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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 December 31, 2008

Commission file number: 001-22473





HQ SUSTAINABLE MARITIME
INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)







|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 62-1407522                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

1511 Third Avenue, Suite 788,

Seattle, Washington 98101

(Address of principal executive offices)

(206) 621-9888

(Registrants telephone number, including area code)





Securities registered
pursuant to Section 12(b) of the Act:



|                                         |  |                                     
|---------------------------------------- |  | ------------------------------------
|Title Of Each Class                      |  | Name of Exchange on which registered
|Common Stock, Par Value $0.001 Per Share |  | American Stock Exchange             

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





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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant 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.   ̈

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. (Check one):





|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

The aggregate market value of voting stock held by non-affiliates of the registrant on December 31, 2008 was approximately $69,140,000

State the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: At of December 31,
2008, there were 12,085,846 shares of Common Stock, $0.001 par value per share issued and outstanding and 100,000 Series A preferred stock, $0.001 par value per share, issued outstanding.









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Table of Contents



|                                      |  |                                                                                                              |  |   
|------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I                                |  |                                                                                                              |  |   
|                                      |  |                                                                                                             
|ITEM 1.                               |  | BUSINESS                                                                                                     |  | 1 
|                                      |  |                                                                                                             
|ITEM 1A.                              |  | RISK FACTORS                                                                                                 |  | 15
|                                      |  |                                                                                                             
|ITEM 1B.                              |  | UNRESOLVED STAFF COMMENTS                                                                                    |  | 19
|                                      |  |                                                                                                             
|ITEM 2.                               |  | PROPERTIES                                                                                                   |  | 19
|                                      |  |                                                                                                             
|ITEM 3.                               |  | LEGAL PROCEEDINGS                                                                                            |  | 20
|                                      |  |                                                                                                             
|ITEM 4.                               |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          |  | 20
|                                      |  |                                                                                                             
|PART II                               |  |                                                                                                              |  |   
|                                      |  |                                                                                                             
|ITEM 5.                               |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 20
|                                      |  |                                                                                                             
|ITEM 6.                               |  | SELECTED FINANCIAL DATA                                                                                      |  | 22
|                                      |  |                                                                                                             
|ITEM 7.                               |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | 23
|                                      |  |                                                                                                             
|ITEM 7A.                              |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | 28
|                                      |  |                                                                                                             
|ITEM 8.                               |  | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                     |  | 29
|                                      |  |                                                                                                             
|ITEM 9.                               |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         |  | 56
|                                      |  |                                                                                                             
|ITEM 9A.                              |  | CONTROLS AND PROCEDURES                                                                                      |  | 56
|                                      |  |                                                                                                             
|ITEM 9B.                              |  | OTHER INFORMATION                                                                                            |  | 56
|                                      |  |                                                                                                             
|PART III                              |  |                                                                                                              |  |   
|                                      |  |                                                                                                             
|ITEM 10.                              |  | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE .                                                    |  | 57
|                                      |  |                                                                                                             
|ITEM 11.                              |  | EXECUTIVE COMPENSATION                                                                                       |  | 61
|                                      |  |                                                                                                             
|ITEM 12.                              |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS               |  | 74
|                                      |  |                                                                                                             
|ITEM 13.                              |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                    |  | 75
|                                      |  |                                                                                                             
|ITEM 14.                              |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                       |  | 76
|                                      |  |                                                                                                             
|PART IV                               |  |                                                                                                              |  |   
|                                      |  |                                                                                                             
|ITEM 15.                              |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                   |  | 77
|                                      |  |                                                                                                             
|                                      |  | SIGNATURES                                                                                                   |  | 80
|                                      | 
|CERTIFICATIONS                        |  |                                                                                                             
|                                      | 
|Exhibit 31  Management certification |  |                                                                                                             
|                                      | 
|Exhibit 32  Sarbanes-Oxley Act       |  |                                                                                                             



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Forward Looking Statements  Cautionary Language

Certain statements made in these documents and in other written or oral statements made by HQ Sustainable Maritime Industries, Inc or on HQ Sustainable
Maritime Industries, Incs behalf are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). A forward-looking statement is a statement that is not a historical
fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: believe, anticipate, expect,
estimate, project, will, shall and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements
relating to future actions, trends in our businesses, prospective products, future performance or financial results. HQ Sustainable Maritime Industries, Inc. claims the protection afforded by the safe harbor for forward-looking statements provided
by the PSLRA. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary
materially, some of which are described in this filing. The risks included herein are not exhaustive. This annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed with the SEC include
additional factors which could impact HQ Sustainable Maritime Industries, Inc.s business and financial performance. Moreover, HQ Sustainable Maritime Industries, Inc. operates in a rapidly changing and competitive environment. New risk factors
emerge from time to time and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the impact of all risk factors on HQ Sustainable Maritime Industries, Inc.s business or the extent to which
any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements
as a prediction of actual results. In addition, HQ Sustainable Maritime Industries, Inc. disclaims any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of the report.



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|ITEM 1. | BUSINESS
|------- | --------

As used in this annual report,
we, us, our, HQS, the Group, Company or our company refers to HQ Sustainable Maritime Industries, Inc. and all of its subsidiaries and affiliated companies including
Hainan Quebec Ocean Fishing Co. Ltd. or HQOF and Jiahua Marine Bio-Product Company Limited or Jiahua Marine.

History

Our company was initially incorporated on September 21, 1989 under the laws of the State of Nevada. On March 17, 2004,
Process Equipment, Inc., Process Equipment Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of Process Equipment, Inc., or PEAC, and Jade Profit Investment Limited, or Jade, a British Virgin Islands limited liability
corporation, entered into an agreement and plan of merger with us. Pursuant to that agreement, Process Equipment, Inc., through PEAC, acquired Jade, and 84.42 percent ownership in Jades subsidiary Hainan Quebec Ocean Fishing Co. Ltd, a
Peoples Republic of China, limited liability corporation, which we refer to as HQOF. As a result of that transaction, HQOF became our main operating subsidiary . In April of 2004, pursuant to the above agreement and plan of merger, the board
of directors of Process Equipment, Inc. and a majority of the stockholders approved a name change and change of domicile of that company to Delaware via a merger with the newly formed wholly-owned Delaware subsidiary, HQS. The name change, change of
domicile and merger became effective on May 19, 2004, with HQS being the surviving entity in the merger and acquiring all the assets and liabilities of Process Equipment, Inc. On August 17, 2004, we entered into a Purchase Agreement with
Sino-Sult Canada (S.S.C.) Limited, a Canadian limited liability corporation (SSC), whereby we acquired Sealink Wealth Limited (Sealink), SSCs wholly owned subsidiary incorporated in the British Virgin Islands. Sealink
is the sole owner of Hainan Jiahua Marine Bio-Products Co. Ltd., a limited liability company existing in China (Jiahua Marine) which is primarily engaged in the production and sales of marine bio-products and healthcare products in the
PRC, as described in more detail in this current report.

On April 16, 2004, HQ Sustainable Maritime Marketing Inc. (HQS
Marketing) was formed and registered in USA, as a wholly-owned subsidiary of HQS. That subsidiary develops and markets our products in the United States.

On June 15, 2004, HQ Sustainable Maritime Marketing (Canada) Inc (HQS Canada) was formed in Canada and is wholly owned by HQS. HQS Canada commenced operations in June 2004, and performs business
development, sales, and marketing in the Canadian market.

On May 6, 2005, Phoenix Global Creations Limited (Phoenix) was
formed in British Virgin Islands as a wholly owned subsidiary of HQS. Phoenix was established as an investment holding company and is the parent company of Highest Quality Aquaculture Feed Products Co. Ltd.

On September 20, 2005, HQ Sustainable Maritime Industries (Hong Kong) Limited (HQS HK) was formed in Hong Kong and is wholly owned by
HQS indirectly. The subsidiary is primarily engaged in the sales of healthcare products in Hong Kong.

On October 1, 2005, Highest
Quality Aquaculture Feed Products Co. Ltd (Feed Mill) was formed in Hainan, PRC and is wholly owned by HQS indirectly. The construction of the Feed Mill began in 2008 and will produce extruded feed for tilapia. All related expenses and
capital investments related to the new plant were transacted through the Feed Mill Company. The new Feed Mill is expected to start processing feed in first quarter 2009. The Feed Mill is a wholly owned subsidiary of Phoenix.

On November 29, 2007, Kingly Sun International Ltd (Kingly Sun) was formed in British Virgin Islands and is a wholly owned subsidiary of
HQS. Kingly Sun was established as an investment holding company. It has been dormant during the year since its incorporation.

On
November 29, 2007, Liberal Sky Holdings Ltd (Liberal Sky) was formed in British Virgin Islands and is a wholly owned subsidiary of HQS. Liberal Sky was established as an investment holding company. It has been dormant during the
year since its incorporation.

On November 29, 2007, Unique Solutions Holdings Ltd (Unique Solutions) was formed in
British Virgin Islands and is a wholly owned subsidiary of HQS. Unique Solutions was established as an investment holding company. It has been dormant during the year since its incorporation.



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On June 10, 2008, Hainan Hongrui Fish Farming Co. Ltd was set up in the PRC and is wholly owned by
Kingly Sun. The subsidiary has been dormant during the year since its incorporation.

On October 17, 2008, Hainan Jiabao Aquaculture
Co. Ltd was set up in the PRC and is wholly owned by HQOF. The subsidiary has been dormant during the year since it incorporation.

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

General Overview

We are a multi-national company
with our headquarters and primary sales offices based in Seattle, WA. We are a vertically integrated aquatic product producer, processor, and farmer (e.g. through cooperative arrangements with pond farmers) with operations in the PRC of toxin free
tilapia, other aquatic products, and marine bio and healthcare products. We use state-of-the-art and environment-friendly technologies in our production, processing, and cooperative farm operations. Our facilities are currently certified according
to the HACCP standards, currently assigned an EU code required for exporting aquatic products to the EU, and are currently certified in accordance with the ACC standards. Our products are sold principally to customers in North America, Europe and
Asia.

Established in 1999, our aquatic farming and processing operations are in Hainan Province, an island in the South China Sea which is
situated within the most desirable latitude for raising tilapia. Hainan Province in southern China is designated by the Chinese government as a green province, where only environmentally friendly agri-food related industry and tourism are permitted.
We purchase and process farm bred and farm raised tilapia through cooperative supply arrangements with local farmers and cooperatives. Our supply cooperatives, under our guidance, use feed formulated by us to optimize the natural toxin-free growth
of farm raised tilapia. Starting in 2009 we will supply the farmers and cooperatives the feed formulation from our feed processing mill. Our tilapia products have achieved such a high level of toxin-free purity that we market these products as toxin
free and natural tilapia. In addition, we purchase and process ocean-caught aquatic products through cooperative supply arrangements with the local fisherman for our marine bio healthcare products.

In August 2004, the company acquired Jiahua Marine, which develops, produces and sells marine bio and healthcare products in China. The principal
products of Jiahua Marine are manufactured from fish by-products (tilapia and shark) that include shark cartilage capsules and shark liver oil products which are distributed exclusively in China. The products undergo substantial independent
laboratory testing in China administered by the Ministry of Health in China and have resulted in a PRC National Certification for these products. These products have various perceived medicinal and health benefits. As part of the HQSs vertical
integration plan of tilapia, Jiahua Marine has introduced new bio and healthcare products made from tilapia in 2009.

From our headquarter office in Seattle, WA we have marketed and branded our high-quality
toxin-free, tilapia products under the name TILOVEYA®.In early 2009 we will introduce a new family of frozen tilapia meals under the brand name
of Lillians Healthy Gourmet. This new family of products will include an organic, natural and regular line of frozen tilapia meals.

Industry Overview

Aquaculture Industry

Aquaculture is the farming of aquatic animals or plants. Aquaculture is also the worlds fastest growing segment in the food production system and has been for the past two decades. According to a recent study by
the FAO published on March 2, 2009 world fisheries production reached a new high of 143.6 million metric tonnes in 2006. The contribution of aquaculture to the world fisheries production in 2006 was 51.7 million tonnes of fish, which
is 36 percent of world fisheries production up from 3.6 percent in 1970. Global aquaculture accounted for 6 percent of the fish available for human consumption in 1970. In 2006 global aquaculture accounted for 47 percent of the fish available for
human consumption according to the FAO. The FAO report also describes that over half of the global aquaculture in 2006 was freshwater finfish. Based on the FAOs projections, it is estimated that in order to maintain the current level of per
capita consumption, global aquaculture production will need to reach in excess of 80 million tonnes of fish by 2050.

As the
availability of sites for aquaculture is becoming increasingly limited and the ability to develop non-agricultural land is restricted, the competition to develop additional aquaculture production systems is intensifying. As the intensification for
aquaculture production systems increases, the demand for institutional support, services and skilled persons is anticipated to increase, along with



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the demand for more knowledge-based aquaculture education and training as aquaculture becomes more important worldwide. China remains the largest producer of
aquaculture products throughout the world with reported fisheries producing approximately 41.3 million tonnes in 2004. Within the global aquaculture industry, China accounted for 71.0 percent of the worlds supply of fish for direct human
consumption and 29.9 percent of the total production by live weight in 2002.

Tilapia Industry

In 2005, according to the American Tilapia Association, tilapia production was second in volume to carp, and it is projected that tilapia will become the
most important aquaculture crop in this century, potentially reaching $5.0 billion in global sales by 2010. Commercial production of tilapia has become popular in many countries around the world. Touted as the new white fish to replace
the depleted ocean stocks of cod, Pollock, and hake, world tilapia production continues to rise and at least 100 countries currently raise tilapia, with the PRC being the largest producer. The American Tilapia Association further reports that world
production of tilapia products reached approximately 2.5 million metric tonnes in 2007, of which China produced the dominant share of 45.0 percent.

One of the major outlets for Chinese-produced tilapia has been, and should continue to be, the United States. The following chart reflects the increase in per-capita consumption of tilapia in pounds in the United
States in relation to other traditional types of seafood.

LOGO

The following chart reflects the increase in imported tilapia to the United States during the periods indicated.



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LOGO

Separately, according to the International Trade Report produced in 2005 by the United States
Department of Agriculture, or the USDA, U.S. per-capita seafood consumption has remained around 15 billion pounds through the late 1980s and 1990s; it is expected to increase as farm-raised products become cheaper. Currently, the
United States consumes nearly 12 billion pounds of fish a year. By 2025, demand for seafood is projected to grow by another 4.4 billion pounds (2 million metric tonnes) above what is consumed today. In addition, it is estimated that by 2020, 50
percent of the U.S. seafood supply will come from aquaculture. Presently, more than 70 percent of the seafood consumed in the United States is imported, and at least 40 percent of that is farm-raised. Major changes in U.S. population, along with
shifting demographics and economic growth, will alter the U.S. seafood market over the next decade, affecting the selection of products consumed. It is expected that fresh and frozen fish products will account for a growing share of overall seafood
consumption, with shrimp remaining at the top. By 2020, shrimp, salmon, tilapia, and catfish will be the top four seafood products consumed

According to Globefish.org, during the past ten years, tilapia captured by fisheries have stabilized at 0.6 million metric tonnes, while their aquaculture production has grown from 0.55 million metric tonnes
to 2.0 million metric tonnes. Tilapia is one of the top five seafood imports in the world. In 2005, more than $2.4 billion of tilapia was sold worldwide according to the FAO Fishstat 2007. The United States is the worlds largest consumer
of tilapia after China. In 2007 the United States imported 437 thousand metric tonnes of tilapia, in 2005, tilapia moved up to the fourth-ranked most popular seafood after farm-raised shrimp, tuna and Atlantic salmon in terms of aquaculture
products imported into the United States. In terms of volume, frozen whole round fish ranks first, followed by frozen fillets and, lastly, fresh fillets.

Health Benefits as the Driving Force for Growth in Tilapia Industry

The growing consumer demand for seafood is
largely evolving from a new public awareness regarding its health and nutritional benefits. The USDA pyramid guidelines continue to support frequent fish consumption, and the USDA recently completed a highly technical nutritional
analysis report about tilapia for the general public. The USDAs Agriculture Research Service Lab reports that tilapia is moderate in polyunsaturated fatty acid (0.387 g/100g raw, 0.600 g/100g cooked), moderate in omega 3 fatty acids
(0.141g/100g raw, 0.220g/100g cooked) and low in mercury (0.010 parts per million, which we refer to as PPM), which is considered to be non-detectable. With the increased awareness of the health concerns surrounding mercury, tilapias low
mercury levels (0.010 PPM) distinguish tilapia favorably from other types of fish with higher mercury levels, such as swordfish (0.976 PPM), mackerel (0.730 PPM) and yellow fin tuna (0.325 PPM).



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Over-the-Counter Marine Bio and Healthcare Products

As in the United States, because of the aging population, China is demographically attractive for healthcare companies. Of the 1.3 billion people in China
currently, less than 8 percent of Chinas population is 65 or older. However, by 2050 that proportion is expected to rise to 24 percent. It is expected as well that Chinese will benefit from double-digit annual growth in disposable incomes
during this period. This will lead to increasing use of western therapeutics and Over the counter remedies. In addition, the market place is highly fragmented and a clear vision -like the one presented by HQS can benefit from this
evolving situation. There are more than 4,000 manufacturers in China, but most of them lack scale and access to capital. From 2009 to 2011, $124 billion was allocated to healthcare expenditure in China. HQS has benefited from regulatory
consolidation in the recent imposition of higher standards (GMP standards imposed in 2007) and will continue to be a leader in its emphasis on the highest quality standards.

The marine bio and healthcare products industry in China is also sizable, with approximately $6 billion in sales, which still constitutes only 3 percent
of the world market. Currently, overall sales of these products in China have fallen slightly as compared to the previous year, as consumers gravitate toward branded products meeting international standards of excellence and proven benefit for
consumers, and away from the less known brands and traditional remedies.

In general, sales of marine bio and healthcare products are made
through retail and direct sales channels. Direct sales in China are relatively new, and restrictions on direct sales imposed on large foreign companies have been implemented in China, which has allowed for a growth in sales for domestic direct sales
companies. These restrictions require foreign direct sellers to manufacture their products and to capitalize their businesses in China. Several companies have met these requirements, and growth in this sector is expected to be strong in the next few
years.

We believe that nutraceutical supplements in the feed industry is a sector that has strong growth potential, as the importance of
aquaculture and aquaculture feeds increases. We manufacture actualized feeds, which involves choosing additives to be included in the feed, such as vitamin E, that promote health in fish, thus reducing the need for curative measures such as
antibiotics. Once embedded in the flesh of the fish, vitamin E increases the shelf life of the fish and also introduces an additional source of vitamin E to its consumers. Other similar nutraceutical supplements can also be used.

Our Products

Tilapia

Tilapia is currently farmed throughout many countries around the world because this fish is disease-resistant, reproduces easily, eats a wide variety of
feeds and tolerates a variety of poor water quality even water with low dissolved oxygen levels. Although there are many species of tilapia, only a few species are farmed for human consumption. The most common species that is farmed commercially is
the black, or Nile, tilapia that is grown in ponds, cages or rice fields.

In
response to increasing demand for tilapia, we export from our subsidiary in the PRC varying quantities of tilapia in different forms to the United States, Europe, Asia and other regions. In 2007 we launched a marketing and distribution initiative in
the United States and Europe with our TILOVEYA® brand tilapia. We continue to promote our TILOVEYA® brand with several leading
distributors and retailers in Europe and the United States. We also entered into an exclusive agreement with the Beijing division of Newly Weds® Foods, Inc. to introduce an innovative line
of battered and breaded flavored TILOVEYA® fillet for the Chinese consumer. In addition, we co-developed a process and natural flavoring giving tilapia the taste, texture and aroma of fresh
ocean-caught fish. We will process such products without the drawbacks of ocean-caught product such as ocean waste and, ecological management. The tilapia products sold by us are mainly in the following forms: whole round frozen, gutted and
scaled, boneless-skinless tilapia fillets, block frozen tilapia fillets and, more recently, we began selling boneless-skin-on tilapia fillets.

In 2008 we developed a family of frozen tilapia meal products under the brand name of Lillians Healthy Gourmet. The family of products will have three lines focusing on organic, natural and regular frozen meals. These
meals will be processed by a variety of manufacturing facilities in North America including Marsan Foods located in Toronto, Canada. Marsan is the top Canadian processor of Private Label entrées and branded Healthcare products. We will begin
to sale the products under the Lillians Healthy Gourmet brand to distributors and retail chains in the first part of 2009.

Our principal operating subsidiary with respect to our seafood products is Hainan Quebec Ocean Fishing Co. Ltd., a company organized in the PRC (HQOF).



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Marine Bio and Healthcare Products

Since the August 2004 acquisition of our wholly-owned subsidiary, Hainan Jiahua Marine BioProducts Co. Ltd. (Jiahua Marine), a Chinese limited liability
company, we have also been engaged in the development, production, and sales of marine bio and healthcare products in the PRC. We acquired Jiahua Marine pursuant to a purchase agreement with Sino-Sult Canada Limited (SSC), a Canadian limited
liability company, and Sealink Wealth Limited (Sealink), a British Virgin Islands limited liability company, a wholly-owned subsidiary of SSC and the then sole shareholder of Jiahua Marine.

The principal products of Jiahua Marine are manufactured from fish by-products (tilapia and non-endangered shark) that include shark cartilage capsules
and shark liver oil products which are distributed exclusively in China. The products undergo substantial independent laboratory testing in China administered by the Ministry of Health in China and have resulted in a PRC National Certification for
these products. These products have various perceived medicinal and health benefits. As part of the HQSs vertical integration plan of tilapia, Jiahua Marine has introduced new bio and healthcare products made from tilapia in 2008.

These products have proven medicinal and health benefits that include:(1) increasing the efficacy of the immune system, correcting blood acidity,
(2) reducing fatigue, (3) improving absorption of oxygen into the blood, (4) activating the anti-cancer cells (a major component of the innate immune system), (5) strengthening of bones, and (6) increasing subcutaneous
moisture which has anti-wrinkle qualities. All of our healthcare products have undergone stringent independent laboratory testing in China. These tests are administered by the Ministry of Health in China. As part of this process, several
laboratories are selected at random from a pool of top university laboratories to conduct tests which must confirm the results and claims of the applicant company. The applicant company can make claims about the health benefits of its products only
after such stringent, independent validation of its claims by selected laboratories have been verified. Our claims in respect of our healthcare products have been rigorously tested and proven in China through the above process. Clinical trials and
laboratory testing in China by selected university laboratories have resulted in a PRC National Certification of Excellence.

These products
are currently sold throughout China, are naturally derived from ocean-harvested by-products and are winners of Science and Technology Progress Awards in China.

Jiahua Marine has its own research and development team which is responsible for developing new products made from Tilapia and other fish by-products.

Shark cartilageThis product is highly alkalescent, it contains chondroitin sulfate and calcium and impacts the human body positively in the
following ways:



| |  |  | increases efficiency of immune system and activates NK cells associated with combating cancer, as sharks are cancer free; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | reduces blood acidity, thus improving:
| | - |  | --------------------------------------



| |  |  | blood pressure;
| | - |  | ---------------



| |  |  | apoplexy;
| | - |  | ---------



| |  |  | heart disease;
| | - |  | --------------



| |  |  | fertility; and
| | - |  | --------------



| |  |  | Osteoporosis.
| | - |  | -------------

Shark liver
oilThis product is rich in squalene and other nutrients, to which we add vitamins D and E, and impacts the human body positively in the following ways:



| |  |  | improves absorption of oxygen in the body;
| | - |  | ------------------------------------------



| |  |  | eliminates fatigue; and
| | - |  | -----------------------



| |  |  | Improves health, through the high levels of omega 3 oils.
| | - |  | ---------------------------------------------------------

As part of the HQSs vertical integration plan of tilapia, Jiahua Marine has introduced and will continue to introduce new bio and healthcare products made from tilapia in 2009. The products introduced thus far
include; (1) Shalitong Capsules which are made from the amino acids of Tilapia and help in the digestive functions of the body; (2) Xueyuan Capsules vitamin supplement including collagen polypeptides and vitamins; (3) Yubaobaokang
Capsules which contain iron supplements and increase appetite; and (4) Cephalin Capsules made with Tilapia brain extract improves brain function and memory functions and helps resist the aging process of the brain.



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In addition to the marine bio and healthcare products that we currently produce, we started the manufacturing of
nutraceuticals generated from palm oil, or other natural or organic matters to enrich feed formulations for tilapia and shrimp farmed in the Hainan area. The enriched feed will have a longer shelf life, and we expect that the benefits of the
enriched feed will pass to the end users of our tilapia products, the ultimate customers. These ingredients help improve general health, growth, feed conversion and meat quality of fish and shrimp. Our marine bio and healthcare products processing
plant is located in the Wenchang City of Hainan Province and has two production lines, a powder-product line and an oil-product line. These production lines are suited for the manufacture of nutraceutical components. The plant is equipped with a
specific gravity molecular separator and accessory equipment for the manufacture of nutraceutical products that serve as feed additives in the production of feed, including tilapia and shrimp feed.

Shrimp

Our principal shrimp product
is the white shrimp. Our shrimp is exported to various countries in the following forms: head-on shell-on shrimps, headless shell on shrimps, peeled tail-on shrimps, peeled and deveined shrimps, peeled and undeveined shrimps. All orders can be
packaged in accordance with the requirements of the buyer, either block or individually quick frozen.

Our Principal Competitive Strengths

We believe we have the following principal competitive strengths:



| |  |  | Quality Toxin Free Tilapia Products.We produce toxin free tilapia products and have developed a farming system that avoids the use of antibiotics,
hormones and other potentially toxic chemicals. Our tilapia is raised in ponds of pure rain water collected for aquaculture. Two other species of fish are introduced into the ponds to maintain the ponds health naturally. One of the species is
a bottom feeder that cleans up all the waste at the bottom of the ponds (carp), and the other species is a predator fish that eliminates all of the unhealthy fish (snakehead). We formulate feed without fishmeal and produce feed supplements in our
healthcare products processing plant to enrich this feed. It is our policy to raise toxin free tilapia to distinguish our company from other tilapia producers. The latitude and the pristine environment of the Hainan providence of China has provided
us with the optimal conditions for toxin free aquaculture production.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Vertically Integrated Operations. The completion of our own feed mill in early 2009 (construction was started in 2007) is an important
additional step towards our goal of complete vertical integration of our operations. Thus, allowing us to further control and monitor the quality of our aquaculture products, as well as control our costs. The local farmers that we have cooperative
arrangements with use our production methods and allow us to constantly monitor the production process for highly consistent production that results in high quality products at the time of harvest.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Environmental and Quality AssurancesWe are the leader in environmental and quality assurances of aquaculture products. We have adopted and
implemented stringent quality control measures and procedures throughout the production process, in order to comply with the various environmental and quality standards, such as the HACCP and the EU import standards. We are also certified in
accordance with the ACC standards and positioning ourselves for completely organic production certification of our tilapia products in accordance with market demands. We use state-of-the-art technologies in our farming, feed formulation and
processing operations. We have adopted modern and environmentally friendly and responsible technology in our production and processing of tilapia, shrimp, and marine bio and healthcare products, which we believe have been recognized through the
certifications our plants possess.
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| |  |  | Strategic Location in Hainan Province, China. Our processing facilities are geographically well-positioned in Hainan Province to leverage favorable
climatic conditions, abundant water supply and pristine environment, and a readily available source of labor for our processing plant. We are also located near a Seaport near the city of Wenchang, and our processing facilities are conveniently
located near the farmers from whom we obtain our supply of tilapia and shrimp
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| |  |  | International and Domestic Sales and Marketing Efforts.Our Seattle office allows us to differentiate our
TILOVEYA® brand and marketing initiative of our toxin free tilapia products. Following the success of the TILOVEYA® brand, we
will introduce in 2009 a family of frozen tilapia meal products under the brand name of Lillians Healthy Gourmet. The family of products will have three lines focusing on organic, natural and regular frozen meals. The
Lillians Healthy Gourmet brand will help us continue to establish our products as the toxin free tilapia products of choice both domestically and internationally. Sales from both the Seattle and China offices complement our
multi-national sales efforts to become the world leader in toxin free tilapia products.
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| |  |  | An Established Track Record and Brand Name in the Industry.We have an established track record and recognized brand name in the industry and have
received numerous awards and certifications confirming the success of the company in distinguishing itself from its competition.
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| |  |  | Competitive Cost Structure.We benefit from competitive cost structures due to the lower labor costs in China as compared to other companies of
similar products.
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Our Growth Strategies

Our objective is to become the world leader in vertically integrated production, processing and raising of toxin-free tilapia products. This includes the use of tilapia bi-products to increase our marine bio and
healthcare products, with a primary focus on increasing our own seafood products. To achieve this goal, we intend to implement the following strategies:



| |  |  | We will complete a new large-scale feed mill in early 2009, to supply our existing and anticipated new cooperative fish farmers with our fish food formula. The new
feed mill will help to increase our aquatic profit margin and to guarantee our product quality and further vertically integrate our operations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We intend to achieve completely organic production of our tilapia products and to pursue organic certification of our farms as market demand dictates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We plan to expand direct and retail sales of our health products in China and internationally and to add other products we currently have in the development
pipeline;
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| |  |  | We plan to expand our development of health products by using the by-products of tilapia, which will help increase the overall aquatic products gross margins;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We plan to expand our cooperative farming arrangements to increase the availability of tilapia to meet anticipated growth in demand;
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| |  |  | We plan to construct our own tilapia farmed ponds to improve growth time and quality of our product and further vertically integrate our operations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We plan to continue to expand our production and processing facilities in China to satisfy the anticipated growing demand for our products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our Seattle office allows us to increase awareness of the importance of our toxin free products and to benefit from more direct sales. The Seattle office also
allows us to expand our distribution options in North America and Europe by broadening the variety of products we offer to cater to the demands of our customers; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We plan to expand our product offering to include our family of frozen tilapia meals. We will also continue our branding
and marketing initiatives in North America and Europe to introduce our new family of products to major retail and food service chains. Our new family of products like the TILOVEYA® brand
will focuses on branding our products as the toxin-free solution for aquaculture products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Manufacturing and Production

Marine Bio and Healthcare Products

Our plant for processing marine bio and healthcare products consists of two production lines: a powder-product line and an oil-product line. The production lines are equipped with a complete set of imported and
domestic made devices, including a vacuum frozen dryer for bio-products, a molecular distillation device, a micro-disintegrator, a packing machine and test instruments. Our raw material treatment workshops (e.g. work area) includes an extraction
workshop, a freezing and drying workshop, a powder distillation workshop, and a finished product workshop for our powder line. Our pre-treatment workshops include a cooling and filtration workshop, a molecular distillation workshop, a supplemental
items workshop and a capsule workshop for our oil line.



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This plant is equipped with a molecular distillation device, which produces a variety of refined oil
products including vitamin E used for human consumption and as a supplement to tilapia and other feeds. These vitamins are processed from natural products, such as palm oil. This plant has been certified in accordance with the China National Health
Inspection program as a Chinese Good Manufacturing Practice (GMP) by the Hainan Provincial Health Bureau. We believe that our nutraceutical business is closely connected to our planned expansion including the completion of our own feed
mill described below. Actualized feed additives provide health benefits to the fish, such as increasing health and avoiding the use of curative measures involving antibiotics. The consumers of these fish products in turn benefit from increased shelf
life of the fish products, and from the additional sources of vitamin E resulting from the consumption of our products.

Aquaculture
Products

Our plant for processing aquatic products is a Canadian designed facility located in Hainan, China. We operate six processing
lines, which consist of two filleting lines, two whole round fish processing lines (principally tilapia which is gutted, scaled and gilled), and two block processing lines . This processing plant is capable of processing an average of approximately
30,000 metric tonnes (additional capacity of 10,000 metric tonnes was completed in August of 2008) per year of whole round fish (principally, tilapia), 10,000 metric tonnes per year of fillet tilapia and 3,000 metric tonnes per year of all
forms of shrimp. Such capacity may become inadequate to meet our projected demand from our existing customers and the national retail food service chains targeted by us. Based on our projected need for expansion, we will complete in 2009 a large
scale feed mill, to supply our existing and anticipated new cooperative fish farmers with our fish food formula. See Construction of Feed Mill and Processing Plant. We have completed taste trials with several national retail food service
chains, and, we expect to phase in deliveries in the second half of 2009 . The scale of production is a critical factor for such chains, and we expect that expanded production will enable us to enter into larger supply arrangements with several
chains.

Construction of Feed Mill and Processing Plant

In order to maintain the high quality of our products, we have constructed our own feed mill that will begin operations in early 2009 for the production
of extruded (floating) feed formulations. This type of feed is the most efficient feed for our farming operations. In early 2009 we will begin producing the feed, free of antibiotics and fishmeal, and use feed additives manufactured in our
nutraceutical plant. The feed formulations will be prepared with the benefit of the latest technologies to assure a minimum of toxicity. The feed will be enriched using omega 3 rich algae and vitamin E, as well as naturally sourced amino acids,
which provide actualized benefits to the fish and the consumers thereof. The floating feed formulations will reduce waste in the aquaculture reservoirs, thus reducing the requirement for chemicals to stabilize reservoir health. The feed mill will
allow us to continue our vertically integrated production strategy, ensuring quality control throughout the entire production and processing cycle. We plan to partner with other parties, as appropriate, to produce the optimum formulation of feed.
Presently, there is no high quality floating feed production in Hainan. This expanded production will satisfy our own demand from our cooperative farmers, as well as to manufacture feed for other farmed operations in Hainan such as shrimp and other
farmed species. Upon completion in 2009, the plant will manufacture some 100,000 metric tonnes annually of feed.

We expect that the new
processing plant will provide for value added production, allowing us to make fish blocks as well as the fillets and whole round products that we currently manufacture.

Distribution Channels

At the present time, we distribute our seafood products principally in the
United States and Europe, and we sell all of our marine bio and healthcare products exclusively in the PRC. Through our Seattle office, we are able to work directly with wholesale and retail buyers. The programs established with retail distributors
are rather different than with wholesalers. Retailers require product introduction and marketing support and pay differently than wholesalers. The latter generally take delivery of product ex-plant and pay through a letter of credit, while the
former take delivery in the United States and pay on negotiated terms.



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The Seattle office is charged with maintaining
existing accounts and introducing our toxin free tilapia products to a new target market of retail and food service industry purchasers. We plan to introduce our family of products branded Lillians Healthy Gourmet throughout North
America in 2009. We are currently selling our toxin free tilapia products to the European market through distributors and retailers. We are actively seeking to expand our distributor network in Europe for our TILOVEYA® brand.

Currently, all of our marine bio and healthcare products are sold in the PRC. Through our
subsidiary Jiahua Marine, we currently sell a range of healthcare products under the brand name Jiahua in the PRC.

Our China
sales are principally marketed through our offices in Wenchang to customers that include domestic supermarkets, airlines, hotels and local distributors. Direct sales of healthcare products target tourists in various popular destinations in China,
such as Sanya, Beihai and the Three Gorges project. Seminars are organized for these tourists that usually result in the purchase of our products. These products are also sold in various chain stores, over the internet, and through mail order sales
throughout China.

Commencing in 2003, our subsidiary Jiahua Marine has been pursuing a sales strategy which we believe will lead to strong
growth in the current and future years. As part of this strategy, a unique direct marketing campaign has been introduced in conjunction with large scale tours organized throughout China in prime tourist destinationsSanya, Beihai (Chinas
premiere tropical leisure vacation centers) and the Three Gorges project. These tours are captive audiences learning about the health advantages of the products during an outing associated with their leisure activities. In addition, since 2003,
sales have begun in Hualian Supermarket Co. Ltd. (one of the largest specialty chains in China with over 1,200 outlets, the first publicly listed supermarket retailer in China), as well as in health product and pharmaceutical outlets throughout
China. Our five largest customers accounted for 38.6 percent of our consolidated sales for the year ended December 31, 2008. They account individually for approximately 9.1 percent, 8.4 percent, 7.8 percent, 6.8 percent and 6.5 percent of
consolidated sales in 2008. In the future, we may continue to have several significant customers, the loss of any of which could have an adverse material effect on us. See also Risk FactorsA Few Customers Account for a Significant
Portion of our Business.

Advertising and Marketing

Our sales and marketing team consists of ten members that are under the overall supervision of
Mr. Harry Wang Hua, our Chief Operating Officer. Our sales and marketing team is responsible for establishing our sales and distribution networks both domestically and internationally, promoting our image and product awareness and maintaining
our customer relationships. As part of his duties, Mr. Harry Wang Hua leads our plant management teams for both marine bio and healthcare products and aquaculture products. The Seattle personnel are responsible for increasing awareness and
focus of our branding and marketing initiative, the rollout of our toxin free TILOVEYA® brand, and the rollout of our family of products under the Lillians Healthy Gourmet
brand.

We believe that our principal operating subsidiary, HQOF, is the only vertically integrated PRC based producer present at the
international seafood shows (e.g.,Brussels Seafood Show and Boston Seafood Expo). Participation in these industry events enables us to establish high level and immediate contacts with potential buyers. Buyer preferences and our response to
these preferences, as well as prices and response to quality and quantity concerns, can be promptly addressed without the usual screening and middleman costs. We plan to aggressively market our products throughout North America, Europe and Asia
through such shows.

In February 2006, we established our corporate headquarters, marketing and sales office in Seattle, Washington, thus
creating a strong presence in the U.S. market. This office allows us to increase awareness of the importance of our toxin free product focus and to reap the benefits of more direct sales, increasing our overall sales, market penetration and
profitability. We expect to also be able to broaden the scope of our products to cater to additional seafood purchasing requirements.

Sustainable
Farming

The concept of sustainable development has been popularized by the 1987 World Commission on Environment and Development. It
defined sustainable development as meeting the needs of the present generation, without compromising the needs of future generations. The idea of sustainability has caught up with aquaculture partly because of pressure from environmental
groups. In 1998, the Holmenkollen Guidelines for Sustainable Aquaculture were formulated. These guidelines recommended, among other things, that new technologies and management procedures should be utilized so that the quality and quantity of
aquaculture products is improved and the risk of adverse effects on the environment and on the livelihood of other people, including future generations, is reduced. The guidelines also recommended (1) strict compliance with the internationally
agreed food safety, environmental safety and ethical criteria if genetically modified organisms or hormones are utilized in the production, as well as (2) giving priority to the



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development of integrated fish farming and of sources for animal feed other than fish protein and fish lipid. We fully endorse the idea of sustainable
farming and implement it in our operations through our cooperative supply arrangements.

Organic Farming

We believe that organic farming may be considered to be the next step after sustainable farming. Organic farming is a trend towards simple and moderate
farming methods that are inherently sustainable. Organic farming advocates against the use of hormones and certain drugs, genetically modified organisms, very intensive culture systems, use of fish meal from the fish meal industry and oils from
animals. As the market demand for sustainable and environmentally sustainable practices increases, the aquaculture industry is in the process of adjusting to such demand by starting to offer organic products. Further, we believe that many companies
are finding that the use of waste streams from aquaculture can be used as a nutrient source for the culture of other aquatic flora and fauna, as well as land based agriculture.

We believe that operating costs for organic culture should be lower than intensive farming, with the feed remaining the key operating cost. We have
determined that organic production of tilapia is technically possible in Hainan Province. Further, our preliminary evaluation of farm production economics (such as feed costs, feed conversion ratios, growth rates and yields) as they relate to
expected market demand indicates that we could engage in organic farming profitably. Therefore, we will finish the construction of a large-scale feed mill in early 2009 and pursue organic certification of our farms and commence organic tilapia
production.

We anticipate that, following our construction of a large scale feed mill and processing plant, our tilapia products will meet
organic standards as defined by The US Department of Agriculture.

In January of 2008 the Company received the Certification attesting to
the organic standards for its tilapia production, processing, labeling, marketing and management system. Certification came after an initial annual audit conducted by Beijing Continental Hengtong Certification Co., Ltd. (CHTC), a certifier
authorized by The China National Accreditation Service for Conformity (CNAS) and the Certification and Accreditation Administration of the PRC (CNCA).

Our Cooperative Supply Arrangements

We purchase and process farm-bred and ocean caught aquatic products through cooperative
supply arrangements with local fishermen and cooperatives. Our farmed tilapia products come from approximately 1,647 pond acres of farms situated in the Wenchang area of Hainan. These farms are grouped through cooperatives to supply us with the
highest quality tilapia in accordance with the sustainable farming standards described above.

We strive to implement the principles
underlying sustainable farming and elements of organic farming in our cooperative supply arrangements with local fishermen and cooperatives, from which we purchase and process farm-bred and ocean caught aquatic products. Under our related
cooperatives, or collaboration agreements, the farmers or holders of the concession retain their proprietary status, while agreeing to operate under planned and scheduled practices put forward by our company as cooperative partner of the
concessions. The farmers are trained to our standards for deploying appropriate feeds and using poly-culture techniques, while we monitor compliance with these standards on an on-going basis. The farmers are also required to agree to treat waste
water responsibly as a nutrient rich fertilizer for the vegetable fields maintained by neighboring farmers.

We typically have between five
and ten cooperative supply agreements, which number may vary from time to time. We believe that these cooperative supply arrangements provide mutual benefits to the parties involved, as they help increase revenues of the local farmers, while
ensuring a stable supply of quality raw tilapia to us.

Trademarks and Patents

We have the following patents on our products: Chinese Patent Number 460000X340-2001Shark Cartilage; Chinese Patent Number
460000X131-2001Shark Cartilage; Chinese Patent Number 460000X338-2001Shark Liver Oil; and Patent Number 460000X342-2001Shark Liver Oil. These patents are for a 20 year period and will expire in 2021. Two products are produced from
refined shark cartilage and two from shark liver, both harvested from non-endangered shark species.

We consider our service marks,
trademarks, trade secrets, patents and similar intellectual property to be critical to our success. We rely on trademark, patent and trade secret law, as well as confidentiality and license agreements with our employees, customers, partners and
others to protect our proprietary rights. We have received patent protection and applied for trademark protection for our



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products in the PRC. We have also applied for trademark protection in the U.S., as described below, in connection with our branding of toxin free tilapia.
Effective trademark, service mark, patent and trade secret protection may not be available in every country in which we sell or may in the future sell our products, and our competitors may independently develop formulations and processes that are
substantially equivalent or superior to our own.

TILOVEYA®

In May 2006, we
introduced our new toxin free tilapia brand TILOVEYA® at the European Seafood Exposition in Brussels, the largest seafood show in the world. This brand is designed to celebrate the health
benefits of our tilapia produced in Hainan Province, China. Our freshwater tilapia products are made without hormones, antibiotics and free of levels of heavy metals and other toxins associated with ocean sourced products. We have filed with the
United States Patent and Trademark Office the following applications for trademark registrations in connection with our branding of toxin free tilapia:



| |  |  | Registration Number 3313536 for the TILOVEYA® mark;
| | - |  | ---------------------------------------------------



| |  |  | Registration Number 3304756 for the TILOVEYA® Logo; and
| | - |  | -------------------------------------------------------

Lillians Healthy Gourmet®

In August of 2008, we developed the concept of a family of products under the brand of
Lillians Healthy Gourmet. This family of products is based on the concept of our toxin free tilapia products produced in Hainan Province, China. Individuals should be able to eat a convenient healthy seafood meal at a reasonable
price, while maintaining their demanding life style. This family of products brand Lillians Healthy Gourmet is designed to meet the need for a convenient healthy seafood meal at a reasonable price. We have filed with the United
States Patent and Trademark Office for trademark registrations in connection with our branding of the Lillians Healthy Gourmet family of products and these filings are pending approval from the authorities.

Competition

In general, the aquaculture industry is
intensely competitive and highly fragmented. The PRC aquaculture industry is further open to competition from local and overseas operators engaged in aquaculture and from other captured fish producers. We compete with various companies, many of
which are developing or can be expected to develop products similar to ours. For example, 8th SeaThe Organic Seafood Company currently produces and processes tilapia fillets in Brazils Parana state. Our main aquaculture products (tilapia
and shrimp) are also facing competition from some other domestic aquaculture producers. Some of the domestic aquaculture processing companies in Hainan Province have obtained certifications similar to those we possess. However, we believe that the
competition from such producers is minimal because, to the best of our knowledge, there are no competitors in Hainan Province that have a similar operating scale and production capacity, or that have developed the vertically integrated business
model under which we operate.

Many of our competitors are more established than we are, and have significantly greater financial,
technical, marketing and other resources than we presently possess. Some of our competitors have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer
requirements, and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We intend to create greater brand awareness for our brand name(s) so that we can
successfully compete with our competitors. We cannot assure you that we will be able to compete effectively or successfully with current or future competitors, or that the competitive pressures we face will not harm our business.

With respect to potential new competitors, although there are no formal barriers to entry for engaging in similar aquaculture processing production and
activities in the PRC, we believe that the high infrastructure costs associated with developing and constructing processing plants and facilities does pose a barrier to potential competitors. Fish farms are tied directly to a processing plant and a
new processing plant must either enlist new farms or build its own. Furthermore, measures addressing environmental considerations, such as water quality and waste water processing requirements, are costly to deploy on a greenfield site and are not
readily available to all new companies. Accordingly, potential competitors have to mobilize extensive resources in order to maintain a presence similar to ours.

Government Regulation

Our company complies with various national, provincial and local environmental protection laws and
regulations, as well as certifications and inspections relating to the quality control of our production and the environmental and social impact of our



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operations. In addition to statutory and regulatory compliance, we actively ensure the environmental sustainability of our operations. Also, all of our
healthcare products have met stringent independent testing by selected university laboratories in China. Our costs of compliance with applicable environmental laws are minimal. Penalties would be levied upon us if we fail to adhere to and maintain
our compliance with the applicable environmental regulations in the PRC. Such failure has not occurred in the past, and we generally do not anticipate that it may occur in the future, although no assurance can be given in this regard.

HACCP Standards

Our facilities are
certified in accordance with the Hazard Analysis Critical Control Points, or HACCP, standards for exporting aquatic products to the United States. The HACCP standards are developed by the FDA pursuant to the FDAs HACCP regulation, Title 21,
Code of Federal Regulations, part 123, and are used by the FDA to help ensure food safety and control sanitary standards.

These standards focus on
monitoring the quality of production and sanitation measures in processing plants for food products, and also take into account the environmental and social impact of the operations of the certified company. Compliance with the HACCP procedures is
mandatory, and the successful implementation of these procedures depends on the design and performance of facilities and equipment, and excellent quality control and hygiene practices. HACCP conducts sample laboratory testing on our processed
aquatic products to ensure no forbidden substances are present in them. Laboratory testing of our processed aquatic products was initiated by the HACCP in compliance with strict quarantine guidelines imposed by domestic export control government
agencies and foreign import control government agencies.

In addition, our facilities continuously pass USDC inspection in conformity with
the USDC Global Seafood Inspection Program (voluntary).

ACC Standards

We have completed the process of certification of our processing plant in China in relation to shrimp and Tilapia processing in accordance with the
Aquaculture Certification Counsel, Inc., or the ACC standards. The ACC standards are considered super HACCP standards, as they also take into account various environmental and social issues. ACC certification is required by many large
retailers in the United States.

The ACC is a U.S.-based, non-governmental body established to certify social, environmental and food
safety standards at aquaculture facilities throughout the world. The ACC uses a certification system that combines site inspections and effluent sampling with sanitary controls, therapeutic controls and traceability. Part of the ACCs mission
is to help educate the aquaculture public regarding the benefits of applying best aquaculture practices and the advancing scientific technology that directs them. The ACC believes that, by implementing such standards, seafood producers can better
meet the demands of the growing global market for safe, wholesome seafood produced in an environmentally and socially responsible manner. The ACC offers a primarily process, rather than product, certification, with an
orientation toward seafood buyers. Successful participation in the ACC program is visually represented by limited use of a Best Aquaculture Practices certification mark. The ACC currently certifies only shrimp hatcheries, farms and
processing plants.

Assignment of EU Code

Our facilities have been assigned a European Union (EU), approval registration, referred to as an EU Code, required for exporting aquatic products to the EU. This requirement applies to production both inside and
outside of the EU, and defines the applicable standards of the EEC for handling, processing, storing and transporting fish. Our aquatic products processing plant in China must meet or exceed these standards every year, in order to maintain the
assigned EU Code. The assignment of the EU Code to us, and our ability to maintain it on an annual basis, evidence the fact that our products meet the EU importable food standards set by the relevant inspection agencies.

Product Liability Insurance

We have
purchased general commercial liability insurance, which provides adequate aggregate product liability insurance based on industry standards. However, there is a possibility that our customers, or the ultimate buyers of our products, may have adverse
reactions to the tilapia and other aquatic products or marine bio and healthcare products that we process and sell. Any such adverse reaction may result in actual or potential product liability claims against us, which may not be covered by our
insurance or, if covered, may be significantly higher than the insurance amount. Such actual or potential product liability claims may have an adverse effect on our reputation and profitability.



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Government Regulation in China

Aquaculture producers in the PRC have to comply with the environmental protection laws and regulations promulgated by the national and local governments
of the PRC. Such rules and regulations include, among others, Environmental Protection Law of the PRC, Ocean Environmental Protection Law of the PRC, Regulations on Administration over Dumping of Wastes in the Ocean of the PRC, Ocean Aquatic
Industry Administration Regulation, Fishing License Administration Regulation, Regulations on Administration of Hygiene Registration of Exported Food Manufacturers, and Regulations on Administration of Quality Control of Food Processors.

In addition, HACCP and sanitary programs in China in accordance with the FDAs HACCP standards are verified by the China Inspection and
Quarantine Office, or CIQ, which is a branch of the State Administration for Entry-Exit Inspection and Quarantine of the PRC and, in our case, also by the Hainan Entry-Exit Inspection and Quarantine Bureau of the PRC. In addition, the CIQ evaluates
the compliance by our processing plant with the EU standards described above under Assignment of EU Code. As a result of such review, our aquatic products processing plant in China has received a CIQ certificate. The CIQ
certificate must be renewed on an annual basis.

Our Work with the Hainan Province

We have enjoyed close collaboration with the local government as we conduct our operations in the Hainan Province. We have continued to expand our
operations in that area and to foster close ties with the local government through the construction of our large scale feed mill, which will be completed in early 2009. See BusinessManufacturing and ProductionConstruction of Feed
Mill. The success of our operations in the PRC depends in part on the continued investment by Hainan Province in the development of the local aquaculture industry. While there can be no assurances that such investment will continue, we believe
that it should continue for the following reasons. The central government of China has limited Hainan Province to two areas of economic activity, agri-food and tourism. The resulting focus of the Hainan Province on the agri-food and tourism sectors
creates a strong potential synergy with private sector companies intent on further development of these sectors. Part of the attraction for investors is the low tax rate in Hainan. In addition, foreign companies setting up new ventures in Hainan do
not pay any tax for the two first years of profitable operations, then pays 7.5 percent for the following three years and 15 percent thereafter. For this reason, we plan to continue to structure and conduct our operations in China through the use of
separate subsidiaries, held by foreign holding companies which are separate and distinct from holding companies already incorporated. In turn, these holding companies are held by HQS. Under these arrangements, we are not considered involved in joint
ventures, but rather in wholly owned foreign enterprises, under the local law. Government support for such ventures meeting local needs is positive, and we believe our operations have already demonstrated our ability to channel this support in the
manner favorable to our business and Hainan. We believe that not having a joint venture with the local government is the best way to minimize the potential for government interference and to maximize government support, and we plan to continue to
conduct our business in China accordingly.

Furthermore, on March 17, 2007, a new PRC Enterprise Income Tax Law (EIT) was promulgated
and introduced a new uniform tax regime in the PRC. The EIT became effective on January 1, 2008. That new Law provides, amongst other issues, that income derived from processing of fishery products and processing of agricultural products will
be exempt from the EIT tax rate. Starting in 2008, our existing fish processing unit and our feed mill plant which is under construction will both benefit from a 0 percent tax rate. With regards to our nutraceutical unit, the income tax
rate, under the new law, will increase by approximately 2 percent yearly until it reaches a maximum of 25 percent in 2012.

Employees

Through our subsidiaries, we currently employ approximately 600 employees, all of whom are full-time employees. They are located predominantly in the PRC.
Of our key employees, Harry Wang Hua, He Jian Bo and Wang Fu Hai are located in China and are fully dedicated to our China operations. In addition, Lillian Wang Li, Norbert Sporns, and William Sujian contribute to both our China operations and our
U.S. operations, depending on the needs of our business over time.

In addition, during the high season, we hire up to 100 part-time
employees. We typically pay our local employees much higher wages than the required minimum wages, in order to attract and retain key employees. We have employment agreements with many of our full-time employees. None of our employees are covered by
a collective bargaining agreement, and we believe our employee relations are good.

Properties

We own two processing plants located in Wenchang, Hainan Province, the PRC, and the related manufacturing equipment, office equipment and motor vehicles.
We use one plant to process the seafood products we produce, and the other plant to process our marine bio and healthcare products. We are in the process of building a new feed mill which we expect to be completed in the first half of 2009.



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In addition, we currently lease corporate premises for our United States headquarters located in Seattle,
Washington, consisting of approximately 4,170 square feet, from Doncaster Investments NV, Inc. The term of the related lease is sixty months, which term commenced on December 1, 2005 and will end in December 1, 2010. Our base rental
payment under the lease is $6,950 per month for 2009 and 2010.

Our properties are in good condition and are sufficient to meet our needs
at this time. We do not plan to obtain additional space in the foreseeable future for the above cited plants but we intend to build or acquire additional processing facilities in the near future.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

An investment in our common stock
involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report on Form 10-K, before investing in our common stock. If any of the events
anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected which could result in a decline in the market price of our common stock, causing you to lose all or part of your
investment.

Risks Relating To Our Business

We rely on cooperative suppliers and any adverse changes in these relationships may adversely affect us.

We have
developed a network of aquaculture farmers in Hainan Province for the supply of tilapia and shrimp by entering into cooperative supply agreements. Pursuant to the cooperative supply agreements, we are assured the necessary supply of aquatic products
that meet our quality standards. The continuance and smooth operations of these cooperative networks are essential in controlling our costs, meeting quality standards and the timely fulfillment of our customer orders. Any adverse change to our
cooperative network, including any early termination or non-renewal of any supply agreement or any failure of suppliers to fulfill their obligations under the supply agreements, could have a material adverse effect on our business model, operations
and competitiveness.

We may require additional capital in the future, which may not be available on favorable terms or at all.

Our future capital requirements will depend on many factors, including industry and market conditions, our ability to successfully implement our new
branding and marketing initiative and expansion of our production capabilities. We anticipate that we may need to raise additional funds in order to grow our business and implement our business strategy. We anticipate that any such additional funds
would be raised through equity or debt financings. In addition, we may enter into a revolving credit facility or a term loan facility with one or more syndicates of lenders. Any equity or debt financing, if available at all, may be on terms that are
not favorable to us. Even if we are able to raise capital through equity or debt financings, as to which there can be no assurance, the interest of existing stockholders in our company may be diluted, and the securities we issue may have rights,
preferences and privileges that are senior to those of our common stock or may otherwise materially and adversely affect the holdings or rights of our existing stockholders. If we cannot obtain adequate capital, we may not be able to fully implement
our business strategy, and our business, results of operations and financial condition would be adversely affected. See also Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
Resources. In addition, we have and will continue to raise additional capital through private placements or registered offerings, in which broker-dealers will be engaged. The activities of such broker-dealers are highly regulated and we cannot
assure that the activities of such broker-dealers will not violate relevant regulations and generate liabilities despite our expectation otherwise.

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

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



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We depend on our key management personnel, and the loss of any of their services could materially adversely affect
us.

Our operations are dependent upon the experience and expertise of a small number of key management personnel, which includes
Lillian Wang Li, our Chairman of the Board, Norbert Sporns, our Chief Executive Officer and President, and Harry Wang Hua, our Chief Operating Officer. Lillian Wang Li and Harry Wang Hua are brother and sister, and Ms. Wang Li is married to
Norbert Sporns. Although we have begun the process of obtaining the life insurance on Ms. Wang Li and Mr. Sporns, of which we are the beneficiary, the loss of the services of any of them for any reason would have a material adverse effect
on our business, and the results of our operations and financial condition, or could delay or prevent us from fully implementing our business strategy.

A few of our customers account for a significant portion of our business.

We have derived, and over the near term
we expect to continue to derive, a significant portion of our sales from a limited number of customers. For example, our five largest customers accounted for a total of 38.6 percent of our consolidated sales for the year ended December 31,
2008, and they are all related to the aquaculture product segment. At December 31, 2008, approximately 46.3 percent of our trade receivables was from transactions with these five largest customers. The loss of any of these customers or
non-payment of outstanding amounts due to the company could materially and adversely affect our business in terms of results of operations, financial position and liquidity.

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

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

Any adverse changes in the supply of our tilapia and other raw materials, including contamination or disease or increased
costs of raw materials, may adversely affect our operations or reduce our margins or profits.

We are dependent on the availability
of raw materials from Hainan Province and the oceans in that region. The supply of these raw materials can be adversely affected by any material change in the climatic or environmental conditions in and around Hainan Province. In addition, if there
is contamination resulting from disease, pollution or other foreign substances, our supply of raw materials could be jeopardized or disrupted. The shortage or lack of raw materials and any consequential change in their cost would, in turn, have a
material adverse effect on the cost on our operations and margins and our ability to provide products to our customers.

We may be adversely affected
by the fluctuation in raw material prices and selling prices of our products.

In the winter of 2008 there was a winter freeze in
mainland China that was exceptionally cold. This winter freeze killed a significant amount of the farmed tilapia in mainland China driving up the market price for live tilapia. At the same time oil futures and commodity future reached near record
highs driving up the price of raw materials for our cooperative farmers. Thus, at different points in early 2008 the costs of raw material had risen faster than the market price of finished products causing a negative impact on various
companies gross margins. We think it is highly unlikely that the above mentioned weather and market conditions will happen again, but there is no assurance that these market conditions will not occur again causing significant future price
fluctuations or pricing control like occurred in 2008. The products and raw materials we use may experience price volatility caused by events such as market fluctuations or changes in governmental programs. The market price of these raw materials
may also experience significant upward adjustment, if, for instance, there is a material under-supply or over-demand in the market. These price changes may ultimately result in increases in the selling prices of our products, and may, in turn,
adversely affect our sales volume, revenue and operating profit.

We could be adversely affected by the occurrence of natural disasters in Hainan
Province.

From time to time, Hainan Province experiences typhoons, particularly from June through September of any given year.
Natural disasters could impede operations, damage infrastructure necessary to our operations or adversely affect the logistical services to and from Hainan Province. The occurrence of natural disasters in Hainan Province could adversely affect our
business, the results of our operations, prospects and financial condition, even though we currently have insurance against damages caused by natural disasters, including typhoons, accidents or similar events.



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Intense competition from existing and new entities may adversely affect our revenues and profitability.

In general, the aquaculture industry is intensely competitive and highly fragmented. We compete with various companies, many of which are
developing or can be expected to develop products similar to ours. For example, 8th SeaThe Organic Seafood Company, currently produces and processes tilapia fillets in Brazils Parana state. Many of our competitors are more established
than we are and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors have greater name recognition and a larger customer base. These competitors may be able to respond more
quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We intend to create greater
awareness for our brand names so that we can successfully compete with our competitors. We cannot assure you that we will be able to compete effectively or successfully with current or future competitors or that the competitive pressures we face
will not harm our business.

Our operating subsidiary must comply with environmental protection laws that could adversely affect our profitability.

We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments
of the PRC. Some of these regulations govern the level of fees payable to government entities providing environmental protection services and the prescribed standards relating to the discharge of effluent, or liquid waste. Yearly inspections of
waste treatment systems require the payment of a license fee which could become a penalty fee if standards are not maintained. Currently, our plant treats all of its effluent completely to level one, which is consistent with releasing potable water
back to the environment, and there is currently no charge being levied. Although our production technologies allow us to efficiently control the level of pollution resulting from our production process, and notwithstanding the fact that we have
received evidence of compliance with environmental protection requirements from government authorities, due to the nature of our business, effluent wastes are unavoidably generated in the aquaculture production processes. If we fail to comply with
any of these environmental laws and regulations in the PRC, depending on the types and seriousness of the violation, we may be subject to, among other things, warning from relevant authorities, imposition of fines, specific performance and/or
criminal liability, forfeiture of profits made, being ordered to close down our business operations and suspension of relevant permits.

Our
operations, revenue and profitability could be adversely affected by changes in laws and regulations in the countries where we do business.

The governments of countries into which we sell our products, including the United States, Canada and the European Union, from time to time, consider regulatory proposals relating to raw materials, food safety and markets, and environmental
regulations, which, if adopted, could lead to disruptions in distribution of our products and increase our operational costs, which, in turn, could affect our profitability. To the extent that we increase our product prices as a result of such
changes, our sales volume and revenues may be adversely affected.

Furthermore, these governments may change import regulations or impose
additional taxes or duties on certain Chinese imports from time to time. For example, in 2004, the United States government imposed heavy tariffs of more than 100 percent on certain Chinese shrimp exporters. Similar regulations and fees or new
regulatory developments may have a material adverse impact on our operations, revenue and profitability.

There could be changes in the policies of
the PRC government that may adversely affect our business.

The aquaculture industry in the PRC is subject to policies implemented
by the PRC government. The PRC government may, for instance, impose control over aspects of our business such as distribution of raw materials, product pricing and sales. On the other hand, the PRC government may also make available subsidies or
preferential treatment, which could be in the form of tax benefits or favorable financing arrangements.

If the raw materials used by us or
our products become subject to any form of government control, then depending on the nature and extent of the control and our ability to make corresponding adjustments, there could be a material adverse effect on our business and operating results.

Separately, our business and operating results also could be adversely affected by changes in policies of the Chinese government such as:
changes in laws, regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion, imports



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on sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government has been pursuing economic reform
policies for approximately two decades to liberalize the economy and introduce free market aspects, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in
the event of a change in leadership, social or political disruption, or other circumstances affecting Chinas political, economic and social life.

Certain political and economic considerations relating to PRC could adversely affect our company.

The PRC is
passing from a planned economy to a market economy. The Chinese government has confirmed that economic development will follow a model of market economy under socialism. While the PRC government has pursued economic reforms since its adoption of the
open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans and annual state plans adopted by the government that set down national economic development goals. Through these plans and other economic
measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic
reforms are unprecedented or experimental for the PRC government, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process
may not necessarily have a positive effect on our operations or future business development. Our operating results may be adversely affected by changes in the PRCs economic and social conditions as well as by changes in the policies of the PRC
government, which we may not be able to foresee, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the rate or method of taxation, and imposition of
additional restrictions on currency conversion.

The recent nature and uncertain application of many PRC laws applicable to us create an uncertain
environment for business operations and they could have a negative effect on us.

The PRC legal system is a civil law system.
Unlike the common law system, such as the legal system used in the United States, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, the PRC began to promulgate a comprehensive
system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations
dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have
a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

If relations between the United States and China worsen, our stock price may decrease and we may have difficulty accessing the U.S. capital markets.

At various times during recent years, the United States and China have had disagreements over political and economic issues.
Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could adversely affect the market price of our common stock and our ability to access U.S. capital markets.

Governmental control of currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of
the PRC. Currently, the Renminbi is not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency
denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior
approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of loans and corporate debt obligations denominated in foreign currencies.

The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain of our expenses as they come due.



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The fluctuation of the Renminbi may materially and adversely affect your investment.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRCs
political and economic conditions. Any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars into Renminbi for
our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations.

Conversely, if we decide to convert our Renminbi into U.S. dollars for business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced.
Any significant devaluation of Renminbi may reduce our operation costs in U.S. dollars but may also reduce our earnings in U.S. dollars. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our
income statement and a reduction in the value of these assets.

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

In addition, there can be no assurance that we will be able to obtain sufficient foreign exchange to pay dividends or satisfy other foreign exchange
requirements in the future and we currently do not intend to pay dividends.

It may be difficult to effect service of process and enforcement of
legal judgments upon our company and our officers and directors because some of them reside outside the United States.

As our
operations are presently based in China and some of our key directors and officers reside outside the United States, service of process on our key directors and officers may be difficult to effect within the United States. Also, substantially all of
our assets are located outside the United States and any judgment obtained in the United States against us may not be enforceable outside the United States. We have appointed Norbert Sporns, our Chief Executive Officer and President, as our agent to
receive service of process in any action against our company in the United States.

Risks Relating to our Common Stock

There are a large number of shares underlying our secured convertible notes and warrants that may be available for future sale and the sale of these shares may
depress the market price of our common stock.

As of December 31, 2008, we had 12,085,846 shares of common stock issued and
outstanding. As of the same date, there were 1,000,000 shares of our common stock issuable upon conversion of the convertible notes we issued in November 2006. In addition, we currently have outstanding Class A warrants to purchase up to 43,750
shares of our common stock, Class B warrants to purchase up to 114,583 shares of our common stock, Class C warrants to purchase up to 79,825 shares of our common stock, Class D warrants to purchase up to 141,200 shares of our common stock, and stock
purchase warrants to purchase up to 30,000 shares of our common stock issued in connection with the November 2006 financing.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None.



|ITEM 2. | PROPERTIES
|------- | ----------

We own two processing plants
located in Wenchang, Hainan Province, the PRC, and the related manufacturing equipment, office equipment and motor vehicles. We use one plant to process the seafood products we produce, and the other plant to process our marine bio and healthcare
products. We are currently in the process of building a new feed plant that is planned to be in operation in first half of 2009.

In
addition, we currently lease corporate premises for our United States headquarters located in Seattle, Washington, consisting of approximately 4,170 square feet from Doncaster Investments NV, Inc. The term of the related lease is sixty months, which
term commenced on December 1, 2005, to end December 1, 2010 Our base rental payment under the lease is $6,950 per month for 2009 and 2010.

Our properties are in good condition and are sufficient to meet our needs at this time. We do not plan to obtain additional space in the foreseeable future for the above-cited plants but we intend to build additional
processing facilities in the near future.



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|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

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



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

There were no matters submitted to the vote of securities holders during the year ended December 31, 2008 except as follows:

On October 24, 2008, we held our annual meeting of stockholders in which a majority of the stockholders elected the current Board of Directors to hold office until the next Companys Annual Meeting of Stockholders or until his or
her successor is duly elected and qualified and ratified the appointment of Schwartz Levitsky Feldman LLP, as the Companys independent certified public accountant.

PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

Shares of our common stock commenced trading on May 17, 2007, on the American Stock Exchange (AMEX) under the symbol HQS.

For the periods indicated, the following table sets forth the high and low bid prices per share of common stock, as reported by the OTC Bulletin Board
until May 16, 2007, and the high and low closing price of our common stock since May 17, 2007 when our common stock commenced trading on AMEX. These prices represent inter-dealer quotations without retail markup, markdown, or commission
and may not necessarily represent actual transactions. The prices set forth below have been adjusted for the reverse stock split of our common stock.



|               |  |      |       |      |   |      |  |     |       |  |   |     
|-------------- |  | ---- | ----- | ---- | - | ---- |  | --- | ----- |  | - | ----
|               |  | 2008 |       | 2007
|               |  | High |       | Low  |   | High |  | Low
|First Quarter  |  | $    | 14.20 |      | $ | 9.04 |  | $   | 7.74  |  | $ | 4.00
|Second Quarter |  |      | 15.40 |      |   | 9.51 |  |     | 13.00 |  |   | 6.30
|Third Quarter  |  |      | 16.45 |      |   | 3.85 |  |     | 10.45 |  |   | 8.25
|Fourth Quarter |  |      | 8.24  |      |   | 3.29 |  |     | 10.55 |  |   | 7.40

On December 31, 2008, the closing bid price of our common stock was $7.83

Holders of Record

As of December 31, 2008, we
had approximately 1,100 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various
security brokers, dealers, and registered clearing agencies.

Recent sales of unregistered securities

On February 21, 2008, we issued 2,526 shares to our three independent non-executive directors to satisfy our obligations to pay each such director an
annual bonus in shares of our common stock pursuant to our independent non-executive director agreements with them. All of these shares were issued pursuant to the exemption provided by Section 4 (2) under the Securities Act for a
transaction not involving a public offering.

On March 12, 2008, we issued 6,046 shares of our Common Stock to Lucky Ventures Limited
in consideration of financial consulting services rendered to us by that company. All of these shares were issued pursuant to the exemption provided by Section 4 (2) under the Securities Act for a transaction not involving a public
offering.



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On March 18, 2008, we issued 300,000 shares of our Common Stock to two investors, namely The Tail
Wind Fund Ltd and Solomon Strategic Holdings, Inc in relation to a waiver agreement related to payment of penalties and interests on the notes issued to those two investors in November 2006. All of these shares were issued pursuant to the exemption
provided by Section 4 (2) under the Securities Act for a transaction not involving a public offering.

During the three months
period ending June 30, 2008, we issued an aggregate of 190,401 shares to our investors as a result of exercise of warrants. Of that number of common shares issued, 79,399 shares were issued in connection with the American Arbitration
Association decision.

On August 25, 2008, we issued 45,432 common shares as a result of exercise of warrants to Tail Wind Fund
Limited, one of our investors.

On September 5, 2008 we issued a total of 6,468 shares to our four independent non-executive
directors, Fred Bild, Daniel Too, Joseph I. Emas, and Andrew Intrater to satisfy our obligations to pay each such director an annual bonus in shares of our common stock pursuant to our independent non-executive director agreements with them. All of
these shares were issued pursuant to the exemption provided by Section 4 (2) under the Securities Act for a transaction not involving a public offering.

Transfer agent

Our transfer agent is American Stock Transfer and Trust Company. Its address is 59 Maiden Lane, Plaza Level,
New York, New York 10038.

Dividends

We may never pay any dividends to our shareholders. We did not declare any dividends for the year ended December 31, 2008. Our Board of Directors does not intend to distribute dividends in the near future. The declaration, payment and
amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other
factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.

Equity Compensation Plan Information

On December
2004, our Board of Directors ratified grants of non-qualified stock options to purchase shares of our common stock under our Stock Option Plan to some of our executive officers and directors, as well as to several of our employees. Each of these new
stock options has up to a ten-year term, is subject to the terms and conditions of the Plan, and is priced at $5.60 which represents the fair market value as of the initial grant date of November 23, 2004.

Specifically, in 2004, Norbert Sporns, our Chief Executive Officer, President and director,
received 25,000 stock options. Lillian Wang, the Chairman of our Board of Directors, received 25,000 stock options. Harry Wang, our Chief Operating Officer, director and brother of Ms. Wang, received 25,000 stock options; and Fusheng Wang, our
director in 2004, Honorary Chairman and father of Ms. Wang, received 50,000 stock options. Together, Norbert Sporns, Harry Wang and Lillian Wang also indirectly control the majority of capital stock of HQS. The stock options granted to each of
them, as well as to Fusheng Wang, were fully vested when granted. In addition, our Chief Financial Officer, Jean-Pierre Dallaire, received 10,000 stock options. Mr. Dallaires options were vested in 2004 immediately as to 50% of the grant,
with the remaining 50% vesting as follows: 1/3on June 16, 2005, 1/3on June 16, 2006, and the remaining 1/3on
June 16, 2007.

Further, at the same date, our Board of
Directors ratified grants of stock options to thirteen other employees of HQS. These stock options were vested immediately as to 50% of each individual grant, with the remaining 50% vesting as follows: 1/3on June 16, 2005,1/3on June 16, 2006,
and the remaining 1/3on June 16, 2007. In the case of one of the employees, the stock options were fully vested when
granted.

Our Board of Directors believes that these stock option grants will help our company to continue to attract,
retain and motivate our employees, directors and executive officers. In connection with these grants, our Board of Directors reserved 250,000 shares for issuance under the Plan. In addition, pursuant to the provisions of the Plan, our Board of
Directors delegated the full power and authority to administer the Plan, in accordance with its terms, to our Compensation Committee presently consisting of Fred Bild, an independent director, and Daniel Too, also an independent director of HQS.



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The following table provides information about option awards under our Stock Option Plan as of
December 31, 2008.



|                                                                  |  |                                                                      |  |                                                     |      |                                                                                                                                             |    
|----------------------------------------------------------------- |  | -------------------------------------------------------------------- |  | --------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------- | ---
|Plan Category                                                     |  | Number of securities to beissued upon exercise ofoutstanding options |  | Weighted-average exerciseprice ofoutstandingoptions |      | Number of securitiesremaining available forfuture issuance under employeecompensation plans (excludingsecurities reflected in first column)
|Equity compensation plans previously approved by security holders |  | 53,750                                                               |  | $                                                   | 5.60 |                                                                                                                                             | NIL
|Equity compensation plans not approved by security holders        |  |                                                                      |  |                                                     |      |                                                                                                                                             |    
|Total                                                             |  | 53,750                                                               |  | $                                                   | 5.60 |                                                                                                                                             | NIL

The Company did not repurchase any equity securities in the fourth quarter of 2008.



|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following
tables set forth, for the periods indicated, selected consolidated financial and other data. You should read the selected consolidated financial and other data below in conjunction with our consolidated financial statements and related notes and
with Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, included within this Form 10-K. We have derived the following selected financial data from our audited consolidated
financial statements for the years ended December 31, 2008, 2007, 2006, 2005 and 2004.



|                                        |  |      |             |      |   |            |  |      |            |      |   |            |  |   |            |  
|--------------------------------------- |  | ---- | ----------- | ---- | - | ---------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|Statement of operation data:            |  | 2008 |             | 2007 |   | 2006       |  | 2005 |            | 2004 |  
|Sales                                   |  | $    | 67,723,283  |      | $ | 54,970,211 |  | $    | 39,095,403 |      | $ | 27,553,030 |  | $ | 21,191,492 |  
|Cost of sales                           |  |      | 39,525,933  |      |   | 29,426,918 |  |      | 21,917,345 |      |   | 16,002,911 |  |   | 16,082,992 |  
|Gross profit                            |  |      | 28,197,350  |      |   | 25,543,293 |  |      | 17,178,058 |      |   | 11,550,119 |  |   | 5,108,500  |  
|                                        |  |      |             |      |  
|Income from operations                  |  |      | 15,048,886  |      |   | 12,850,000 |  |      | 7,042,230  |      |   | 4,582,933  |  |   | 459,479    |  
|Income before taxes                     |  |      | 12,954,028  |      |   | 7,035,374  |  |      | 1,841,932  |      |   | 3,895,092  |  |   | (229,590   | )
|Net income attributable to shareholders |  |      | 10,040,688  |      |   | 4,486,562  |  |      | 873,964    |      |   | 3,254,098  |  |   | (383,943   | )
|                                        |  |      |             |      |  
|Balance Sheet data:                     |  |      |             |      |   |            |  |      |            |      |   |            |  |   |            |  
|Cash and cash equivalents               |  |      | 54,920,548  |      |   | 46,959,908 |  |      | 11,389,375 |      |   | 5,140,159  |  |   | 4,551,505  |  
|Working capital                         |  |      | 72,203,260  |      |   | 61,550,488 |  |      | 22,063,084 |      |   | 8,434,344  |  |   | 1,471,961  |  
|Total assets                            |  |      | 100,186,273 |      |   | 84,326,866 |  |      | 41,852,480 |      |   | 24,416,680 |  |   | 20,925,662 |  
|Total liabilities                       |  |      | 11,913,245  |      |   | 15,551,203 |  |      | 12,246,745 |      |   | 6,555,210  |  |   | 9,314,238  |  
|Shareholders equity                    |  |      | 88,273,028  |      |   | 68,775,663 |  |      | 29,605,735 |      |   | 17,861,470 |  |   | 11,611,424 |  



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

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

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

General overview

We are a leader in toxin free vertically integrated aquaculture and aquatic product processing, with processing facilities located in
Hainan, PRC. We market our products in Asia, America and Europe. We have two processing plants in Hainan, one that processes aquatic products providing toxin-free tilapia and other aquatic products, and the other processes marine bio and healthcare
products. We seek to expand our operations through providing additional processing facilities (e.g. the construction of our third facility in early 2009, which will process extruded feed) in China and marketing efforts throughout North America and
Europe.

Recently, we announced that we had entered into a conditional agreement with the government of Tayang Town in the Province of
Hainan, PRC, in order to work with the cooperative farms which are capable of producing some 20,000 tonnes of live weight tilapia. We expect this agreement to result in doubling the farming capacity available to us.

In addition, you should consider the following information as you read the below results of operations discussion and our financial statements and
related notes included elsewhere in this prospectus. From the first quarter of 2004, following our reverse merger with Process Equipment, Inc., we have been operating under the name of HQS. At that time, we owned 84.4 percent of HQOF, currently our
principal operating subsidiary that processes our seafood products; in August 2004 we acquired the remaining ownership interest that we did not already own in HQOF. The fiscal year-end of Process Equipment was changed from April 30, to
December 31 following the reverse merger. In August 2004, we acquired a 100 percent interest in our current subsidiary Jiahua Marine which operates a marine bio and healthcare plant, including nutraceuticals, in Hainan Province, China. In the
first half of 2005, our aquatic processing plant stopped production in order to add production lines and increase its production capacity to properly meet forecasted incremental demand, which affected some of our operating results during that
period.

Our business operations consist of two segments, the marine bio and healthcare product segment and the aquaculture product
segment. Since the acquisition of Jiahua Marine, which represents the marine bio and healthcare product segment, those product sales have represented a significant contribution to the net income of the company and currently are higher profit margin
products than our aquaculture products. The company expects the sales and contribution to net income to continue during the next year in similar proportions. However, as the marketing efforts increase in connection with the aquaculture product
segment and the investment in the feed mill plant and equipment for new processing capacity of extruded feed is completed next year, the company expects that the aquaculture product segment will begin to contribute a greater portion of income and a
higher profit margin in 2009 and beyond.

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

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



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Critical accounting policies and estimates

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

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

Inventories

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

Income taxes

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

Related parties

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

Revenue recognition

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

Concentration of credit risk

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

Recent developments

Results of OperationsYear Ended December 31, 2008 Compared to Year Ended December 31, 2007

Total sales for the year ended
December 31, 2008 increased by $12,753,072, or 23 percent compared to the same period of 2007. The aquaculture product segments sales increased by $9,121,963, or 25 percent while the health and bio-products segments sales increased
by $3,631,109 or 19 percent. Income from operations for the year ended December 31, 2008 increased by 17 percent when



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compared to 2007; that improvement was due mostly to the higher sales and gross profit of 2008 originating from both of our segments. A net income of
$10,040,688 was generated in 2008, increasing from $4,486,562 in 2007, an increase of 124 percent in 2008. That significant increase in 2008 is attributable to the increased sales and gross profit of 2008 from both our segments, coupled to a
reduction of financing costs in 2008 and no income taxes from our aquaculture products segment since January 2008. Financing costs have decreased by $3,194,383 or 55 percent to $2,662,734 as compared to $5,857,117 for 2007. Financing costs will
continue to decrease in 2009 as the maturity of the promissory notes, triggering the warrants amortization costs (non-cash) and the related amortization of the embedded conversion option (also non-cash), will occur in November 2009. Those financing
costs are recognized as such in accordance with FAS 123R and EITF 00-27.

Segments

Manufacturing and selling of aquatic products

Hainan Quebec Ocean Fishing Co. Ltd
(HQOF), is engaged in the processing and selling of aquatic products. The revenue contributed by this segment was $45,370,400 and $36,248,437 for the years ended December 31, 2008 and 2007, respectively, an improvement of 25 percent. In 2008,
the production capacity of our fish processing plant was increased by 50 percent, effective from the third quarter of the year. The related gross profit ratio of this segment was 25 percent and 27 percent for the years ended December 31, 2008
and 2007 respectively. The second half of 2008 showed a recovery in the percentage of gross profit as the first half gross profit margins were hurt significantly by the international markets not recognizing the difficult position of the tilapia
industry in that period. This segment contributed $9,963,357 and $6,299,304 to net income for the year ended December 31, 2008 and 2007 respectively. The significant increase in sales and related gross profit of this segment in 2008, added to a
bad debt recovery and no income taxes since January 2008 led to such favorable improvement in the profitability in 2008 compared to 2007.

Manufacturing and selling of health and bio-product

Our other manufacturing subsidiary, Jiahua Marine, is
engaged in the manufacturing and selling of marine bio and healthcare products. During the years ended December 31, 2008 and 2007, Jiahua Marine realized sales of $22,352,883 and $18,721,774 respectively, an increase of 19 percent. The gross
profit ratio from this segment was 75 percent and 84 percent for the years ended December 31, 2008 and 2007 respectively. That reduction in gross profit experienced in 2008 was the result of a different sales mix, added to development costs
incurred in relation to new products to be marketed in 2009, and finally to market penetration costs incurred from the second half of 2008 The major expense of this segment was advertising, representing 20 percent and 28 percent of revenue for the
year ended December 31, 2008 and 2007 respectively. The net income contributed by this segment was $8,999,699 and $7,984,935 for the years ended December 31, 2008 and 2007 respectively, an increase of 13 percent in the year in 2008.

Operations

Sales. For the
year ended December 31, 2008, sales increased by $12,753,072 or 23 percent to $67,723,283 from $54,970,211. That significant increase in sales was the result of better performances of both segments in 2008: sales from the aquaculture product
segment increased by $9,121,963, or 25 percent while sales from the health and bio product segment increased by $3,631,109, or 19 percent in 2008, compared to 2007. In 2008, the production capacity of our fish processing plant was increased by 50
percent, effective from the third quarter of the year.

Cost of Sales. Cost of sales increased by $10,099,015 or 34 percent to
$39,525,933 from $29,426,918 for the year ended December 31, 2008, as compared to the year ended December 31, 2007. The overall gross profit margin decreased from 46 percent for the year ended December 31, 2007 to 42 percent for the
year ended December 31, 2008, mostly due to the margin decrease in the health and bio-product segment related to product mix, development costs of new products to be marketed in 2009 and market penetration costs incurred in 2008.

Selling and distribution expenses. Selling and distribution expenses increased by $709,597 or 84 percent from $841,263 to $1,550,860 for the year ended
December 31, 2008, as compared to 2007. The increase was the result of higher sales volumes realized in the current year from both our segments, including higher transportation costs.

Marketing and advertising expenses. Marketing and advertising expenses decreased by $735,921 or 14 percent from $5,162,299 to $4,426,378 for the
year ended December 31, 2008, as compared to 2007. The reduction in those expenses is mostly due to the winding down of publicity programs for those products that have successfully penetrated the targeted markets and that have raised consumer
awareness about our products. In 2008, we continued to maintain a high level of advertising in order to sustain our market share in this highly competitive market as is consistent with industry practices.



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General and administrative expenses. For the year ended December 31, 2008, general and
administrative expenses increased by $1,405,632 or 29 percent to $6,205,993, as compared to 2007. The major part of the increase was the result of additional costs related to Sarbanes Oxleys documentation and audit requirements of section 404,
increased franchise tax from State of Delaware, branding-related expenses, traveling, investors relations and other U.S. head office expenses.

Depreciation and amortization. Depreciation and amortization increased by $239,172 to $1,456,456 for the year ended December 31, 2008, mainly as a result of acquisition of fixed assets in 2008 triggering new
depreciation charges.

(Recovery of)/Provision for doubtful accounts.Recovery of doubtful accounts amounted to $491,223 for the year
ended December 31, 2008 compared to a provision of $672,086 for the year ended 2007. The 2008 recovery originated from the aquaculture segment where the statistical estimate provided in 2007 reversed in 2008.

Income from operations. Income from operations increased to $15,048,886 in financial year 2008, compared to $12,850,000 in 2007, an improvement of
17 percent. That improvement in 2008 is mostly the result of increased sales and related gross profit from both our segments in 2008 as described above, added to bad debt recovery and offset by increased selling, marketing and general and
administrative expenses.

Finance costs. Finance costs decreased to $2,662,734 from $5,857,117 for the year ended December 31, 2008 as
compared to the previous year, a reduction of $3,194,383 or 55 percent. Included in the 2008 finance costs are the non-recurring costs recognized in relation to the final judgment on the Westminster Securities and John OShea claims against the
Company and settled in the first half of 2008. In addition, also included in the first half of 2008 non-recurring finance costs are the penalties and interests on late filing of the registration statement relating to the underlying shares on the
convertible notes issued in November 2006. Finally, the carrying interests on the promissory notes issued in 2006 added to the continued combination of amortization of the future conversion of warrants (noncash) attributed to investors on
those notes of $10,225,000 issued in 2006, and to the amortization of the embedded conversion option (also noncash) related to the same notes. Those non-cash financing costs were recognized in accordance with FAS 123R and EITF 00-27. Such
amortization will be repeated, on a pro-rata basis, until maturity of the underlying notes. Finance costs will continue to decrease in 2009 as the maturity of the promissory notes will occur in November 2009.

Other income.Other income amounted to $567,876 in 2008 compared to $42,491 in 2007. The 2008 balance was mostly the result of a non-recurring gain
on disposal of fixed assets of approximately $495,000 during the last quarter of 2008.

Income before income taxes. Income before income
taxes increased by $5,918,654 to $12,954,028 for the year ended December 31, 2008, from $7,035,374 in 2007. That significant increase is the result of increased income from operations as described above coupled with a reduction in finance
costs.

Current income tax. Current income taxes decreased by $453,836 to $2,094,976 from $2,548,812 for the year ended December 31,
2008 and December 31, 2007 respectively. Income taxes were lower in 2008 due to the application of the new PRC Enterprise Income Tax Law (EIT) which became effective on January 1, 2008. That new Law provides, amongst other issues, that
income derived from processing of fishery products is now exempted from income tax while it stood at 15 percent in 2007. Furthermore, with regards to our nutraceutical unit, the income tax rate increased to 18 percent in 2008 from 15 percent in
2007; for that segment, the income tax rate will gradually increase to a maximum of 25 percent by 2012.

Deferred income tax.Deferred
income taxes increased from NIL in 2007 to $818,364 for year ended December 31, 2008. The increase was the result of a non-recurring write-off of deferred taxation representing an expense of approximately $818,000 related to the sale of fixed
assets. Otherwise, there was no deferred income tax recognized in both financial years as there was no other material timing differences to justify recognition of such deferred tax expenses.

Net income attributable to shareholders. Net income attributable to shareholders increased significantly from $4,486,562 for the year ended
December 31, 2007, to $10,040,688 for the year ended December 31, 2008. That increase of 124 percent in net income was the result of increased sales and gross profit from both segments in 2008, added to a reduction in finance costs and
income taxes as described above.



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Liquidity and Capital Resources

Our cash and cash equivalents increased by $7,960,640 during the financial year of 2008, to $54,920,548. As at December 31, 2008, working capital was $72,203,260 compared to $61,550,488 at December 31, 2007.
The funds generated by the operating activities during 2008 were used mainly to support the increase in our receivable and inventory levels, to decrease our payables and increase in our investment in the new feed plant under construction.

Total assets increased by $15,859,407 to $100,186,273 at December 31, 2008, from $84,326,866 as of December 31, 2007.
Shareholders equity increased by $19,497,365, or 28 percent, to $88,273,028 as at December 31, 2008, from $68,775,663 as of December 31, 2007.

To date, we have financed our operations through the combination of our operating revenues, equity and debt financing (in connection with which we have at times incurred significant costs), shortterm bank loans,
and the use of shares of our common stock issued as payment for services rendered to us by third parties. In the past, we issued shares of our common stock and warrants in private placement transactions to help finance our operations, and to pay for
professional services (such as financial consulting, market development, legal services and public relations services). We recognized these services on our books as operating or deferred expenses and amortized over their estimated useful life. The
number of shares we issued for these purposes were determined as of the dates of invoices relating to such services, and the shares were valued at their market prices on those respective dates. In addition, as required by PRC laws, we establish
yearly reserves shown in the shareholders equity section of our balance sheet. Those reserves, which are created by a transfer from the retained earnings account, limit our capacity to pay dividends to shareholders until the retained earnings
become positive. As we are in an expansion phase, we do not intend to pay dividends to shareholders in the foreseeable future. To date, we have not paid any dividends.

We also completed a financing in January 2006, in which we issued to a group of twenty one investors, in a private placement, (1) convertible secured promissory notes bearing interest at 8 percent per year
which matured on January 25, 2008, in the aggregate principal amount of $5,225,000; (2) Class A warrants, with each warrant giving the right to the holder to purchase one share of our common stock at the exercise price of $6.00 until
January 2009; and (3) Class B warrants, with each warrant giving the right to the holder to purchase one share of our common stock at the exercise price of $6.00 until January 2011. The net proceeds of this financing to us were $4,702,500,
after deducting commissions and other costs of this transaction equal to $522,500. At December 31, 2008, that financing was totally reimbursed.

In addition, we also completed a financing in November 2006, in which we issued to two investors, in a private placement, (1) convertible promissory notes bearing interest at 6.5 percent and maturing in
November 1, 2009, in the principal aggregate amount of $5,000,000 with the conversion price of $5.00 per share and (2) warrants registered in the name of each investor to purchase an aggregate of up to 200,000 of our common stock, with
each warrant giving the right to the holder to purchase one share of our common stock at the exercise price of $5.00 until the fifth anniversary of the effective date of the reverse stock split effectuated in January 2007. At December 31, 2008,
170,000 such warrants were exercised, leaving a balance of 30,000 unexercised warrants. The net proceeds of this financing to us were $4,932,500, after deducting commissions and other costs of this transaction equal to $67,500. The notes are due on
November 1, 2009.

In December 2007, we completed a follow-on offering by issuing 3,450,000 new shares of Common Stock to two
underwriters (including the over-allotment of 450,000 shares) for a total gross consideration of $26,910,000 (corresponding to a net proceed of approximately $23,800,000). The Company intends to use this financing for the purpose of completing its
new feed plant expected to be in operation in the first half of 2009, to build a new processing plant expected to be in operation in 2010 and to use the balance for general working capital purpose.

We are currently in the process of examining various financing opportunities to obtain additional liquidities to help finance our operations, as well as
support our additional cash requirements related to volume increases that we anticipate might occur in the future, specifically in the inventory and receivables buildup. No assurances can be given that additional debt or equity financing we
may require will be available to us or, even if available, that such financing will be on terms favorable to us.

At present, about 38
percent of our consolidated sales are derived from our five largest clients, and our results of operations therefore depend on a small number of clients (39 percent in 2007). As part of our short and mediumterm business plan, including our
recent efforts to raise funds to support the anticipated expansion of our operations, we intend to invest in our infrastructure to construct a new processing plant and our own feed mill. We expect that this will allow us to meet forecasted
incremental demand for our products in the United States and Europe. As a result, we plan to develop and serve new clients, which should reduce our dependence on individual clients to more acceptable levels.



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

The ratio of current assets to current liabilities increased to 7.06 times ($84,116,505/$11,913,245) at December 31, 2008, from 6.2
times ($73,448,339/$11,897,851) at December 31, 2007.

Contractual Obligations

We have various contractual obligations that are recorded as liabilities in our consolidated financial statements. Other items, such as purchase
commitments, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. For example, we are contractually committed to make certain minimum lease payments for the use of property and equipment under
operating lease agreements and arrangements we classify as capital leases.

The following table summarizes (in millions) our significant
contractual obligations and commercial commitments at December 31, 2008 and the future periods in which such obligations and commitments are expected to be settled in cash. In addition, the table reflects the timing of principal payments on
outstanding borrowings. This table does not reflect regular recurring trade payables incurred in the normal course of business and generally due within 30 days of service. Additional details regarding these obligations are provided in notes to
the consolidated financial statements also included herein, as referenced in the table:



|                                 |  |                  |           |           |   |           |  |                   |        |       |   |         |  |   |          
|-------------------------------- |  | ---------------- | --------- | --------- | - | --------- |  | ----------------- | ------ | ----- | - | ------- |  | - | ---------
|                                 |  | Less than 1 year |           | 1-3 years |   | 3-5 years |  | More than 5 years |        | Total
|Notes payable & other borrowings |  | $                | 5,000,000 |           |   |           |  |                   |        |       |   |         |  | $ | 5,000,000
|Operating leases                 |  | $                | 124,432   |           | $ | 165,464   |  | $                 | 82,064 |       | $ | 430,832 |  | $ | 802,792  
|Purchase and other commitments   |  | $                | 3,195,890 |           |   |           |  |                   |        |       |   |         |  | $ | 3,195,890
|Total                            |  | $                | 8,320,322 |           | $ | 165,464   |  | $                 | 82,064 |       | $ | 430,832 |  | $ | 8,998,682

Off-Balance Sheet Transactions

We have no off-balance sheet arrangements or transactions with unconsolidated, special purpose entities.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

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



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|ITEM 8. | CONSOLIDATED FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
|------- | -------------------------------------------------------



|                                                                                                          |  |     
|--------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                          |  | Page
|Managements Report on Internal Control over Financial Reporting                                          |  | 30  
|                                                                                                          | 
|Independent Auditors Report                                                                              |  | 31  
|                                                                                                          | 
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                              |  | 34  
|                                                                                                          | 
|Consolidated Statements of Income and comprehensive income for the years ended December 31, 2008 and
2007 |  | 36  
|                                                                                                          | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2008 and 2007 |  | 37  
|                                                                                                          | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007                      |  | 38  
|                                                                                                          | 
|Notes to Consolidated Financial Statements                                                                |  | 39  



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MANAGEMENT REPORT

Management is responsible for the preparation and integrity of the Consolidated Financial Statements appearing in this Annual Report. The Consolidated
Financial Statements were prepared in conformity with accounting principles generally accepted in the United States and include amounts based on managements estimates and judgments.

Management is also responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-l5(f) promulgated under the Securities Exchange Act of 1934. We maintain a system of internal controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the
Consolidated Financial Statements in accordance with generally accepted accounting principles, as well as to safeguard assets from unauthorized use or disposition.

Our control environment is the foundation for our system of internal control over financial reporting and is embodied in our Code of Conduct. Our internal control over financial reporting includes written policies and
procedures that:



| |  |  | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that receipts and expenditures of the Company are made in accordance with the appropriate authorization of management and the directors
of the Company; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on
the consolidated financial statements. Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and remedial actions to correct deficiencies as they are identified.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Management evaluated the effectiveness of the Companys internal control over financial reporting as of
December 31, 2008. Management based such assessment upon the criteria set forth in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the
documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of
internal controls over financial reporting, based on our evaluation, we have concluded that our internal controls over financial reporting were effective as of December 31, 2008.

Schwartz Levitsky Feldman LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this
Report and, as part of their audit, has issued their report, included herein in Item 8, on the effectiveness of our internal control over financial reporting.



|                                      |  |                        
|------------------------------------- |  | -----------------------
|Norbert Sporns                        |  | Jean- Pierre Dallaire  
|President and Chief Executive Officer |  | Chief Financial Officer



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Schwartz Levitsky Feldman llp

CHARTERED ACCOUNTANTS

LICENSED PUBLIC ACCOUNTANTS

TORONTO  MONTREAL

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Shareholders of

HQ Sustainable Maritime Industries, Inc.

We have audited HQ Sustainable Maritime Industries, Incs (the Company) internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A 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 generally accepted accounting principles. A Companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with 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; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the financial statements.



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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, 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.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based
on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as at December 31, 2008 and the related consolidated statement of income and comprehensive income, cash flows and changes in shareholders equity for the year ended December 31, 2008 and our
report dated March 2, 2009 expressed an unqualified opinion thereon



|                                  |  |  |  |                            
|--------------------------------- |  |  |  | ---------------------------
|/s/ Schwartz Levitsky Feldman LLp |  |  |  |                            
|                                  |  | 
|Toronto, Ontario, Canada          |  |  |  | Chartered Accountants      
|March 2, 2009                     |  |  |  | Licensed Public Accountants



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Schwartz Levitsky Feldman llp

CHARTERED ACCOUNTANTS

LICENSED PUBLIC ACCOUNTANTS

TORONTO  MONTREAL

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

HQ Sustainable Maritime Industries, Inc.

We have audited the accompanying consolidated balance sheet of HQ Sustainable Maritime Industries, Inc. (the Company) as at December 31, 2008 and the
related consolidated statements of income and comprehensive income, cash flows and changes in shareholders equity for the year ended December 31, 2008. These consolidated financial statements are the responsibility of the management of HQ
Sustainable Maritime Industries, Inc. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and the results of its income and
comprehensive income and its cash flows for the year ended December 31, 2008 in conformity with generally accepted accounting principles in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2009, expressed an unqualified opinion on the effectiveness of
the Companys internal control over financial reporting.

The consolidated financial statements of HQ Sustainable Maritime Industries, Inc. and
Subsidiaries as of December 31, 2007 were audited by other auditors whose report dated March 27, 2008 expressed an opinion without qualification on those consolidated financial statements.



|                                  |  |  |  |                            
|--------------------------------- |  |  |  | ---------------------------
|/s/ Schwartz Levitsky Feldman LLp |  |  |  |                            
|                                  |  | 
|Toronto, Ontario, Canada          |  |  |  | Chartered Accountants      
|March 2, 2009                     |  |  |  | Licensed Public Accountants



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC

(INCORPORATED IN THE STATE OF DELAWARE

WITH
LIMITED LIABILITY)

CONSOLIDATED BALANCE SHEETS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007



|                                     |  |      |             |      |   |           
|------------------------------------ |  | ---- | ----------- | ---- | - | ----------
|                                     |  | 2008 |             | 2007
|ASSETS                               |  |      |             |      |   |           
|CURRENT ASSETS:                      |  |      |             |      |   |           
|Cash and cash equivalents            |  | $    | 54,920,548  |      | $ | 46,959,908
|Trade receivables, net of provisions |  |      | 27,689,410  |      |   | 25,234,502
|Inventories                          |  |      | 1,041,628   |      |   | 877,716   
|Prepayments                          |  |      | 464,919     |      |   | 350,116   
|Future income taxes                  |  |      |            |      |   | 26,097    
|                                     |  |      |             |      |   |           
|                                     |  |     
|TOTAL CURRENT ASSETS                 |  |      | 84,116,505  |      |   | 73,448,339
|                                     |  |      |             |      |   |           
|                                     |  |     
|PROPERTY, PLANT AND EQUIPMENT, NET   |  |      | 8,315,593   |      |   | 7,716,615 
|CONSTRUCTION IN PROGRESS             |  |      | 6,622,501   |      |   | 949,728   
|INTANGIBLE ASSETS                    |  |      | 1,112,904   |      |   | 1,254,002 
|                                     |  |      |             |      |   |           
|                                     |  |     
|                                     |  |      | 16,050,998  |      |   | 9,920,345 
|                                     |  |     
|OTHER ASSETS                         |  |      |             |      |   |           
|Deferred taxes                       |  |      |            |      |   | 873,865   
|Deferred expenses                    |  |      | 18,770      |      |   | 84,317    
|                                     |  |      |             |      |   |           
|                                     |  |     
|                                     |  |      | 18,770      |      |   | 958,182   
|                                     |  |      |             |      |   |           
|                                     |  |     
|TOTAL ASSETS                         |  | $    | 100,186,273 |      | $ | 84,326,866
|                                     |  |      |             |      |   |           

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC

(INCORPORATED IN THE STATE OF DELAWARE

WITH LIMITED LIABILITY)

CONSOLIDATED BALANCE SHEETS

FOR THE YEARS
ENDED DECEMBER 31, 2008 AND 2007



|                                                                                                                                                                                  |  |      |             |      |   |           
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------
|                                                                                                                                                                                  |  | 2008 |             | 2007
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                              |  |      |             |      |   |           
|CURRENT LIABILITIES:                                                                                                                                                              |  |      |             |      |   |           
|Accounts payable and accrued liabilities                                                                                                                                          |  | $    | 5,787,514   |      | $ | 8,935,928 
|Taxes payable                                                                                                                                                                     |  |      | 823,382     |      |   | 956,289   
|Due to directors                                                                                                                                                                  |  |      | 698,429     |      |   | 1,544,350 
|Current portion of promissory notes                                                                                                                                               |  |      | 4,603,920   |      |   | 461,284   
|                                                                                                                                                                                  |  |      |             |      |   |           
|                                                                                                                                                                                  |  |     
|TOTAL CURRENT LIABILITIES                                                                                                                                                         |  |      | 11,913,245  |      |   | 11,897,851
|                                                                                                                                                                                  |  |     
|OTHER LIABILITIES                                                                                                                                                                 |  |      |             |      |   |           
|Convertible promissory notes, net of discount                                                                                                                                     |  |      |            |      |   | 3,653,352 
|                                                                                                                                                                                  |  |      |             |      |   |           
|                                                                                                                                                                                  |  |     
|TOTAL LIABILITIES                                                                                                                                                                 |  |      | 11,913,245  |      |   | 15,551,203
|SHAREHOLDERS EQUITY                                                                                                                                                              |  |      |             |      |   |           
|Preferred stock, $0.001 par value, 10,000,000 shares authorized, 100,000 shares issued and outstanding                                                                            |  |      | 100         |      |   | 100       
|Common stock, $0.001 par value, 200,000,000 shares authorized, 12,085,846 and 11,511,317 shares issued and outstanding as of December 31,
2008 and December 31, 2007 respectively |  |      | 12,086      |      |   | 11,511    
|Additional paid-in capital                                                                                                                                                        |  |      | 61,572,410  |      |   | 57,142,204
|Accumulated other comprehensive income                                                                                                                                            |  |      | 9,615,956   |      |   | 4,590,060 
|Retained earnings                                                                                                                                                                 |  |      | 10,510,961  |      |   | 2,373,825 
|Appropriation of retained earnings (reserves)                                                                                                                                     |  |      | 6,561,515   |      |   | 4,657,963 
|                                                                                                                                                                                  |  |      |             |      |   |           
|                                                                                                                                                                                  |  |     
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                        |  |      | 88,273,028  |      |   | 68,775,663
|                                                                                                                                                                                  |  |      |             |      |   |           
|                                                                                                                                                                                  |  |     
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                        |  | $    | 100,186,273 |      | $ | 84,326,866
|                                                                                                                                                                                  |  |      |             |      |   |           

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC

(INCORPORATED IN THE STATE OF DELAWARE

WITH
LIMITED LIABILITY)

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007



|                                           |  |      |            |   |      |   |            |  
|------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                           |  | 2008 |            |   | 2007 |  
|Sales                                      |  | $    | 67,723,283 |   |      | $ | 54,970,211 |  
|Cost of sales                              |  |      | 39,525,933 |   |      |   | 29,426,918 |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|Gross profit                               |  |      | 28,197,350 |   |      |   | 25,543,293 |  
|Selling and distribution expenses          |  |      | 1,550,860  |   |      |   | 841,263    |  
|Marketing and advertising                  |  |      | 4,426,378  |   |      |   | 5,162,299  |  
|General and administrative expenses        |  |      | 6,205,993  |   |      |   | 4,800,361  |  
|Depreciation and amortization              |  |      | 1,456,456  |   |      |   | 1,217,284  |  
|(Recovery of)/doubtful accounts            |  |      | (491,223   | ) |      |   | 672,086    |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|Income from operations                     |  |      | 15,048,886 |   |      |   | 12,850,000 |  
|Finance costs                              |  |      | 2,662,734  |   |      |   | 5,857,117  |  
|Other income                               |  |      | (567,876   | ) |      |   | (42,491    | )
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|Income before income taxes                 |  |      | 12,954,028 |   |      |   | 7,035,374  |  
|Income taxes                               |  |      |            |   |      |   |            |  
|Current                                    |  |      | 2,094,976  |   |      |   | 2,548,812  |  
|Deferred                                   |  |      | 818,364    |   |      |   |           |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|Net income attributable to shareholders    |  |      | 10,040,688 |   |      |   | 4,486,562  |  
|                                           |  |     
|OTHER COMPREHENSIVE INCOME                 |  |      |            |   |      |   |            |  
|Foreign currency translation income        |  |      | 5,025,896  |   |      |   | 2,977,694  |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|COMPREHENSIVE INCOME                       |  | $    | 15,066,584 |   |      | $ | 7,464,256  |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|NET INCOME PER SHARE                       |  |      |            |   |      |   |            |  
|Basic                                      |  | $    | 0.843      |   |      | $ | 0.587      |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|Diluted                                    |  | $    | 0.785      |   |      | $ | 0.543      |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |  |      |            |   |      |   |            |  
|Basic                                      |  |      | 11,905,739 |   |      |   | 7,635,124  |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|Diluted                                    |  |      | 13,198,438 |   |      |   | 8,989,469  |  
|                                           |  |      |            |   |      |   |            |  

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



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE

WITH
LIMITED LIABILITY)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007



|                                      |  |              |  |                 |        |                          |         |           |   |     |  |   |           
|------------------------------------- |  | ------------ |  | --------------- | ------ | ------------------------ | ------- | --------- | - | --- |  | - | ----------
|                                      |  | Common Stock |  | Preferred Stock |        | Additionalpaid inCapital
|                                      |  | Share        |  | Par Value       |        | Share                    |         | Par Value |  
|Balance at January 1, 2007            |  | 6,416,856    |  | $               | 6,417  |                          | 100,000 |           | $ | 100 |  | $ | 25,441,626
|                                      |  |              |  |                 |        |                          |         |           |   |     |  |   |           
|                                      |  |              |  |                 |       
|Issuance of common stock and warrants |  | 5,094,461    |  |                 | 5,094  |                          |        |           |   |    |  |   | 31,700,578
|Net income for the year               |  |             |  |                 |       |                          |        |           |   |    |  |   |          
|Transfer to reserve                   |  |             |  |                 |       |                          |        |           |   |    |  |   |          
|Transfer to reserve                   |  |             |  |                 |       |                          |        |           |   |    |  |   |          
|                                      |  |              |  |                 |        |                          |         |           |   |     |  |   |           
|                                      |  |              |  |                 |       
|Balance at December 31, 2007          |  | 11,511,317   |  | $               | 11,511 |                          | 100,000 |           | $ | 100 |  | $ | 57,142,204
|                                      |  |              |  |                 |        |                          |         |           |   |     |  |   |           
|                                      |  |              |  |                 |       
|Issuance of common stock and warrants |  | 574,529      |  |                 | 575    |                          |        |           |   |    |  |   | 4,430,206 
|Net income for the year               |  |             |  |                 |       |                          |        |           |   |    |  |   |          
|Transfer to reserve                   |  |             |  |                 |       |                          |        |           |   |    |  |   |          
|                                      |  |              |  |                 |        |                          |         |           |   |     |  |   |           
|                                      |  |              |  |                 |       
|Balance at December 31, 2008          |  | 12,085,846   |  | $               | 12,086 |                          | 100,000 |           | $ | 100 |  | $ | 61,572,410
|                                      |  |              |  |                 |        |                          |         |           |   |     |  |   |           



|                                        |  |                                             |           |                                     |   |                           |  |   |            |   |  |   |           
|--------------------------------------- |  | ------------------------------------------- | --------- | ----------------------------------- | - | ------------------------- |  | - | ---------- | - |  | - | ----------
|                                        |  | Appropriation ofretained earnings(reserves) |           | Accumulatedothercomprehensiveincome |   | Retainedearnings(deficit) |  |   | Total     
|Balance at January 1, 2007              |  | $                                           | 3,229,072 |                                     | $ | 1,612,366                 |  | $ | (683,846   | ) |  | $ | 29,605,735
|                                        |  |                                             |           |                                     |   |                           |  |   |            |   |  |   |           
|                                        |  |                                             |           |                                    
|Issuance of common stock and warrants   |  |                                             |          |                                     |   |                          |  |   |           |   |  |   | 31,705,672
|Net income for the year                 |  |                                             |          |                                     |   |                          |  |   | 4,486,562  |   |  |   | 4,486,562 
|Transfer to reserve                     |  |                                             | 1,428,891 |                                     |   |                          |  |   | (1,428,891 | ) |  |   |          
|Foreign currency translation adjustment |  |                                             |          |                                     |   | 2,977,694                 |  |   |           |   |  |   | 2,977,694 
|                                        |  |                                             |           |                                     |   |                           |  |   |            |   |  |   |           
|                                        |  |                                             |           |                                    
|Balance at December 31, 2007            |  | $                                           | 4,657,963 |                                     | $ | 4,590,060                 |  | $ | 2,373,825  |   |  | $ | 68,775,663
|                                        |  |                                             |           |                                     |   |                           |  |   |            |   |  |   |           
|                                        |  |                                             |           |                                    
|Issuance of common stock and warrants   |  |                                             |          |                                     |   |                          |  |   |           |   |  |   | 4,430,781 
|Net income for the year                 |  |                                             |          |                                     |   |                          |  |   | 10,040,688 |   |  |   | 10,040,688
|Transfer to reserve                     |  |                                             | 1,903,552 |                                     |   |                          |  |   | (1,903,552 | ) |  |   |          
|Foreign currency translation adjustment |  |                                             |          |                                     |   | 5,025,896                 |  |   |           |   |  |   | 5,025,896 
|                                        |  |                                             |           |                                     |   |                           |  |   |            |   |  |   |           
|                                        |  |                                             |           |                                    
|Balance at December 31, 2008            |  | $                                           | 6,561,515 |                                     | $ | 9,615,956                 |  | $ | 10,510,961 |   |  | $ | 88,273,028
|                                        |  |                                             |           |                                     |   |                           |  |   |            |   |  |   |           

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



37



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES

(INCORPORATED IN THE STATE OF DELAWARE

WITH
LIMITED LIABILITY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007



|                                                                        |  |      |            |   |      |   |            |  
|----------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                        |  | 2008 |            |   | 2007 |  
|OPERATING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Net income                                                              |  | $    | 10,040,688 |   |      | $ | 4,486,562  |  
|Non-cash items:                                                         |  |      |            |   |      |   |            |  
|Depreciation and amortization                                           |  |      | 1,456,456  |   |      |   | 1,217,284  |  
|                                                                        |  |     
|(Gain)/loss on disposal of fixed assets                                 |  |      | (491,253   | ) |      |   | 53,603     |  
|                                                                        |  |     
|Write off of fixed assets                                               |  |      |           |   |      |   | 41,637     |  
|Financial and other non cash services                                   |  |      | 3,032,822  |   |      |   | 5,164,795  |  
|Deferred income taxes                                                   |  |      | 818,362    |   |      |   |           |  
|                                                                        |  |     
|Change in non-cash working capital items:                               |  |      |            |   |      |   |            |  
|Inventories                                                             |  |      | (76,042    | ) |      |   | (168,858   | )
|Trade receivables, net of provisions                                    |  |      | (656,094   | ) |      |   | (7,276,981 | )
|Prepayments                                                             |  |      | (44,576    | ) |      |   | 34,577     |  
|                                                                        |  |     
|Accounts payable and accrued expenses                                   |  |      | (1,329,388 | ) |      |   | 5,113,418  |  
|                                                                        |  |     
|Taxes payable                                                           |  |      | (166,708   | ) |      |   | 624,860    |  
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|Cash flow generated from operating activities                           |  |      | 12,584,269 |   |      |   | 9,290,897  |  
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|INVESTING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Acquisition of property, plant and equipment-net                        |  |      | (1,310,683 | ) |      |   | (745,546   | )
|                                                                        |  |     
|Sale proceeds of disposal of fixed assets                               |  |      | 495,449    |   |      |   |           |  
|                                                                        |  |     
|Construction in progress                                                |  |      | (5,398,904 | ) |      |   | (634,905   | )
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|Cash flow used in investing activities                                  |  |      | (6,214,138 | ) |      |   | (1,380,451 | )
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|FINANCING ACTIVITIES                                                    |  |      |            |   |      |   |            |  
|Cash proceeds from issuance of common stock                             |  |      | 137,536    |   |      |   | 28,570,475 |  
|                                                                        |  |     
|(Due to) directors                                                      |  |      | (845,921   | ) |      |   | (153,915   | )
|Repayment to related parties                                            |  |      |           |   |      |   | (198,553   | )
|                                                                        |  |     
|Bank loan payments                                                      |  |      |           |   |      |   | (1,255,203 | )
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|Cash flow (used in)/generated from financing activities                 |  |      | (708,385   | ) |      |   | 26,962,804 |  
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |  |      | 5,661,746  |   |      |   | 34,873,250 |  
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  |      | 2,298,894  |   |      |   | 697,283    |  
|Cash and cash equivalents, beginning of year                            |  |      | 46,959,908 |   |      |   | 11,389,375 |  
|                                                                        |  |      |            |   |      |   |            |  
|Cash and cash equivalents, end of year                                  |  |      | 54,920,548 |   |      |   | 46,959,908 |  
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|SUPPLEMENTARY CASH FLOWS DISCLOSURES                                    |  |      |            |   |      |   |            |  
|Interest paid                                                           |  |      |           |   |      |   |           |  
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|Taxes paid                                                              |  |      | 2,263,701  |   |      |   | 1,155,429  |  
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |  |      |            |   |      |   |            |  
|Common shares issued for services                                       |  |      | 4,425,432  |   |      |   | 173,000    |  
|                                                                        |  |      |            |   |      |   |            |  
|                                                                        |  |     
|Reclassification of Construction in Progress to Land Use Rights         |  |      |           |   |      |   | 964,002    |  
|                                                                        |  |      |            |   |      |   |            |  



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HQ SUSTAINABLE MARITIME INDUSTRIES, INC

NOTES FOR THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

NOTE 1  ORGANIZATION AND PRINCIPAL ACTIVITIES

Our company was initially incorporated on September 21, 1989 under the laws of the State of Nevada. On March 17, 2004, Process Equipment, Inc.,
Process Equipment Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of Process Equipment, Inc., or PEAC, and Jade Profit Investment Limited, or Jade, a British Virgin Islands limited liability corporation, entered into an
agreement and plan of merger with us. Pursuant to that agreement, Process Equipment, Inc., through PEAC, acquired Jade, and 84.42 percent ownership in Jades subsidiary Hainan Quebec Ocean Fishing Co. Ltd, a Peoples Republic of China,
limited liability corporation, which we refer to as HQOF. As a result of that transaction, HQOF became our main operating subsidiary . In April of 2004, pursuant to the above agreement and plan of merger, the board of directors of Process Equipment,
Inc. and a majority of the stockholders approved a name change and change of domicile of that company to Delaware via a merger with the newly formed wholly-owned Delaware subsidiary, HQS. The name change, change of domicile and merger became
effective on May 19, 2004, with HQS being the surviving entity in the merger and acquiring all the assets and liabilities of Process Equipment, Inc. On August 17, 2004, we entered into a Purchase Agreement with Sino-Sult Canada (S.S.C.)
Limited, a Canadian limited liability corporation (SSC), whereby we acquired Sealink Wealth Limited (Sealink), SSCs wholly owned subsidiary incorporated in the British Virgin Islands. Sealink is the sole owner of Hainan
Jiahua Marine Bio-Products Co. Ltd., a limited liability company existing in China (Jiahua Marine) which is primarily engaged in the production and sales of marine bio-products and healthcare products in the PRC, as described in more
detail in this current report.

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

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

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

NOTE 2  BASIS OF PRESENTATION

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



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NOTE 3  ACCOUNTING POLICIES

A. CASH AND CASH EQUIVALENTS

The Group considers cash and cash equivalents to include cash on hand and
demand deposits with banks with an original maturity of three months or less.

B. INVENTORIES

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

C. Construction in progress

Construction in progress represents buildings under construction and plant and equipment pending installation as of December 31, 2008 and 2007, and
is stated at cost. Cost includes construction of buildings, acquisitions and installation of equipment, and interest charges arising from borrowings used to finance assets during the period of construction or installation and testing. No provision
for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for their intended commercial use.

D.
Long-live Assets

The Company has adopted the provisions of Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets. Property, plant and equipment and intangible assets are reviewed periodically for impairment losses whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be fully recoverable. If required, an impairment loss is recognized as the difference between the carrying value and the fair value of the assets.

In January 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, impairment of long-lived assets is monitored on a continuing basis, and is assessed based on the undiscounted cash
flows generated by the underlying assets. In the event that the carrying amount of long-lived assets exceeds the undiscounted future cash flows, then the carrying amount of such assets is adjusted to their fair value.

E. PROPERTY, PLANT AND EQUIPMENT

Property, plant and
equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the
accounts, and any resulting gains or losses are included in income in the year of disposition. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The percentages applied are:



|                                    |  |              
|----------------------------------- |  | -------------
|Buildings and leasehold improvement |  | 10  40 years
|Plant and machinery                 |  | 5  10 years 
|Motor vehicles                      |  | 5  years    
|Office equipment and furnishings    |  | 5  years    

F. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of financial instruments including cash, receivables, accounts payable and accrued expenses and debt, approximates their fair value at
December 31, 2008 and 2007 due to the relatively short-term nature of these instruments.

G. INCOME TAXES

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



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H. GOVERNMENT SUBSIDIES

Subsidies from the government are recognized at their fair values when received or there is reasonable assurance that they will be received, and all attached conditions are complied with.

I. RELATED PARTIES

Parties are considered to be related if
one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to
common control or common significant influence. Related parties may be individuals or corporate entities. The Company conducts business with several related parties in the ordinary course of business. All transactions have been recorded at fair
market value of the goods or services exchanged.



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J. FOREIGN CURRENCY TRANSLATION

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

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



|                                 |  |        |  |       
|-------------------------------- |  | ------ |  | ------
|                                 |  | 2008   |  | 2007  
|Year-end RMB : US$ exchange rate |  | 6.8240 |  | 7.3046
|Average RMB : US$ exchange rate  |  | 7.0643 |  | 7.5603

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

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

K. USE OF ESTIMATES

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

L. REVENUE RECOGNITION

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

M. EMPLOYEES BENEFITS

Mandatory contributions are
made to the Governments health, retirement benefit and unemployment schemes at the statutory rates in force during the period, based on gross salary payments. The cost of these payments is charged to the statement of income in the same period
as the related salary cost.



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N. SEGMENTS

No geographical segment analysis is provided for the years ended December 31, 2008 and 2007 as less than 10 percent of consolidated revenues and less than 10 percent of consolidated income from operations is attributable to the segment
other than the Mainland China.

Business Segment for the year ended December 31, 2008



|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  
|----------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ---------- | ---------------- |  | - | ------------- | - |  | - | ----------- | -
|                                    |  | AquacultureProduct |            |   | Health andBio-product |   |            | UnallocatedItems |  |   | Consolidation |  
|Sales to external customers         |  | $                  | 45,370,400 |   |                       | $ | 22,352,883 |                  |  | $ |              |   |  | $ | 67,723,283  |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  
|                                    |  |                    |            |  
|Selling and distribution expenses   |  |                    | 872,589    |   |                       |   | 678,271    |                  |  |   |              |   |  |   | 1,550,860   |  
|Marketing and advertising           |  |                    |           |   |                       |   | 4,426,378  |                  |  |   |              |   |  |   | 4,426,378   |  
|General and administrative expenses |  |                    | 855,546    |   |                       |   | 562,794    |                  |  |   | 4,787,653     |   |  |   | 6,205,993   |  
|Depreciation and amortization       |  |                    | 761,923    |   |                       |   | 437,045    |                  |  |   | 257,488       |   |  |   | 1,456,456   |  
|(Recovery of)/doubtful accounts     |  |                    | (498,681   | ) |                       |   | 7,458      |                  |  |   |              |   |  |   | (491,223    | )
|Finance costs                       |  |                    | (40,667    | ) |                       |   | (152,747   | )                |  |   | 2,856,148     |   |  |   | 2,662,734   |  
|Income/(loss) before income taxes   |  |                    | 10,320,298 |   |                       |   | 10,785,850 |                  |  |   | (8,152,120    | ) |  |   | 12,954,028  |  
|Income taxes                        |  |                    | 864,279    |   |                       |   | 2,049,061  |                  |  |   |              |   |  |   | 2,913,340   |  
|Net Income/(loss) for the year      |  | $                  | 9,456,019  |   |                       | $ | 8,736,789  |                  |  | $ | (8,152,120    | ) |  | $ | 10,040,688  |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  
|                                    |  |                    |            |  
|Segment assets                      |  | $                  | 49,054,644 |   |                       | $ | 36,026,012 |                  |  | $ | 15,105,617    |   |  | $ | 100,186,273 |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  
|                                    |  |                    |            |  
|Segment liabilities                 |  | $                  | 2,541,594  |   |                       | $ | 2,271,766  |                  |  | $ | 7,099,885     |   |  | $ | 11,913,245  |  
|                                    |  |                    |            |   |                       |   |            |                  |  |   |               |   |  |   |             |  

Business Segment for the year ended December 31, 2007



|                                    |  |                    |            |                       |   |                  |  |   |               |   |  |   |           
|----------------------------------- |  | ------------------ | ---------- | --------------------- | - | ---------------- |  | - | ------------- | - |  | - | ----------
|                                    |  | AquacultureProduct |            | Health andBio-product |   | UnallocatedItems |  |   | Consolidation
|Sales to external customers         |  | $                  | 36,248,437 |                       | $ | 18,721,774       |  | $ |              |   |  | $ | 54,970,211
|                                    |  |                    |            |                       |   |                  |  |   |               |   |  |   |           
|                                    |  |                    |            |                      
|Selling and distribution expenses   |  |                    | 371,939    |                       |   | 469,324          |  |   |              |   |  |   | 841,263   
|Marketing and advertising           |  |                    |           |                       |   | 5,162,299        |  |   |              |   |  |   | 5,162,299 
|General and administrative expenses |  |                    | 856,068    |                       |   | 237,655          |  |   | 3,706,638     |   |  |   | 4,800,361 
|Depreciation and amortization       |  |                    | 645,152    |                       |   | 355,667          |  |   | 216,465       |   |  |   | 1,217,284 
|Doubtful accounts                   |  |                    | 664,873    |                       |   | 5,644            |  |   | 1,569         |   |  |   | 672,086   
|Finance costs                       |  |                    | 1,717      |                       |   | 112,937          |  |   | 5,742,463     |   |  |   | 5,857,117 
|Income/(loss) before income taxes   |  |                    | 7,478,613  |                       |   | 9,380,535        |  |   | (9,823,774    | ) |  |   | 7,035,374 
|Income taxes                        |  |                    | 1,179,309  |                       |   | 1,395,600        |  |   | (26,097       | ) |  |   | 2,548,812 
|Net Income/(loss) for the year      |  | $                  | 6,299,304  |                       | $ | 7,984,935        |  | $ | (9,797,677    | ) |  | $ | 4,486,562 
|                                    |  |                    |            |                       |   |                  |  |   |               |   |  |   |           
|                                    |  |                    |            |                      
|Segment assets                      |  | $                  | 34,238,892 |                       | $ | 25,076,495       |  | $ | 25,011,479    |   |  | $ | 84,326,866
|                                    |  |                    |            |                       |   |                  |  |   |               |   |  |   |           
|                                    |  |                    |            |                      
|Segment liabilities                 |  | $                  | 4,208,988  |                       | $ | 1,965,657        |  | $ | 9,376,558     |   |  | $ | 15,551,203
|                                    |  |                    |            |                       |   |                  |  |   |               |   |  |   |           

O. COMPREHENSIVE INCOME

The Group has adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130 establishes standards for
the reporting and display of comprehensive income, its components and accumulated balances in a full set of general-purpose financial statements. SFAS No. 130 defines comprehensive income to include all changes in equity except those resulting
from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.



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P. CONCENTRATION OF CREDIT RISK

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

Q. SHIPPING AND HANDLING COSTS

Shipping and handling costs are classified as cost of sales and are expensed as incurred.

R. ADVERTISING COSTS

Advertising costs are
expensed as incurred.

S. NET INCOME PER COMMON SHARE

Net income per common share is computed in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per common share is calculated by dividing income available to common shareholders by the weighted-average number
of common shares outstanding for each period. Diluted earnings per common share is calculated by adjusting the weighted-average shares outstanding assuming conversion of all potentially dilutive convertible securities.

T. DEFERRED EXPENSES

Deferred expenses represent the
unamortized portion of finders fees related to the convertible promissory notes issued in November 2006.

U. INTANGIBLE ASSETS

Intangible assets are recognized if it is probable that the future economic benefits attributable to the assets will flow to the Company, and if the cost
of the assets can be measured reliably. After initial recognition, intangible assets are measured at cost less any impairment losses. Intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives.



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V. RECENT PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. This Statement applies
to all entities, including not-for-profit organizations. SFAS 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. As such, the Company has currently chosen not to elect the fair value
option as permitted by SFAS No.159, which provides entities the option to measure many financial instruments and certain other items at fair value.

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141(R), Business Combinations. SFAS 141(R) establishes principles and requirements for how
the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, an any non controlling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or
a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the
impact of SFAS 141(R) on its consolidated financial statements but does not expect it to have a material effect.

In December 2007, the
Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. SFAS 160 establishes
an accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements
but does not expect it to have a material effect.

In March, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133 (FAS 161). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhances
disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments
and related hedged items affect an entitys financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of FAS 161.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 is
intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S.GAAP for non-governmental
entities. SFAS 162 is effective 60 days following the Securities and Exchange Commissions approval of the Public Company Accounting Oversight Board auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity
with Generally Accepted accounting Principles. The Company does not expect SFAS 162 to have a material effect on its consolidated financial statements.

In May, 2008, the FASB issued Statement of Financial Accounting Standards No. 163 (SFAS 163), Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement
No. 60. SFAS 163 prescribes accounting for insures of financial obligations, bringing consistency to recognizing and recording premiums and to loss recognition. SFAS 163 also requires expanded disclosures about financial guarantee
insurance contracts. Except for some disclosures, SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of SFAS 163 will not have an impact on the results of operations or
financial position of the Company.



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The Company believes that the above standards would not have a material impact on its financial position,
results of operations or cash flows.

NOTE 4  TRADE RECEIVABLES

The Groups trade receivables at December 31, 2008 and 2007 are summarized as follows:



|                                      |  |      |            |      |   |           
|------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                      |  | 2008 |            | 2007
|Trade receivables                     |  | $    | 27,175,264 |      | $ | 25,383,330
|Other receivables                     |  |      | 813,271    |      |   | 523,730   
|                                      |  |      |            |      |   |           
|                                      |  |      | 27,988,535 |      |   | 25,907,060
|Less: Provision for doubtful accounts |  |      | 299,125    |      |   | 672,558   
|                                      |  |      |            |      |   |           
|                                      |  |     
|Balance at end of year                |  | $    | 27,689,410 |      | $ | 25,234,502
|                                      |  |      |            |      |   |           

The activity in the Groups provision for doubtful accounts during the year ended December 31, 2008 and
2007 is summarized as follows:



|                                                   |  |      |          |   |      |   |         |  
|-------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|                                                   |  | 2008 |          |   | 2007 |  
|Balance at beginning of year                       |  | $    | 672,558  |   |      | $ | 59,866  |  
|Add/(less): Provision / (recovery) during the year |  |      | (491,223 | ) |      |   | 672,086 |  
|Exchange difference transfer to exchange reserve   |  |      | 117,790  |   |      |   | (59,394 | )
|                                                   |  |      |          |   |      |   |         |  
|Balance at end of year                             |  | $    | 299,125  |   |      | $ | 672,558 |  
|                                                   |  |      |          |   |      |   |         |  



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NOTE 5  PROPERTY, PLANT AND EQUIPMENT, NET



|                                    |  |      |            |      |   |           
|----------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                    |  | 2008 |            | 2007
|Cost:                               |  |      |            |      |   |           
|Buildings and leasehold improvement |  | $    | 3,705,261  |      | $ | 3,465,219 
|Plant and machinery                 |  |      | 11,451,662 |      |   | 9,583,421 
|Motor vehicles                      |  |      | 217,901    |      |   | 130,212   
|Office equipment and furnishings    |  |      | 308,691    |      |   | 254,120   
|                                    |  |      |            |      |   |           
|                                    |  |      | 15,683,515 |      |   | 13,432,972
|                                    |  |     
|Less: Accumulated depreciation:     |  |      |            |      |   |           
|                                    |  |     
|Buildings and leasehold improvement |  |      | 691,039    |      |   | 560,107   
|Plant and machinery                 |  |      | 6,455,502  |      |   | 4,968,053 
|Motor vehicles                      |  |      | 53,403     |      |   | 55,914    
|Office equipment and furnishings    |  |      | 167,978    |      |   | 132,283   
|                                    |  |      |            |      |   |           
|                                    |  |      | 7,367,922  |      |   | 5,716,357 
|                                    |  |      |            |      |   |           
|Property, plant and equipment, net  |  | $    | 8,315,593  |      | $ | 7,716,615 
|                                    |  |      |            |      |   |           

Depreciation expenses relating to property, plant and equipment was $1,248,342 and $1,034,084 for
the year ended December 31, 2008 and 2007, respectively.

NOTE 6  INVENTORIES

The inventories at December 31, 2008 and December 31, 2007 are summarized as follows:



|                 |  |      |           |      |   |        
|---------------- |  | ---- | --------- | ---- | - | -------
|                 |  | 2008 |           | 2007
|Raw materials    |  | $    | 183,232   |      | $ | 288,656
|Work-in-progress |  |      | 156,416   |      |   | 106,756
|Finished goods   |  |      | 701,980   |      |   | 482,304
|                 |  |      |           |      |   |        
|                 |  | $    | 1,041,628 |      | $ | 877,716
|                 |  |      |           |      |   |        

NOTE 7  PREPAYMENTS

The Groups prepayment at December 31, 2008 and 2007 are summarized as follows:



|                      |  |      |         |      |   |        
|--------------------- |  | ---- | ------- | ---- | - | -------
|                      |  | 2008 |         | 2007
|Advances to suppliers |  | $    | 322,392 |      | $ | 301,180
|Prepaid expenses      |  |      | 142,527 |      |   | 48,936 
|                      |  |      |         |      |   |        
|                      |  | $    | 464,919 |      | $ | 350,116
|                      |  |      |         |      |   |        



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NOTE 8  INTANGIBLE ASSETS

At December 31, 2008 and 2007, the Groups intangible assets are comprised of the following:



|                                                |  |      |           |      |   |          
|----------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                |  | 2008 |           | 2007
|Land use rights, at cost                        |  | $    | 1,031,895 |      | $ | 964,002  
|Sales network, at cost                          |  |      | 550,000   |      |   | 550,000  
|                                                |  |      |           |      |   |          
|Intangible assets, at cost                      |  |      | 1,581,895 |      |   | 1,514,002
|Less: Accumulated amortization, land use rights |  |      | 25,791    |      |   |         
|Less: Accumulated amortization, sales network   |  |      | 443,200   |      |   | 260,000  
|                                                |  |      |           |      |   |          
|Intangible assets, net                          |  | $    | 1,112,904 |      | $ | 1,254,002
|                                                |  |      |           |      |   |          

LAND USE RIGHTS:

According to the Law in China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through
land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 48 years. Since the related building will be completed in 2009 and operations will start in 2009,
amortization will commence only in that year. The estimated amortization for each of the next five years will be approximately $25,800.

SALES NETWORK:

In 2006, the Company entered into an agreement with an unrelated third party by which it was agreed to
purchase a sales network in order for us to develop the American market for our branded seafood products. The cost of the network, established at $550,000, is amortized on a 36 months period, starting in August 2006. The amortization of 2006
amounted to $76,800. The amortization of 2007 and 2008 amounted to $183,200. The amortization for 2009 will amount to $106,800.

NOTE 9  ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at December 31, 2008 and 2007 are summarized as follows:



|                    |  |      |           |      |   |          
|------------------- |  | ---- | --------- | ---- | - | ---------
|                    |  | 2008 |           | 2007
|Accounts payables   |  | $    | 1,005,921 |      | $ | 1,226,797
|Other payables      |  |      | 2,735,484 |      |   | 4,275,774
|Accrued liabilities |  |      | 2,046,109 |      |   | 3,433,357
|                    |  |      |           |      |   |          
|                    |  | $    | 5,787,514 |      | $ | 8,935,928
|                    |  |      |           |      |   |          

NOTE 10  RELATED PARTY TRANSACTIONS

The net amounts due to related parties at December 31, 2008 and December 31, 2007 are non-interest bearing and are without terms of maturity.
They consist mainly of net advances from shareholders of the Company and are shown in the current liabilities as management expects those advances to be repaid during the next year. The amounts due to directors of $698,429 was repaid subsequent to
year-end.



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NOTE 11  CONVERTIBLE PROMISSORY NOTES AND WARRANTS

Effective January 25, 2006, the Company closed on a financing transaction with a group of private investors for an amount of $5,225,000. After
deducting commissions and other costs of the offering of $522,500, the Company received net proceeds of $4,702,500. The Notes matured January 25, 2008. The Notes were convertible into shares of the Companys Common Stock at a per share
conversion price at the rate of $6.00 per share of Common Stock. The Company followed EITF 0027, the issue 985 model in recording the convertible notes and warrants in its financial statements. The Notes were accruing interest on the
principal amount at a rate per annum of eight percent (8 percent) from January 25, 2006 payable in arrears, subject to the terms and conditions of the Notes, together with principal amount payments, up to January 25, 2008.

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

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

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

Furthermore, effective
November 8, 2006, the Company completed another financing transaction with a group of private investors for an amount of $5,000,000, bearing interest at 6.5 percent per annum. The financing consisted of two components: (a) promissory
notes of the Company, in the principal aggregate amount of $5,000,000 due November 1, 2009 and (b) warrants registered in the name of each Investor to purchase an aggregate of up to 200,000 shares of our Common Stock. The Notes are
convertible into shares of the Companys $0.001 par value Common Stock at a conversion price of $5.00 per share. The Warrants expire on the fifth (5th) anniversary of the effective date of the reverse stock split. In 2008, 170,000 such warrants were exercised leaving a balance of 30,000 unexercised at December 31, 2008.The exercise price to acquire a share of Common Stock is equal
to the Conversion Price under the Notes, currently at the rate of $5.00 per share of Common Stock.



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NOTE 12  INCOME TAXES

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

The Companys subsidiaries registered in the PRC are subject to state and local income taxes within the PRC at the applicable tax
rates on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign enterprises. On March 17, 2007, a new PRC Enterprise Income Tax Law (EIT) was promulgated
and introduced a new uniform tax regime in the PRC. The EIT became effective on January 1, 2008. That new Law provides, amongst other issues, that income derived from processing of fishery products and processing of agricultural products will
be exempt from the EIT tax rate. Starting in 2008, HQOF benefits from a 0 percent tax rate. Jiahua Marine was subject to a tax rate under the new law, which increased by 3 percent in 2008 and will increase gradually until it reaches a
maximum of 25 percent in 2012.

The reconciliation of the effective income tax rate of the Company to the statutory income tax rate in the
PRC for 2008 is as follows:



|                             |  |           |  |              
|---------------------------- |  | --------- |  | -------------
|                             |  | HQOF      |  | Jiahua Marine
|Statutory tax rate           |  | 0 percent |  | 18 percent   
|Tax holidays and concessions |  |          |  |             
|                             |  |           |  |              
|Effective tax rate           |  | 0 percent |  | 18 percent   
|                             |  |           |  |              

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

NOTE 13  DEFERRED TAX

Deferred tax assets as at December 31, 2008 and 2007 comprise the following:



|                                                 |  |      |          |   |      |   |        
|------------------------------------------------ |  | ---- | -------- | - | ---- | - | -------
|                                                 |  | 2008 |          |   | 2007
|Balance at January 1                             |  | $    | 873,865  |   |      | $ | 817,577
|Deferred tax written off for the year            |  |      | (935,409 | ) |      |   |       
|Exchange difference transfer to exchange reserve |  |      | 61,544   |   |      |   | 56,288 
|                                                 |  |      |          |   |      |   |        
|Balance at December 31                           |  | $    |         |   |      | $ | 873,865
|                                                 |  |      |          |   |      |   |        

Deferred taxation is calculated under the liability method in respect of taxation effect arising
from all timing differences, which are expected with reasonable probability to crystallize in the foreseeable future.



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NOTE 14  APPROPRIATION OF RETAINED EARNINGS (RESERVES)

The reserves are comprised of the following:



|                          |  |      |           |      |   |          
|------------------------- |  | ---- | --------- | ---- | - | ---------
|                          |  | 2008 |           | 2007
|Statutory surplus reserve |  | $    | 5,460,527 |      | $ | 3,556,975
|Public welfare reserve    |  |      | 1,064,042 |      |   | 1,064,042
|Capital reserve           |  |      | 36,946    |      |   | 36,946   
|                          |  |      |           |      |   |          
|                          |  | $    | 6,561,515 |      | $ | 4,657,963
|                          |  |      |           |      |   |          

The reserves are disclosed separately in the statement of changes in equity as appropriation of
retained earnings. Pursuant to the relevant laws and regulations of Wholly Owned Foreign Enterprises, the profits of the companies, which are based on their PRC statutory financial statements, are available for distribution in the form of cash
dividends after they have satisfied all the PRC tax liabilities, provided for losses of previous years, and made appropriations to reserves, as determined by the board of directors in accordance with the PRC accounting standards and regulations.

As stipulated by the relevant laws and regulations for enterprises operating in the PRC, HQOF and Jiahua Marine (both wholly-owned foreign
enterprises) are required to make annual appropriations to two reserves, consisting of the statutory surplus reserve and public welfare reserve. In accordance with the relevant PRC regulations and the articles of association of the respective
companies, the companies are required to allocate a certain percentage of their net income, as determined in accordance with the PRC accounting standards applicable to the companies, to the statutory surplus reserve until such reserve reaches 50
percent of the registered capital of the companies.

Net income as reported in the US GAAP financial statements differs from that
reported in the PRC statutory financial statements. In accordance with the relevant laws and regulations in the PRC, profits available for distribution are based on the statutory financial statements. If HQOF has foreign currency available after
meeting its operational needs, HQOF may make its profit distributions in foreign currency to the extent foreign currency is available. Otherwise, it is necessary to obtain approval and convert such distributions at an authorized bank.



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NOTE 15  EMPLOYEE STOCK OPTION PLAN

In December 2004, our board of directors ratified grants of non-qualified stock options to purchase shares of our common stock under our Stock Option Plan
to some of our executive officers and directors, who qualify as employees for valuation purposes, as well as to several of our employees. The following number of share options and related values are shown after giving effect to the reverse stock
split that occurred in January 2007. Each of these new stock options have up to a ten-year term, are subject to the terms and conditions of the Plan, and have an exercise price of $5.60. Specifically, Norbert Sporns, our Chief Executive Officer,
President and director, received 25,000 stock options; Lillian Wang, the Chairman of our board of directors, received 25,000 stock options; Harry Wang, our Chief Operating Officer, director and brother of Ms. Wang, received 25,000 stock
options; and Fusheng Wang, director (who resigned in 2006) and Honorary Chairman and father of Ms. Wang, received 50,000 stock options. Together, Norbert Sporns, Harry Wang and Lillian Wang also indirectly control the majority of capital stock
of HQS. The stock options granted to each of them, as well as to Fusheng Wang, were fully vested when granted. In addition, our Chief Financial Officer, Jean-Pierre Dallaire, received 10,000 stock options. Mr. Dallaires options were
vested in 2004 as to 50 percent of the grant, with the remaining 50 percent vesting as follows: 1/3 on June 16, 2005, 1/3 on June 16, 2006, and the remaining 1/3 on June 16, 2007. Further, at the same date, our board of directors
ratified grants of stock options to thirteen other employees of HQS. These stock options were vested then as to 50 percent of each individual grant, with the remaining 50 percent vesting as follows: 1/3 on June 16, 2005, 1/3 on June 16,
2006, and the remaining 1/3 on June 16, 2007. In the case of one of the employees, the stock options were fully vested when granted.

Our board of directors believes that these stock option grants will help our company to continue to attract, retain and motivate our employees, directors and executive officers. In connection with these grants, our board of directors
reserved 250,000 shares for issuance under the Plan. In addition, pursuant to the provisions of the Plan, our board of directors delegated the full power and authority to administer the Plan, in accordance with its terms, to our Compensation
Committee presently consisting of Fred Bild, an independent director, and Daniel Too, also an independent director of HQS.

Information
concerning the plan incentive and non-qualified stock options is as follows:



|                                   |  |         |  |                          |     
|---------------------------------- |  | ------- |  | ------------------------ | ----
|                                   |  | Options |  | Exercise Price Per Share
|December 31, 2006 (Vested)         |  | 198,334 |  | $                        | 5.60
|Options vested in 2007             |  | 16,666  |  | $                        | 5.60
|Options cancelled/forfeited        |  |        |  |                          |     
|Options exercised in 2007          |  | 151,250 |  | $                        | 5.60
|December 31, 2007 (Vested)         |  | 63,750  |  | $                        | 5.60
|Options vested in 2008             |  |        |  | $                        | 5.60
|Options canceled/forfeited in 2008 |  |        |  |                          |     
|Options exercised in 2008          |  | 10,000  |  | $                        | 5.60
|December 31, 2008 (Vested)         |  | 53,750  |  | $                        | 5.60

The table below summarizes information with respect to stock options outstanding as of December 31, 2008:



|               |  |                     |  |                           |  |                    |  |                                      |     
|-------------- |  | ------------------- |  | ------------------------- |  | ------------------ |  | ------------------------------------ | ----
|Exercise Price |  | Options Outstanding |  | RemainingContractual Life |  | OptionsExercisable |  | Exercise Price ofExercisable Options
|$ 5.60         |  | 53,750              |  | Up to June 2014           |  | 53,750             |  | $                                    | 5.60

The aggregate intrinsic value of the options outstanding as at December 31, 2008 is $119,862.
Since no options were granted in 2007 and 2008, the weighted average fair value of options granted under the plan during fiscal years 2007 and 2008 was $NIL and $NIL, respectively.

The Company has ceased to follow Accounting Principles Board Opinion (APBO) No. 25 and related interpretations in accounting for its stock-based
compensation made to its employees. APBO No. 25 requires no recognition of compensation expense for most of the stock-based compensation arrangements provided by the Company, namely, broad-based employee stock purchase plans and option grants
where the exercise price is equal to or less than the market value at the date of grant. However, APBO No. 25 requires recognition of compensation expense for variable award plans over the vesting periods of such plans, based upon the
then-current market values of the underlying stock. In contrast, Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of FASB Statement No. 123, requires recognition of compensation expense for grants of



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stock, stock options, and other equity instruments, over the vesting periods of such grants, based on the estimated grant-date fair values of those grants.
The Company generally uses the straight-line method of amortization for stock-based compensation.

NOTE 16  SIGNIFICANT CONCENTRATION

The Group grants credit to its customers, generally on an open account basis. The Groups five largest customers accounted for
38.6 percent of the consolidated sales for the year ended December 31, 2008 and they are all related to the aquaculture product segment. At December 31, 2008, approximately 46.3 percent of trade receivables were from trade transactions
with the aforementioned five largest customers.

For the year ended December 31, 2007, the Groups five largest customers
accounted for 38.6 percent of the consolidated sales for the year. At December 31, 2007, approximately 35.4 percent of trade receivables were from trade transactions with the aforementioned five largest customers.

NOTE 17  WARRANTIES

The Group did not incur
any warranty costs for both years ended December 31, 2008 and 2007.



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NOTE 18  COMMITMENTS AND CONTINGENCIES

A. CAPITAL COMMITMENTS

As of December 31, 2008, there
were capital commitments amounting to $3,195,890, which were mainly related to the construction work of the feed mill.

B. LEASE
COMMITMENTS

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



|           |  |   |        
|---------- |  | - | -------
|2009       |  | $ | 124,432
|2010       |  |   | 124,432
|2011       |  |   | 41,032 
|2012       |  |   | 41,032 
|2013       |  |   | 41,032 
|Thereafter |  |   | 430,832
|           |  |   |        
|Total      |  | $ | 802,792

C. LEGAL PROCEEDINGS

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

NOTE 19  CAPITAL STRUCTURE

Common stock
consists of authorized shares of 200,000,000 with a par value of $0.001 per share. Common stock issued and outstanding as of December 31, 2008 and 2007 was 12,085,846 and 11,511,317, respectively.

Preferred stock consists of authorized shares of 10,000,000 with a par value of $0.001 per share. Preferred shares amounting to 100,000 have been
designated as Series A preferred stock. The Series A preferred stock is entitled to superior voting rights and is also convertible into common shares.

During the years ended December 31, 2008 and 2007, the Company issued 574,529 and 5,094,461 common shares for net proceeds of $6,658,567 and $32,866,506, respectively. The amounts recorded in the accompanying
financial statements are net of costs incurred in raising capital.



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NOTE 20  EARNINGS PER SHARE

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

The
following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share (EPS) computation at December 31, 2008.



|                                                                              |  |                   |  |                     |  |                
|----------------------------------------------------------------------------- |  | ----------------- |  | ------------------- |  | ---------------
|                                                                              |  | 2008             
|                                                                              |  | Income(Numerator) |  | Shares(Denominator) |  | Per ShareAmount
|Basic EPS                                                                     |  |                   |  |                     |  |                
|Net income available to common shareholders                                   |  | 10,040,688        |  | 11,905,739          |  | 0.843          
|Effect of dilutive securities stock options issued to employees and investors |  | 325,000           |  | 1,292,689           |  |               
|                                                                              |  |                   |  |                     |  |                
|                                                                              |  |                   | 
|Diluted EPS                                                                   |  |                   |  |                     |  |                
|Net income available to common stockholders plus assumed conversions          |  | 10,365,688        |  | 13,198,438          |  | 0.785          
|                                                                              |  |                   |  |                     |  |                

NOTE 21  CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

The Group faces a number of risks and challenges since its operations are in the PRC. The Groups operations in the PRC are subject to special
considerations and significant risks not typically associated with companies in North America and Western Europe. The Groups results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

NOTE 22  SUBSEQUENT EVENT

On February 2, 2009, the Board of Directors approved the 2009
Stock Option Plan which will attribute 971,000 shares to employees of the Company. There was consequently a similar amount of shares reserved for issuance under that 2009 stock option plan. No grants are attributed yet and consequently no financial
impact was recognized in the financial statements for the year ended December 31, 2008.



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

As of the end of the
period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Companys chief executive officer and chief financial officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on this evaluation, the Companys chief executive officer and
chief financial officer concluded that as of the end of such period such disclosure controls and procedures were effective to provide reasonable assurance that they were reasonably designed to ensure that information required to be disclosed by the
Company in reports it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission and (ii) is accumulated and
communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in the Companys internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the
Exchange Act) during the fourth quarter of 2008 that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

Managements Report on Internal Control over Financial Reporting is set forth in Part II, Item 8 of this Annual Report on Form 10-K.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.



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PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
|-------- | --------------------------------------------------------

Executive Officers, Directors and Key Employees

Our executive officers and directors, and their ages and positions as of
December 31, 2008 are as follows:



|                     |  |     |  |                                                              
|-------------------- |  | --- |  | -------------------------------------------------------------
|Name                 |  | Age |  | Position                                                     
|Lillian Wang Li      |  | 52  |  | Chairman of the Board of Directors and Secretary and Director
|Norbert Sporns       |  | 55  |  | Chief Executive Officer, President and Director              
|Harry Wang Hua       |  | 46  |  | Chief Operating Officer and Director                         
|Jean-Pierre Dallaire |  | 57  |  | Chief Financial Officer and Financial Controller             
|Trond Ringstad       |  | 41  |  | Executive Vice-President Sales and Distribution              
|Andrew Intrater      |  | 46  |  | Independent non-executive Director                           
|Fred Bild            |  | 73  |  | Independent non-executive Director                           
|Joseph I. Emas       |  | 54  |  | Independent non-executive Director                           
|Daniel Too           |  | 57  |  | Independent non-executive Director                           

Our other key employees and their ages and positions as of December 31, 2008 are as follows:



|               |  |     |  |                                           
|-------------- |  | --- |  | ------------------------------------------
|Name           |  | Age |  | Position                                  
|William Sujian |  | 39  |  | International Sales and Compliance Officer
|He Jian Bo     |  | 41  |  | Manager Finance Department                

Biographies

Lillian Wang LiChairman of Board of Directors and SecretaryMs. Wang Li is one of our founders, and has served as our Secretary and Chairman of our board of directors since March
2004, when we effected the reverse merger with Process Equipment, Inc. Prior to joining HQS, between June 1994 and March 2004, she worked for SSC where her responsibilities included project development and financing, particularly in relation to
China projects using Western technologies. She is responsible for the general administration, strategic planning and financial management of HQS. She has over twenty five years of experience in management of China and Canadian businesses,
particularly with respect to financial matters.

Norbert SpornsChief Executive Officer, President and
DirectorMr. Sporns is one of our founders, and has served as our Chief Executive Officer and President and as a director since March 2004. Prior to joining HQS, between June 1994 and March 2004, he worked for SSC, where he was
instrumental in completing Western sourced funding for China projects, as well as interfacing with Western technology providers managing Western supply and systems deployment in China. Mr. Sporns is also the Chief Executive Officer of Red Coral
Group Limited from February 2003 to date. He has extensive experience in project development and investment consultancy.

Harry Wang
HuaChief Operating Officer and DirectorMr. Wang Hua is one of our founders, and has served as our Chief Operating Officer and as a director since March 2004. He is responsible for the establishment of the
production facilities and their operation at HQS. Mr. Wang also leads our plant management teams and our sales teams. Mr. Wang has over fifteen years of experience in managing startup companies in China and in Canada and also has expertise
in training middle managers in China in accordance with Western management standards. Prior to joining HQS, between June 1994 and March 2004, he was a director of SSC, where his primary task was to identify China projects for where Western
technologies and funding were available. Mr. Wang Hua is also a director of Red Coral Group Limited from June 1994 to date.

Jean-Pierre DallaireChief Financial Officer and Financial ControllerMr. Dallaire is our Chief Financial Officer and Financial Controller. Prior to joining HQS in September 2004, he worked for SSC from
June 2000 to September 2004, in the position of the Chief Financial Officer. Prior to that, Mr. Dallaire worked for Canadas largest engineering company, SNC Lavalin Group, where he was responsible for cash flow projections and financial
supervision of projects.



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Trond RingstadExecutive Vice-President, Sales and DistributionMr.
Ringstad joined us in June 2006 as our Executive Vice-President Sales and Distribution. He leads our sales and marketing activities from our headquarters in Seattle, Washington. Prior to joining us, from February 2004 through July 2006, he was
President and the owner of Pacific Supreme Seafoods. Prior to that, Mr. Ringstad was Vice President Sales and Marketing for Royal Supreme Foods, a seafood importer and sales company, from May 2001 to February 2004. He has over ten years of
seafood sales experience and has been a pioneer in selling tilapia in the United States.

Fred BildIndependent
non-executive DirectorMr. Bild has been our director since June 2004. He is currently a Visiting Professor at the University of Montreal where he has taught since January 1995. For over thirty-six years, Mr. Bild has served
as a Canadian diplomat in Ottawa and in various functions at embassies abroad including Cultural Attaché (Tokyo), Economic Counselor and Deputy Chief of Mission (Paris) and Canadian Ambassador to Thailand, China and Mongolia.

Daniel TooIndependent non-executive DirectorMr. Too has been our director since September 2004. He has extensive
business experience in Asia and possesses a deep understanding of the business difficulties associated with working in China. He had been the Managing Director of Delta Elevator Far East and until recently Mr. Too also serves as Director of
Voker Chemical Paint Limited.

Joseph I. EmasIndependent non-executive DirectorMr. Emas has been a
director since May 18, 2007. Mr. Emas is licensed to practice law in Florida, New Jersey and New York and has served as our general counsel since August 17, 2005. Since 2001, Mr. Emas has been the senior partner of Joseph I.
Emas, P.A. Mr. Emas specializes in securities regulation, corporate finance, mergers and acquisitions and corporate law. Mr. Emas received his Honors BA at University of Toronto, Bachelor of Administrative Studies, with distinction, at
York University in Toronto, his JD, cum laude from Nova Southeastern Shepard Broad Law School and his L.L.M. in Securities Regulation at Georgetown University Law Center. Mr. Emas was an Adjunct Professor of Law at Nova Southeastern Shepard
Broad Law School. Mr. Emas received the William Smith Award, Pro Bono Advocate for Children in 2000 and the 2006 Child Advocacy Award in Florida and is the author of Update of Juvenile Jurisdiction Florida Practice in Juvenile Law.
Mr. Emas was been a member of the Juvenile Court Rules Committee for the State of Florida from 1999 through 2006, and currently sits on the Florida Child Advocacy Committee.

Andrew IntraterIndependent non-executive Director Mr. Intrater has been a director since June 1, 2007.
Mr. Intrater is the Chairman and CEO of Columbus Acquisition Corp. and the Chief Executive Officer of Columbus Nova, a private investment firm with offices in New York, Los Angeles, Charlotte and Moscow where he has held this position since
Columbus Novas inception in January 2000. Columbus Nova manages in excess of $2 billion of investor capital and debt in a variety of credit and private equity businesses. Mr. Intrater also serves as the Senior Managing Partner of Columbus
Novas investment business, including Columbus Nova Capital and Columbus Nova Opportunity Fund, and is a former Director of Renova Group of companies. Columbus Nova is the U.S.-based affiliate of the Renova Group, one of the largest Russian
strategic investors in the metallurgical, oil, machine engineering, mining, chemical, construction, housing & utilities and financial sectors, with net assets of over $9 billion. From 1985 to 2000, Mr. Intrater served as President and
Chief Operating Officer of Oryx Technology Corp., and its predecessor, ATI, a leading manufacturer of semi-conductor testing equipment, based in Silicon Valley. Mr. Intrater serves as Chairman of the board of directors of Moscow Cablecom Corp.,
a company listed on the Nasdaq Global Market. Mr. Intrater is also a member of the board of directors of Oryx Technology Corp., Clareos, Inc. and Ethertouch, Ltd. Mr. Intrater received a B.S. from Rutgers University.

William SujianInternational Sales and Compliance OfficerMr. Sujian joined HQS in July 2004, and is currently our
International Sales and Compliance Officer. He has over 12 years of experience in international trade and project development. He is familiar with both Western and Asian business practices. His functions include the supervision of the China based
sales team and supervision of compliance with our code of ethics and business conduct. Prior to 2002, Mr. Sujian worked for SSC in the position of the General Manager for China.



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He Jian BoManager Finance DepartmentMr. Jian Bo joined us in July 2002.
He is currently the Manager of the Finance Department of HQS. Prior to joining us, he worked for several years for PricewaterhouseCoopers and was responsible for the restructuring of companies in China.

See Certain Relationships and Related TransactionsFamily Relationships for a description of family relationships among certain of our
executive officers.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of any class of our
equity securities, who collectively we generally refer to as insiders, to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of common stock and other equity securities of the company. Our
insiders are required by SEC regulation to furnish us with copies of all Section 16(a) reports they file. Based solely upon a review of the copies of the forms furnished to us, we believe that the following insiders made late filings for the
2008 fiscal year and prior years.



| |  |  | Jean-Pierre Dallaire timely filed a Form 5 to report one late transaction and his status as an insider.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Andrew Intrater timely filed a Form 5 to report one late transaction and his status as an insider.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Trond Ringstad filed one late filing to report his status as an insider.
| | - |  | ------------------------------------------------------------------------



| |  |  | Daniel Too filed two late filing to report five late transactions and his status as an insider.
| | - |  | -----------------------------------------------------------------------------------------------

In addition, based on information we received from certain insiders, we believe that certain insiders will file late filings in the near future to report late
transactions for the 2008 fiscal year and prior years. These late filings will be disclosed in our Proxy Statement for the 2009 Annual Meeting of Stockholders and the Form 10-K for the fiscal year ended December 31, 2009.

Compensation of Directors

Our bylaws provide that,
unless otherwise restricted by our certificate of incorporation, our board of directors has the authority to fix the compensation of directors. The directors may be paid their expenses, if any, related to attendance at each meeting of the board of
directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as our director. Our bylaws further provide that no such payment will preclude any director from serving our company in any other
capacity and receiving compensation therefore. Further, members of special or standing committees may be given compensation for attending committee meetings.

In addition, effective in 2004, our non-employee directors, Messrs. Bild and Too, have entered into independent non-executive director agreement with us. The non-executive director agreement between Mr. Bild
and us became effective in June 2004 while the agreement with Mr. Too became effective on September 2, 2004. Under these agreements, each non-employee director agreed to serve as our non-executive independent director commencing in 2004,
until the next meeting of our shareholders, unless terminated earlier, provided, however, that during such term of service the directors may also hold officer and non-executive director positions at other entities not affiliated with us. In
consideration of the directors services under these agreements, during their respective terms, we agreed to pay each directorpro rata quarterly portions of a total annual cash fee of $15,000. Such base annual fee is increased annually,
on January 1 of each calendar year, by not less than ten percent (10 percent). Our board of directors, in its discretion, may approve an increase of such annual base fee in excess of ten percent (10 percent). During the respective terms of
these agreements, we also agreed to pay each director an annual bonus of not less than $15,000 payable in shares of our common stock. We also agreed to reimburse any reasonable expenses paid or incurred by each non-employee director in connection
with the performance of his duties and responsibilities for us.

Furthermore, in 2008, our two other non-employee directors, Messrs.
Intrater and Emas have entered into independent non-executive agreement with us. The non-executive director agreement between Messrs. Intrater, Emas and us became effective in August 2008. Under these agreements, each of those two non-employee
director agreed to serve as our non-executive independent director commencing in 2008, until the next meeting of our shareholders, unless terminated earlier, provided, however, that during such term of service the directors may also hold officer and
non-executive director positions at other entities not affiliated with us. In consideration of the directors services under these agreements, during their respective terms, we agreed to pay each directorpro rata quarterly portions of a
total annual cash fee of $30,000 for Mr. Intrater ant $20,000 for Mr. Emas. Such base annual fee is increased annually, on January 1 of each calendar year, by not less than ten percent (10 percent). Our board of directors, in its
discretion, may approve an increase of such annual base fee in excess of ten percent (10 percent).



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During the respective terms of these agreements, we also agreed to pay each director an annual bonus of not less than $20,000 payable in shares of our common
stock. We also agreed to reimburse any reasonable expenses paid or incurred by each non-employee director in connection with the performance of his duties and responsibilities for us.

Board Committees and Independence

All of our directors serve until the next annual meeting of
shareholders and until their successors are elected by the holders of our common stock, or until their earlier death, retirement, resignation or removal. Our bylaws set the authorized number of directors at not less than one or more than nine, with
the actual number fixed by our board of directors. Currently, our board of directors consists of seven members. Our bylaws authorized the board of directors to designate from among its members one or more committees and alternate members thereof, as
they deem desirable, each consisting of one or more of the directors, with such powers and authority (to the extent permitted by law and these bylaws) as may be provided in such resolution.

Our board of directors has established two committees to date, an audit committee and a compensation committee. The audit committee consists of Messrs.
Andrew Intrater, Fred Bild and Daniel Too, and the compensation committee consists of Messrs. Fred Bild and Daniel Too. Our board of directors has determined that each of these directors is independent within the meaning of the
applicable rules and regulations of the SEC and the American Stock Exchange.

In addition, we believe one of our independent directors,
Mr. Andrew Intrater, qualifies as an audit committee financial expert as the term is defined by the applicable SEC rules and regulations and American Stock Exchange listing standards, which we believe is consistent with his
experience. In the course of his career, Mr. Intrater serves as the Senior Managing Partner at Columbus Novas investment business and is the Chief Executive Officer of Columbus Nova, a private investment firm. At the time of the listing
of our common stock on the American Stock Exchange, we were required to certify to the American Stock Exchange that our audit committee has, and will continue to have, at least one member who has past employment experience in finance or accounting,
requisite professional certification in accounting, or other comparable experience or background that results in the individuals financial sophistication.

Audit Committee

The audit committee assists our board of directors in its oversight of the
companys accounting and financial reporting processes and the audits of the companys financial statements, including (i) the quality and integrity of the companys financial statements, (ii) the companys compliance
with legal and regulatory requirements, (iii) the independent auditors qualifications and independence and (iv) the performance of the companys internal audit functions and independent auditors, as well as other matters which
may come before it as directed by the board of directors. Further, the audit committee, to the extent it deems necessary or appropriate, among its several other responsibilities, shall:



| |  |  | be responsible for the appointment, compensation, retention, termination and oversight of the work of any independent auditor engaged for the purpose of preparing
or issuing an audit report or performing other audit, review or attest services for the Company;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | discuss the annual audited financial statements and the quarterly unaudited financial statements with management and the independent auditor prior to their filing
with the SEC in the Companys Annual Report on Form 10-K and Quarterly Reports on Form 10-Q;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | review with the companys financial management on a periodic basis (a) issues regarding accounting principles and financial statement presentations,
including any significant changes in the companys selection or application of accounting principles, and (b) the effect of any regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of
the company;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | monitor the Companys policies for compliance with federal, state, local and foreign laws and regulations and the Companys policies on corporate conduct;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintain open, continuing and direct communication between the board of directors, the Committee and both the companys independent auditors and its internal
auditors; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Monitor our compliance with legal and regulatory requirements, with the authority to initiate any special investigations of conflicts of interest, and compliance
with federal, state and local laws and regulations, including the Foreign Corrupt Practices Act.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Mr. Intrater is
the chairman of our audit committee, and the other members are Messrs. Bild and Too.



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Compensation Committee

The compensation committee aids our board of directors of directors in meeting its responsibilities relating to the compensation of the companys
executive officers and to administer all incentive compensation plans and equity-based plans of the company, including the plans under which company securities may be acquired by directors, executive officers, employees and consultants. Further, the
compensation committee, to the extent it deems necessary or appropriate, among its several other responsibilities, shall:



| |  | review periodically the companys philosophy regarding executive compensation to (i) ensure the attraction and retention of corporate officers;
(ii) ensure the motivation of corporate officers to achieve the Companys business objectives, and (iii) align the interests of key management with the long-term interests of the Companys shareholders;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | review and approve corporate goals and objectives relating to Chief Executive Officer compensation and other executive officers of the company;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | make recommendations to the board of directors regarding compensation for non-employee directors, and review periodically non-employee director compensation in
relation to other comparable companies and in light of such factors as the Committee may deem appropriate; and
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Review periodically reports from management regarding funding of the companys pension, retirement, long-term disability and other management welfare and
benefit plans.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Mr. Too is the chairman of our compensation committee, and the other member is Mr. Bild.

Code of Ethics

We have adopted a code
of ethics that applies to all of our executive officers, directors and employees. Code of ethics codifies the business and ethical principles that govern all aspects of our business. This document will be made available in print, free of charge, to
any shareholder requesting a copy in writing from our Secretary at our U.S. headquarters in Seattle, Washington. A copy of our code of ethics is available on our website at www.hqfish.com, under Investor RelationsCorporate
GovernanceCode of Ethics.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

Compensation Discussion
and Analysis

Executive Compensation Philosophy

Our compensation program is designed to attract, retain and motivate highly qualified executives and drive sustainable growth. We compensate our executives named in the summary compensation table, which we refer to as
named executive officers or NEOs, through a combination of base salary, incentive, and discretionary cash bonuses. This compensation program is designed to be competitive with comparable companies and to align executive compensation with
the long-term interests of our owner. Base salary and incentive compensation (cash bonuses) are designed to reward current performance. Incentive compensation is earned on the basis of achieving Company and operating level performance objectives,
personal performance objectives, and the executives adherence to our core values.

Elements of Our Compensation

The compensation framework for our named executive officers consists of the following three key elements:



| |  | Base salary;
|- |  | ------------



| |  | Annual cash bonuses and other special cash bonuses, as warranted; and
|- |  | ---------------------------------------------------------------------



| |  | Long-term incentives (including the annual grant of stock options and/or restricted stock units)
|- |  | ------------------------------------------------------------------------------------------------

In addition to these key elements of compensation, our compensation framework includes limited fringe benefits, perquisites, severance and other benefits

Base Salaries

Our named executive officers receive a majority of
their overall cash compensation as base salary. Generally, base salaries have not been based upon specific measures of corporate performance, but are determined upon the recommendations of the chief executive officer, based upon his determination of
each employees individual performance, position and responsibilities, and contributions to both our financial performance and ethical culture. We generally seek to position base salary at the market median of the peer group.



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Annual Bonuses

Annual cash bonuses, if any, to our named executive officers are intended to reward company-wide performance and, to a lesser extent, individual performance during the year

Long-Term Incentives

The Committee believes that the grant of non-cash, long-term compensation, primarily in the
form of long-term incentive awards, to our named executive officers is appropriate to attract, motivate and retain such individuals, and enhance stockholder value through the use of non-cash, equity incentive compensation opportunities. The
Committee believes that our best interests will be advanced by enabling our named executive officers, who are responsible for our management, growth and success, to receive compensation in the form of long-term incentive awards. Since long-term
awards will increase in value in conjunction with an increase in the value of our common stock, the awards are designed to provide our named executive officers with an incentive to remain with us.

Prohibition Against Speculative Transactions

Our Code of Business
Conduct and Ethics, which applies to all of our employees and directors, prohibits speculative transactions in our stock such as short sales, puts, calls or other similar options to buy or sell our stock.

Guidelines For Trades By Insiders

We maintain policies that govern
trading in our stock by officers and directors required to report under Section 16 of the Exchange Act, as well as certain other employees who regularly have access to material non-public information about us. These policies include
pre-approval requirements for all trades and periodic trading black-out periods designed with reference to our quarterly financial reporting schedule. We also require pre-approval of all trading plans adopted pursuant to Rule 10b5-1
promulgated under the Exchange Act. To mitigate the potential for abuse, no trades are allowed under a plan within 30 days after adoption. We discourage termination or amendment of plans by prohibiting trades under new or amended plans within
90 days following a plan termination or amendment.

Conclusion

The foregoing discussion describes the compensation objectives and policies which were utilized with respect to our named executive officers during 2008 and our intended compensation framework for 2008. In the future,
as the Compensation Committee continues to review each element of the executive compensation program with respect to our named executive officers, the objectives of our executive compensation program, as well as the methods which the Compensation
Committee utilizes to determine both the types and amounts of compensation to award to our named executive officers, may change.

Compensation Committee
Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on
such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

Fred Bild

Daniel Too



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The following table sets forth for the years ended December 31, 2008, 2007 and 2006 the compensation
awarded to, paid to, or earned by, our Chief Executive Officer and our three other most highly compensated executive officers whose total compensation during the last fiscal year exceeded $100,000.

Executive Compensation Tables

2008 SUMMARY
COMPENSATION TABLE



|                                                                             |  |               |  |                        |  |                       |  |                |  |                 |  |                                        |  |                                                                      |  |                          |  |                       
|---------------------------------------------------------------------------- |  | ------------- |  | ---------------------- |  | --------------------- |  | -------------- |  | --------------- |  | -------------------------------------- |  | -------------------------------------------------------------------- |  | ------------------------ |  | ----------------------
|Name and Principal Position                                                  |  | Year          |  | Salary ($)             |  | Bonus ($)             |  | StockAwards($) |  | OptionAwards($) |  | Non-EquityIncentivePlanCompensation($) |  | Change inPensionValue
andNonqualifiedDeferredCompensationEarnings($) |  | All OtherCompensation($) |  | Total($)              
|Norbert SpornsChief Executive Officer                                        |  | 20082007 2006 |  | 219,615199,650181,500  |  | 73,20566,55060,500    |  |                |  |                 |  |                                        |  |                                                                      |  | 33,21031,80026,340       |  | 326,030298,000268,340 
|                                                                             |  |               |  |                        |  |                       |  |                | 
|Lillian Wang LiChairman of the Board                                         |  | 20082007 2006 |  | 219.615199,650181,500  |  | 146,410133,100121,000 |  |                |  |                 |  |                                        |  |                                                                      |  | 33,21031,80026,340       |  | 399,235364,550328,840 
|                                                                             |  |               |  |                        |  |                       |  |                | 
|Harry Wang HuaChief Operating Officer                                        |  | 20082007 2006 |  | 146,410133,100121,000  |  | 146,410133,100121,000 |  |                |  |                 |  |                                        |  |                                                                      |  |                       |  | 292,820266,200242,000 
|                                                                             |  |               |  |                        |  |                       |  |                | 
|Jean-Pierre DallairePrincipal Financial Officer/Principal Accounting Officer |  | 20082007 2006 |  | 146,410133,100 121,100 |  | 36,49233,27530,250    |  |                |  |                 |  |                                        |  |                                                                      |  | 47,33035,760 27,315      |  | 230,232202,565 178,565
|                                                                             |  |               |  |                        |  |                       |  |                | 
|                                                                             |  |               |  |                       |  |                    |  |                |  |                 |  |                                        |  |                                                                      |  |                       |  |                       



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2008 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE



|                                                                             |  |                                                    |  |                                                    |  |                                                                                       |  |                        |  |                      |  |                                                       |  |                                                            |  |                                                                                             |  |                                                                                                             
|---------------------------------------------------------------------------- |  | -------------------------------------------------- |  | -------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ---------------------- |  | -------------------- |  | ----------------------------------------------------- |  | ---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------
|                                                                             |  | Option Awards                                      |  | Stock Awards                                      
|                                                                             |  | Number ofSecuritiesUnderlyingUnexercisedOptions(#) |  | Number ofSecuritiesUnderlyingUnexercisedOptions(#) |  | EquityIncentivePlan Awards:Number
ofSecuritiesUnderlyingUnexercisedUnearnedOptions(#) |  | OptionExercisePrice($) |  | OptionExpirationDate |  | Number ofShares orUnits ofStock ThatHave NotVested(#) |  | MarketValue ofShares orUnits ofStock ThatHave NotVested($) |  | EquityIncentivePlanAwards:Number ofUnearnedShares,Unitsor OtherRights ThatHave NotVested(#) |  | EquityIncentivePlan Awards:Market orPayout Valueof UnearnedShares, Unitsor OtherRights
ThatHave NotVested($)
|Name                                                                         |  | Exercisable                                        |  | Unexercisable                                      |  |                                                                                       |  |                        |  |                      |  |                                                       |  |                                                            |  |                                                                                             |  |                                                                                                             
|Norbert SpornsChief Executive Officer                                        |  |                                                    |  |                                                   |  |                                                                                      |  | 5.60                   |  | 06/2014              |  |                                                      |  |                                                           |  |                                                                                            |  |                                                                                                            
|                                                                             |  |                                                    |  |                                                    |  |                                                                                       |  |                        | 
|Lillian Wang LiChairman of the Board of Directors                            |  |                                                    |  |                                                   |  |                                                                                      |  | 5.60                   |  | 06/2014              |  |                                                      |  |                                                           |  |                                                                                            |  |                                                                                                            
|                                                                             |  |                                                    |  |                                                    |  |                                                                                       |  |                        | 
|Harry Wang HuaChief Operating Officer                                        |  |                                                    |  |                                                   |  |                                                                                      |  | 5.60                   |  | 06/2014              |  |                                                      |  |                                                           |  |                                                                                            |  |                                                                                                            
|                                                                             |  |                                                    |  |                                                    |  |                                                                                       |  |                        | 
|Jean-Pierre DallairePrincipal Financial Officer/Principal Accounting Officer |  |                                                    |  |                                                   |  |                                                                                      |  | 5.60                   |  | 06/2014              |  |                                                      |  |                                                           |  |                                                                                            |  |                                                                                                            
|                                                                             |  |                                                    |  |                                                    |  |                                                                                       |  |                        | 
|                                                                             |  |                                                   |  |                                                   |  |                                                                                      |  |                       |  |                     |  |                                                      |  |                                                           |  |                                                                                            |  |                                                                                                            



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##### Table of Contents

2008 OPTION EXERCISES AND STOCK VESTED TABLE



|                                                                             |  |                                        |  |                             |  |                                       |  |                           
|---------------------------------------------------------------------------- |  | -------------------------------------- |  | --------------------------- |  | ------------------------------------- |  | --------------------------
|                                                                             |  | Option Awards                          |  | Stock Awards               
|Name                                                                         |  | Number ofSharesAcquired on Exercise(#) |  | ValueRealizedon Exercise($) |  | Number ofSharesAcquired on Vesting(#) |  | ValueRealizedon Vesting($)
|Norbert SpornsChief Executive Officer                                        |  |                                        |  | NIL                         |  |                                      |  |                          
|                                                                             |  |                                        |  |                            
|Lillian Wang LiChairman of the Board of Directors                            |  |                                        |  | NIL                         |  |                                      |  |                          
|                                                                             |  |                                        |  |                            
|Harry Wang HuaChief Operating Officer                                        |  |                                        |  |                             |  |                                      |  |                          
|                                                                             |  |                                        |  |                            
|Jean-Pierre DallairePrincipal Financial Officer/Principal Accounting Officer |  | 10,000                                 |  | 6,918                       |  |                                      |  |                          
|                                                                             |  |                                        |  |                            
|                                                                             |  |                                       |  |                            |  |                                      |  |                          



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2008 PENSION BENEFITS TABLE



|                                                                             |  |          |  |                                  |  |                                      |  |                                  
|---------------------------------------------------------------------------- |  | -------- |  | -------------------------------- |  | ------------------------------------ |  | ---------------------------------
|Name                                                                         |  | PlanName |  | Number ofYearsCreditedService(#) |  | PresentValueof AccumulatedBenefit($) |  | Payments DuringLastFiscal Year($)
|Norbert SpornsChief Executive Officer                                        |  |         |  |                                 |  |                                     |  |                                 
|                                                                             |  |          |  |                                 
|Lillian Wang LiChairman of the Board of Directors                            |  |         |  |                                 |  |                                     |  |                                 
|                                                                             |  |          |  |                                 
|Harry Wang HuaChief Operating Officer                                        |  |         |  |                                 |  |                                     |  |                                 
|                                                                             |  |          |  |                                 
|Jean-Pierre DallairePrincipal Financial Officer/Principal Accounting Officer |  |         |  |                                 |  |                                     |  |                                 
|                                                                             |  |          |  |                                 
|                                                                             |  |         |  |                                 |  |                                     |  |                                 



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2008 NONQUALIFIED DEFERRED COMPENSATION TABLE



|                                                                             |  |                                               |  |                                              |  |                                         |  |                                        |  |                                           
|---------------------------------------------------------------------------- |  | --------------------------------------------- |  | -------------------------------------------- |  | --------------------------------------- |  | -------------------------------------- |  | ------------------------------------------
|Name                                                                         |  | Executive Contributionsin Last Fiscal Year($) |  | RegistrantContributions inLastFiscal Year($) |  | Aggregate Earningsin Last FiscalYear($) |  | AggregateWithdrawals /Distributions($) |  | Aggregate Balanceat Last FiscalYear-End($)
|Norbert SpornsChief Executive Officer                                        |  |                                              |  |                                             |  | 292,820                                 |  | 822,270                                |  | NIL                                       
|                                                                             |  |                                               |  |                                              | 
|Lillian Wang LiChairman of the Board of Directors                            |  |                                              |  |                                             |  | 366,025                                 |  | 1,113,774                              |  | NIL                                       
|                                                                             |  |                                               |  |                                              | 
|Harry Wang HuaChief Operating Officer                                        |  |                                              |  |                                             |  | 292,820                                 |  | NIL                                    |  | 1,133,540                                 
|                                                                             |  |                                               |  |                                              | 
|Jean-Pierre DallairePrincipal Financial Officer/Principal Accounting Officer |  |                                              |  |                                             |  | 182,902                                 |  | 265,328                                |  | 16,468                                    
|                                                                             |  |                                               |  |                                              | 
|                                                                             |  |                                              |  |                                             |  |                                         |  |                                        |  |                                          



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##### Table of Contents

2008 DIRECTOR COMPENSATION TABLE



|                |  |                              |  |                 |  |                  |  |                                        |  |                                                                      |  |                          |  |         
|--------------- |  | ---------------------------- |  | --------------- |  | ---------------- |  | -------------------------------------- |  | -------------------------------------------------------------------- |  | ------------------------ |  | --------
|Name            |  | Fees EarnedorPaid in Cash($) |  | Stock Awards($) |  | Option Awards($) |  | Non-EquityIncentivePlanCompensation($) |  | Changein PensionValue
andNonqualifiedDeferredCompensationEarnings($) |  | All OtherCompensation($) |  | Total($)
|Norbert Sporns  |  |                             |  |                |  |                 |  |                                       |  |                                                                     |  | 33,210                   |  | 33,210  
|                |  |                              |  |                 |  |                  | 
|Lillian Wang Li |  |                             |  |                |  |                 |  |                                       |  |                                                                     |  | 33,210                   |  | 33,210  
|                |  |                              |  |                 |  |                  | 
|Harry Wang Hua  |  |                             |  |                |  |                 |  |                                       |  |                                                                     |  |                         |  |        
|                |  |                              |  |                 |  |                  | 
|Fred Bild       |  | 28,280                       |  | 15,000          |  |                 |  |                                       |  |                                                                     |  |                         |  | 43,280  
|                |  |                              |  |                 |  |                  | 
|Daniel Too      |  | 28,280                       |  | 15,000          |  |                 |  |                                       |  |                                                                     |  |                         |  | 43,280  
|                |  |                              |  |                 |  |                  | 
|Andrew Intrater |  | 45,000                       |  | 20,000          |  |                 |  |                                       |  |                                                                     |  |                         |  | 65,000  
|                |  |                              |  |                 |  |                  | 
|Joseph I Emas   |  | 30,000                       |  | 20,000          |  |                 |  |                                       |  |                                                                     |  |                         |  | 50,000  



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##### Table of Contents

2008 ALL OTHER COMPENSATION TABLE



|                                                                             |  |          |  |                                         |  |                      |  |                      |  |                                                     |  |                                |  |                                       |  |             
|---------------------------------------------------------------------------- |  | -------- |  | --------------------------------------- |  | -------------------- |  | -------------------- |  | --------------------------------------------------- |  | ------------------------------ |  | ------------------------------------- |  | ------------
|Name                                                                         |  | Year     |  | Perquisitesand OtherPersonalBenefits($) |  | TaxReimbursements($) |  | InsurancePremiums($) |  | CompanyContributionsto Retirementand401(k) Plans($) |  | SeverancePayments /Accruals($) |  | Changein ControlPayments /Accruals($) |  | Total($)    
|Norbert SpornsChief Executive Officer                                        |  | 20082007 |  | 33,21031,800                            |  |                    |  |                    |  |                                                   |  |                              |  |                                     |  | 33,21031,800
|                                                                             |  |          |  |                                         |  |                      |  |                     
|Lillian Wang LiChairman of the Board                                         |  | 20082007 |  | 33,21031,800                            |  |                    |  |                    |  |                                                   |  |                              |  |                                     |  | 33,21031,800
|                                                                             |  |          |  |                                         |  |                      |  |                     
|Harry Wang HuaChief Operating Officer                                        |  | 20082007 |  |                                       |  |                    |  |                    |  |                                                   |  |                              |  |                                     |  |           
|                                                                             |  |          |  |                                         |  |                      |  |                     
|Jean-Pierre DallairePrincipal Financial Officer/Principal Accounting Officer |  | 20082007 |  | 41,69035,760                            |  |                    |  | 5,6406,400           |  |                                                   |  |                              |  |                                     |  | 47,33042,610



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2008 PERQUISITES TABLE



|                                                                             |  |          |  |                                   |  |                               |  |           |  |                     |  |                                           
|---------------------------------------------------------------------------- |  | -------- |  | --------------------------------- |  | ----------------------------- |  | --------- |  | ------------------- |  | ------------------------------------------
|Name                                                                         |  | Year     |  | Personal Use ofCompanyCar/Parking |  | Financial Planning/Legal Fees |  | Club Dues |  | ExecutiveRelocation |  | Total PerquisitesandOther PersonalBenefits
|Norbert SpornsChief Executive Officer                                        |  | 20082007 |  |                                 |  |                             |  |         |  |                   |  |                                         
|                                                                             |  |          |  |                                   |  |                              
|Lillian Wang LiChairman of the Board                                         |  | 20082007 |  |                                |  |                            |  |        |  |                  |  |                                        
|                                                                             |  |          |  |                                   |  |                              
|Harry Wang HuaChief Operating Officer                                        |  | 20082007 |  |                                   |  |                               |  |         |  |                   |  |                                         
|                                                                             |  |          |  |                                   |  |                              
|Jean-Pierre DallairePrincipal Financial Officer/Principal Accounting Officer |  | 20082007 |  |                                 |  |                             |  |         |  |                   |  |                                         



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2008 POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE



|                                                                             |  |                   |  |                                                             |  |                                                            |  |                      |  |       |  |            |  |                   
|---------------------------------------------------------------------------- |  | ----------------- |  | ----------------------------------------------------------- |  | ---------------------------------------------------------- |  | -------------------- |  | ----- |  | ---------- |  | ------------------
|Name                                                                         |  | Benefit           |  | BeforeChange inControlTerminationw/o Cause orforGood Reason |  | After ChangeinControlTerminationw/o Cause
orfor GoodReason |  | VoluntaryTermination |  | Death |  | Disability |  | Change inControl  
|Norbert SpornsChief Executive Officer                                        |  | Basic salaryBonus |  | 219,61573,205                                               |  |                                                            |  |                      |  |       |  |            |  | 1,572,112524,035  
|                                                                             |  |                   |  |                                                             |  |                                                            | 
|Lillian Wang LiChairman of the Board                                         |  | Basic salaryBonus |  | 219,615146,410                                              |  |                                                            |  |                      |  |       |  |            |  | 1,572,1121,048,070
|                                                                             |  |                   |  |                                                             |  |                                                            | 
|Harry Wang HuaChief Operating Officer                                        |  | Basic salaryBonus |  | 146,410146,410                                              |  |                                                            |  |                      |  |       |  |            |  | 1,048,0701,048,070
|                                                                             |  |                   |  |                                                             |  |                                                            | 
|Jean-Pierre DallairePrincipal Financial Officer/Principal Accounting Officer |  | Basic salaryBonus |  | 146,41036,492                                               |  |                                                            |  |                      |  |       |  |            |  | 107,36726,761     

Director Compensation

Unless otherwise restricted by the certificate of incorporation, the members of board of directors have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated amount as director. No such payment shall preclude any director from serving the corporation in any
other capacity and receiving compensation thereafter. Members of special or standing committees may be allowed, like, for example, compensation for attending committee meetings. The annual remuneration of our independent non-executive directors Fred
Bild, and Daniel Too was $15,000 plus an annual bonus to them of not less than $15,000 payable in shares of our common stock. Andrew Intrater is remunerated on the basis of $30,000 per year in cash plus an annual bonus of $20,000 payable in shares
of our common stock while Joseph Emas is remunerated on the basis of $20,000 in cash per year plus an annual bonus of $20,000 payable in shares of our common stock.

Audit Committee Financial Expert

As stated above, we appointed four independent non-executive
directors to our Board of Directors. We consider one of our independent directors, Mr. Andrew Intrater to be an audit committee financial expert within the meaning of the applicable Securities and Exchange Commission rules and regulations.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee consists of Messrs. Bild and Too. None of the members of the Compensation Committee is a current or former officer or employee of the Company or any of our subsidiaries. There are no
compensation committee interlocks or insider participation in compensation decisions that are required to be disclosed in this Annual Report on Form 10-K.

Employment Agreements

The following information summarizes the employment agreements we entered into with Lillian Wang Li,
our Chairman and Secretary, Harry Wang Hua, our Chief Operating Officer, Norbert Sporns, our Chief Executive Officer and President, Jean-Pierre Dallaire, our Chief Financial Officer and Financial Controller, and Trond Ringstad, our Executive
Vice-President Sales and Distribution.



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Lillian Wang Li. Under Ms. Wangs employment agreement, she has agreed to serve as the
Chairman of our board of directors and Secretary. Her term of service under this agreement commenced on April 1, 2004 and continues for a term of five (5) years. The agreement provides for a base salary of $150,000 for the first year of
the term and an annual increase of at least 10 percent thereafter. The agreement also provides Ms. Wang with an annual bonus of at least $100,000, and this amount may be increased subject to the decision of our board of directors. The agreement
also provides for a grant of options to purchase shares of our common stock. The options include an option to purchase an aggregate of twenty percent (20 percent) of the then fully diluted shares of our common voting stock made available under
our 2004 Stock Incentive Plan, and, at the beginning of each calendar quarter, an option to purchase an aggregate of five percent (5 percent) of the then fully diluted shares of our common voting stock made available under our 2004 Stock
Incentive Plan. No shares of common stock were made available for option grants since the initial grants in 2004, and therefore no option grants were made to Ms. Wang. We and Ms. Wang have an understanding that she would waive any right
she might have to receive any options during year 2005 and through the present date under our 2004 Stock Incentive Plan. Each option grant must be evidenced by an option agreement substantially identical to the form included in the employment
agreement. The options granted under the employment agreement will have an exercise price of the fair market value per share of our common voting stock on the date the option is granted. We can terminate Ms. Wangs employment with cause,
or without cause upon at least ninety days written notice. In the event Ms. Wangs employment is terminated without cause, she will be eligible to receive (1) monthly payments at her then applicable monthly base salary for the
rest of her term from the date of termination of her employment; (2) an annual bonus of $50,000 for the rest of her term from the date of termination of her employment; (3) the value of any earned, but unused vacation days;
(4) continued coverage under our companys benefits plan; and (5) severance in an amount equal to her annual base salary in effect immediately prior to her last date of employment.

Harry Wang Hua. Under Mr. Wangs employment agreement, he has agreed to serve as our Chief Operating Officer. His term of service under
this agreement commenced on April 1, 2004 and continues for a term of five (5) years. The agreement also provides for a base salary of $100,000 for the first year of the term and an annual increase of at least 10 percent thereafter. The
agreement also provides Mr. Wang with an annual bonus of at least $100,000, and this amount may be increased subject to the decision of our board of directors. The agreement also provides for the grant of options to purchase shares of our
common stock. The options include an option to purchase an aggregate of twenty percent (20 percent) of the then fully diluted shares of our common voting stock made available under our 2004 Stock Incentive Plan, and, at the beginning of each
calendar quarter, an option to purchase an aggregate of five percent (5 percent) of the then fully diluted shares of our companys common voting stock made available under the 2004 Stock Incentive Plan. No shares of common stock were made
available for option grants since the initial grants in 2004, and therefore no option grants were made to Mr. Wang. We and Mr. Wang have an understanding that he would waive any right he might have to receive any options during year 2005
and through the present date under our 2004 Stock Incentive Plan. Each option grant must be evidenced by an option agreement substantially identical to the form included in the employment agreement. The options granted under the employment agreement
will have an exercise price of the fair market value per share of our common voting stock on the date the option is granted. We can terminate Mr. Wangs employment with cause, or without cause upon at least ninety days written
notice. In the event Mr. Wangs employment is terminated without cause, he will be eligible to receive (1) monthly payments at his then applicable monthly base salary for the rest of his term from the date of termination of his
employment; (2) an annual bonus of $50,000 for the rest of his term from the date of termination of his employment; (3) the value of any earned, but unused vacation days; (4) continued coverage under our companys benefits plan;
and (5) severance in an amount equal to his annual base salary in effect immediately prior to his last date of employment.

Norbert
Sporns. Under Mr. Sporns employment agreement, he has agreed to serve as our Chief Executive Officer and President. His term of service under this agreement commenced on April 1, 2004 and continues for a term of five
(5) years. The agreement also provides for a base salary of $150,000 for the first year of the term and an annual increase of at least 10 percent thereafter. The agreement also provides Mr. Sporns with an annual bonus of at least $50,000,
and this amount may be increased subject to the decision of our board of directors. The agreement also provides for the grant of options to purchase shares of our common stock. The options include an option to purchase an aggregate of twenty percent
(20 percent) of the then fully diluted shares of our common voting stock made available under our 2004 Stock Incentive Plan, and, at the beginning of each calendar quarter, an option to purchase an aggregate of five percent (5 percent) of
the then fully diluted shares of our companys common voting stock made available under our 2004 Stock Incentive Plan. No shares of common stock were made available for option grants since the initial grants in 2004, and therefore no option
grants were made to Mr. Sporns. We and Mr. Sporns have an understanding that he would waive any right she might have to receive any options during year 2005 and through the present date under our 2004 Stock Incentive Plan. Each option
grant must be evidenced by an option agreement substantially identical to the form included in the employment agreement. The options granted under the employment agreement will have an exercise price of the fair market value per



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share of our common voting stock on the date the option is granted. We can terminate Mr. Sporns employment with cause, or without cause upon at
least ninety days written notice. In the event Mr. Sporns employment is terminated without cause, he will be eligible to receive (1) monthly payments at his then applicable monthly base salary for the rest of his term from the
date of termination of his employment; (2) an annual bonus of $50,000 for the rest of his term from the date of termination of his employment; (3) the value of any earned, but unused vacation days; (4) continued coverage under our
companys benefits plan; and (5) severance in an amount equal to his annual base salary in effect immediately prior to his last date of employment.

Jean-Pierre Dallaire. Under Mr. Dallaires employment agreement, he has agreed to serve as our Chief Financial Officer and Financial Controller. His term of service under this agreement commenced on
September 1, 2004 and continues for a term of five (5) years. The agreement provides for a base salary of $100,000 for the first year of the term and an annual increase of at least 10 percent thereafter. The agreement also provides
Mr. Dallaire with an annual bonus of at least $25,000, and this amount may be increased subject to the decision of our board of directors. The agreement also provides for the grant of options to purchase shares of our common stock. The options
include an option to purchase an aggregate of ten percent (10 percent) of the then fully diluted shares of our common voting stock made available under our 2004 Stock Incentive Plan, and, at the beginning of each calendar quarter, an option to
purchase an aggregate of two and one-half percent (2.5 percent) of the then fully diluted shares of our companys common voting stock made available under our 2004 Stock Incentive Plan. No shares of common stock were made available for
option grants since the initial grants in 2004, and therefore no option grants were made to Mr. Dallaire. Each option grant must be evidenced by an option agreement substantially identical to the form included in the employment agreement. The
options granted under the employment agreement will have an exercise price of the fair market value per share of our common voting stock on the date the option is granted. We can terminate Mr. Dallaires employment with cause, or without
cause upon at least ninety days written notice. In the event Mr. Dallaires employment is terminated without cause, he will be eligible to receive (1) monthly payments at his then applicable monthly base salary for the rest of
his term from the date of termination of his employment; (2) an annual bonus of $25,000 for the rest of his term from the date of termination of his employment; (3) the value of any earned, but unused vacation days; (4) continued
coverage under our companys benefits plan; and (5) severance in an amount equal to his annual base salary in effect immediately prior to his last date of employment.

Trond Ringstad. Under Mr. Ringstads employment agreement, he has agreed to serve as our Executive Vice-President Sales and
Distribution. His term of service under this agreement commenced on June 28, 2006 and continues for a term of three (3) years. The agreement provides for a base salary of $150,000 for the first year of the term and an annual adjustment,
whereby Mr. Ringstads base salary will increase by no more than 150 percent and no less than 50 percent of his base salary if the volume of sales generated by our Seattle sales office for the year immediately following his employment
exceeds $15,000,000. An adjustment in Mr. Ringstads base salary will be paid in 50 percent cash and 50 percent restricted shares of our common stock. The agreement also provides Mr. Ringstad with an annual bonus at the discretion of
our board of directors. We can terminate Mr. Ringstads employment with cause, or without cause upon at least a thirty day written notice. In the event that Mr. Ringstads employment is terminated without cause, he will be
eligible to receive (1) any earned but unpaid base salary through his last date of employment; (2) the value of any earned, but unused vacation days; (3) continued coverage under our companys benefits plan; and (4) an
amount equal to six months of his annual base salary in effect immediately prior to his last date of employment.

Stock Incentive Plan

The purpose of our 2004 Stock Incentive Plan is to encourage and enable employees, directors and other persons upon whose judgment, initiative and
efforts we largely depend upon, to acquire a proprietary interest in our company. Under the Stock Incentive Plan, our board of directors, or a stock option committee appointed by the board of directors, may grant stock options to purchase up to
250,000 shares of our common stock (subject to adjustment due to certain recapitalizations, reorganizations or other corporate events) to our key employees (including officers), directors and consultants. To date, all of the options available under
the 2004 Stock Incentive Plan have been granted, and our ability to grant additional options will be subject to first obtaining board and Shareholder approvals. The per share exercise price of options granted under our 2004 Stock Incentive Plan will
be not less than 100 percent of the fair market value per share of common stock on the date the options are granted. Our board of directors or a committee thereof administering the 2004 Stock Incentive Plan has discretion to determine what portions
of any awards shall be granted as incentive stock options or ISOs, stock appreciation rights, or SARs, and non-statutory options, and is generally empowered to interpret the 2004 Stock Incentive Plan; to prescribe rules and regulations
relating thereto; to determine the terms of the option agreements; to amend the option agreements with the consent of the optionee; to determine the key employees and directors to whom options are to



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be granted; and to determine the number of shares subject to each option and the exercise price thereof. If any option expires, terminates or is cancelled
without having been exercised, the shares subject to the option will again be available for issuance under the Stock Incentive Plan.

Our
board of directors did not approve, and therefore, we did not make, any options/SAR grants during the fiscal year ended December 31, 2008.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

On December 2004, our Board of Directors ratified grants of non-qualified stock options to purchase shares of our common stock under our Stock Option Plan
to some of our executive officers and directors, as well as to several of our employees. Each of these new stock options has up to a ten-year term, is subject to the terms and conditions of the Plan, and is priced at $5.60 which represents the fair
market value as of the initial grant date of November 23, 2004.

Specifically,
in 2004, Norbert Sporns, our Chief Executive Officer, President and director, received 25,000 stock options. Lillian Wang, the Chairman of our Board of Directors, received 25,000 stock options. Harry Wang, our Chief Operating Officer, director and
brother of Ms. Wang, received 25,000 stock options; and Fusheng Wang, our director in 2004, Honorary Chairman and father of Ms. Wang, received 50,000 stock options. Together, Norbert Sporns, Harry Wang and Lillian Wang also indirectly
control the majority of capital stock of HQS. The stock options granted to each of them, as well as to Fusheng Wang, were fully vested when granted. In addition, our Chief Financial Officer, Jean-Pierre Dallaire, received 10,000 stock options.
Mr. Dallaires options were vested in 2004 immediately as to 50 percent of the grant , with the remaining 50 percent vesting as follows:1/3on June 16, 2005, 1/3on June 16, 2006, and the remaining 1/3on June 16, 2007.

Further, at the same date, our Board of Directors ratified grants of stock options to thirteen
other employees of HQS. These stock options were vested immediately as to 50 percent of each individual grant, with the remaining 50 percent vesting as follows: 1/3on June 16, 2005, 1/3on June 16, 2006, and the remaining
1/3on June 16, 2007. In the case of one of the employees, the stock options were fully vested when granted.

Our Board of Directors believes that these stock option grants will help our company to continue to attract, retain and motivate
our employees, directors and executive officers. In connection with these grants, our Board of Directors reserved 250,000 shares for issuance under the Plan. In addition, pursuant to the provisions of the Plan, our Board of Directors delegated the
full power and authority to administer the Plan, in accordance with its terms, to our Compensation Committee presently consisting of Fred Bild, an independent director, and Daniel Too, also an independent director of HQS.

The following table sets forth certain information regarding beneficial ownership of common stock as of December 31, 2008, by:



| |  |  | each person known to us to own beneficially more than 5 percent, in the aggregate, of the outstanding shares of our common stock
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | each director;
| | - |  | --------------



| |  |  | each of our chief executive officer and our other two most highly compensated executive officers; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | all executive officers and directors as a group
| | - |  | -----------------------------------------------

The number of shares beneficially owned and the percent of shares outstanding are based on 12,085,846 shares outstanding as of December 31, 2008. Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with respect to securities. Except as otherwise noted below, the address of each of the shareholders in the table is c/o HQ Sustainable Maritime Industries, Inc., 1511 Third Avenue, Suite
788, Seattle, Washington.



|                    |  |                               |  |                           
|------------------- |  | ----------------------------- |  | --------------------------
|Beneficial Owner    |  | Shares of Common Stock Number |  | Beneficially Owned Percent
|Norbert Sporns (1)  |  | 796,761                       |  | 6.6 percent               
|                    |  |                              
|Lillian Wang Li (1) |  | 828,918                       |  | 6.9 percent               
|                    |  |                              
|Harry Wang Hua (1)  |  | 1,639,993                     |  | 13.6 percent              



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|                                                                             |  |           |  |                    
|---------------------------------------------------------------------------- |  | --------- |  | -------------------
|                                                                             |  |          
|Andrew Intrader(2)                                                           |  | 2,878     |  | Less than 1 percent
|                                                                             |  |          
|Fred Bild                                                                    |  | 2,541     |  | Less than 1 percent
|                                                                             |  |          
|Daniel Too                                                                   |  | 9,151     |  | Less than 1 percent
|                                                                             |  |          
|Joseph I. Emas                                                               |  | 15,878    |  | Less than 1 percent
|                                                                             |  |          
|All such directors and executive officers as a group (7 persons)             |  | 3,296,120 |  | 27.3 percent       
|                                                                             |  |          
|Five Percent Shareholders (Other than Directors and named executive officers |  |           |  |                    
|River Road Asset Management, LLC (3)                                         |  | 784,103   |  | 6.5 percent        
|                                                                             |  |          
|Hound Partners, LLC, Hound Performance, LLC and Jonathan Auerbach (4)        |  | 785,915   |  | 6.5 percent        
|                                                                             |  |          
|The Tail Wind Fund Ltd. (5)                                                  |  | 1,001,252 |  | 7.7 percent        



|(1) | Beneficially owns the shares indicated, which are owned of record by Red Coral Group Limited and Sino-Sult Canada (S.S.C.) Limited. Each of Mr. Sporns, Ms. Wang and
Mr. Wang own respectively 24 percent, 25 percent and 51 percent of the issued capital of Red Coral Group Limited and Sino-Sult Canada (S.S.C.) Limited and share voting and investment power over the shares held by Red Coral Group Limited and
Sino-Sult Canada (S.S.C.) Limited.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The address of this stockholder is c/o Renova U.S. Management LLC, 153 E. 53rd Street, 58th Floor, New York, New York 10022.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(3) | Based on a Schedule 13G/A filed by River Road Asset Management, LLC with the SEC on February 17, 2009. The address of the indicated holder is 462 S. 4th Street, Suite 1600,
Louisville, KY 40202.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Based on a Schedule 13G/A jointly filed by Hound Partners, LLC, Hound Performance, LLC and Jonathan Auerbach with the SEC on February 13, 2009. The address of the indicated
holders is 101 Park Avenue, 48th Floor, New York, New York 10178.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Based on a Schedule 13G/A filed by The Tail Wind Fund Ltd. (Tail Wind) with the SEC on February 13, 2009. The address of the indicated holder is Windermere House,
404 East Bay Street, P.O. Box SS-5539 British Virgin Isles. Includes (i) 151,252 shares of common stock currently held by Tail Wind and (ii) 850,000 shares of common stock issuable upon conversion of $4,250,000 in principal amount of the
issuers 6.5% Convertible Notes due November 1, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Changes in Control

We know of no plans or arrangements that will result in a change of control at our company.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

In the last three fiscal years, none of our present directors, officers or principal shareholders, nor any family member of the foregoing, nor, to the best of our information and belief, any of our former directors,
senior officers or principal shareholders, nor any family member of such former directors, officers or principal shareholders, has or had any material interest, direct or indirect, in any transaction, or in any proposed transaction which has
materially affected or will materially affect us, except as follows:

Family Relationships

Lillian Wang Li and Harry Wang Hua are brother and sister and Lillian Wang Li is married to Norbert Sporns.



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Director Independence

Our board of directors has adopted independence standards consistent with the current listing standards of American Stock Exchange to assist the board of directors in determining which of its members is independent.
Our board of directors has determined that each of Fred Bild, Daniel Too, Joseph I. Emas, and Andrew Intrater satisfies our independence standards and further determined that each of them is independent within the meaning of American Stock
Exchanges listing standards. Our audit committee consists of Messrs. Andrew Intrater, Fred Bild and Daniel Too, and the compensation committee consists of Messrs. Fred Bild and Daniel Too. Our board of directors has determined that each of
these directors is independent within the meaning of the applicable rules and regulations of the SEC and the American Stock Exchange.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



|(a) | Audit Fees
|--- | ----------

Our auditors Schwartz, Levitsky, Feldman.,
LLP, billed us aggregate fees in the amount of approximately $240,000 for year ended December 31, 2008 while Rotenberg billed us $155,000 for the financial year ended December 31, 2007. These amounts were billed for professional services
our auditors provided for the audit of our annual financial statements and SOX 404 internal controls over financial reporting, review of our securities offerings and other services typically provided by an accountant in connection with statutory and
regulatory filings or engagements for those financial years.



|(b) | Audit-Related Fees
|--- | ------------------

Schwartz Levitsky Feldman billed us
aggregate fees in the amount of $60,000 for year ended December 31, 2008 while Rotenberg billed us $105,000 for the financial year ended December 31, 2007, and for assurance and related services that were reasonably related to the
performance of the reviews of our financial statements.



|(c) | Tax Fees
|--- | --------

Schwartz Levitsky Feldman and Rotenberg billed
us aggregate fees in the amount of $0 for the financial years ended December 31, 2008 and December 31, 2007, for tax compliance, tax advice, and tax planning.



|(d) | All Other Fees
|--- | --------------

Schwartz Levitsky Feldman and Rotenberg
billed us aggregate fees in the amount of $0 for the financial years ended December 31, 2008 and December 31, 2007, and for all other fees.

All audit-related services, tax services and other non-audit services were pre-approved by the Audit Committee, which concluded that the provision of such services by Schwartz Levitsky Feldman was compatible with the
maintenance of that firms independence in the conduct of its auditing functions. The Audit Committees Outside Auditor Independence Policy provides for pre-approval of audit, audit-related and tax services specifically described by the
committee on an annual basis and, in addition, individual engagements anticipated to exceed pre-established thresholds must be separately approved. The policy authorizes the committee to delegate to one or more of its members pre-approval authority
with respect to permitted services.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



|            |  |                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                  
|3.1(a)      |  | Certificate of Incorporation of HQ Sustainable Maritime Industries, Inc., as amended (incorporated by reference to Exhibit 2 to the Schedule 14C of Process Equipment, Inc. (SEC file No.
0-18980), filed with the SEC on April 28, 2004).                                   
|            | 
|3.1(b)      |  | Certificate of Amendment of Certificate of Incorporation, dated December 28, 2006, of HQ Sustainable Maritime Industries, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
Form SB-2 (SEC File Number 333-139454), filed with the SEC on April 20, 2007).
|            | 
|3.2         |  | By-laws of HQ Sustainable Maritime Industries, Inc. (incorporated by reference to Exhibit 3 to the Schedule 14C of Process Equipment, Inc. (SEC file No. 0-18980), filed with the SEC on April 28,
2004).                                                                    
|            | 
|4.1         |  | Form of Rights and Preferences of Preferred Stock (incorporated by reference to Form 14C (SEC File Number 0-18980), filed with the SEC on October 3, 2005).                                                                                                                  
|            | 
|4.2         |  | Form of Subscription Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors, exhibits attached (incorporated by reference to Exhibit 4.1 to Form 8-K (SEC File Number
0-18980), filed with the SEC on January 26, 2006).                           
|            | 
|4.3         |  | Form of Stock Purchase Agreement by and among Process Equipment, Inc. and certain Investors, dated April 21, 2004 (incorporated by reference to Exhibit 10.19 to Form SB-2 (SEC File Number
333-139454), filed with the SEC on December 18, 2006).                           
|            | 
|4.4         |  | Form of Registration Rights Agreement by and among Process Equipment, Inc. and certain Investors, dated April 21, 2004 (incorporated by reference to Exhibit 10.20 to Form SB-2 (SEC File Number
333-139454), filed with the SEC on December 18, 2006).                      
|            | 
|4.5         |  | Form of Class C Warrant (incorporated by reference to Exhibit 10.21 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006).                                                                                                                     
|            | 
|4.6         |  | Form of Class D Warrant (incorporated by reference to Exhibit 10.22 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006).                                                                                                                     
|            | 
|10.1        |  | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Harry Wang (incorporated by reference to Exhibit 10.1 to Form 10-QSB (SEC File Number
0-18980), filed with the SEC on August 13, 2004).                            
|            | 
|10.2        |  | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Harry Wang (incorporated by reference to Exhibit 10.16 to Form 10-KSB (SEC File
Number 18980), filed with the SEC on April 11, 2005).                        
|            | 
|10.3        |  | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Lillian Wang Li (incorporated by reference to Exhibit 10.2 to Form 10-QSB (SEC File
Number 0-18980), filed with the SEC on August 13, 2004).                       
|            | 
|10.4        |  | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Lillian Wang Li (incorporated by reference to Exhibit 10.15 to Form 10-KSB (SEC
File Number 18980), filed with the SEC on April 11, 2005).                   



77



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|      |  |                                                                                                                                                                                                                                                                        
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5  |  | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Norbert Sporns (incorporated by reference to Exhibit 10.3 to Form 10-QSB (SEC File
Number 0-18980), filed with the SEC on August 13, 2004).                  
|      | 
|10.6  |  | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Norbert Sporns (incorporated by reference to Exhibit 10.14 to Form 10-KSB (SEC
File Number 18980), filed with the SEC on April 11, 2005).              
|      | 
|10.7  |  | Employment Agreement, dated as of September 1, 2004, between HQ Sustainable Maritime Industries Inc. and Jean-Pierre Dallaire (incorporated by reference to Exhibit 10.3 to Form 10-QSB
(Commission file No. 0-18980), filed with the Commission on November 15, 2004).
|      | 
|10.8  |  | Employment Agreement, dated as of June 28, 2006, between HQ Sustainable Maritime Industries Inc. and Trond Ringstad (incorporated by reference to Exhibit 10.13 Form SB-2 (Commission file No.
333-139454), filed with the Commission on December 18, 2006).           
|      | 
|10.9  |  | Independent Non-Executive Director Agreement, dated as of June 15, 2004, between HQ Sustainable Maritime Industries Inc. and Fred Bild (incorporated by reference to Exhibit 10.4 to Form 10-QSB
(SEC file No. 0-18980), filed with the SEC on August 13, 2004).       
|      | 
|10.10 |  | Independent Non-Executive Director Agreement, dated as of June 15, 2004, between HQ Sustainable Maritime Industries Inc. and Jacques Vallée (incorporated by reference to the Report on
Form 10-QSB (SEC file No. 0-18980), filed with the SEC on August 13, 2004).    
|      | 
|10.11 |  | Independent Non-Executive Director Agreement, dated as of September 2, 2004, between HQ Sustainable Maritime Industries Inc. and Daniel Too (incorporated by reference to Exhibit 10.2 to Form
10-QSB (SEC file No. 0-18980), filed with the SEC on November 15, 2004).
|      | 
|10.12 |  | Form of Stock Option Grant Notice (incorporated by reference to Exhibit 10.1 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004).                                                                                                           
|      | 
|10.13 |  | Form of Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004).                                                                                                                    
|      | 
|10.14 |  | Form of Exercise Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004).                                                                                                                  
|      | 
|10.15 |  | Agreement, dated as of November 4, 2004, between HQ Sustainable Maritime Industries, Inc. and Sino-Sult Canada (S.S.C.) Limited (incorporated by reference to Exhibit 10.1 to Form 10-QSB (SEC
file No. 0-18980), filed with the SEC on November 15, 2004).            
|      | 
|10.16 |  | Form of Purchase Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors dated November 8, 2006 (incorporated by reference to Exhibit 4.1 to Form 8-K (SEC File
Number 18980), filed with the SEC on November 13, 2006).                      
|      | 
|10.17 |  | Form of Underwriters Purchase Option between HQ Sustainable Maritime Industries, Inc. and Several Underwriters (incorporated by reference to Exhibit 10.24 to Amendment No. 2 to Form SB-2
(SEC File Number 333-139454), filed with the SEC on May 24, 2007).         
|      | 
|10.18 |  | Melbourne Tower Lease, dated November 22, 2005, between Doncaster Investments NV, Inc. and HQ Sustainable Maritime Industries, Inc (incorporated by reference to Exhibit 10.18 to Form SB-2 (SEC
File Number 333-139454), filed with the SEC on December 18, 2006).    



78



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|      |  |                                                                                                                                                                                                                                                                                             
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19 |  | Waiver and Amendment Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors, dated February 22, 2008 (incorporated by reference to Exhibit 10.24 to Amendment No. 5
to Form S-3 (SEC File Number 333-143453), filed with the SEC on May 8, 2008).                 
|      | 
|10.20 |  | Contract for Land Use Rights Transfer between Hainan Hengtian Industry Co., Ltd and Hainan Yu Bao Feedstuff Co., Ltd. dated October 18, 2006 (incorporated by reference to Exhibit 10.25 to
Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007). 
|      | 
|10.21 |  | Contract for Land Attachment Transfer between Hainan Hengtian Industry Co., Ltd and Hainan Yu Bao Feedstuff Co., Ltd. dated December 20, 2006 (incorporated by reference to Exhibit 10.26 to
Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007).
|      | 
|10.22 |  | 2009 Stock Option Plan*                                                                                                                                                                                                                                                                     
|      | 
|21.1  |  | Subsidiaries of HQ Sustainable Maritime Industries, Inc.*                                                                                                                                                                                                                                   
|      | 
|31.1  |  | Certification of Chief Executive Officer Pursuant to Section 302 of the SarbanesOxley Act.*                                                                                                                                                                                                
|      | 
|31.2  |  | Certification of Principal Accounting Officer Pursuant to Section 302 of the SarbanesOxley Act.*                                                                                                                                                                                           
|      | 
|32.1  |  | Certification of Chief Executive Officer Pursuant to Section 906 of the SarbanesOxley Act.*                                                                                                                                                                                                
|      | 
|32.2  |  | Certification of Principal Accounting Officer Pursuant to Section 906 of the SarbanesOxley Act.*                                                                                                                                                                                           



|* | Filed herewith.
|- | ---------------



79



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.



|               |  |                                      
|-------------- |  | -------------------------------------
|               | 
|By:            |  | /s/ Norbert Sporns                   
|Name:          |  | Norbert Sporns                       
|Title:         |  | Chief Executive Officer and President
|              
|March 12, 2009
|               | 
|By:            |  | /s/ JeanPierre Dallaire             
|Name:          |  | JeanPierre Dallaire                 
|Title:         |  | Principal Accounting Officer         
|              
|March 12, 2009

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.



|                         |  |                                                             |  |               
|------------------------ |  | ----------------------------------------------------------- |  | --------------
|SIGNATURE                |  | TITLE                                                       |  | DATE          
|                         |  |                                                            
|/s/ Norbert Sporns       |  | Chief Executive Officer, President and Director             |  | March 12, 2009
|Norbert Sporns           |  | (Principal Executive Officer)                               |  |               
|                         |  |                                                            
|/s/ Lillian Wang         |  | Secretary, Chairman of the Board of Directors, and Director |  | March 12, 2009
|Lillian Wang             |  |                                                             | 
|                         |  |                                                            
|/s/ Harry Wang           |  | Chief Operating Officer and Director                        |  | March 12, 2009
|Harry Wang               |  |                                                             |  |               
|                         |  |                                                            
|/s/ Andrew Intrater      |  | Independent Non-Executive Director                          |  | March 12, 2009
|Andrew Intrater          |  |                                                             |  |               
|                         |  |                                                            
|/s/ Fred Bild            |  | Independent Non-Executive Director                          |  | March 12, 2009
|Fred Bild                |  |                                                             |  |               
|                         |  |                                                            
|/s/ Daniel Too           |  | Independent Non-Executive Director                          |  | March 12, 2009
|Daniel Too               |  |                                                             |  |               
|                         |  |                                                            
|/s/ Jean-Pierre Dallaire |  | Chief Financial Officer and Financial Controller            |  | March 12, 2009
|Jean-Pierre Dallaire     |  | (Principal Accounting Officer)                              |  |               
|                         |  |                                                            
|/s/ Joseph I. Emas       |  | Independent Non-Executive Director                          |  | March 12, 2009
|Joseph I. Emas           |  |                                                             |  |               



80



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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                  
|3.1(a)      |  | Certificate of Incorporation of HQ Sustainable Maritime Industries, Inc., as amended (incorporated by reference to Exhibit 2 to the Schedule 14C of Process Equipment, Inc. (SEC file No.
0-18980), filed with the SEC on April 28, 2004).                                   
|            | 
|3.1(b)      |  | Certificate of Amendment of Certificate of Incorporation, dated December 28, 2006, of HQ Sustainable Maritime Industries, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
Form SB-2 (SEC File Number 333-139454), filed with the SEC on April 20, 2007).
|            | 
|3.2         |  | By-laws of HQ Sustainable Maritime Industries, Inc. (incorporated by reference to Exhibit 3 to the Schedule 14C of Process Equipment, Inc. (SEC file No. 0-18980), filed with the SEC on April 28,
2004).                                                                    
|            | 
|4.1         |  | Form of Rights and Preferences of Preferred Stock (incorporated by reference to Form 14C (SEC File Number 0-18980), filed with the SEC on October 3, 2005).                                                                                                                  
|            | 
|4.2         |  | Form of Subscription Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors, exhibits attached (incorporated by reference to Exhibit 4.1 to Form 8-K (SEC File Number
0-18980), filed with the SEC on January 26, 2006).                           
|            | 
|4.3         |  | Form of Stock Purchase Agreement by and among Process Equipment, Inc. and certain Investors, dated April 21, 2004 (incorporated by reference to Exhibit 10.19 to Form SB-2 (SEC File Number
333-139454), filed with the SEC on December 18, 2006).                           
|            | 
|4.4         |  | Form of Registration Rights Agreement by and among Process Equipment, Inc. and certain Investors, dated April 21, 2004 (incorporated by reference to Exhibit 10.20 to Form SB-2 (SEC File Number
333-139454), filed with the SEC on December 18, 2006).                      
|            | 
|4.5         |  | Form of Class C Warrant (incorporated by reference to Exhibit 10.21 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006).                                                                                                                     
|            | 
|4.6         |  | Form of Class D Warrant (incorporated by reference to Exhibit 10.22 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006).                                                                                                                     
|            | 
|10.1        |  | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Harry Wang (incorporated by reference to Exhibit 10.1 to Form 10-QSB (SEC File Number
0-18980), filed with the SEC on August 13, 2004).                            
|            | 
|10.2        |  | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Harry Wang (incorporated by reference to Exhibit 10.16 to Form 10-KSB (SEC File
Number 18980), filed with the SEC on April 11, 2005).                        
|            | 
|10.3        |  | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Lillian Wang Li (incorporated by reference to Exhibit 10.2 to Form 10-QSB (SEC File
Number 0-18980), filed with the SEC on August 13, 2004).                       
|            | 
|10.4        |  | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Lillian Wang Li (incorporated by reference to Exhibit 10.15 to Form 10-KSB (SEC
File Number 18980), filed with the SEC on April 11, 2005).                   
|            | 
|10.5        |  | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Norbert Sporns (incorporated by reference to Exhibit 10.3 to Form 10-QSB (SEC File
Number 0-18980), filed with the SEC on August 13, 2004).                        



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|      |  |                                                                                                                                                                                                                                                                            
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6  |  | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Norbert Sporns (incorporated by reference to Exhibit 10.14 to Form 10-KSB (SEC
File Number 18980), filed with the SEC on April 11, 2005).                  
|      | 
|10.7  |  | Employment Agreement, dated as of September 1, 2004, between HQ Sustainable Maritime Industries Inc. and Jean-Pierre Dallaire (incorporated by reference to Exhibit 10.3 to Form 10-QSB
(Commission file No. 0-18980), filed with the Commission on November 15, 2004).    
|      | 
|10.8  |  | Employment Agreement, dated as of June 28, 2006, between HQ Sustainable Maritime Industries Inc. and Trond Ringstad (incorporated by reference to Exhibit 10.13 Form SB-2 (Commission file No.
333-139454), filed with the Commission on December 18, 2006).               
|      | 
|10.9  |  | Independent Non-Executive Director Agreement, dated as of June 15, 2004, between HQ Sustainable Maritime Industries Inc. and Fred Bild (incorporated by reference to Exhibit 10.4 to Form 10-QSB
(SEC file No. 0-18980), filed with the SEC on August 13, 2004).           
|      | 
|10.10 |  | Independent Non-Executive Director Agreement, dated as of June 15, 2004, between HQ Sustainable Maritime Industries Inc. and Jacques Vallée (incorporated by reference to the Report on
Form 10-QSB (SEC file No. 0-18980), filed with the SEC on August 13, 2004).        
|      | 
|10.11 |  | Independent Non-Executive Director Agreement, dated as of September 2, 2004, between HQ Sustainable Maritime Industries Inc. and Daniel Too (incorporated by reference to Exhibit 10.2 to Form
10-QSB (SEC file No. 0-18980), filed with the SEC on November 15, 2004).    
|      | 
|10.12 |  | Form of Stock Option Grant Notice (incorporated by reference to Exhibit 10.1 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004).                                                                                                               
|      | 
|10.13 |  | Form of Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004).                                                                                                                        
|      | 
|10.14 |  | Form of Exercise Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004).                                                                                                                      
|      | 
|10.15 |  | Agreement, dated as of November 4, 2004, between HQ Sustainable Maritime Industries, Inc. and Sino-Sult Canada (S.S.C.) Limited (incorporated by reference to Exhibit 10.1 to Form 10-QSB (SEC
file No. 0-18980), filed with the SEC on November 15, 2004).                
|      | 
|10.16 |  | Form of Purchase Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors dated November 8, 2006 (incorporated by reference to Exhibit 4.1 to Form 8-K (SEC File Number
18980), filed with the SEC on November 13, 2006).                          
|      | 
|10.17 |  | Form of Underwriters Purchase Option between HQ Sustainable Maritime Industries, Inc. and Several Underwriters (incorporated by reference to Exhibit 10.24 to Amendment No. 2 to Form SB-2
(SEC File Number 333-139454), filed with the SEC on May 24, 2007).             
|      | 
|10.18 |  | Melbourne Tower Lease, dated November 22, 2005, between Doncaster Investments NV, Inc. and HQ Sustainable Maritime Industries, Inc (incorporated by reference to Exhibit 10.18 to Form SB-2 (SEC
File Number 333-139454), filed with the SEC on December 18, 2006).        
|      | 
|10.19 |  | Waiver and Amendment Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors, dated February 22, 2008 (incorporated by reference to Exhibit 10.24 to Amendment No. 5
to Form S-3 (SEC File Number 333-143453), filed with the SEC on May 8, 2008).



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|      |  |                                                                                                                                                                                                                                                                                             
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20 |  | Contract for Land Use Rights Transfer between Hainan Hengtian Industry Co., Ltd and Hainan Yu Bao Feedstuff Co., Ltd. dated October 18, 2006 (incorporated by reference to Exhibit 10.25 to
Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007). 
|      | 
|10.21 |  | Contract for Land Attachment Transfer between Hainan Hengtian Industry Co., Ltd and Hainan Yu Bao Feedstuff Co., Ltd. dated December 20, 2006 (incorporated by reference to Exhibit 10.26 to
Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007).
|      | 
|10.22 |  | 2009 Stock Option Plan*                                                                                                                                                                                                                                                                     
|      | 
|21.1  |  | Subsidiaries of HQ Sustainable Maritime Industries, Inc.*                                                                                                                                                                                                                                   
|      | 
|31.1  |  | Certification of Chief Executive Officer Pursuant to Section 302 of the SarbanesOxley Act.*                                                                                                                                                                                                
|      | 
|31.2  |  | Certification of Principal Accounting Officer Pursuant to Section 302 of the SarbanesOxley Act.*                                                                                                                                                                                           
|      | 
|32.1  |  | Certification of Chief Executive Officer Pursuant to Section 906 of the SarbanesOxley Act.*                                                                                                                                                                                                
|      | 
|32.2  |  | Certification of Principal Accounting Officer Pursuant to Section 906 of the SarbanesOxley Act.*                                                                                                                                                                                           



|* | Filed herewith.
|- | ---------------



83