo
              Director
              400
      Professional Drive
                Suite
      310
                Gaithersburg,
      MD 20879
            0
      (6)
            0.00%Michael
      Boswell
              Director
      and
              Acting
      Chief Accounting Officer
              400
      Professional Drive
              Suite
      310
              Gaithersburg,
      MD 20879
            1,328,000
      (7) (8)
            2.58%Victor
      Bolton
              345-916
      W. Broadway
              Vancouver,
      BC V5Z 1K7
            10,000
      (9)
            0.02%Darryl
      Horton
              33568
      Eagle Mountain Drive
              Abbortsford,
      BC V3G 2X7
            10,000
      (10)
            0.02%Vision
      Opportunity Master Fund, Ltd.
              20
      West 55th
      St., 5th
      Floor
              New
      York, NY 10019
            2,033,108
      (11)
            4.99%All
      directors and officers as a group (7 persons)
            14,546,000
            28.27%








85






_________________





(1)
            All
      Percentages have been rounded up to the nearest one hundredth of one
      percent and such percentage is based upon the amount of outstanding our
      common stock and preferred stock, on an as converted basis.  The
      percentage assumes in the case of each shareholder listed in the above
      list that all warrants or options held by such shareholder that are
      exercisable currently or within 60 days were fully exercised by such
      shareholder, without the exercise of any warrants or options held by any
      other shareholders.


(2)
            In
      addition to his stock ownership, Mr. Saunders was granted 300,000
      five-year nonqualified stock options on August 17, 2007 that vested on a
      1/12 monthly basis over a twelve month period beginning on the grant
      date.  The exercise price of the options is $1.21, which
      represents 110% of the closing price of our common stock on August 17,
      2007.  All of these options vested on August 17,
      2008.


(3)
            In
      addition to his stock ownership, Mr. MacLellan was granted 200,000
      five-year nonqualified stock options on August 17, 2007 that vested on a
      1/12 monthly basis over a twelve month period beginning on the grant
      date.  The exercise price of the options is $1.21, which
      represents 110% of the closing price of our common stock on August 17,
      2007.  All of these options vested on August 17,
      2008..  Additionally on October 13, 2008 and October 14, 2008
      respectively, Mr. MacLellan purchased an additional 5,000 and 15,000
      shares of common stock.


(4)
            Mr.
      Elenowitz is a 100% percent shareholder of MHE, Inc., which owns 18,000
      shares of our voting stock.  Additionally, MHE, Inc. is a 40%
      member of TriPoint Capital Advisors, LLC, which owns 3,000,000 shares of
      our voting stock. Mr. Elenowitz owns 20,000 shares of our voting stock
      directly.  Therefore, Mr. Elenowitz beneficially owns
      1,238,000shares of our voting
stock.


(5)
            In
      addition to his stock ownership, Mr. Elenowitz was granted 520,000
      five-year nonqualified stock options on August 17, 2007 that vested on a
      1/12 monthly basis over a twelve month period beginning on the grant
      date.  The exercise price of the options is $1.21, which
      represents 110% of the closing price of our common stock on August 17,
      2007.  All of these options vested on August 17,
      2008..




(6)
            On
      September 8, 2008, our board of directors authorized the issuance of an
      aggregate of 100,000 options to purchase our common stock pursuant to our
      2005 Equity Plan to Mr. Idrovo.   The options shall vest in
      two equal installments over the next two years (on September 8, 2009 and
      2010).  Each option is exercisable for a period of five years
      from the issuance date and has an exercise price of $0.45
      respectively. As of August 31, 2008, Mr. Idrovo had not yet been
      granted any options. As of November 28, 2008, none of these options
      have vested and none will vest within 60 days from such
    date.





(7)
            Mr.
      Boswell and his wife jointly own Invision, LLC, which owns 38,000 shares
      of our voting stock.  Additionally, Invision, LLC is a 30%
      member of TriPoint Capital Advisors, LLC, which owns 3,000,000 shares of
      our voting stock. Therefore, Mr. Boswell beneficially owns 938,000 shares
      of our voting stock.


(8)
            In
      addition to his stock ownership, Mr. Boswell was granted 390,000 five-year
      nonqualified stock options on August 17, 2007 that vested on a 1/12
      monthly basis over a twelve month period beginning on the grant
      date.  The exercise price of the options is $1.21, which
      represents 110% of the closing price of our common stock on August 17,
      2007.  All of these options vested on August 17,
      2008..


(9)
            Mr.
      Bolton was granted 10,000 five-year nonqualified stock options on August
      17, 2007 that vested on a 1/12 monthly basis over a twelve month period
      beginning on the grant date.  The exercise price of the options
      is $1.21, which represents 110% of the closing price of our common stock
      on August 17, 2007.  All of these options vested on August 17,
      2008..


(10)
            Mr.
      Horton was granted 10,000 five-year nonqualified stock options on August
      17, 2007 that vested on a 1/12 monthly basis over a twelve month period
      beginning on the grant date.  The exercise price of the options
      is $1.21, which represents 110% of the closing price of our common stock
      on August 17, 2007.  All of these options vested on August 17,
      2008..


(11)
            Vision
      owns 2,204,296 shares of common stock, 5,238,333 shares of common stock
      issuable upon conversion of their Series A Convertible Preferred Stock,
      1,495,740 shares of common stock issuable upon conversion of their Series
      B Convertible Preferred Stock, 747,870 shares of common stock issuable
      upon conversion of their Series C Convertible Preferred Stock, 12,714,650
      shares of common stock issuable upon the conversion of their Series D
      Convertible Preferred Stock and 740,627 shares of common stock received as
      dividends.  However, based upon the terms of the preferred
      stock, Vision may not convert its preferred stock if on any date, it would
      be deemed the beneficial owner of more than 4.99% of the then outstanding
      shares of our common stock.  However, Vision can elect to waive
      the cap upon 61 days notice to us or less if, and only if less than 61
      days remain on the term of the warrant and in such case the waiver will
      not be effective until the warrant’s expiration
  date.






86







Changes
in Control





To the
best of our knowledge, there are no arrangements that could cause a change in
our control.





ITEM
      12.
            CERTAIN
      RELATIONSHIPS AND RELATED
TRANSACTIONS





Dr.
Kristina Miller, our Chief Scientific Advisor is Robert Saunders, our Chairman,
CEO and President’s wife.





We are
party to a consulting agreement with TriPoint Capital Advisors, LLC, a company
in which Mark Elenowitz, a director and one of our significant shareholders,
indirectly owns a 40% interest.  Michael Boswell, our acting Chief
Accounting Officer and one of our directors, indirectly owns a 30% interest in
TriPoint.  Louis Taubman, our outside corporate and securities counsel
also indirectly owns an interest (30%) in TriPoint.  Our Board
recently approved the Compensation Committee’s recommendation of a flat rate
$15,000 per month fee, which shall be reduced to $7,500 per month until our cash
flow position improves, for the legal services Louis Taubman provides
us.  The Board also approved the recommendation of a $15,000 per month
fee, which shall be reduced to $7,000 per month until our cash flow position
improves, for the Acting CFO type services and financial advisory services
Michael Boswell and TriPoint, respectively, provide us.  Additionally,
our corporate offices in Gaithersburg, Maryland are currently provided by
Tripoint Holdings, LLC, the parent company of Tripoint at no cost to
us.





Island
Scallops, our wholly owned subsidiary, recently transferred 100% ownership of
RKS Laboratories, Inc. to Robert Saunders, our Chairman, CEO and
President.  RKS is a Vancouver research and development that is
working towards developing superior strains of scallops (developed by Island
Scallops and known as the Qualicum Beach Scallop) with beneficial traits such as
higher meat yield and rapid growth.  Island Scallops agreed to
transfer its ownership of RKS in consideration for the grant to Island Scallops
by RKS and Robert Saunders of a right of first refusal to commercialize any
intellectual property developed by RKS.  Island Scallops has the right
to acquire or use any intellectual property from RKS at RKS’ cost, in perpetuity
or until such time as RKS shall cease to exist.   Between June
2006 and August 2008, Island Scallops agreed to loan RKS a total of
approximately $114,000 under five non-interest bearing notes that are secured by
all of RKS’ assets and are due at various dates between November 30, 2008 and
August 31, 2009.


















87











ITEM
13.                                EXHIBITS
LIST







Exhibit Number
            Description3.1
            Articles
      of Incorporation of the Company, as amended. (Incorporated by reference to
      Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the
      quarter ending February 28, 2007, which was filed on April 13,
      2007.)3.2
            Amended
      and restated Bylaws of the Company  (Incorporated by reference
      to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the
      quarter ending February 28, 2007, which was filed on April 13,
      2007.)4.1+
            Form
      of certificate representing shares of the Company’s common
      stock.4.2
            Form
      of Certificate of Designation of Rights and Preferences of Series A
      Convertible Preferred Stock. (Incorporated by reference to Exhibit 10.3 to
      the Company’s Current Report on Form 8-K filed on April 14,
      2006).4.3+
            Form
      of certificate representing shares of the Company’s Series A Preferred
      Stock.4.4+
            Form
      of certificate representing shares of the Company’s Series B Preferred
      Stock.4.5+
            Form
      of certificate representing shares of the Company’s Series C Preferred
      Stock.10.1
            Form
      of Series A Convertible Preferred Stock Purchase Agreement, dated April
      12, 2006, by and between the Company and each of the Purchasers thereto
      (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed on April 14, 2006).10.2
            Form
      of Registration Rights Agreement, dated April 12, 2006, by and between the
      Company and each of the Purchasers thereto. (Incorporated by reference to
      Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.4
            Form
      of Individual Lock-Up Agreement dated April 12, 2006 by and between the
      Company and each of the shareholders listed therein. (Incorporated by
      reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K
      filed on April 14, 2006).10.5
            Form
      of Lock-Up Agreement dated April 12, 2006 by and between the Company and
      World Wide Mortgage Corporation.  (Incorporated by reference to
      Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.6
            Form
      of Series A Warrant dated April 12, 2006. (Incorporated by reference to
      Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.7
            Form
      of Series B Warrant dated April 12, 2006. (Incorporated by reference to
      Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.8
            Form
      of Series C Warrant dated April 12, 2006. (Incorporated by reference to
      Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.9
            Form
      of Series D Warrant dated April 12, 2006. (Incorporated by reference to
      Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.10
            Form
      of Series E Warrant dated April 12, 2006. (Incorporated by reference to
      Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.11
            Form
      of Series F Warrant dated April 12, 2006. (Incorporated by reference to
      Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.12
            Form
      of Series G Warrant dated April 12, 2006. (Incorporated by reference to
      Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.13
            Form
      of Series H Warrant dated April 12, 2006. (Incorporated by reference to
      Exhibit 10.13 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.14
            Form
      of Series J Warrant dated April 12, 2006. (Incorporated by reference to
      Exhibit 10.14 to the Company’s Current Report on Form 8-K filed on April
      14, 2006).10.15
            Form
      of Series A Convertible Preferred Stock Purchase
      Agreement,  dated May 30, 2006,  by and between the
      Company and each of the Purchasers thereto (Incorporated by reference to
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 30,
      2006).10.16
            Form
      of Registration Rights Agreement, dated May 30, 2006, by and between the
      Company and each of the Purchasers thereto. (Incorporated by reference to
      Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 30,
      2006).10.17
            Form
      of Series A Warrant dated May 30, 2006. (Incorporated by reference to
      Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 30,
      2006).10.18
            Form
      of Series B Warrant dated May 30, 2006. (Incorporated by reference to
      Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 30,
      2006).10.19
            Form
      of Series C Warrant dated May 30, 2006. (Incorporated by reference to
      Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 30,
      2006).16, 2005).10.20
            Form
      of Series D Warrant dated may 30, 2006. (Incorporated by reference to
      Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on May 30,
      2006).10.21
            Amendment
      to Registration Rights Agreement dated May 30, 2006(Incorporated by
      reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K
      filed on August 16, 2005).10.22
            Form
      of Joinder Agreement to the Series A Convertible Preferred Stock Purchase
      Agreement, dated May 30, 2006, by and between the Company and each of the
      Purchasers thereto (Incorporated by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed on June 30,
    2006).10.23
            Form
      of Joinder Agreement to the Registration Rights Agreement, dated May 30,
      2006, by and between the Company and each of the Purchasers thereto.
      (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report
      on Form 8-K filed on June 30, 2006).4.12
            Form
      of Series C Convertible Preferred Stock Purchase Agreement, dated November
      5, 2007, by and between the Company and each of the Purchasers thereto
      (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report
      on Form 8-K filed on November 7, 2007).4.13
            Form
      of Registration Rights Agreement by and between the Company and each of
      the Purchasers thereto (Incorporated by reference to Exhibit 10.2 to the
      Company’s Current Report on Form 8-K filed on November 7,
      2007).4.14
            Form
      of Certificate of Designation of Rights and Preferences of Series C
      Convertible Preferred Stock (Incorporated by reference to Exhibit 10.3 to
      the Company’s Current Report on Form 8-K filed on November 7,
      2007).4.15
            Form
      of Lock-Up Agreement by and between the Company and each of the
      shareholders listed therein (Incorporated by reference to Exhibit 10.4 to
      the Company’s Current Report on Form 8-K filed on November 7,
      2007).4.16
            Form
      of Warrants (Incorporated by reference to Exhibits 10.5 through 10.11 to
      the Company’s Current Report on Form 8-K filed on November 7,
      2007).31.1+
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2+
            Certification
      of Acting Chief Accounting Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1+
            Certification
      of Chief Executive Officer and Acting Chief Accounting Officer Pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


+ Filed
herewith.





88


ITEM
      14.               
      PRINCIPAL ACCOUNTANT FEES AND
SERVICES
  (1) AUDIT
FEES
   The aggregate fees billed for
professional services rendered by LBB & Associates, Ltd., LPP (formerly
Lopez, Blevins, Bork & Associates, LLP) for the audit of the registrant's
annual financial statements and review of financial statements included in the
registrant's Form 10-K or services that are normally provided by the accountant
in connection with statutory and regulatory filings or engagements for fiscal
years 2008 and 2007 were approximately $99,000 and $102,000
respectively.
   (2)
AUDIT-RELATED FEES
   NONE
   (3) TAX
FEES
   NONE
   (4) ALL
OTHER FEES
   NONE
   (5) AUDIT
COMMITTEE POLICIES AND PROCEDURES
   The
policy of our Audit Committee is to pre-approve all audit and permissible
non-audit services to be performed by the Company’s independent auditors during
the fiscal year.
  No services related to
Audit-Related Fees,
Tax Fees or All Other Fees described
above, were approved by the Audit Committee.
 
 
 
 
 
 
 
 89
 
   
 SIGNATURES
 
 In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
   /s/
      Robert Saunders
                
                Dated:
      December 1, 2008Robert
      Saunders
                  President
      and Chief Executive Officer/s/  Michael
      Boswell
                
                Dated:
      December 1, 2008Michael
      Boswell
                  Director
      & Acting Chief Accounting Officer/s/
      Douglas C. MacLellanDouglas
      C. MacLellan
                  Vice-chairman
      of the Board
                
                Dated:
      December 1, 2008/s/  Mark
      H. ElenowitzMark
      H. Elenowitz
                  Director
                
                Dated:
      December 1, 2008/s/  Javier
      Idrovo
                
                Dated:
      December 1, 2008Javier
      Idrovo
                  Director/s/  Victor
      Bolton
                
                Dated:
      December 1, 2008Victor
      Bolton
                  Director/s/
      Darryl Horton
                
                Dated:
      December 1, 2008Darryl
      Horton
                  Director
 
 90