UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
                                   (MARK ONE)

          [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

        [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                      For the year ended December 31, 2005

                          COMMISSION FILE NO. 0-18980

                    HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
                 (Name of Small Business Issuer in Its Charter)

           Delaware                      000-18980                62-1407522
(State or other jurisdiction of   (Commission File Number)    (I.R.S. Employer
incorporation or organization)                               Identification No.)

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

Registrant's telephone number, including area code: (917) 291-3679

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:

                    Common Stock, Par Value $0.001 Per Share
                                (Title of Class)

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

Yes [X] No [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of registrant's  knowledge, in definite proxy or information statements


<PAGE>

incorporated  by reference  in Part III of this form 10-KSB or any  amendment to
this Form 10-KSB. [X]

The issuer's revenues for the year ended December 31, 2005 were $27,553,030. The
aggregate market value of the registrant's  common stock held by  non-affiliates
as of December 31, 2005 was approximately $15,410,722

State the number of shares outstanding of each of the issuer's classes of equity
securities,  as of the latest  practicable  date:  116,105,225  shares of Common
Stock,  $0.001 par value per share,  outstanding  as of December 31,  2005,  and
100,000  Series A preferred  stock,  $0.001 par value per share,  outstanding at
December 31, 2005.

Transitional Small Business Disclosure Format (check one):

Yes [ ] No [X]

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


================================================================================

PART I
ITEM 1. BUSINESS

As used in this annual report, "we", "us", "our", "HQSM", 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 as Sharon Capital Corporation, or Sharon,
on September 21, 1989 under the laws of the State of Nevada. Sharon was a "blind
pool/blank check" corporation  organized for the purpose of purchasing,  merging
with or  acquiring  a business  or assets from  another  company.  In July 1990,
Sharon  was  changed to PEI,  Inc.,  which was  subsequently  changed to Process
Equipment,  Inc. in November 1990. On March 17, 2004, Process  Equipment,  Inc.,
Process Equipment Acquisition Corporation, a Nevada corporation and wholly-owned
subsidiary  of Process  Equipment,  Inc.,  or PEAC,  and Jade Profit  Investment
Limited,  or Jade,  a British  Virgin  Islands  limited  liability  corporation,
entered  into an  agreement  and plan of  merger.  Pursuant  to that  agreement,
Process Equipment,  Inc.,  through PEAC,  acquired Jade, and 84.42% ownership in



                                      -2-
<PAGE>

Jade's  subsidiary  Hainan Quebec Ocean Fishing Co. Ltd, a People's  Republic of
China, limited liability corporation,  which we refer to as HQOF. As a result of
that transaction, HQOF became our main operating subsidiary.

In April of 2004,  pursuant to the above agreement and plan of merger, the board
of  directors  of Process  Equipment,  Inc.  and a majority of the  stockholders
approved a name change and change of domicile of that  company to Delaware via a
merger with the newly formed wholly-owned  Delaware  subsidiary,  HQSM. The name
change,  change of domicile and merger  became  effective on May 19, 2004,  with
HQSM being the  surviving  entity in the merger and acquiring all the assets and
liabilities  of Process  Equipment,  Inc. On August 17, 2004,  we 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 the above current
report.

On April 16, 2004, HQ Sustainable Maritime Marketing Inc. ("HQSM Marketing") was
formed  and  registered  in USA,  as a  wholly-owned  subsidiary  of HQSM.  That
subsidiary has been dormant during the year.

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

On September 20, 2005, HQ Sustainable  Maritime  Industries  (Hong Kong) Limited
("HQSM  HK") was newly  formed in Hong  Kong and is wholly  owned by HQSM.  That
subsidiary has been dormant during the year.

Our  principal  executive  office is located at 1511  Third  Avenue,  Suite 788,
Seattle, Washington, and our telephone number is (917) 291-3679. The URL for our
website is http://www.hqfish.com.

Business

The Group is  principally  engaged  in the  vertically  integrated  business  of
aquaculture through co-operative supply arrangements,  ocean product harvesting,
and processing and sales of farm-bred and ocean harvested aquatic  products,  as
well as the production and sale of marine bio-products and healthcare  products.
The Group is committed to providing a variety of high quality  aquatic  products
and health products through an integrated  operation that covers value added key
areas along the production  chain from a bio-secure and stable supply of tilapia
and shrimp under stringently monitored conditions,  processed in accordance with
internationally  recognized  standards  of  hygiene.  Since the  Group  acquired
Sealink Wealth Limited ("Sealink" hereafter),  The Group has also engaged in the
production and sale of marine  bio-products and healthcare  products in the PRC.
The principal products of Jiahua Marine Bio-Product  Company Limited (100% owned
subsidiary of Sealink) are Shark  Cartilage  Capsule,  Shark Liver Oil and Shark
Liver (Soft gel). The major market is in the PRC.

The Group has developed a co-operative supply network in Hainan Province,  China
(for aquaculture products), which allows it to guarantee quality and quantity of
products for  processing  without  engaging  directly in farming  operations and
having to deal with the associated  capital costs and risks. The Group,  through
the co-operative  supply agreements,  is active in the transfer of technology to
its suppliers and the constant monitoring of quality.


                                      -3-
<PAGE>

Manufacturing

Aquaculture product

The Group's aquatic products  processing plant is a Canadian  designed  facility
and is  located  in  Hainan,  the PRC.  Prior to May  2004,  the  Group  had two
production  lines in aggregate and they are located in the same processing plant
in Hainan.  From January to May,  2004 the plant was expanded to six  production
lines.  These six lines  include  two  filleting  lines,  two whole  round  fish
processing lines  (principally  Tilapia which is gutted,  scaled and gilled) and
two shrimp processing lines. The facility is capable of processing an average of
approximately  10,000 tons per year of whole round fish  (principally  Tilapia),
3,000  tons per year of fillet  and  3,000  tons per year of  shrimp.  The plant
operates in two shifts for a total of 17 hours.

The Group's products have been awarded HACCP Certification for exporting aquatic
products  to  the US  and  Japan.  HACCP  is  used  by  the  US  Food  and  Drug
Administration  in  controlling  food  safety  and  sanitary  hazards.  It  is a
preventive system previously used by astronauts,  focusing on preventing hazards
that could cause food-borne  illnesses by applying science based controls,  from
raw materials to finished  products.  The successful  implementation  of a HACCP
plan is dependent  upon the design and  performance of facilities and equipment,
combined  with  excellent  quality  control  and  hygiene  practices,  which can
minimize the occurrence of a hazard in a finished product.

Apart from the HACCP Certification,  the Group has also been assigned an EU Code
for  exporting  aquatic  products  to the EU.  The EU has  designated  only  two
producers  in Hainan  Province.  The code is highly  coveted  since very few new
attributions of code are being  accepted.  This increases the value of export to
the EU since buyers routinely pay more than their US counterparts. The Directors
believe the awards of the HACCP  Certification and the assignment of the EU Code
have  enabled the Group to export to the US and the EU  respectively.  The HACCP
Certification and EU Code assignment signify the Group's attainment of stringent
hygiene standards and enable the Group to better market and export its processed
aquatic products to overseas clients in the US and the EU.

The Group conducts sample  laboratory  testing on the Group's  processed aquatic
products to ensure no forbidden  substances  are present in them. The laboratory
testing  was  initiated  by the  Group  in  compliance  with  strict  quarantine
guidelines  imposed by domestic export control  government  agencies and foreign
import control government agencies.

Health and Bio-products

Our production  workshops  consist of two production  lines: the powder line and
the oil line. We have raw material  treatment  workshops,  such as an extraction
workshop, a freezing and drying workshop,  a powder distillation  workshop and a
finished product workshop in powder line. We also have pre-treatment  workshops,
such as a cooling and filtration workshop, a molecular  distillation workshop, a
supplemental  stuff workshop and a capsule  workshop in oil line. The production



                                      -4-
<PAGE>

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, etc.

The products

The following are a brief description of our products.

Tilapia products

Tilapia are native to Africa,  but have been introduced in many countries around
the world. They are  disease-resistant,  reproduce easily, eat a wide variety of
foods and tolerate  poor water quality with low dissolved  oxygen  levels.  Most
will grow in  brackish  water and some will  adapt to full  strength  sea water.
These  characteristics  make  tilapia  suitable  for culture in most  developing
countries. They are most often grown in ponds, cages and rice fields.

There are many  tilapia  species but only a few are cultured  widely  around the
world today.  There are three common  species which are reared  commercially  in
ponds from Japan,  the  Philippines  down to Thailand and Indonesia,  namely the
black or Nile  tilapia  (Oreochromis  niloticus),  the red tilapia  (Oreochromis
mossambicus) and the blue tilapia (Oreochromis aureus), usually in the form of a
new hybrid based on the original strains.

Black or Nile tilapia

The fry eat zooplankton and the adults eat zooplankton,  phytoplankton, insects,
other bottom organisms and manufactured food. The optimum temperature to culture
black tilapia is 25 to 30 degrees  centigrade and black tilapia can tolerate low
temperature of 11 degrees centigrade. Black tilapia can grow well in water up to
20 parts per thousand salinity.

Red tilapia

The fry eat zooplankton and the adults eat zooplankton, phytoplankton and
manufactured food. The optimum temperature to culture red tilapia is 25 to 30
degrees centigrade and red tilapia can tolerate low temperature of 10 to 12
degrees centigrade. Red tilapia can grow well in full strength sea water.


Tilapia market

In the 1960s and 1970s,  tilapia  culture was geared  towards the  production of
food for  local  consumption  and for the  diversification  of rural  activities
related  to  agriculture  and  animal  husbandry.  During  the  past  20  years,
commercially  viable  techniques have been developed to control  overcrowding in
the different  production  systems,  thereby  permitting faster and more uniform
growth to  larger  sizes.  Commercial  production  has  become  popular  in many
countries around the world.



                                      -5-
<PAGE>

Tilapia  aquaculture  has grown  impressively  during the 1990s,  and  forecasts
indicate that the industry will continue to expand significantly in the years to
come. US is the world's largest  consumer of tilapia.  In 2005, there was around
393 million USD of Tilapia  imported to the United States,  compared to in 2004,
around 297 million USD of Tilapia  imported to the United States.  (See American
Tilapia  Association  http://ag.arizona.edu/azaqua/ista/2005tilapia.htm)  Due to
limited resources in domestic US tilapia  production,  tilapia imports to the US
are expected to increase.  Imported  tilapia already  accounts for around 90% of
total  consumption  of tilapia in the US. We believe that the largest demand for
tilapia  in the world  will  continue  to be the US.

In the US,  consumption  of tilapia has risen in the recent  years.  Tilapia now
ranks third after farm-raised shrimp and Atlantic salmon in terms of aquaculture
products  imported  into the US. In terms of value,  frozen  fillet ranks first,
followed by fresh fillets, and lastly whole frozen.  Frozen whole round fish and
fillets originate  primarily from Asia, and fresh fillets primarily from Central
and South America.

Recently,  with the increase in production of tilapia in the PRC and the growing
demand of tilapia in the  international  market,  the export of tilapia from the
PRC has also  increased.  We believe that tilapia has great potential for market
growth.

Fresh water shrimp products

Shrimp is a favorite  seafood all over the world. The giant tiger prawn or black
tiger shrimp (Penaeus  monodon) accounts for more than half of all farmed shrimp
and dominates production in Thailand,  Indonesia, India and the Philippines.  In
the PRC,  the fleshy  prawn or  Chinese  white  shrimp  (Penaeus  chinensis)  is
dominant,  whereas  in Latin  America  it is the white leg  shrimp  (Litopenaeus
Vannamei) which is the leading  species.  The Indian prawn (Penaeus  indicus) is
also farmed in Asia.

White leg shrimp in the PRC

Aquaculture  of shrimp is rapidly  developing in the PRC.  White leg shrimp with
its  scientific  name  of  Litopenaeus  vannamei,  is one of  the  world's  most
important farmed products.  It is found throughout Central and South America and
along the coast of the Pacific Ocean.  With the introduction of parent white leg
shrimp into the PRC and the success in raising  seedlings,  total  production of
white leg shrimp increased to 300,000 tons in 2000.

Health products

The  acquisition  of Jiahua Marine  provides HQ with the capacity to manufacture
nutraceuticals  to enrich feed formulations for tilapia and shrimp farmed in the
Hainan area. These ingredients are directed at improving general health, growth,
feed  conversion  and meat quality of fish and shrimp.  Such products  boost the
immune  system  of  shrimp  to ward  off  common  viruses  and  deliver  various
functional  food nutrients to humans through the fish and shrimp they eat. HQ is
working with leading technology providers throughout the world, in particular in
the United States, to deliver these new nutraceutical  additives to the fish and
shrimp farming industry.


                                      -6-
<PAGE>

Jiahua Marine is also engaged in the production and sales of marine bio-products
and  healthcare  products in the PRC. It currently  operates two  activities,  a
marine bio-products  factory and research and development  activity.  The marine
bio-products  factory is located in  Wenchang  City of Hainan  Province,  with a
ground  floor  area  of  16,667  square  meters  and  a  construction   area  of
approximately  8,000  square  meters.  It operates  two  production  lines:  the
powder-product  line and the  oil-product  line.  The  bio-products  factory has
obtained  HACCP  certification  from the CIQ (China  Entry-Exit  Inspection  and
Quarantine Bureau).  Jiahua Marine currently sells healthcare products under the
brand name "Jiahua." Sales for its fiscal year ended December 31, 2005 were over
$9 million and after-tax net profit was approximately $4 million.

Jiahua  Marine's  second  activity is related to  research  and  development  in
association with Marine Organism Research Institute,  which is headed by a group
of experts specializing in the research and development of products derived from
marine  organisms in China.  Clinical  trials and  laboratory  testing on Jiahua
Marine's various  healthcare  products have resulted in National  Certification.
These  products  currently sold  throughout  China,  are naturally  derived from
ocean-harvested  byproducts and are winners of Science and  Technology  Progress
Awards in China.  Jiahua Marine also has  established  a long-term  relationship
with  the  Qingdao  University  of  Oceanography  for   production-research  and
training.

Jiahua  Marine  production  lines are  ideally  suited  for the  manufacture  of
nutraceutical components.  The plant is equipped with specific gravity molecular
separator and accessory equipment for the manufacture of nutraceutical  products
that can serve as feed  additives in the production of feed,  including  tilapia
and shrimp feed.

Jiahua Marine products provide leading  ocean-sourced raw materials processed at
its own plant. Patented, laboratory and clinically tested products have resulted
from years of research and development  administered  through a partnership with
Qingtao Ocean University and its Marine Bioengineering  Research Institute.  Two
products are  produced  from refined  shark  cartilage  and two from shark liver
(harvested from  non-endangered  shark  species).  These products are more fully
described below:

o    Patent Number 460000X340-2001 -- Shark cartilage is highly alkalescent; it
     contains chondroitin sulfate and calcium and impacts the human body
     positively in the following ways:

     >>   Increases  efficiency of immune system,  activates NK cells associated
          with combating cancer (sharks are cancer free);

     >>   Reduces blood acidity improving -- Blood pressure

     >>   Apoplexy

     >>   Heart disease

     >>   Fertility

     >>   Osteoporosis



                                      -7-
<PAGE>

o    Patent   Number   460000X131-2001   --  Shark   cartilage   also   contains
     glycosaminoglycan,  Amino  Acids,  and  collagen  proteins  which have been
     specially processed for absorption into the skin and impacts the human body
     positively in the following ways:

     >>   Increases subcutaneous water content -- Reduces wrinkles

     >>   Slows the visible effects of aging

o    Patent  Number  460000X338-2001  -- Shark Liver oil 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  which  is  particularly
          important  for the brain which  consumes 23% of the oxygen used in the
          body

     >>   Eliminates fatigue

     >>   Improves health

o    Patent Number 460000X342-2001 -- Shark liver oil contains 100 times more
     Alkoxy-Glyceryl (AKGS) than mothers milk. It is also rich in omega 3 oils
     recommended for nursing mothers, and impacts the human body positively in
     the following ways:

     >>   Improves resistance to disease;

     >>   Improves phosphate for brain cell production

The above products have been shown to be effective.

In 2003,  Jiahua Marine commenced a sales strategy,  which it believes will lead
to strong  growth in the current and future  years.  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  the health  advantages  of the  products
during an outing associated with their leisure activities.  In addition, in 2003
sales have begun in Hualian  Supermarket Co. Ltd., (one of the largest specialty
chains in China with well over 1200 outlets and sales of US$2 billion, the first
publicly listed supermarket  retailer in China) as well as in health product and
pharmaceutical outlets throughout China.

In March 2005, the Group  finalized with American River  Nutrition Inc. (ARN) an
agreement  providing HQSM with leading  nutraceutical  technology for its health
products and nutraceutically  enriched  aquaculture feed products business.  The
Agreement also sets the stage for  distribution of Health  products  produced by
HQSM in the United States as well as introducing ARN  nutraceuticals  into China
through HQSM's marketing network there.


                                      -8-
<PAGE>

ARN has cutting edge technology to develop unique nutraceuticals for aquaculture
feeds. These ingredients are directed at improving general health,  growth, feed
conversion  and meat quality of fish and shrimp.  ARN is currently  developing a
product that can boost the immune  system of shrimp to ward off common  viruses.
The impact of access to these new  technologies  will be a significant  boost in
developing proprietary technology within the company and an expected significant
boost in sales and  profitability.  Furthermore,  the  agreement  will begin the
process of selling HQSM health products in the United States as well as the sale
of ARN  products  through  HQSM's  distribution  network in China.  The relevant
health  products  markets in both  countries  represent a  multi-billion  dollar
business and is expected to lead to the  development  and sale of many more such
products for these  markets.  Currently  HQSM produces and sells shark liver oil
and shark  cartilage  products and sells these through a unique direct sales and
retail   sales   system  in  China.   Currently   ARN  produces  and  sells  its
patent-protected DeltaGold(R) vitamin E, primarily in the USA and Canada.

ARN will  work with HQSM to  develop  and  validate  relevant  technologies  and
coordinate the application of  nutraceutical  feed  ingredients in feed products
for Tilapia and Shrimp particularly  developing  Nutraceutical feed additives in
HQSM's Nutraceutical plant that are health oriented and environmentally sound.

Marketing

Our  sales  and  marketing  team  consists  of nine  members  and is  under  the
supervision  of Mr.  Harry  Wang,  our Chief  Operating  Officer.  The 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.

We believe that HQOF, one of our principal operating  subsidiaries,  is the only
vertically  integrated  PRC-based producer present at the International  Seafood
Shows.  This enables HQOF 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 immediately
addressed without the usual screening and middleman costs.

We have  located the  following  as potential  and  prospective  markets that we
intend to focus upon for expansion:

North America

The North American  market for tilapia and shrimp is significant and is growing.
Competition from producers  across the globe,  ranging from Bangladesh to Chile,
is intense. Minimum quality is presumed as a pre-requisite and consumers tend to
be less educated as to the benefits of higher quality in this region. We plan to
continue  to export  to this  market  where  our  products  are  generally  well
received.


                                      -9-
<PAGE>

People's Republic of China

Given the enormous demand and potential in the PRC market, we also consider it a
prospective  market.  The  advantageous  climatic  conditions  found  in  Hainan
Province allow year-round  production,  which differentiates it from other areas
in the PRC. With the PRC's accession to the WTO and the continued development of
our  distribution  network,  opportunities  should  arise  for  us to  establish
strategic  linkages with foreign  producers and suppliers  seeking access to the
ever changing and modernizing  Chinese market. We will consolidate this position
by being a producer of quality product and this strategy should also allow us to
decide and select strategic partners in the PRC in the future.

All health and  bio-products of the group are sold in this geographic  region. A
North  American  marketing  initiative  has been  commenced  by the signing of a
marketing and  distribution  agreement with American River Nutrition in March of
2005.  The first  step in this  process is the  re-testing  of the  products  by
American  laboratories to reproduce Chinese results and to make additional tests
to support more claims regarding the products.

Competition

Our company is  principally  engaged in the  vertically  integrated  business of
aquaculture through co-operative supply agreements, ocean product harvesting and
processing  and sales of farm-bred and ocean  harvested  aquatic  products.  The
co-operative  supply  agreements  entered into between HQOF and selected tilapia
and shrimp farmers in Hainan  Province  secure the supply,  quality and price of
raw materials for our Production.  Through such arrangement,  we believe that we
have a competitive advantage over our competitors in Hainan Province.

The PRC  aquaculture  industry is open to  competition  from local and  overseas
operators  engaged in aquaculture  and from other captured fish  producers.  Our
major 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 also obtain the same HACCP Certification
and EU Code assignment that we possess,  which certifies that their products are
also  in  compliance  to  certain  standards.   However,  we  believe  that  the
competition  from  such  producers  is  minimal  because,  to  the  best  of our
knowledge,  there  is no  competitor  in  Hainan  Province  that  has a  similar
operating  scale and production  capacity,  or that has developed the vertically
integrated business model under which we operate.

Although  there is no formal entry  barrier 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. Accordingly,
competitors have to mobilize extensive resources in order to maintain a presence
similar to ours.

We believe  that we are  geographically  well-positioned  to  capitalize  on the
significant  potentials of seafood  markets both overseas and within the PRC. As
buying power  increases  in Asia,  and  developed  countries  gravitate  towards
fishery  products,  seafood  producers  are under  great  pressure to respond to
increasing  demands. We further believe that the following factors contribute to
our principal strengths and competitive advantages:


                                      -10-
<PAGE>

Integrated operations. We run a vertically integrated operation that covers key
areas along the production chain including sourcing, co-operative supply farming
and distribution. Co-operative supply agreements have been secured with several
producers who benefit from our extensive technology development program. Through
intensive monitoring and quality control of fish fry, pond environment and feed
supply, we are able to assure the supply of quality aquaculture products.

International and domestic sales and marketing  efforts.  We have a distribution
network for our export sales and domestic sales that is developed and maintained
through our marketing offices in Beijing and Shanghai, through our international
direct and indirect  marketing  efforts,  and also by virtue of our presence and
participation at international seafood shows.

Strategic   location  of  co-operative   supply  and  production  base.  We  are
geographically  well-positioned in Hainan Province to leverage on the year-round
favorable climatic conditions,  abundant water supply and pristine  environment.
Such  strategic  location is a key attribute to the success of our  co-operative
suppliers of locally farmed tilapia and shrimp, particularly white leg shrimp.

Co-operative supply and vertical  integration.  We have assured supply,  quality
and price of raw materials for production  through long term  arrangements  with
leading local suppliers of shrimp and tilapia.  We actively monitor  aquaculture
quality and provide technological  support to our suppliers,  which allows us to
concentrate our resources and minimize risks.  Through intensive  monitoring and
control of the growth of fish fry,  shrimp  larvae,  pond  environment  and feed
supply, we are able to assure the supply of quality aquaculture  products and to
enhance product differentiation.

An established track record and brand name in the industry. Since our inception,
we have established a track record of supplying high quality aquatic products to
our overseas and local customers.

Good quality  control.  Safe and hygienic  processing of aquatic  products is of
paramount  importance,  as any failure to carry out the  processing of harvested
fish correctly  could render the product  unsuitable for human  consumption.  We
adopt and implement stringent quality control measures and procedures throughout
our production  process.  Our processing  plant in Hainan  Province has obtained
HACCP and EU Code assignment.

Low labor cost. We are operating in a labor intensive industry. Due to the lower
labor costs in China, we are able to achieve lower operating cost advantage when
compared to our competitors in North America and elsewhere.

Local  government  support.  The policy of Hainan  Provincial  Government  is to
encourage  increased  investment in aquaculture  and increased  export of farmed
aquatic  products.  In December 2001, HQOF, our main operating  subsidiary,  was
recognized  as  a  "Leading   Agriculture   Enterprise"  by  Hainan   Provincial
Government,  and in April  2001  HQOF  was  recognized  as a New and  High  Tech



                                      -11-
<PAGE>

Enterprise of Hainan Province.  These recognitions will be a great asset when we
participate  in annual trade shows  including the  International  Boston Seafood
Show and European Seafood Exposition.

Reduction of production  cost due to the benefit of economy of scale.  Expansion
of  facilities  and current  sales  volumes  allows our company to benefit  from
significant economies of scale. Our research and quality control staff have been
able to monitor an increased  number of  operations  without the need of further
hiring.  Large buyers are able to sole source  instead of having to group supply
from various producers, allowing long term supply agreements.

Awards we have  received.  In December  2001,  the Company was  recognized  as a
"Leading Agriculture  Enterprise" by Hainan Provincial Government,  and in April
2001, the Company was awarded the "New/high tech Enterprise of Hainan  Province"
by Hainan Provincial  Technology  Authorities.  In January 2003, the Company was
awarded the  Industrial  Enterprise  of the Province.  In 2002,  The Company was
named a Leading  Agriculture  Enterprise for both Hainan  Province and Wenchang.
Our  board  of  directors  believes  that  these   accreditations   reflect  our
achievements  and  contribution  to  the  development  of  the  PRC  aquaculture
industry.  In  March  2005,  the  Company  was  awarded  the  prestigious  China
Excellence  Award,  for  health  product  excellence  and  advancement  of China
business practices,  by the China Association of Entrepreneur Foreign Investment
(CAEFI),  a branch of the China Ministry of Commerce of the People's Republic of
China.

Production certification.  We also have received HACCP Certification and EU Code
assignment,  which  demonstrates  our  commitment to providing a variety of high
quality aquatic products under stringent hygiene standards.

International  management expertise.  We have successfully achieved a vertically
integrated  operation  that enables us to  capitalize  on  opportunities  in the
domestic and international  fishery markets.  Such achievement can be attributed
to our founders and senior management who have contributed  their  international
management expertise and technical know-how to our development.

Government regulation

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.

Our Company complies with various national,  provincial and local  environmental
protection  laws and  regulations.  In  addition  to  statutory  and  regulatory
compliance,   we  actively  ensure  the  environmental   sustainability  of  our
operations.  Our costs of  compliance  with  applicable  environmental  laws are



                                      -12-
<PAGE>

minimal,  since the design of the plan includes a state-of-the-art  settling and
filtration  system which is inexpensive to maintain.  Penalties  would be levied
upon us if we fail to adhere to and maintain this standard. 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.

Patents and trade secrets

The Company presently has the following patents on its products.

* Patent Number  460000X340-2001  -- Shark cartilage is highly  alkalescent;  it
contains  chondroitin  sulfate and calcium and impacts the human body positively
in the following ways:

--   Increases  efficiency of immune system,  activates NK cells associated with
     combating cancer (sharks are cancer free);
--   Reduces blood acidity improving
--   Blood pressure
--   Apoplexy
--   Heart disease
--   Fertility
-- Osteoporosis

*   Patent   Number   460000X131-2001   --   Shark   cartilage   also   contains
glycosaminoglycan,  Amino Acids, and collagen proteins which have been specially
processed for absorption  into the skin and impacts the human body positively in
the following ways:

--   Increases subcutaneous water content -- Reduces wrinkles
--   Slows the visible effects of aging

* Patent Number 460000X338-2001 -- Shark Liver oil 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 which is particularly  important
     for the brain which consumes 23% of the oxygen used in the body

--   Eliminates fatigue

--   Improves health

* Patent  Number  460000X342-2001  -- Shark  liver oil  contains  100 times more
Alkoxy-Glyceryl  (AKGS)  than  mothers'  milk.  It is also  rich in omega 3 oils
recommended  for nursing  mothers,  and impacts the human body positively in the
following ways:

--   Improves resistance to disease;
--   Improves phosphate for brain cell production.

Employees

Through  HQOF and  Jiahua  Marine,  our  principal  operating  subsidiaries,  we
currently  employ  approximately  400  employees,  all  of  whom  are  full-time
employees.  They are located  predominantly  in Haikou,  PRC, with the remainder
employed  Wenchang,  PRC.  None of our  employees  are  covered by a  collective
bargaining agreement, and we believe our employee relations are good.



                                      -13-
<PAGE>

ITEM 2. PROPERTIES

The Group operates its aquaculture  processing activities in its production base
located at No. 1 Pier of Qinglan  Sub-factory,  Qinglan Port,  Wenchang,  Hainan
Province,  the PRC. The land where the production base is located is rented from
PLA Haijun No. 4802 Factory to Hainan Fuyuan  pursuant to a lease agreement (the
"Lease  Agreement")  dated 5 September  1999 for a term of 10 years from October
1,1999 to September  20,  2009,  at an annual rent of  RMB210,000.  According to
Jundui Property Leasing Certificate of Approval (Document number: (2001) - 00386
dated 20 May 2001, the Lease Agreement has been  registered/filed  by PLA Haijun
Property  Administration  Bureau  and HQOF had issued a  confirmation  letter on
September 23, 2002 to undertake all rental payable and other  conditions set out
in the Lease Agreement.)

The Group  operates  its health and  bio-product  processing  activities  in its
production  base  located  on the East side of Wen Qing Road,  Wenchang,  Hainan
Province, the PRC. The land-use-right cost is $81,154. and the term of the right
is 50 years, which commenced in December 2000.

We currently lease corporate  premises in Seattle of  approximately  4170 square
feet from  Doncaster  Investments  NV, Inc.  for a five year  period  commencing
November 22nd 2005 The space is leased for $3,500 per month.. The property is in
good  condition and sufficient to meet our needs at this time. We do not plan to
obtain additional space in the foreseeable future.

Cost:-                                                     2005          2004
------                                                 -----------   -----------
Buildings and leasehold improvements                   $ 2,884,010     2,817,990
Plant and Machinery                                      8,336,665     8,461,585
Motor vehicles                                              55,993        68,580
Office equipment and furnishings                           135,552       126,470
                                                       -----------   -----------
    TOTAL                                               11,412,220    11,474,625
Less: accumulated depreciation                           3,411,717     2,444,952
                                                       -----------   -----------

Property, plant and equipment, net                     $ 8,000,503   $ 9,029,673
                                                       ===========   ===========


Depreciation expenses relating to property, plant and equipment was $961,295 and
$615,120 for the year ended  December 31, 2005 and twelve months ended  December
31, 2004, respectively.

Property and  equipment are carried at cost.  Maintenance,  repairs and renewals
are expensed as incurred. Depreciation of property and equipment is provided for
over their estimated useful lives,  which range from three to seven years, using
the straight-lined method.

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



                                      -14-
<PAGE>

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 VOTE OF SECURITY HOLDERS

Not applicable

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is quoted on the Over-The-Counter Bulletin Board system and the
National  Association  of Securities  Dealers (NASD)  Electronic  Bulletin Board
under the symbol  "HQSM.OB."  The  following  table sets forth,  for the periods
indicated,  the high and low sale prices for our common stock as reported by the
National Quotation Bureau, Inc.

Fiscal Year Ended December 31                                   High        Low
                                                                ----        ---

2004   First Quarter (May 2004 - June 2004) (1)                $1.15       $0.56
       Second Quarter (July 2004 - September 2004)             $0.95       $0.27
       Third Quarter (October 2004 - December 2004)            $0.38       $0.18

2005   First Quarter (January 2005 - March 2005)               $0.31       $0.21
       Second Quarter (April 2005 - June 2005)                $0.175       $0.16
       Third Quarter (July 2005 - September 2005)              $0.53       $0.12
       Fourth Quarter (October 2005 - December 2005)           $0.58       $0.29

Period following December 31, 2005
       January 31, 2006                                        $0.37       $0.26
       February 28, 2006                                       $0.34       $0.26
       March 30, 2006                                          $0.44       $0.29

(1)  Effective  May 1,  2004,  we changed  our fiscal  year end from April 30 to
December 31.

On December 31, 2005, the closing bid price of our common stock was
$0.325.

As of December 31, 2005, there were  approximately 1215 holders of record of our
common stock.

Recent sales of unregistered securities

During  the  period  covered  by this  annual  report,  we have sold  securities
pursuant  to the  following  transactions,  all of which  were  exempt  from the
registration  requirements  of the  Securities  Act of  1933,  as  amended  (the
"Securities Act").



                                      -15-
<PAGE>

On January  24,  2005,  we issued  364,167shares  of our  common  stock to Lucky
Ventures Resources Limited and Paul Courteau, in consideration of the consulting
services rendered to us by this company, amounting to $127,406.

In February 2005, we issued  1,051,969  shares of our common stock to 36 parties
in consideration of $305,114.

On  February  2005,  we issued  53,571  shares of our common  stock to our three
independent  non-executive directors Jacques Vallee, Fred Bild and Daniel Too in
consideration of $15,000 of their salaries.

In March 2005, we issued 1,600,029 shares of our common stock to 62 parties in
consideration of $440,116.

In April 2005, we issued  1,174,643  shares of our common stock to 32 parties in
consideration of $268,104.

On April 27, 2005 we issued 148,000 shares of our common stock to Lucky Ventures
Resources  Limited,  in  consideration  of  the  financial  consulting  services
rendered to us by those parties, amounting to $51,800.

In May  2005,  we issued  319,153  shares of our  common  stock to 8 parties  in
consideration of $64,065.

In June 2005,  we issued  394,869  shares of our  common  stock to 10 parties in
consideration of $68,426.

On June 29,  2005,  we issued  99,999  shares of our  common  stock to our three
independent  non-executive directors Jacques Vallee, Fred Bild and Daniel Too in
consideration of $15,000 of their salaries.

In July 2005,  we issued  989,252  shares of our  common  stock to 25 parties in
consideration of $158,265.

On July 20,  2005,  we issued  1,000,000  shares of our  common  stock to Andrea
Cortellazi and Proactive  Computer  Services Inc. in  consideration of guarantee
service on loans rendered to us by those parties, amounting to $180,000.

In August 2005,  we issued  601,409  shares of our common stock to 15 parties in
consideration of $95,043.

On August  22,  2005 we issued  1,200,000  shares of our  common  stock to Lucky
Ventures Resources Limited,  in consideration of financial  consulting  services
rendered to us by this company, amounting to $230,000.

In September 2005, we issued 465,343 shares of our common stock to 12 parties in
consideration of $90,820.


                                      -16-
<PAGE>

On September  20, 2005, we issued  3,300,000  shares of our common stock to Wang
Guoliang,  Shui Hong  Enterprises  Limited and Wu Zhi Quan in  consideration  of
consulting service rendered to us by those parties, amounting to $632,390.

In October 2005, we issued  187,567  shares of our common stock to 13 parties in
consideration of $55,888.

On October 5, 2005, we issued  1,400,000 shares of our common stock to Huang Wen
in  consideration  of  consulting  service  rendered to us by him,  amounting to
$250,000.

On October 21, 2005, we issued 570,000 shares of our common stock to John O'Shea
and Daniel Luskind in consideration of financial consulting services rendered to
us by them,  amounting to $96,900.  On the same date, Lui Hung Yen exercised his
conversion  right on the $255,422  convertible  note in exchange  for  1,500,000
newly issued shares of common stock.

In November  2005, we issued  241,131 shares of our common stock to 8 parties in
consideration of $81,460.  In the same month, 3 parties  exercised their class C
warrants in exchange  for1,087,500  shares of our common stock, in consideration
of $456,750.

On November 3, 2005,  we issued  37,500  shares of our common stock to our three
independent  non-executive directors Jacques Vallee, Fred Bild and Daniel Too in
consideration of $15,000 of their salaries.

On November 15, 2005,  Lai Hung Chiu  exercised  her employee  option of 200,000
shares of our common stock, in consideration of $56,000.

On November  18, 2005 we issued  250,000  shares of our common  stock to Stanley
Wunderlick,  in  consideration  of  financial  services  rendered  to us by him,
amounting to $117,500.

On December 1, 2005, we issued  124,000 shares of our common stock to John Cheng
in  consideration  of  financial  services  rendered to us by him,  amounting to
$37,100.

On December  12, 2005,  2 parties  exercised  their class C warrants to exchange
140,000 shares of our common stock,  in  consideration  of $58,800.  On the same
date,  we  issued  50,000  shares  of our  common  stock to  Joseph  I.  Emas in
consideration of legal services rendered to us by him, amounting to $20,500.

On December 15, 2005, we issued 100,000  Series A Preferred  Shares to Sino-Sult
Canada (S.S.C.) Limited in satisfaction of a promissory note for $100,000.

On  December  20,  2005,  we  issued  1,500,000  shares of our  common  stock to
Proactive Computer Services Inc. in consideration of financial services rendered
to us , amounting to $180,000.

On December 31, 2005, we issued  1,000,000 shares of our common stock to Capital
Power International Limited and Stag Management Canada Ltd., in consideration of
guarantee services to be provided on potential loans, amounting to $130,000.


                                      -17-
<PAGE>

On January 25, 2006, we issued to a group of private  investors  (a)  promissory
notes of the Company ("Note" or "Notes"),  in the principal  aggregate amount of
$5,225,000  and (b) Class A and Class B Warrants  registered in the name of each
Investor.

The offer and sale of such shares of our common stock were  effected in reliance
on the  exemptions  for sales of  securities  not  involving a public  offering,
either through Regulation S for non-United States citizens or entities or as set
forth in Rule 506  promulgated  under the  Securities Act and in Section 4(2) of
the Securities  Act, based on the following:  (a) the investors  confirmed to us
that they were  "accredited  investors,"  as defined in Rule 501 of Regulation D
promulgated  under the  Securities  Act and had such  background,  education and
experience  in  financial  and  business  matters as to be able to evaluate  the
merits and risks of an  investment  in the  securities;  (b) there was no public
offering or general solicitation with respect to the offering; (c) the investors
were  provided  with  certain  disclosure  materials  and all other  information
requested with respect to our company;  (d) the investors  acknowledged that all
securities  being  purchased were  "restricted  securities"  for purposes of the
Securities  Act, and agreed to transfer  such  securities  only in a transaction
registered  under the  Securities  Act or  exempt  from  registration  under the
Securities  Act;  and (e) a legend was placed on the  certificates  representing
each such security  stating that it was restricted and could only be transferred
if  subsequent   registered  under  the  Securities  Act  or  transferred  in  a
transaction exempt from registration under the Securities Act.

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, 2005. 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.

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following is  management's  discussion  and analysis of certain  significant
factors which 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



                                      -18-
<PAGE>

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-KSB.

General overview

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

On July 25,  2005,  we  executed a loan  guarantee  commitment  letter with Alps
Resources Bankers Inc. (Alps), a Florida corporation,  for loan guarantees of up
to an aggregate  of USD 60 million,  such loans to mature in five years from the
date of issuance.  Alps undertook,  pursuant to that agreement, to secure a bank
guarantee from a Standard and Poor's A+ rated Bank.

The loan  guarantees  were in increments of USD 10 million each.  The first loan
guarantee  closing  was  anticipated  to be  executed  on August  15,  2005.  No
assurances  could be given that we would  exercise our right to this initial USD
10 million increment.

The above arrangement was modified on October 17, 2005.

At that date, we executed a financial  partnership agreement for loan guarantees
of up to an aggregate of USD 70 million.

Pursuant to the terms and  conditions  of the financial  partnership  agreement,
upon utilization of the underlying  guarantees,  we will be obligated to appoint
two directors, designated by Alps, to our Board of Directors.  Furthermore, upon
such  utilization,  we will grant Alps  11,666,667  restricted  shares of common
stock. Finally, as a condition of the guarantee,  and to secure the repayment of
the guarantee, if exercised,  Alps will have the right to receive, as collateral
in the event of default, a block of control shares from the founders of HQSM. As
of the date of the filing of this annual report,  no loan  guarantees  have been
exercised.

HQSM and its subsidiaries, collectively referred to in this report as the Group,
is  principally  engaged in the  vertically  integrated  business of aquaculture
through co-operative supply agreements, ocean product harvesting, and processing
and sales of farm-bred  and ocean  harvested  aquatic  products.  The  principal
products  of HQOF are  cross-bred  hybrid of  tilapia  and  white-legged  shrimp
exporting,  directly and  indirectly,  to the United States,  Canada,  Japan and
European countries. The major market is for export.


                                      -19-
<PAGE>

The Group has 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  (wholly-owned  subsidiary  of Sealink)  are Shark
Cartilage Capsule,  Shark Liver Oil and Shark Liver (Soft gel). The major market
for these products is the PRC. Our principal executive office is located at 1511
Third Avenue, Suite 788, Seattle,  Washington, and our telephone number is (206)
621 9888. The URL for our website is http://www.hqfish.com.

Critical accounting policies and estimates

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

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

Inventories

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

Income taxes

Taxes are calculated in accordance with taxation principles  currently effective
in the PRC.  The Group  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 in 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.



                                      -20-
<PAGE>

Related parties

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

Revenue recognition

In accordance with the provisions of Staff Accounting  Bulletin No. 101, revenue
is recognized  when  merchandise is shipped and title passes to the customer and
collectibility is reasonably assured.

Concentration of credit risk

Financial   instruments  that  potentially  subject  the  Group  to  significant
concentrations  of credit risk consist  primarily of trade accounts  receivable.
The Group  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 Group's  accounts  receivable,  the Group  records a
provision for doubtful  accounts to cover  probable  credit  losses.  Management
reviews and adjusts this allowance  periodically based on historical  experience
and its evaluation of the collectibility of outstanding accounts receivable.

For this  transitional  Form 10-KSB Report (the prior fiscal year ended December
31, 2004 with Eight  Months'  Result from May 1, 2004 to December  31, 2004) and
for  comparative  and  analytical  purposes,  the following  section is based on
audited  result of the year ended  December  31,  2005 and twelve  months  ended
December 31, 2004 respectively.

Recent developments

In October 2005, HQSM approved that its Certificate of  Incorporation be amended
a follows:

Article IV: Capital Stock. The total number of authorized  shares of all classes
of stock which the Corporation  shall have the authority to issue is 210,000,000
shares,  of which  200,000,000  shares  are Common  Stock,  $0.001 par value per
share,  and which 10,000,000  shares are Preferred  Stock,  $0.001 par value per
share with such rights and  preferences as designated by the Board of Directors,
of which 100,000 will be designated as Series A Preferred Stock.

Results of  Operations  - Year Ended  December  31, 2005  Compared to Year Ended
December 31, 2004

Segments
--------

Manufacturing and selling of health and bio-product
---------------------------------------------------

One of our  subsidiaries,  Jiahua Marine (which was acquired in August 2004) was
engaged in manufacturing and selling of health and bio-products. During the year
ended December 31, 2005 and twelve months ended December 31, 2004, Jiahua Marine
contributed  sales of $9,772,762 and $3,242,288 to the Group  respectively.  The



                                      -21-
<PAGE>

gross profit ratio for this segment was 85% and 83% for 12 months ended December
31,  2005 and 2004  respectively,  and the major  expense  for this  segment was
advertising,  corresponding  to about 37% and 52% of revenue  for the year ended
December 31, 2005 and twelve months ended  December 31, 2004  respectively.  Net
income  contributed  by this segment was  $4,116,399 and $1,005,557 for the year
ended December 31, 2005 and twelve months ended December 31, 2004  respectively.
The improvement of 2005 compared to 2004 was essentially due to the fact that in
2004,  Jiahua Marine was part of our Group for 5 months only,  while a full year
in 2005.

Manufacturing and selling of aquatic products
---------------------------------------------

The other principal  activity of the Group was the  manufacturing and selling of
aquatic  products.  The revenue  contributed by this segment was $17,780,268 and
$17,949,204  for the year  ended  December  31,  2005 and  twelve  months  ended
December 31, 2004,  respectively.  The gross profit ratio of this segment was at
18% and 13% for the year  ended  December  31,  2005  and  twelve  months  ended
December  31,  2004,  respectively.  This  segment  contributed  $1,003,857  and
$1,121,208 to net income for the year ended  December 31, 2005 and twelve months
ended December 31, 2004,  respectively.  As the production temporarily ceased in
the first half of 2004 because of major renovations at the factory, this segment
actually  suffered from a major  operational loss in 2004. The rise in profit in
2004 was  mainly  caused by a  substantial  recovery  of bad debt of  $1,057,130
during that period.  Without  considering such recovery , the improvement in the
operating performance of that segment in 2005 was significant compared to 2004.

Operations
----------

Sales.  For the year ended December 31, 2005 revenue  increased by $6,361,538 or
30% to  $27,553,030  from  $21,191,492  for the twelve months ended December 31,
2004.  The  increase  resulted  from a  better  performance  by the  health  and
bio-product segment,  since its operations were acquired in August 2004, showing
five  months'  activities  in our Group from that  segment in 2004  compared  to
twelve  months'  result for 2005.  That  segment saw its sales  increase by $6.5
million  compared to the  corresponding  period of 2004.  The  revenue  from the
aquatic  products  segment  slightly  decreased by $0.2 million  compared to the
corresponding  period of 2004, as there was an increase in unit selling price of
about 16% during the year.  That  resulted in a higher profit margin for aquatic
products in 2005 than 2004.

Cost of sales slightly  decreased by $80,081 to $16,002,911 from $16,082,992 for
the year ended  December  31,  2005,  as  compared  to the twelve  months  ended
December 31, 2004. The slight decrease in cost of sales, while a 30% increase in
revenue, was due to a combination of lower costs of sales in the aquatic product
segment  with higher gross  margins,  and higher cost of sales in the health and
bio-product  segment due to higher volume  related to a full year's  activity in
2005 compared to 5 months in 2004.


                                      -22-
<PAGE>

Both segments improved their gross profit contribution in 2005. The gross profit
ratio of the aquatic product segment improved from 13% to 18% for the year ended
December 31, 2005,  compared to the twelve months ended  December 31, 2004.  The
gross profit of the health and bio-product  segment increased  significantly due
to a full year's activity in 2005 as compared to 5 months in 2004.

Selling and  distribution  expenses  decreased by $82,472 or 21% to $301,630 for
the year ended  December  31,  2005,  as  compared  to the twelve  months  ended
December 31, 2004. The decrease resulted from the Company's  decision in 2005 to
cancel its sales commission policy from the financial year of 2005.

Advertising  expenses  increased by $1,948,119 from $1,674,988 to $3,623,107 for
the year ended December 31, 2005 as compared to the twelve months ended December
31,  2004.  The primary  factor  responsible  for that  increase was that Jiahua
Marine entered our Group in August 2004, showing 5 months of activities in 2004,
while  in  2005,  that  segment  was  part of our  Group  for a full 12  months.
Furthermore,  significant  advertising  expenditures  for the  promotion  of our
bio-products  to  achieve  customer  recognition  is  consistent  with  industry
practices.

General and  administrative  expenses decreased by $610,160 or 20% to $2,421,781
as compared to the corresponding  period of the prior year.  Non-recurring costs
of 2004  related to our  Company's  going  public in that year justify the major
portion of the decrease in 2005.

Depreciation  increased by $346,175 to $961,295 as compared to the corresponding
period to the previous year. The increase in 2005 is due to a full year activity
of our  bio-products  segment in 2005 as Jiahua Marine  integrated  our Group in
August  2004 and also to the  effect in 2005 of a full  year's  depreciation  of
improvements  and  renovations  that took place in the first half of 2004 in the
aquatic product segment.

Profit  from  operations,  before  considering  the bad debt  recovery  for both
periods,  improved  significantly from a loss of $597,651 in 2004 to a profit of
$4,242,306 in 2005.  That  improvement in 2005 is mostly due to higher volume of
sales with higher gross profit from the bio-products  segment and improved gross
profit ratio from the aquatic product segment compared to those of 2004.

Finance costs  decreased to $360,782  from $406,840 for the year ended  December
31, 2005 as compared to the twelve  months ended  December  31, 2004,  an 11% or
$46,058  decrease.  The decrease  was  attributable  mostly to the  reduction in
interest on debentures and promissory  notes in 2005 since they were  reimbursed
in the current year.  Those  debentures and promissory  notes were the result of
the acquisition in 2004 of Jiahua Marine.

Other expenses  increased from $282,229 for the twelve months ended December 31,
2004 to  $327,059  for the  year  ended  December  31,  2005,  a 16% or  $44,830
increase.  Other expenses  mainly included  insurance for vessels,  salaries for


                                      -23-
<PAGE>

sailors and loss on disposal of property,  plant and equipment  during the year.
The main  reason for the  increase  was an  incurred  loss on  disposal of motor
vehicles in 2005.

Profit before income taxes  increased to $3,895,092 for the year ending December
31, 2005, from a loss of $229,590 for the twelve months ended December 31, 2004.
That significant  improvement was due to higher sales volume and related margins
in 2005 from the  bio-product  segment,  and about  similar  volumes with higher
margins from the aquatic products segment.

Current  income taxes  increased  from zero for the twelve months ended December
31, 2004 to $333,092 for the year ended December 31, 2005.  Such increase is due
to the fact that  Jiahua  Marine and HQOF  earned  taxable  incomes for the year
ended December 31, 2005,  while the tax holiday for Jiahua Marine  terminated in
2004 and HQOF  experienced a tax loss for the twelve  months ended  December 31,
2004.

Deferred  income tax increased by $91,358 from $216,544 to $307,902 for the year
ended  December 31, 2005, as compared to twelve months ended  December 31, 2004.
The increase was due to the  elimination of temporary  differences  arising from
the recovery of provision for doubtful  accounts recorded in the last quarter of
2005.

Minority  interest  decreased from $62,191 in 2004 to zero in 2005.  That change
resulted from our Company's acquisition of all the minority interests in HQOF in
August 2004, therefore making HQOF a wholly-owned subsidiary from that date.

The net income  attributable to  shareholders  was $3,254,098 for the year ended
December 31, 2005,  compared with a net loss  attributable  to  shareholders  of
$383,943  for the twelve  months  ended  December  31,  2004.  That  significant
improvement  was  the  result  of  higher  sales  and  related  margins  in  the
bio-products  segment in 2005  compared to 2004 as we acquired  Jiahua Marine in
August 2004,  and to higher  profitability  experienced in 2005 from the aquatic
product segment.

Liquidity and capital resources

The Group has in recent years financed its  operations  primarily with operating
revenues.  The Group  anticipates  that  revenues  from its  operations  will be
sufficient to satisfy the Group's cash  requirements  for operations  during the
foreseeable  future,  except to the extent that increasing  orders and sales may
require  temporary  borrowings  to finance such  expansion  and related costs of
employee  compensation  and  inventory  build-up.  No  assurance  can be  given,
however,  that additional debt or equity  financing will not be required or will
be available if required.

The current ratio increased from 1.2 times  ($10,686,199/$9,214,238) at December
31,  2004 to 2.3  times  ($14,989,554/$6,555,210)  at  December  31,  2005.  The
increase was mainly due to the Group's  improved  operating  results in 2005 and
repayment of approximately $2.7 million short-term loan during the same period.



                                      -24-
<PAGE>

Risk factors

In addition to the risks listed  below,  risks and  uncertainties  not presently
foreseeable  to us  may  also  impair  our  business  operations.  If any of the
following risks actually occurs, our business,  financial condition or operating
results could be materially adversely affected.  In such case, the trading price
of our  common  stock  could  decline,  and  you  may  lose  all or part of your
investment.

Risks relating to our Company

We have no long-term  agreements  with  customers or  distributors;  should they
discontinue  to do  business  with us, our  business  and  profitability  may be
adversely affected.

Currently,  most of our  immediate  customers  are  distributors  who resell our
products to other customers.  Our sales arrangement with these  distributors are
generally  short-term  in nature and we have not formed or engaged in any agency
or distributorship  arrangements with such distributors.  In the event that some
of  these  distributors  cease  to  purchase  our  products,  our  business  and
profitability may be adversely  affected.  Even if we are able to procure agency
or  distributorship  arrangements,  there is no guarantee that such arrangements
will be exclusive in procuring the domestic and/or export sales of our products.

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

We have  developed a co-operative  network in Hainan  Province for the supply of
tilapia and shrimp by entering into co-operative  supply agreements with various
co-operative suppliers, who are aquaculture farmers in Hainan Province. Pursuant
to the co-operative  supply agreements,  HQOF is assured the necessary supply of
aquatic  products from its  cooperative  suppliers.  The  continuance and smooth
operations  of  this  co-operative   network  are  essential  in  ensuring  cost
efficiency and the timely fulfillment of our customer orders. Any adverse change
to the co-operative  network,  including any early termination or non-renewal of
any material  supply  agreement  or any failure of the  suppliers to fulfill the
obligations under the supply agreement,  may result in a material adverse effect
on our business model, operation and competitiveness.

If we are not  able to  implement  our  strategies  in  achieving  our  business
objectives,  our business operations and financial  performance may be adversely
affected.

Our business plan is based on circumstances  currently  prevailing and the bases
and assumptions  that certain  circumstances  will or will not occur, as well as
the inherent risks and uncertainties  involved in various stages of development.
However,  there is no assurance that we will be successful in  implementing  our
strategies  or that  our  strategies,  even  if  implemented,  will  lead to the
successful  achievement of our  objectives.  If we are not able to  successfully
implement our strategies,  our business operations and financial performance may
be adversely affected.

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



                                      -25-
<PAGE>

We are currently  experiencing a period of significant  growth in terms of sales
volume.  We believe that our  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  operational and
financial resources.

As the scale of our operations  grows,  we will have to continually  improve our
management,  operational  and financial  systems,  procedures and controls,  and
expand our workforce.  The expansion of our business operations may also involve
co-operation,  or development of new relationships,  with third parties, such as
customers and  suppliers.  There can be no assurance that our existing or future
management,  operational 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.  There can also be no assurance that we will be able
to establish,  develop or maintain the business relationships  beneficial to our
operations.  Failure to manage growth  effectively could have a material adverse
effect  on our  business  and  the  results  of  our  operations  and  financial
condition.

We depend on 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.  Our future results will depend significantly upon
the efforts of these persons, in particular, Mr. Harry Wang, Ms. Lillian Wang Li
and Mr.  Norbert  Sporns.  The loss of the service of any of them for any reason
could have a material  adverse  effect on the  business,  and the results of our
operation and financial condition.

We depend on supply of raw materials,  and any adverse changes in such supply or
the costs of raw materials may adversely affect our operations.

We currently obtain all of our raw materials from various  aquaculture  farms in
Hainan Province and are, therefore, dependent on a stable and reliable supply of
such raw  materials  in the  region.  The supply of these raw  materials  can be
adversely  affected by any  material  change in the  climatic  or  environmental
conditions in the Hainan  province,  which may, in turn, have a material adverse
effect on the cost of our raw materials and on our operations.

We do not maintain any product  liability  insurance,  and we could therefore be
adversely affected by product liability claims against us.

During the past four years,  we have not purchased or  maintained  any liability
insurance  for our tilapia or shrimp  products.  We believe that there are valid
reasons for not purchasing this liability  insurance.  However,  our tilapia and
shrimp  products  are sold in the PRC  domestic  market as well as  exported  to
locations in the United States, Canada, Japan and some European countries. There
is a possibility that our customers, or the ultimate buyers of our products, may
have adverse  reactions to the tilapia and shrimp  products  that we process and
sell. Any adverse reaction may result in actual or potential  product  liability
claims to the Group.  Accordingly,  any significant  product liability claim may
have an adverse effect on our reputation and profitability.

We may never pay any dividends to our shareholders.



                                      -26-
<PAGE>

We did not declare any dividends for the year ended December 31, 2005. 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.

Risks relating to the Aquaculture Industry

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

The Company is 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.  Currently  the plant treats all of its
waste  effluent  completely  to level one (that is,  consistent  with  releasing
potable water back to the  environment),  and there is currently no charge being
levied.  In addition,  these  regulations  further empower local  governments to
impose  penalties on those  companies  which fail to comply with the  prescribed
standards.  If we,  through  the  Company,  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 profit made, being ordered to close down our
business operations and suspension of relevant permits.

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.

The national and the local  governments may promulgate new regulations  that may
require us to pay  environmental  protection  fees or require us to upgrade  our
environmental  protection  facilities.  These  regulations may impose additional
costs and may adversely affect our profitability.

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

From time to time,  Hainan  Province,  like other South China Sea  destinations,
experiences  typhoons,  particularly  during the third  quarter of any  calendar
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.  We do not  currently  have any  insurance  against  damage caused by



                                      -27-
<PAGE>

natural  disasters,  accidents or other similar events, nor do we have insurance
covering  losses due to  resulting  business  interruption.  Should  such losses
occur, our operations, revenue and profitability might be adversely affected.

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

The raw  materials  we use are  aquaculture  stocks  and  commodities  that  may
experience  price  volatility  caused by events such as market  fluctuations  or
changes in governmental aquaculture programs. 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.

Neither  our  products  nor  the  raw  materials   required  have,  in  general,
experienced  any  significant  price  fluctuations  in the past, but there is no
assurance  that  the  raw  materials  we  require  will  not be  subject  to any
significant  price  fluctuations  or pricing  control in the future.  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.
Should this  happen,  our business  and the results of our  operations  could be
adversely affected.

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 our exporting  countries,  including the United States, Japan
and other overseas markets,  such as Europe and Canada,  may, from time to time,
consider regulatory proposals relating to raw materials, food safety and market,
and environmental  regulation,  which, if adopted,  could lead to disruptions in
supply of our products and/or  increases in 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  certain  regulations  or  impose
additional  taxes or duties on certain  Chinese  imports from time to time. Such
regulations,  if effected, may have a material adverse impact on our operations,
revenue and/or our profitability.

We could be adversely  affected by contamination  and disease resulting from our
purchases of raw materials from third parties.

We ceased our aquaculture  farming  operations in January 2003. Since that time,
we  have  been  purchasing  raw  materials  from  contracted  large-scale  local
suppliers. If any contamination or outbreak of disease occurs, our supply of raw
materials may be  jeopardized  or disrupted,  which,  in turn,  could  adversely
affect our operations, revenue and/or profitability.

We may be  unable  to  continue  to  take  advantage  of  the  seasonal  pricing
fluctuation in sales of our products.



                                      -28-
<PAGE>

We have been  experiencing  seasonal  fluctuation  in sales in terms of pricing.
Pricing  fluctuation occurs during the winter season when fish farms in northern
PRC suspend production due to cold weather  conditions.  With the lack of supply
from these farms in northern PRC,  aquaculture  products from other parts of the
PRC could  customarily be sold at a premium  during the winter season.  However,
there can be no assurance  that such premium or pricing  could be  maintained in
the future.

Our inability to  successfully  compete with our  competitors in the aquaculture
industry may adversely affect us.

The  aquaculture  industry  is open  to  competition  from  local  and  overseas
operators  engaged in  similar  businesses  and  products  to ours.  There is no
assurance  that we can  consistently  be successful in maintaining a competitive
advantage  against our  competitors.  Any  increase in  competition  may have an
adverse  effect on both the sales and the pricing of our  aquaculture  products,
which,  in turn, will have an adverse effect on our  performance,  profitability
and cash flow.

During late 2004,  the USA  government  imposed  heavy  tariffs of more than 100
percent to some Chinese shrimp exporters.  This action was intended to avoid the
dumping of Chinese exporters and goods.

The decisions were seen as a victory by the domestic shrimp industry,  which has
suffered in recent  years as cheap shrimp  imports  from Latin  America and Asia
have increased supplies and dropped prices in the United States.

Foreign exporters and American  importers argue that imported shrimp,  which are
farm-raised rather than netted as most U.S. shrimp are, are simply produced more
efficiently.  American  shrimpers say their  competitors are cheating by dumping
their product and selling it below cost to drive U.S. producers out of business.


Last  December,  the  alliance,  which  represents  shrimpers in eight  Southern
states,  petitioned the Commerce  Department to investigate  possible dumping of
shrimp from China,  Vietnam,  Brazil,  Ecuador,  India and Thailand.  Dumping is
illegal in the United  States and is punished  with  tariffs to put  law-abiding
companies on equal footing.

In July 2004, the Commerce  Department issued  preliminary  anti-dumping  tariff
determinations for the six countries, which last year provided 90 percent of the
shrimp  consumed in the United States.  While the U.S.  shrimp  industry and its
lawyers  accurately  predicted the Chinese  tariffs last summer,  the Vietnamese
tariffs were far below the roughly 90 percent rate they expected.

The United State may impose hefty tariff on other aqua  products,  but since the
direct  export  sales of the  Group is less  than 5% of the  total  sales of the
Group, the potential negative effect on the Group will not be material.

Risks relating to the Health and Bio-Product Industry



                                      -29-
<PAGE>

We may have difficulty  defending our  intellectual  property from  infringement
Since effective trademark, patent and trade secret protection may be unavailable
in  every  country  in  which we do or plan to do  business,  protection  of our
intellectual property rights is uncertain and we may be unable to prevent others
from  developing  similar  products  or using our marks.  We regard our  service
marks,  trademarks,  trade secrets, patents and similar intellectual property as
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
trademark  and patent  protection  for our products in the People's  Republic of
China.  While presently we sell our products mainly in China and Eastern Europe,
we  intend  to enter  the  markets  in the  United  States  and  possibly  other
countries.  However, 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 due to our foreign currency constraint.  Therefore, the
measures  we take to protect our  proprietary  rights may be  inadequate  and we
cannot  give you any  assurance  that  our  competitors  will not  independently
develop formulations and processes that are substantially equivalent or superior
to  our  own.  We  intend  to  take  necessary  actions  toward  protecting  our
intellectual  property  rights  upon  the  resolution  of our  foreign  currency
constraints.

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

We compete with  companies,  many of whom are  developing  or can be expected to
develop  products  similar  to ours.  Our  market  is a large  market  with many
competitors.  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 so that we can  successfully  compete
with our  competitors.  We  cannot  assure  you that we will be able to  compete
effectively with current or future competitors or that the competitive pressures
we face will not harm our business.

The products and the processes we use could expose us to substantial liability

Product  liability  could  arise  from  claims  by users of our  products  or of
products manufactured by processes we developed, or from manufacturers or others
selling our products,  either directly or as a component of other  products.  To
date, we have not  experienced  any problems  associated with claims by users of
our products.  For this reason, we do not have any insurance  coverage for these
risks at this time. Depending on our experience, we may decide to seek this type
of insurance coverage.  When, and if, we acquire product liability insurance, we
cannot give you any assurance that it will be adequate to protect us or that the
insurance coverage will continue to be available to us on reasonable terms.



                                      -30-
<PAGE>

Unexpected  Changes in the  regulatory  environment  may  negatively  impact our
business

The regulatory environment involving our products is subject to changes that may
be  introduced  either by the relevant  governmental  regulatory  agencies or by
virtue of new regulation. Such changes may have a positive or negative impact on
the sale of our products.  Such regulatory  environment also covers any existing
or potential trade barriers in the form of import tariff and taxes that may make
it  difficult  for us to import our products to certain  countries,  which would
limit our international expansion.

We may suffer from  political  and economic  instability  in countries  where we
operate

We are currently operating mainly in China,  however, we expect to begin selling
our  products  in  other  countries  in  the  future.   Political  and  economic
instability  in the  countries in which we presently  operate and may operate in
the future may negatively affect our sales, revenues and business operations.

We may experience currency fluctuation and longer exchange rate payment cycles

The local currencies in the countries in which we operate may fluctuate in value
in relation to other  currencies.  Such fluctuations may affect the costs of our
products  sold and the value of our  local  currency  profits.  While we are not
conducting  any  meaningful  operations  in  countries  other  than China at the
present  time,  we may expand to other  countries and may then have an increased
risk of exposure of our business to currency fluctuation.

Risks relating to the PRC

There could be changes in  government  policies  that may  adversely  affect our
business

The aquatic products  industry in the PRC is subject to policies  implemented by
the PRC  government  from time to time.  The PRC  government  may, for instance,
impose control over aspects such as raw material  distribution,  product pricing
and  sales.  On the other  hand,  the PRC  government  may also  make  available
subsidies  or  preferential  treatments  (such as in the form of tax benefits or
favorable financing arrangements).

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

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

The PRC is transitioning  from a planned economy to a market economy.  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.  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 carried out by the PRC government are unprecedented
or experimental,  and are expected to be refined and improved.  Other political,


                                      -31-
<PAGE>

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,  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,  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.

Potential  effects  related  to the PRC's WTO  accession  could  have a material
adverse affect our company.

The PRC became a member of the WTO in December  2001.  Pursuant to the bilateral
agreement  entered  into  between the PRC and the United  States on December 11,
1999, the PRC agreed to lower tariffs on imports by an average of  approximately
17% and to eliminate quotas and other quantitative  restrictions on food product
imports  within two to five years.  There is no  assurance  that such  increased
competition  will  not have any  material  adverse  effect  on our  business  or
profitability.

Currency  conversion and exchange rate  volatility  could  adversely  affect our
financial condition.

The PRC government  imposes control over the conversion of Renminbi into foreign
currencies.  Under the  current  unified  floating  exchange  rate  system,  the
People's Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate,  based on the previous  day's dealings in the inter-bank  foreign
exchange market.  Financial institutions  authorized to deal in foreign currency
may enter  into  foreign  exchange  transactions  at  exchange  rates  within an
authorized  range  above or below the PBOC  exchange  rate  according  to market
conditions.

Pursuant to the Foreign  Exchange  Control  Regulations of the PRC issued by the
State Council which came into effect on April 1, 1996,  and the  Regulations  on
the Administration of Foreign Exchange  Settlement,  Sale and Payment of the PRC


                                      -32-
<PAGE>

which came into  effect on July 1, 1996,  regarding  foreign  exchange  control,
conversion of Renminbi into foreign exchange by Foreign Investment  Enterprises,
or FIEs,  for use on  current  account  items,  including  the  distribution  of
dividends and profits to foreign investors,  is permissible.  FIEs are permitted
to convert their after-tax  dividends and profits to foreign  exchange and remit
such  foreign  exchange  to their  foreign  exchange  bank  accounts in the PRC.
Conversion  of Renminbi  into  foreign  currencies  for capital  account  items,
including  direct  investment,  loans, and security  investment,  is still under
certain restrictions. On January 14, 1997, the State Council amended the Foreign
Exchange  Control  Regulations  and added,  among  other  things,  an  important
provision,  which provides that the PRC government shall not impose restrictions
on recurring international payments and transfers under current account items.


Enterprises  in the PRC  (including  FIEs) which  require  foreign  exchange for
transactions  relating to current account items,  may,  without  approval of the
State  Administration  of Foreign  Exchange,  or SAFE, effect payment from their
foreign exchange  account or convert and pay at the designated  foreign exchange
banks by providing valid receipts and proofs.

Convertibility  of foreign exchange in respect of capital account items, such as
direct  investment  and  capital  contribution,  is  still  subject  to  certain
restrictions,  and prior approval from the SAFE or its relevant branches must be
sought.

Since 1994, the exchange rate for Renminbi against the United States dollars has
remained  relatively  stable,  most of the time in the  region of  approximately
RMB8.28 to US$1.00. However, there can be no assurance that Renminbi will not be
subject to devaluation. We may not be able to hedge effectively against Renminbi
devaluation,  so there can be no assurance that future movements in the exchange
rate of Renminbi  and other  currencies  will not have an adverse  effect on our
financial condition.

HQOF and Jiahua Marine, our principle operating subsidiaries,  are FIEs to which
the  Foreign  Exchange  Control  Regulations  are  applicable.  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.

Our dependence  upon Chinese  production  facilities and raw material  suppliers
could affect our company.

All of our  processing  facilities  are  located  in the  PRC  and  all  the raw
materials  we require  are located in the PRC.  Therefore,  our  operations  and
performance are subject to changes in the economic and political  environment in
the PRC and to the risks inherent in maintaining  operations  outside the United
States.

Selected financial data

The  following  information  has  been  summarized  from  financial  information
included  elsewhere  and  should  be read in  conjunction  with  such  financial
statements and notes thereto.



                                      -33-
<PAGE>

Summary of Statements of Operations of HQSM

Year Ended December 31, 2005 and 2004

                                              December 31, 2005    December 2004
                                              ----------------------------------
Sales                                            $ 27,553,030      $ 21,191,492
Gross Profit                                     $ 11,550,119      $  5,108,500
Net Income/(Loss)                                $  3,254,098      $   (383,943)
Net Income Per Share                             $       0.03      $      (0.01)

Summary of Balance Sheets of HQSM as at December 31, 2005 and 2004

                                              December 31, 2005    December 2004
                                              ----------------------------------
Working Capital                                  $  8,434,344      $  1,471,961
Total Assets                                     $ 24,416,680      $ 20,925,662
Stockholders' Equity                             $ 17,861,470      $ 11,611,424























                                      -34-
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

            HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
                     (INCORPORATED IN THE STATE OF DELAWARE
                             WITH LIMITED LIABILITY)
                        CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005
                          INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report                                              F-2

Consolidated Balance Sheets as of December 31, 2005 and 2004           F-3 - F-4

Consolidated Statements of Income for the years ended December 31,
  2005 and 2004                                                           F-5

Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2005 and 2004                                    F-6


Consolidated Statement of Cash Flows for the years ended December 31,
  2005 and 2004                                                           F-7

Notes to Consolidated Financial Statements                            F-8 - F-23













                                       F-1


<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
HQ Sustainable Maritime Industries, Inc. and Subsidiaries in State of Delaware

We have audited the accompanying  consolidated  balance sheets of HQ Sustainable
Maritime Industries, Inc. and Subsidiaries as of December 31, 2005 and 2004, and
the related consolidated  statements of income, changes in shareholders' equity,
and cash flows for the years then ended. These consolidated financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audits.

We  conducted  our  audits in  accordance  with The  Public  Company  Accounting
Oversight Board Standards (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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as of
December 31, 2005 and 2004, and the results of its operations and its cash flows
for the years ended  December 31, 2005 and 2004, in conformity  with  accounting
principles generally accepted in the United States of America.

/s/ Rotenberg & Co., LLP

Rotenberg & Co., LLP
Certified Public Accountants

Rochester, New York
March 23, 2006








                                       F-2


<PAGE>
<TABLE>
<CAPTION>

            HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
                     (INCORPORATED IN THE STATE OF DELAWARE
                             WITH LIMITED LIABILITY)
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2005 AND 2004
                                     ASSETS

                                                  December 31, 2005   December 31, 2004
                                                  -----------------   -----------------
<S>                                               <C>                 <C>
CURRENT ASSETS
    Cash and cash equivalents                     $       5,140,159   $       4,551,505
    Trade receivables, net of provisions                  8,423,127           5,406,172
    Inventories                                             557,464             228,564
    Prepayments                                             131,864               1,932
    Due from related parties, net of provisions             526,195             388,506
    Advances to employees                                   127,231              27,918
    Tax recoverable                                          83,514              81,602
                                                  -----------------   -----------------
    TOTAL CURRENT ASSETS                                 14,989,554          10,686,199
                                                  -----------------   -----------------

OTHER ASSETS

    Deferred taxes                                          926,623           1,209,790
    Deferred loan costs                                     500,000                --
                                                  -----------------   -----------------
                                                          1,426,623           1,209,790


PROPERTY, PLANT AND EQUIPMENT,
NET                                                       8,000,503           9,029,673
                                                  -----------------   -----------------

TOTAL ASSETS                                      $      24,416,680   $      20,925,662
                                                  =================   =================

</TABLE>





The  accompanying  notes  are in  integral  part of the  consolidated  financial
statements
                                      F-3


<PAGE>
<TABLE>
<CAPTION>

            HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
                     (INCORPORATED IN THE STATE OF DELAWARE
                             WITH LIMITED LIABILITY)

                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2005 AND 2004

                      LIABILITIES AND SHAREHOLDERS' EQUITY

                                                    December 31, 2005    December 31, 2004
                                                    -----------------    -----------------
<S>                                                 <C>                  <C>
CURRENT LIABILITIES
    Accounts payable and accrued expenses           $       2,617,446    $       4,204,630
    Bank loans                                              1,726,264            4,457,831
    Taxes payable                                              73,245                 --
    Due to related parties                                    787,716               86,994
    Due to directors                                        1,350,539              209,361
    Convertible notes                                            --                255,422
                                                    -----------------    -----------------
    TOTAL CURRENT LIABILITIES                               6,555,210            9,214,238
                                                    -----------------    -----------------

OTHER LIABILITIES
    Promissory note
                                                                 --                100,000
                                                    -----------------    -----------------

TOTAL LIABILITIES                                           6,555,210            9,314,238

SHAREHOLDERS' EQUITY
    Preferred stock                                               100                 --
    Common stock                                              116,105               95,055
    Additional paid-in capital                             15,574,752           13,099,205
    Accumulated Other Comprehensive Income                    499,251                 --
    Retained Earnings (Deficit)                              (314,583)          (2,729,152)
    Appropriation of Retained Earnings (Reserves)           1,985,845            1,146,316
                                                    -----------------    -----------------
TOTAL SHAREHOLDERS' EQUITY                                 17,861,470           11,611,424
                                                    -----------------    -----------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $      24,416,680    $      20,925,662
                                                    =================    =================
</TABLE>


The  accompanying  notes  are in  integral  part of the  consolidated  financial
statements
                                       F-4


<PAGE>
<TABLE>
<CAPTION>

            HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
                     (INCORPORATED IN THE STATE OF DELAWARE
                             WITH LIMITED LIABILITY)

                        CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

                                                           2005             2004
                                                      -------------    -------------
<S>                                                   <C>              <C>
SALES                                                 $  27,553,030    $  21,191,492

COST OF SALES                                            16,002,911       16,082,992
                                                      -------------    -------------
GROSS PROFIT                                             11,550,119        5,108,500

SELLING AND DISTRIBUTION EXPENSES                           301,630          384,102
ADVERTISING                                               3,623,107        1,674,988
GENERAL AND ADMINISTRATIVE EXPENSES                       2,421,781        3,031,941
DEPRECIATION                                                961,295          615,120
PROVISION FOR DOUBTFUL ACCOUNTS (RECOVERY)                 (340,627)      (1,057,130)
                                                      -------------    -------------
INCOME FROM CONTINUING OPERATIONS                         4,582,933          459,479

FINANCE COSTS                                               360,782          406,840
OTHER EXPENSES                                              327,059          282,229
                                                      -------------    -------------

INCOME/(LOSS) BEFORE INCOME TAXES                         3,895,092         (229,590)

INCOME TAXES
     CURRENT                                                333,092             --
     DEFERRED                                               307,902          216,544
                                                      -------------    -------------
INCOME/(LOSS) BEFORE MINORITY INTEREST                    3,254,098         (446,134)

MINORITY INTEREST                                              --             62,191
                                                      -------------    -------------
INCOME/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS            $   3,254,098    $    (383,943)
                                                      =============    =============

NET INCOME/(LOSS) PER SHARE
     BASIC AND DILUTED                                $        0.03    $       (0.01)
                                                      =============    =============

WEIGHTED AVERAGE COMMON SHARE OUTSTANDING - BASIC       102,764,361       49,199,528
                                                      =============    =============

WEIGHTED AVERAGE COMMON SHARE OUTSTANDING - DILUTED     103,312,264       49,199,528
                                                      =============    =============
</TABLE>

The  accompanying  notes  are in  integral  part of the  consolidated  financial
statement
                                      F-5


<PAGE>
<TABLE>
<CAPTION>
            HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
                     (INCORPORATED IN THE STATE OF DELAWARE
                             WITH LIMITED LIABILITY)
                  CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

                                              Common Stock                    Preferred Stock            Additional
                                                                                                          paid-in
                                         Share          Par value           Share      Par value          capital
                                     -------------    -------------    -------------   -------------   -------------
<S>                                  <C>              <C>              <C>             <C>             <C>
Balance at December 31, 2003                10,000    $         100             --     $        --     $  12,731,114
Issued 25,000,000 common stock at
   $0.001 each                          25,000,000           25,000             --              --           390,000
Net income for the period of four
   months                                     --               --               --              --              --
Shares of subsidiary eliminated in
   re-capitalization                       (10,000)            (100)            --              --              --
                                     -------------    -------------    -------------   -------------   -------------
Balance at April 30, 2004               25,000,000           25,000             --              --        13,121,114
                                     -------------    -------------    -------------   -------------   -------------
Issued 70,055,123 common stock at
   $0.001 each                          70,055,123           70,055             --              --        22,533,644
Net income for the period of
   eight months                               --               --               --              --              --
Transfer to reserve                           --               --               --              --              --
Capital reserve accrued during
   the period                                 --               --               --              --              --
Adjustment from acquisition of
   assets under cost basis                    --               --               --              --       (22,555,553)
                                     -------------    -------------    -------------   -------------   -------------
Balance at December 31, 2004            95,055,123           95,055             --              --        13,099,205
                                     -------------    -------------    -------------   -------------   -------------
Issued 21,050,102 common stock at
   $0.001 each net of cost of
   raising capital                      21,050,102           21,050             --              --         2,375,647
Issued 100,000 preferred stock at
   $0.001 each                                --               --            100,000             100          99,900
Net income for the year                       --               --               --              --              --
Transfer to reserve                           --               --               --              --              --
Foreign currency translation
   adjustment                                 --               --               --              --              --
                                     -------------    -------------    -------------   -------------   -------------
                                       116,105,225    $     116,105          100,000   $         100   $  15,574,752
                                     =============    =============    =============   =============   =============


<PAGE>

                                     Appropriation    Accumulated
                                      of retained       other            Retained
                                        earnings     comprehensive       earnings
                                       (reserves)       income          (deficit)          Total
                                     -------------   -------------    -------------    -------------
Balance at December 31, 2003         $     957,656   $        --         (2,193,496)   $  11,495,374
Issued 25,000,000 common stock at
   $0.001 each                                --              --               --            415,000
Net income for the period of four
   months                                     --              --         (2,513,990)      (2,513,990)
Shares of subsidiary eliminated i
   re-capitalization                          --              --               --               (100)
                                     -------------   -------------    -------------    -------------
Balance at April 30, 2004                  957,656            --         (4,707,486)       9,396,284
                                     -------------   -------------    -------------    -------------
Issued 70,055,123 common stock at
   $0.001 each                                --              --               --         22,603,699
Net income for the period of
   eight months                               --              --          2,130,047        2,130,047
Transfer to reserve                         151,713            --           (151,713)            --
Capital reserve accrued during
   the period                               36,947            --               --             36,947
Adjustment from acquisition of
   assets under cost basis                    --              --               --        (22,555,553)
                                     -------------   -------------    -------------    -------------
Balance at December 31, 2004             1,146,316            --         (2,729,152)      11,611,424
                                     -------------   -------------    -------------    -------------
Issued 21,050,102 common stock at
   $0.001 each net of cost of
   raising capital                            --              --               --          2,396,697
Issued 100,000 preferred stock at
   $0.001 each                                --              --               --            100,000
Net income for the year                       --              --          3,254,098        3,254,098
Transfer to reserve                        839,529            --           (839,529)            --
Foreign currency translation
   adjustment                                 --           499,251             --            499,251
                                     -------------   -------------    -------------    -------------
                                     $   1,985,845   $     499,251    $    (314,583)   $  17,861,470
                                     =============   =============    =============    =============
</TABLE>

The  accompanying  notes  are in  integral  part of the  consolidated  financial
statements
                                      F-6

<PAGE>
<TABLE>
<CAPTION>

            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, 2005 AND 2004

                                                                      2005            2004
                                                                  ------------    ------------
<S>                                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income/(loss)                                             $  3,254,098    $   (446,134)
    Adjustments to reconcile net income to net cash provided by
        operating activities :
    Loss on disposal of fixed assets                                   105,476            --
    Goodwill adjusted for reorganization process                          --
    Depreciation                                                       961,295         615,120
    Provision for doubtful accounts (recovery)                        (340,627)     (1,057,130)
    (Increase)/decrease in assets:
        Inventories                                                   (328,900)        239,775
        Trade receivables, net of provisions                        (2,676,328)      3,977,348
        Prepayment                                                    (129,932)        300,820
        Advances to employees                                          (99,313)        (27,918)
        Deferred taxes                                                 283,167         216,544
    Increase/(decrease) in liabilities:
        Accounts payables and accrued expenses                      (1,587,184)        381,152
        Deposit received from customers                                   --           (28,663)
        Promissory notes                                                  --           100,000
        Tax payable                                                     71,334            --
                                                                  ------------    ------------
Net cash used in operating activities                                 (486,914)
                                                                  ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition of property, plant and equipment                       (15,401)     (1,065,042)
    Capital expenditure                                                   --        (5,966,633)
    Purchase of minority interest from shareholders                       --           162,904
    Cash received from acquisition                                        --         1,205,193
                                                                  ------------    ------------
Net cash used in investing activities                                  (15,401)     (5,663,578)
                                                                  ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from common stock, net of cost of raising capital       2,141,275      23,018,698
    Received from directors                                          1,141,175         209,362
    Received from related parties                                      563,035         498,943
    Repayment of bank loans                                         (2,731,567)     (6,265,061)
    Deferred loan guarantee                                           (500,000)           --
                                                                  ------------    ------------
Net cash provided by financing activities                              613,918      17,461,942
                                                                  ------------    ------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                111,603      (6,486,275)

EFFECT OF CHANGES IN EXCHANGE RATE ON CASH AND CASH
EQUIVALENTS                                                            477,051            --

    Cash and cash equivalents, beginning of period                   4,551,505      11,037,780
                                                                  ------------    ------------

    Cash and cash equivalents, end of period                      $  5,140,159    $  4,551,505
                                                                  ============    ============

SUPPLEMENTARY CASH FLOWS DISCLOSURES
    Interest paid                                                 $    230,090    $    313,881
                                                                  ============    ============

    Taxes paid                                                    $    260,749    $       --
                                                                  ============    ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES

    Conversion of promissory note to preferred stock              $    100,000    $       --
                                                                  ============    ============

    Conversion of convertible notes to common stock               $    255,422    $       --
                                                                  ============    ============

    Common shares issued for services                             $  2,098,596    $       --
                                                                  ============    ============
</TABLE>

The  accompanying  notes  are in  integral  part of the  consolidated  financial
statements
                                      F-7
<PAGE>

                    HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
                     (INCORPORATED IN THE STATE OF DELAWARE
                             WITH LIMITED LIABILITY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

HQ Sustainable Maritime Industries,  Inc. ("HQSM") was initially incorporated as
Sharon Capital  Corporation,  or Sharon, on September 21, 1989 under the laws of
the State of Nevada. Sharon was a "blind pool/blank check" corporation organized
for the purpose of  purchasing,  merging  with or acquiring a business or assets
from another company.  In July 1990,  Sharon was changed to PEI, Inc., which was
subsequently  changed to Process Equipment,  Inc. in November 1990. On March 17,
2004, Process  Equipment,  Inc., Process Equipment  Acquisition  Corporation,  a
Nevada corporation and wholly-owned  subsidiary of Process  Equipment,  Inc., or
PEAC,  and Jade Profit  Investment  Limited,  or Jade, a British  Virgin Islands
limited  liability  corporation,  entered into an agreement  and plan of merger.
Pursuant to that agreement,  Process  Equipment,  Inc.,  through PEAC,  acquired
Jade, and 84.42% ownership in Jade's  subsidiary Hainan Quebec Ocean Fishing Co.
Ltd, a People's Republic of China, limited liability corporation, which we refer
to as HQOF.  As a result of that  transaction,  HQOF  became our main  operating
subsidiary.  In April of  2004,  pursuant  to the  above  agreement  and plan of
merger, the board of directors of Process Equipment,  Inc. and a majority of the
stockholders  approved a name change and change of  domicile of that  company to
Delaware via a merger with the newly formed  wholly-owned  Delaware  subsidiary,
HQSM. The name change, change of domicile and merger became effective on May 19,
2004,  with HQSM being the surviving  entity in the merger and acquiring all the
assets and  liabilities of Process  Equipment,  Inc. On August 17, 2004, we have
entered into a Purchase  Agreement with Sino-Sult  Canada  (S.S.C.)  Limited,  a
Canadian  limited  liability  corporation  ("SSC"),  whereby we acquired Sealink
Wealth Limited  ("Sealink"),  SSC's wholly owned subsidiary  incorporated in the
British Virgin Islands.  That purchase agreement has been filed as an exhibit to
our  current  report on Form 8K filed with the  Commission  on August 18,  2004.
Sealink is the sole owner of Jiahua  Marine  Bio-Products  Co.  Ltd.,  a limited
liability company existing in China ("Jiahua Marine") which is primarily engaged
in the production and sales of marine  bio-products  and healthcare  products in
the PRC,  as  described  in more  detail in the above  current  report.  Also as
previously  disclosed,  in the same current report, SSC is owned by three of our
current  directors  and  executive  officers  who are also,  together,  indirect
beneficial owners of the majority of our capital stock.

                                       F-8


<PAGE>

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

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

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

2. BASIS OF PRESENTATION

The consolidated  financial  statements include the accounts of HQSM 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.

3. SUMMARY OF PRINCIPAL 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.




                                       F-9


<PAGE>

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. 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                   2.25% - 9% (10 - 40 years)

Plant and machinery                                    9% - 18% (5 - 10 years)

Motor vehicles                                              18% (5 years)

Office equipment and furnishings                            18% (5 years)

The  Company  owns 4 fully  depreciated  vessels  which  have been  taken out of
service.

D. 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,  2005 and 2004 due to the  relatively  short-term  nature of these
instruments.


                                      F-10


<PAGE>

E. 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.

F. 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.

G. 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.

H. FOREIGN CURRENCY TRANSLATION

We follow SFAS No. 52, "Foreign Currency Translation",  for both the translation
and remeasurement 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.


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.


                                      F-11


<PAGE>

I. 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.

J. REVENUE RECOGNITION

In accordance with the provisions of Staff Accounting  Bulletin No. 101, revenue
is recognized  when  merchandise is shipped and title passes to the customer and
collectibility is reasonably assured.

K. 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.

L. SEGMENTS

No  geographical  segment  analysis is provided for the year ended  December 31,
2005 and twelve months ended December 31, 2004, as less than 10% of consolidated
revenue and less than 10% consolidated income from operations is attributable to
the segment other than the Mainland China.
















                                      F-12


<PAGE>
<TABLE>
<CAPTION>

Business Segment for the year ended December 31, 2005

                                             Aquaculture     Health and     Unallocated
                                               Products     Bio-products       Items       Consolidation
                                            -------------   ------------    -----------    -------------
<S>                                         <C>             <C>             <C>            <C>
Sales to external customers
                                               17,780,268      9,772,762           --         27,553,030
                                            ============================================================

General and administrative expenses               427,813        142,482      1,851,486        2,421,781
Depreciation                                      650,804        304,719          5,772          961,295
Selling expenses
                                                  157,570        144,060           --            301,630
Advertising
                                                     --        3,623,107           --          3,623,107
Finance costs                                     227,701        124,173          8,908          360,782
Provision/(Recovery) of doubtful accounts          91,276       (431,903)          --           (340,627)
Income/(loss) before income taxes               1,357,080      4,404,169     (1,866,157)       3,895,092
Income taxes
                                                  353,223        287,771           --            640,994
Net income/(loss) for the year                  1,003,857      4,116,398     (1,866,157)       3,254,098
                                            ============================================================

Segment assets                                 14,212,919      9,059,564      1,144,197       24,416,680
                                            ============================================================

Segment liabilities                             3,070,504      2,106,884      1,377,823        6,555,210
                                            ============================================================

Business segment for the year ended December 31, 2004

                                             Aquaculture     Health and     Unallocated
                                               Products     Bio-products       Items       Consolidation
                                            -------------   ------------    -----------    -------------

Sales to external customers                    17,949,204      3,242,288           --         21,191,492
                                            ============================================================

General and administrative expenses             2,260,417           --          771,524        3,031,941
Depreciation                                      523,688         87,184          4,248          615,120
Selling expenses                                  355,894         28,208           --            384,102
Advertising
                                                     --        1,674,988           --          1,674,988
Finance costs                                     162,403         50,088        194,349          406,840
Recovery of doubtful accounts                   1,057,130           --             --          1,057,130
Income/(loss) before income taxes               1,337,752      1,005,557     (2,572,899)        (229,590)
Income taxes
                                                  216,544           --             --            216,544
Net income/(loss) for the year                  1,121,208      1,005,557     (2,572,899)        (446,134)
                                            ============================================================

Segment assets                                 13,412,191      7,452,718         60,753       20,925,662
                                            ============================================================

Segment liabilities                             4,809,501      2,932,717      1,472,020        9,214,238
                                            ============================================================
</TABLE>


                                      F-13


<PAGE>

N. COMPREHENSIVE INCOME/(LOSS)

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  (loss) 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.

O. 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 collectibility of outstanding accounts receivable.

P. SHIPPING AND HANDLING COSTS

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

Q. ADVERTISING COSTS

Advertising costs are expensed as incurred.

R. 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.

S. DEFERRED LOAN COST

Deferred loan costs represent  deposits made to a potential  guarantor that will
be returned in the event the Company is not provided the loan guaranty

T. RECENT PRONOUNCEMENTS

Prior  to  January  1,  2005,  we  accounted  for  stock-based  compensation  to
non-employees  (directors,  investors,  consultants) in accordance with SFAS No.
123,  Accounting  for  Stock-Based  Compensation,  as amended  by SFAS No.  148,
Accounting for Stock-Based  Compensation - Transition and Disclosure.  Under the
fair value recognition provisions of SFAS No. 123, stock-based compensation cost
for all stock-based  awards was measured at the grant date based on the value of
the award and was  recognized as expense over the service period for awards that
were expected to vest.

Effective  January 1, 2005,  we adopted SFAS No.  123(R),  Share-Based  Payment,
using the modified prospective  application  transition method. Because the fair
value recognition provisions of SFAS No. 123 and SFAS No. 123(R) were materially
consistent  under our equity plans, the adoption of SFAS No. 123(R) did not have
a  significant  impact on our financial  position or our results of  operations.
Prior to our adoption of SFAS No.  123(R),  benefits of tax deductions in excess
of recognized compensation costs were reported as operating cash flows. SFAS No.
123(R)  requires  excess tax  benefits be  reported  as a financing  cash inflow
rather than as a reduction of taxes paid.

                                      F-14


<PAGE>

In November  2005, the FASB issued Staff Position  ("FSP")  FAS115-1/124-1,  The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments,  which  addresses  the  determination  as to when an  investment is
considered  impaired,  whether that impairment is other than temporary,  and the
measurement  of  an  impairment   loss.   This  FSP  also  includes   accounting
considerations   subsequent  to  the  recognition  of  an   other-than-temporary
impairment and requires certain  disclosures  about unrealized  losses that have
not been recognized as  other-than-temporary  impairments.  The guidance in this
FSP amends FASB Statements No. 115,  Accounting for Certain  Investments in Debt
and Equity Securities,  and No. 124,  Accounting for Certain Investments Held by
Not-for-Profit  Organizations  , and APB  Opinion  No. 18, The Equity  Method of
Accounting for Investments in Common Stock . This FSP is effective for reporting
periods  beginning  after  December 15, 2005.  We do not believe the adoption of
this FSP will have a material impact on our financial statements.

In  November  2005,  the FASB  issued FSP  FAS123(R)-3,  Transition  Election to
Accounting for the Tax Effects of Share-Based  Payment Awards. This FSP requires
an   entity   to   follow    either   the    transition    guidance    for   the
additional-paid-in-capital  pool as prescribed in SFAS No.  123(R),  Share-Based
Payment , or the  alternative  transition  method as  described  in the FSP.  An
entity that adopts SFAS No.  123(R) using the modified  prospective  application
may make a one-time  election to adopt the transition  method  described in this
FSP. An entity may take up to one year from the later of its initial adoption of
SFAS No.  123(R) or the  effective  date of this FSP to evaluate  its  available
transition  alternatives  and  make  its  one-time  election.  This  FSP  became
effective in November 2005. We continue to evaluate the impact that the adoption
of this FSP could have on our financial statements.

4. TRADE RECEIVABLES

The Group's trade receivables at December 31, 2005 and 2004 are summarized as
follows:
                                                            2005         2004
                                                         ----------   ----------

Trade receivable                                         $9,160,129   $6,463,031
Less: Allowance for doubtful accounts                       737,002    1,056,859
                                                         -----------------------
                                                         $8,423,127   $5,406,172
                                                         =======================

The  activity in the Group's  allowance  for doubtful  accounts  during the year
ended  December 31, 2005 and twelve months ended December 31, 2004 is summarized
as follows:

                                                         2005           2004
                                                     -----------    -----------

Balance at beginning of year                         $ 1,056,859    $   829,716
Add: amount acquired from acquisition of Sealink            --        1,284,273
Less: recovery during the year                          (340,627)    (1,057,130)
Exchange difference transfer to exchange reserve          20,770           --
                                                     --------------------------
Balance at end of year                               $   737,002    $ 1,056,859
                                                     ==========================


                                      F-15


<PAGE>

5. PROPERTY, PLANT AND EQUIPMENT

                                                           2005          2004
                                                       -----------   -----------
Cost:-
Buildings and leasehold improvement                    $ 2,884,010   $ 2,817,990
Plant and machinery                                      8,336,665     8,461,585
Motor vehicles                                              55,993        68,580
Office equipment and furnishings                           135,552       126,470
                                                       -------------------------
                                                        11,412,220    11,474,625
Less: Accumulated depreciation:-
Buildings and leasehold improvement                        357,734       273,479
Plant and machinery                                      2,929,515     2,050,400
Motor vehicles                                              35,877        55,228
Office equipment and furnishings                            88,591        65,845
                                                       -------------------------
                                                         3,411,717     2,444,952

                                                       -------------------------
Property, plant and equipment, net                     $ 8,000,503   $ 9,029,673
                                                       =========================

Depreciation expenses relating to property, plant and equipment was $961,295 and
$615,120 for the year ended  December 31, 2005 and twelve months ended  December
31, 2004, respectively.

6. INVENTORIES

The Group's inventories at December 31, 2005 and 2004 are summarized as follows:

                                                               2005       2004
                                                             --------   --------

Raw materials                                                $ 63,822   $ 84,569
Work-in-progress                                               23,082     82,609
Finished goods                                                470,560     61,386
                                                             -------------------
Total Inventories                                            $557,464   $228,564
                                                             ===================

7. PREPAYMENT

The Group's prepayment at December 31, 2005 and 2004 are summarized as follows:

                                                               2005       2004
                                                             --------   --------

Advances to suppliers                                        $  1,888   $  1,932
Prepaid expenses                                              129,976       --
                                                             -------------------
Total                                                        $131,864   $  1,932
                                                             ===================


                                      F-16

<PAGE>

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts  payable  and  accrued  expenses  at  December  31,  2005  and 2004 are
summarized as follows:

                                                             2005        2004
                                                         ----------   ----------

Accounts payable                                         $  273,101   $  146,026
Accrued expenses                                          2,344,345    4,058,604
                                                         -----------------------
                                                         $2,617,446   $4,204,630
                                                         =======================

9. BANK LOANS

As at December 31, 2005, the Group has an expired loan from bank at an amount of
$1,726,264 bearing an interest of 7.56% per annum. As at the date of the report,
the Group is in negotiation  with the banker to extend the said loan and expects
to have the loan extended for not less than one year to December 2006. The loans
were  secured by the pledge of certain  fixed  assets  held by the Group and its
subsidiaries.

10. INCOME TAXES

HQOF,  registered  in the PRC, is subject to state and local income taxes within
the PRC at the applicable tax rate as reported in their PRC statutory  financial
statements  in  accordance  with the  relevant  income  tax laws  applicable  to
wholly-owned  foreign  enterprises.  HQOF was subject to a tax rate of 7.5% from
the  years  of 2003 to  2005.  HQOF  was  entitled  to a  two-year  tax free and
three-year  half-tax holidays from 2001 commencing with its first  profit-making
year.  Furthermore,  the other wholly-owned  subsidiary Jiahua Marine enjoys the
two-year tax free and three-year half-tax holidays from 2003 commencing with its
first  profit-marking  year. The reconciliation of the effective income tax rate
of the  Company to the  statutory  income tax rate in the PRC for the year ended
December 31, 2005 is as follows:

     Statutory tax rate                                       15.0%
     Tax holidays and concessions                            (7.5%)
                                                          ------------
     Effective tax rate                                       7.5%
                                                          ============

                                      F-17


<PAGE>

The Group's income/(loss) before income taxes was comprised of the following for
the year ended  December  31, 2005 and twelve  months  ended  December 31, 2004,
respectively:

                                                         2005           2004
                                                     -----------    -----------

United States                                        $(1,657,206)   $(1,694,305)
Canada                                                  (203,521)      (182,637)
PRC                                                    5,755,819      1,647,352

                                                     --------------------------
                                                     $ 3,895,092    $  (229,590)
                                                     ==========================

Income taxes are calculated on a separate  entity basis.  There  currently is no
tax benefit or burden  recorded for the United States or Canada.  The provisions
for income taxes for the year ended  December  31, 2005 and twelve  months ended
December 31, 2004, respectively, are summarized as follows:

PRC only:                                                      2005       2004
                                                             --------   --------

Current                                                      $333,092   $   --
Deferred                                                      307,902    216,544
                                                             -------------------
                                                             $640,994   $216,544
                                                             ===================

Tax recoverable as at December 31, 2005 and 2004 comprise the following:

                                                              2005        2004
                                                            --------    --------

Balance at January 1                                        $ 81,602    $ 81,602
Income tax provided for the period of twelve months           45,321        --
Income tax paid during the period of twelve months           (45,321)       --
Exchange difference transfer to exchange reserve               1,912        --
                                                            --------------------
Balance at December 31                                      $ 83,514    $ 81,602
                                                            ====================

Tax payable as at December 31, 2005 and 2004 comprise the following:

                                                             2005         2004
                                                          ---------    ---------

Balance at January 1                                      $    --      $    --
Income tax provided for the period of twelve months         287,771         --
Income tax paid during the period of twelve months         (215,428)        --
Exchange difference transfer to exchange reserve                902         --
                                                          ----------------------
Balance at December 31                                    $  73,245    $    --
                                                          ======================


                                      F-18

<PAGE>
<TABLE>
<CAPTION>

11. DEFERRED TAX

Deferred tax assets as at December 31, 2005 and 2004 comprise the following:

                                                               2005           2004
                                                           -----------    -----------
<S>                                                        <C>            <C>
Balance at January 1                                       $ 1,209,790    $ 1,426,334
Deferred tax written off for the period of twelve months      (307,902)      (216,544)
Exchange difference transfer to exchange reserve                24,735           --
                                                           --------------------------
Balance at December 31                                     $   926,623    $ 1,209,790
                                                           ==========================
</TABLE>

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.

12. APPROPRIATED RETAINED EARNINGS (RESERVES)

The reserve funds are comprised of the following:

                                                            2005         2004
                                                         ----------   ----------

Statutory surplus reserve fund                           $1,299,266   $  739,580
Public welfare fund                                         649,633      369,790
Capital reserve                                              36,946       36,946
                                                         ----------   ----------
                                                         $1,985,845   $1,146,316
                                                         ==========   ==========

The  reserves  are  disclosed  separately  on  the  accompanying  statements  of
stockholders' equity and are considered an appropriation of retained earnings.

Pursuant  to  the  relevant  laws  and   regulations  of  Wholly  Owned  Foreign
Enterprises,  the profits of the Company, 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  reserve  funds,  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 reserve funds,  consisting of the
statutory  surplus and public welfare funds. 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 profits after
taxation,  as  determined  in  accordance  with  the  PRC  accounting  standards
applicable to the companies, to the statutory surplus reserve until such reserve
reaches 50% of the registered capital of the companies.

                                      F-19


<PAGE>

Net income as reported in the US GAAP financial  statements differs from that as
reported in the PRC  statutory  financial  statements.  In  accordance  with the
relevant laws and regulations in the PRC, the 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.

13. EMPLOYEE STOCK OPTION PLAN

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,  who qualify as  employees  for
valuation  purposes,  as well as to several of our employees.  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 $0.28.

Specifically,  Norbert  Sporns,  our  Chief  Executive  Officer,  President  and
director,  received  500,000 stock  options.  Lillian Wang,  the Chairman of our
Board of  Directors,  received  500,000  stock  options.  Harry Wang,  our Chief
Operating  Officer,  director and brother of Ms. Wang,  received  500,000  stock
options;  and Fusheng Wang,  our director,  Honorary  Chairman and father of Ms.
Wang, received 1,000,000 stock options. Together, Norbert Sporns, Harry Wang and
Lillian Wang also indirectly  control the majority of capital stock of HQSM. 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 200,000 stock options. Mr. Dallaire's options were vested in
2004 as to 50% of the grant , with the remaining 50% 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 HQSM.  These stock  options were vested
then as to 50% of each  individual  grant,  with the  remaining  50%  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 5,000,000 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 Norbert Sporns,  Fred Bild, an
independent director, and Daniel Too, also an independent director of HQSM.

The Company has elected 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 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.  Had compensation cost for these plans been determined  consistent
with SFAS No. 123, the Company's net loss and net loss per share would have been
increased to the following pro forma amounts:

                                                          For the years ended
                                                              December 31,
                                                       ------------------------
                                                          2005          2004
                                                       ----------    ----------

Net income (loss)
    As reported                                        $3,254,098    $ (383,943)
    Pro forma                                          $3,254,098    $ (383,943)
Earnings per share
     As reported                                       $     0.03    $    (0.01)
     Pro forma                                         $     0.03    $    (0.01)


                                      F-20

<PAGE>
<TABLE>
<CAPTION>

14. SIGNIFICANT CONCENTRATION

The Group grants credit to its  customers,  generally on an open account  basis.
The Group's five largest customers accounted for 62.6% of the consolidated sales
for the year ended  December 31,  2005.  Of those five  customers,  three are in
excess of 10% of consolidated sales, with 17.0%, 14.6% and 13.7% of consolidated
sales, or an aggregate of 45.3%.

At December 31, 2005,  approximately  55.4% of trade receivables were from trade
transactions with the aforementioned five largest customers.

15.  WARRANTIES  The Group did not incur any  warranty  costs for the year ended
December 31, 2005, and for the twelve months ended December 31, 2004

16. COMMITMENTS AND CONTINGENCIES A. CAPITAL COMMITMENTS

As of  December  31,  2005,  the Group has no  significant  capital  commitments
required for disclosure.

B. LEASE COMMITMENTS

The lease  commitments  of the Group as at  December  31,  2005 and 2004 were as
follows:

                                                               2005       2004
                                                             --------   --------

Within 1 year                                                $ 20,645   $ 22,102
1-2 years                                                      62,045       --
2-3 years                                                      62,045       --
Over 3 years                                                  183,755       --
                                                             -------------------
Total                                                        $328,490   $ 22,102
                                                             ===================

C. LEGAL PROCEEDINGS

The  Group  is  not  currently  a  party  to any  threatened  or  pending  legal
proceedings.

17. CAPITAL STRUCTURE

Common stock  consists of  authorized  shares of  200,000,000  with a stated par
value of $0.001 per share.  Common stock issued and  outstanding  as of December
31, 2005 and 2004 was 116,105,225 and 95,055,123,  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, 2005 and 2004,  the Company  issued  common
shares  amounting to 21,050,102 and  70,055,123  with net proceeds of $2,396,697
and  $22,603,699,   respectively.  The  amounts  recorded  in  the  accompanying
financial statements are net of costs incurred in raising capital.

18. EARNINGS PER SHARE

The following is a reconciliation  of the numerators and the denominators of the
basic and diluted earnings per share (EPS) computation at December 31, 2005.

                                                                  2005
                                                                  ----
                                                 Income          Shares       Per Share
                                               (Numerator)   (Denominator)      Amount
                                               -----------   -------------   -----------
<S>                                            <C>             <C>           <C>

Basic EPS
Income available to common shareholders        $ 3,254,098     102,764,361   $       .03
Effect of dilutive securities stock options
issued to employees                                   --           547,903          --
                                               -----------------------------------------
Diluted EPS
Income available to common stockholders plus
assumed conversions                            $ 3,254,908     103,312,264   $       .03
                                               =========================================
</TABLE>

                                      F-21
<PAGE>

19. 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.

20.  UNAUDITED  PRO  FORMA  CONDENSED  CONSOLIDATED  FINANCIAL  STATEMENTS  (for
comparative purposes only)

On August 17, 2004,  HQSM and Sealink,  as the parent and management  company of
Jiahua Marine  Bio-products  Company Limited.  ("Jiahua Marine"),  consummated a
Purchase  Agreement  whereby  HQSM  acquired  all of the issued and  outstanding
capital  stock of Sealink at a  consideration  payable by HQSM in the  following
manner:  (i) $8,888,655 in the form of 12,698,078 shares of HQSM's common stock,
$0.001 par value per share,  to be  delivered  to SSC at  closing,  and (ii) the
remaining balance of $11,111,345 payable in the form of a convertible promissory
note  issued  by  HQSM  to  SSC.  This  note is  included  as  Exhibit  B to the
Nutraceutical  Purchase  Agreement.  The note accrued interest at the rate of 5%
per  annum  and  was  converted  into:  (a)  one  hundred  thousand  US  Dollars
(US$100,000) for 100,000 shares of HQSM's Series A preferred  stock,  $0.001 par
value per share,  the proposed terms of which are described  below and are fully
subject to receipt of all necessary shareholder consents and approvals,  and (b)
the  remaining  principal  amount  of  the  note  equal  to  US$11,011,345  into
15,730,493 shares of HQSM's common stock. The note was converted upon completion
of an audit of HQSM's acquisition of Sealink and Jiahua Marine, performed to the
satisfaction  of HQSM and  receipt of all  necessary  shareholder  consents  and
approvals.

The Purchase Agreement is being accounted for as a  recapitalization  of Sealink
whereby the historical  financial  information of Sealink becomes the historical
financial information of the Registrant.

The accompanying  Unaudited Pro Forma Condensed Consolidated Statement of Income
for the twelve  months  December  31,  2004,  has been  prepared  to reflect the
acquisition as if it had occurred as of January 1, 2004.




                                      F-22


<PAGE>

The  accompanying pro forma  information is presented for illustrative  purposes
only and is not necessarily  indicative of the financial  position or results of
operations which would actually have been reported had the merger been in effect
during the periods presented, or which may be reported in the future.

                                                                         2004
                                                                     -----------
                                                                        (`000)

Sales                                                                $    26,126
Profit from operation                                                $       776
Profit for the period of twelve months                               $       776
                                                                     ===========

Weighted average outstanding number of shares as at December
31, 2004                                                              69,770,366
Earnings per share                                                   $      0.01

21. SUBSEQUENT EVENT

On January 25,  2006,  the  Company  issued  convertible  notes in the amount of
$5,225,000,  maturing January 25, 2008, to a group of private  investors.  After
deducting  commissions  and other  costs,  the Company  received net proceeds of
$4,681,250.  Those notes are  convertible  into shares of the  Company's  common
stock at a per share  conversion price of $0.30. The notes shall accrue interest
at 8% yearly.

On  February  24,  2006,  the  Company  filed a form SB-2  related  to the above
convertible  notes.  That  prospectus  related  to the  resale  by  the  selling
stockholders  of up to 49,637,499  shares of our common  stock,  including up to
17,416,666  (in  addition  to  sufficient  shares  of  common  stock  to cover a
contractual  obligation to register 175% of the number of shares of common stock
underlying  the  convertible  notes,  equaling an aggregate  total of 30,479,166
shares of common  stock)  underlying  secured  convertible  notes in a principal
amount of $5,225,000  and up to 19,158,333  shares of common stock issuable upon
the exercise of common stock purchase  warrants.  The secured  convertible notes
are convertible into our common stock at $0.30.




                                      F-23




<PAGE>

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

We  have  had no  disagreements  on  any  matter  of  accounting  principles  or
practices,  financial statement disclosure, or auditing scope or procedures with
any of our  accountants  for the year ended  December  31,  2005 or any  interim
period.

We have not had any other changes in nor have we had any disagreements,  whether
or not resolved,  with our  accountants on accounting and financial  disclosures
during our two recent fiscal years or any later interim period.

Item 8A. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the  participation  of our management,  including
our Chief  Executive  Officer and Chief  Financial  Officer,  we  evaluated  the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures  (as such term is  defined  in Rule  13a-15(e)  under the  Securities
Exchange Act of 1934 (the "Exchange Act")).  Disclosure  controls and procedures
are the controls and other procedures that we designed to ensure that we record,
process,  summarize  and  report  in a timely  manner  the  information  we must
disclose in reports that we file with or submit to the  Securities  and Exchange
Commission under the Exchange Act. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer  concluded that our disclosure  controls
and  procedures  were  effective  as of the end of the  period  covered  by this
report.

Disclosure controls and procedures are controls and procedures that are designed
to ensure that  information  required to be  disclosed  in our reports  filed or
submitted under the Securities Exchange Act is recorded,  processed,  summarized
and reported,  within the time periods  specified in the Securities and Exchange
Commission's  rules and  forms.  Disclosure  controls  and  procedures  include,
without limitation,  controls and procedures designed to ensure that information
required  to be  disclosed  in our  reports  filed  under  the  Exchange  Act is
accumulated and  communicated to management,  including our principal  executive
officer and our principal  financial  officer,  as appropriate,  to allow timely
decisions regarding required disclosure.


(b) Changes in Internal Control over Financial Reporting..

During the year ended  December  31,  2005,  there was no change in our internal
control  over  financial  reporting  (as such term is defined in Rule  13a-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.


ITEM 8B. OTHER INFORMATION.


         None.


                                      -64-
<PAGE>
<TABLE>
<CAPTION>

PART III

ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE


Directors and Executive Officers

The following  table sets forth the names and ages of our current  directors and
executive officers, their principal offices and positions and the date each such
person became our director or executive officer.  The executive officers are all
full time employees of HQSM.

The directors and executive officers of HQSM are as follows:

    Name          Age   Position                        Date of Appointment            Date of Resign
---------------   ---   -----------------------------   ---------------------------    --------------
<S>               <C>   <C>                             <C>                            <C>
Lillian Wang Li   49    Director/Chairman of Board of   March 25, 2004 as director;    N/A
                        Directors/ Secretary officer    April 13, 2004 as executive

Harry Wang Hua    43    Director/                       March 25, 2004                 N/A
                        Chief Operating Officer

Norbert Sporns    52    Director/President/             March 25, 2004                 N/A
                        Chief Executive Officer

Jacques Vallee    54    Independent Non-executive       June 15, 2004                  N/A
                        Director

Fred Bild         69    Independent Non-executive       June 15, 2004                  N/A
                        Director

Jean-Pierre       54    Financial Controller/           April 13, 2004                 N/A
Dallaire                Chief Financial Officer         September 1, 2004

He Jian Bo        40    Manager Finance Dept.           April 13, 2004                 N/A

Wang Fu Hai       62    Chief Production Controller     April 13, 2004                 N/A

William Sujian    37    International Sales &           July, 1, 2004                  N/A
                        Compliance Officer

Fusheng Wang      72    Honorary Chairman/Director      August 17, 2004                N/A

Daniel Too        54    Independent Non-executive       September 2, 2004              N/A
                        Director
</TABLE>

Our officers are generally  elected  annually by the Board of Directors and hold
office for a term of one year and until a successor is elected and qualified, or
until their earlier resignation or removal.  All officers identified above serve
at the discretion of our board of directors.

Family Relationships

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


                                      -65-
<PAGE>

Set forth below are the brief  descriptions  of the background and experience of
each of our officers and directors:

Lillian Wang Li - Chairman of Board of Directors and Secretary

Lillian  Wang Li, age 49, is one of the  founders of HQSM and is the chairman of
our board of  directors.  She is  responsible  for the  general  administration,
strategic planning and financial management of HQSM. Ms. Wang graduated from the
Beijing  University  majoring in European  and  Chinese  Literature  and holds a
certificate in business  administration from Concordia  University,  Canada. She
has over  twenty-five  years  experience  in  management  of China and  Canadian
businesses, particularly with respect to financial matters.

Harry Wang Hua - Director and Chief Operating Officer

Harry Wang Hua, age 43, is one of the founders of HQSM,  and is our director and
chief  operating  officer.  He is  responsible  for  the  establishment  of  the
production  facilities  and their  operation  in HQSM.  He attended  the Beijing
Industrial  University majoring in civil engineering.  Mr. Wang has over fifteen
years'  experience in managing  startup  companies in China and in Canada and in
training middle managers in China to Western standards.

Norbert Sporns - Director, Chief Executive Officer and President

Norbert  Sporns,  age 53, is one of the founders of HQSM,  and is our  director,
chief executive  officer and president.  He has extensive  experience in project
development  and  investment  consultancy.  He graduated  from the University of
British Columbia,  Canada,  majoring in Philosophy.  He also holds a Bachelor of
Civil Law degree  and a Bachelor  of  English  Common  Law  degree  from  McGill
University and a Certificate of Tax Law, a Certificate in Condominium  Law and a
Diploma of Notarial Law from the University of Montreal.  Mr. Sporns joined HQSM
in 1997.

Jacques Vallee -Independent Non-executive Director

Jacques  Vallee,  age  54,  is  an  independent  non-executive  director.  He is
currently  in charge of Business  Development  and  Financing  with the Altitude
Consulting Group. In addition to an M.B.A. from the University of Sherbrooke and
an advanced Certificate in Business Administration from the University de Quebec
a Trois  Rivieres,  Mr.  Vallee  also holds a  post-graduate  level  Advertising
Management Diploma from the Ecole des Hautes Etudes Commerciales,  Montreal.  He
has over 30 years of management experience at such notable Canadian institutions
as the Bank of Montreal,  La  Federation  des Caisses  Populaires  Desjardins de
Richelieu-Yamaska,  Le  Fonds de  Solidarite  des  Travailleurs  du  Quebec  and
Altitude Consulting Group.

Fred Bild - Independent Non-executive Director

Fred  Bild,  age 70,  is  currently  Visiting  Professor  at the  University  of
Montreal's Centre of East Asian Studies and is a private consultant on political
and economic relations with China and East Asia.  Professor Bild received a B.A.
in Philosophy and Sociology from Sir George  Williams  University,  a Diploma in
International Law from University  College,  London, and a Diplome de Stage from



                                      -66-
<PAGE>

the Ecole National  d'Administration in Paris. Over the past nearly forty years,
Mr. Bild has served the Canadian Embassy in various functions including Cultural
Attache  (Tokyo),  Economic  Counsel and Deputy Chief (Paris) and  Ambassador to
Thailand and China.

Daniel Too - Independent Non-executive Director

Mr.  Too,  age 54, a  graduate  of Hong Kong  University  and  Polytechnic,  has
extensive  business  experience in Asia and brings a keen  understanding  of the
business  difficulties  associated  with working in China.  He is currently  the
Managing  Director  of Delta  Elevator  Far East and serves as Director of Voker
Chemical Paint  Limited.  He has been named to the  compensation  committee with
another Independent  Non-Executive Director, Mr. Fred Bild, and the CEO, Norbert
Sporns.

Jean-Pierre Dallaire - Financial Controller and Chief Financial Officer

Jean-Pierre  Dallaire,  age 54, is the financial  controller and CFO of HQSM. He
has  experience  with  Canada's  largest   engineering   company  where  he  was
responsible for cash flow  projections  and project  financial  supervision.  He
holds a Master  degree in  Administration  (Accounting)  from the  University of
Sherbrooke,  Canada.  He  joined  HQSM in  2000.

He Jian Bo - Manager Finance Department

He Jian Bo, age 40, is the manager of the finance department of HQSM. He holds a
Bachelor's and a Master degree in Economics from the Southwestern  University of
Finance and Economics, the PRC. He joined HQSM in 1999.

Wang Fu Hai - Director and Chief Accounting and Finance Officer

Wang Fu Hai, age 61, is the Chief Production Controller and Engineer of HQSM. He
graduated  from Post College in 1966.  He was the manager of Project  Department
Jiahua Marine Ocean  Organism  Co.,  Ltd. He has solid  experience in production
coordination and control. He joined HQSM in 1997.

Fusheng Wang - Honorary Chairman of Board of Directors

A senior  economist,  Wang  Fusheng,  aged 71,  worked  for many  years with the
Ministry of Public  Security and then as founder of the China Huan Dao Group. As
Chairman of the China Chamber of Commerce,  he led the first business delegation
from  mainland  China to Taiwan.  Now retired,  he has  maintained  an exemplary
network of government and business  contacts.  He remains Chairman of the Hainan
Chamber  of  Commerce  and is a  Director  for the  China  National  Chamber  of
Commerce. He has been the recipient of numerous awards including the prestigious
American Five Star Diamond award in 1997.

William Su Jian- International Sales and Compliance Officer

William Su Jian, aged 37, is the International  Sales and Compliance Officer for
the Company. He Graduated from Beijing Second Foreign Language Institute,  Major
in Business Administration.  He has over 12 years of experience in international
trade and project  development.  He is familiar with western and Asian  business
practices.  His functions  include the supervision of the China based sales team
and  supervision of compliance  with the Code of Ethics and Business  Conduct He
joined HQSM in 2004.


                                      -67-
<PAGE>

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our directors, executive officers and
persons who own more than 10% of a required class of our equity  securities,  to
file with the SEC  initial  reports  of  ownership  and  reports  of  changes in
ownership of common stock and other equity securities of our company.  Officers,
directors and greater than 10%  shareholders  are required by SEC  regulation to
furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based upon a review of the copies of such reports furnished to
us and based upon written  representations  that no other reports were required,
all Section 16(a) filing requirements applicable to our officers,  directors and
greater than 10%  beneficial  owners were  complied  with during the fiscal year
ended December 31, 2005 and subsequently.

Code of Ethics

Since July 2004, our board of directors adopted a code of ethics that applies to
all of our officers and employees,  including our principal  executive  officer,
principal financial officer,  principal  accounting officer and controller.  The
code of ethics will establish  standards and guidelines to assist our directors,
officers and employees in complying  with both our  corporate  policies and with
the law. It has been posted at our website: www.hqfish.com

















                                      -68-
<PAGE>
<TABLE>
<CAPTION>

ITEM 10 EXECUTIVE COMPENSATION

The  following  table sets forth for the years ended  December 31, 2005 and from
March  17,  2004  (the  date  of the  merger)  through  December  31,  2004  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. No other officer had
compensation  of $100,000 or more for the years ended December 31, 2005 and from
March 17, 2004 (the date of the merger)through December 31, 2004.


                                                                              Long Term Compensation
                     ---------------------------------------------------------------------------------------------------------------
                         Annual Compensation                       Awards                                      Payouts
                     ---------------------------------------------------------------------------------------------------------------
Name and                                                                                    Securities                    All Other
Principal                                              Other Annual     Restricted Stock    Underlying          LTIP       Compen-
Position             Year      Salary        Bonus     Compensation        Award (s)      Options/SARs (#)     Payouts     sation
------------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>     <C>            <C>        <C>              <C>    <C>        <C>                  <C>        <C>
Norbert Sporns       2004    $112,500       $37,500         --                 --            500,000             --          --
Chief Executive                                                                       options to purchase
Officer                                                                                     shares of
                                                                                           common stock

                     2005    $165,000       $55,000         --                 --               --               --          --


Lillian Wang Li      2004    $112,500       $75,000         --                 --            500,000             --          --
Chairman of                                                                           options to purchase
   the Board of                                                                             shares of
   Directors                                                                               common stock

                     2005    $165,000     $110,000          --                 --               --               --          --


Harry Wang Hua       2004    $ 75,000     $ 75,000          --                 --            500,000             --          --
Chief Operating                                                                       options to purchase
Officer                                                                                     shares of
                                                                                           common stock

                     2005    $110,000     $110,000          --                 --               --              --           --


Jean-Pierre          2004    $ 41,700     $  8,300          --                 --            200,000            --           --
Dallaire                                                                              options to purchase
   Principal                                                                                shares of
   Financial                                                                            common stock (1)
   Officer/
   Principal        2005    $ 110,000    $ 27,500           --                 --               --              --           --
   Accounting
   Officer
</TABLE>

(1) Mr. Dallaire's  options vest as follows:  100,000 vested 2004, 33,333 vested
in 2005, 33,333 will vest in year end 2006 and the remainder at year end 2007.



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



                                      -69-
<PAGE>

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  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.

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  salary 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  salaries  of  our  independent  non-executive
directors  Fred Bild,  Daniel Too and Jacques  Vallee was $15,000 plus an annual
bonus to them of not less than $15,000 payable in shares of our common stock.

Audit Committee Financial Expert

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

                              Employment Agreements
                              ---------------------

In April 2004,  we entered into  employment  agreements  with our top  executive
officers to secure their commitment to continued service to our company.

Lillian Wang Li's employment agreement has a term of five (5) years,  commencing
on April 1, 2004,  and provides for a base salary of $150,000 for the first year
of the term and an annual  increase of 10%. 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 the grant of options to  purchase  shares of our common  stock.  The options
include an option to purchase an aggregate of twenty  percent  (20%) of the then
fully diluted shares of our common voting stock made  available  under the stock
option  plan,  and, at the  beginning  of each  calendar  quarter,  an option to
purchase an aggregate of five percent (5%) of the then fully  diluted  shares of
our company's  common voting stock made  available  under the stock option plan.
The options  granted under the employment  agreement will have an exercise price


                                      -70-
<PAGE>

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 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's  employment  agreement has a term of five (5) years,  commencing on
April 1, 2004,  and provides for a base salary of $100,000 for the first year of
the term and an annual  increase of 10%. 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%) of the then
fully diluted shares of our common voting stock made  available  under the stock
option  plan,  and, at the  beginning  of each  calendar  quarter,  an option to
purchase an aggregate of five percent (5%) of the then fully  diluted  shares of
our company's  common voting stock made  available  under the stock option plan.
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 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' employment agreement has a term of five (5) years, commencing on
April 1, 2004,  and provides for a base salary of $150,000 for the first year of
the term and an annual  increase of 10%. 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%) of the then
fully diluted shares of our common voting stock made  available  under the stock
option  plan,  and, at the  beginning  of each  calendar  quarter,  an option to
purchase an aggregate of five percent (5%) of the then fully  diluted  shares of
our company's  common voting stock made  available  under the stock option plan.
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.  Sporns'  employment  with cause,  or
without  cause upon at least ninety  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.



                                      -71-
<PAGE>

In September 2004, we entered into  employment with our Chief Financial  Officer
to secure  its  commitment  to  continued  service to our  company.  Jean-Pierre
Dallaire's  employment  agreement  has a term of five (5) years,  commencing  on
September 1, 2004, and provides for a base salary of $100,000 for the first year
of the term and an annual  increase of 10%.  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 twenty  percent  (10%) of
the then fully diluted  shares of our common voting stock made  available  under
the stock option plan, and, at the beginning of each calendar quarter, an option
to purchase an aggregate of five percent (5%) of the then fully  diluted  shares
of our company's common voting stock made available under the stock option plan.
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 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.

Stock Incentive Plan

On April  14,  2004,  our  board  of  directors  formally  adopted  the  Process
Equipment,  Inc.  2004  Stock  Incentive  Plan (the  "Plan").  The  holders of a
majority of our outstanding common stock have given their consent to approve the
adoption of this Plan.  The  purpose of the Plan is to  increase  our ability to
attract and retain  talented  employees,  consultants  and directors and thereby
enhance our growth and profitability. Under the Plan, options to purchase common
stock, including "incentive stock options", within the meaning of Section 422 of
the United States Internal  Revenue Code of 1986, as amended,  restricted  stock
awards, non-qualified stock options and other equity-based compensation,  may be
awarded to directors, officers, employees, consultants or other agents.

The board of directors or a committee of independent  directors appointed by the
board of directors  administers  the Plan and selects those employees and others
who are  eligible  to  participate.  The  total  number  of stock  reserved  and
available for grant and issuance  pursuant to the Plan will be the lesser of (i)
8% of common stock outstanding (determined on a fully diluted basis exclusive of
common  stock issued or issuable  pursuant to options and other  awards  granted
under the Plan) or (ii) 8,000,000 shares of common stock.

As of the date of this  prospectus,  no options  for shares of our common  stock
have been granted under the Plan. However, our board of directors has authorized
the grants of options  exercisable for an aggregate of 5,000,000 shares pursuant
to the Plan.






                                      -72-
<PAGE>

ITEM 11.  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  $0.28,  which
represents  the fair market  value as of the initial  grant date of November 23,
2004.

Specifically,  Norbert  Sporns,  our  Chief  Executive  Officer,  President  and
director,  received  500,000 stock  options.  Lillian Wang,  the Chairman of our
Board of  Directors,  received  500,000  stock  options.  Harry Wang,  our Chief
Operating  Officer,  director and brother of Ms. Wang,  received  500,000  stock
options;  and Fusheng Wang,  our director,  Honorary  Chairman and father of Ms.
Wang, received 1,000,000 stock options. Together, Norbert Sporns, Harry Wang and
Lillian Wang also indirectly  control the majority of capital stock of HQSM. 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 200,000 stock options. Mr. Dallaire's options were vested in
2004  immediately  as to 50% of the grant , with the  remaining  50%  vesting as
follows:1/3  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 HQSM.  These stock  options were vested
immediately as to 50% of each individual  grant,  with the remaining 50% 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 5,000,000 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 Norbert Sporns,  Fred Bild, an
independent director, and Daniel Too, also an independent director of HQSM.





                                      -73-
<PAGE>

The  following  table  sets  forth  certain  information   regarding  beneficial
ownership of common stock as of December 31, 2005, by:

     o    each  person  known to us to own  beneficially  more  than 5%,  in the
          aggregate, of the outstanding shares of our common stock;

     o    each director;

     o    each of our chief  executive  officer  and our  other two most  highly
          compensated executive officers; and

     o    all executive officers and directors as a group.

The number of shares  beneficially  owned and the percent of shares  outstanding
are based on 116,105,225 shares outstanding as of December 31, 2005.  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         16,438,564       (1)           14.25%
Lillian Wang Li        17,123,504       (1)           14.75%
Harry Wang Hua         34,931,946       (1)           30.01%
Jacques Vallee         12,500                         Less than 1%
Fred Bild              99,404                         Less than 1%
Daniel Too             81,547                         Less than 1%

All such directors
and executive
officers as a group
(6 persons)            68,687,465                     59.16%

     (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%, 25% and 51% 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.



                                      -74-
<PAGE>

Changes in Control

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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

No related parties transaction have been made for the 2005 fiscal year.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

 Exhibit No.       Description of Exhibit
-----------       ----------------------

2                 Agreement  and Plan of Merger,  dated as of March 17, 2004, by
                  and  among  Process   Equipment,   Inc.,   Process   Equipment
                  Acquisition  Corporation  and Jade Profit  investment  Limited
                  (incorporated  by  reference  to the  Report  on Form  14-C of
                  Process Equipment,  Inc. (Commission File No. 0-18980),  filed
                  with the Commission on April 28, 2004.)


3.1               Certificate  of  Incorporation  of  HQ  Sustainable   Maritime
                  Industries, Inc., as amended (incorporated by reference to the
                  Report on Form 14-C of  Process  Equipment,  Inc.  (Commission
                  file No.  0-18980),  filed  with the  Commission  on April 28,
                  2004.)

3.2               Bylaws   of   HQ   Sustainable   Maritime   Industries,   Inc.
                  (incorporated  by  reference  to the  Report  on Form  14-C of
                  Process Equipment,  Inc. (Commission file No. 0-18980),  filed
                  with the Commission on April 28, 2004.)

4.1               Process   Equipment,    Inc.   2003   Stock   Incentive   Plan
                  (incorporated   by  reference  to  the  Report  on  Form  14-C
                  (commission File Number 0-18980), filed with the Commission on
                  April 28, 2004.)

4.2               Form of Subscription Agreement between HQ Sustainable Maritime
                  Industries,  Inc.  and Certain  Investors,  exhibits  attached
                  (incorporated   by   reference  to  the  Report  on  Form  8-K
                  (commission File Number 0-18980), filed with the Commission on
                  January 26, 2006.)

4.3               Form  of   Rights   and   Preferences   of   Preferred   Stock
                  (incorporated   by   reference  to  the  Report  on  Form  14C
                  (commission File Number 0-18980), filed with the Commission on
                  October 3, 2005.)



                                      -75-
<PAGE>

10.1              Form of Stock Option Grant Notice  (incorporated  by reference
                  to the Report on Form 8-K  (commission  File Number  0-18980),
                  filed with the Commission on December 3, 2004.)

10.2              Form of Option  Agreement  (incorporated  by  reference to the
                  Report on Form 8-K  (commission  File Number  0-18980),  filed
                  with the Commission on December 3, 2004.)

10.3              Form of Exercise  Agreement  (incorporated by reference to the
                  Report on Form 8-K  (commission  File Number  0-18980),  filed
                  with the Commission on December 3, 2004.)

10.4              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 the Report on
                  Form  10-QSB  (Commission  file No.  0-18980),  filed with the
                  Commission on November 15, 2004.)

10.5              Independent  Non-Executive  Director  Agreement,  dated  as of
                  September 2, 2004, between HQ Sustainable  Maritime Industries
                  Inc. and Daniel Too  (incorporated  by reference to the Report
                  on Form 10-QSB  (Commission file No. 0-18980),  filed with the
                  Commission on November 15, 2004.)

10.6              Employment  Agreement,  dated as of September 1, 2004, between
                  HQ  Sustainable   Maritime  Industries  Inc.  and  Jean-Pierre
                  Dallaire  (incorporated  by  reference  to the  Report on Form
                  10-QSB   (Commission  file  No.   0-18980),   filed  with  the
                  Commission on November 15, 2004.)

10.7              Purchase  Agreement,  dated as of August  17,  2004,  among HQ
                  Sustainable  Maritime   Industries,   inc.,  Sino-Sult  Canada
                  (S.S.C.)  Limited and Sealink Wealth Limited  (incorporated by
                  reference  to the Report on Form 8-K  (commission  File Number
                  0-18980), filed with the Commission on August 18, 2004.)


10.8              Purchase Agreement, dated as of August 17, 2004, between Jade
                  Profit Investment Limited and Hainan Fuyuan Investment Company
                  Limited (incorporated by reference to the Report on Form 8-K
                  (commission File Number 0-18980), filed with the Commission on
                  August 18, 2004.)

10.9              Form of Employment  Agreement,  effective as of April 1, 2004,
                  between HQ  Sustainable  Maritime  Industries,  Inc. and Harry
                  Wang (incorporated by reference to the Report on Form 10-QSB
                  (commission File Number 0-18980), filed with the Commission on
                  August 13, 2004.)

10.10             Form of Employment  Agreement,  effective as of April 1, 2004,
                  between HQ Sustainable Maritime  Industries,  Inc. and Lillian
                  Wang Li (incorporated by reference to the Report on Form
                  10-QSB (commission File Number 0-18980), filed with the
                  Commission on August 13, 2004.)



                                      -76-
<PAGE>

10.11             Form of Employment  Agreement,  effective as of April 1, 2004,
                  between HQ Sustainable Maritime  Industries,  Inc. and Norbert
                  Sporns (incorporated by reference to the Report on Form 10-QSB
                  (commission File Number 0-18980), filed with the Commission on
                  August 13, 2004.)

10.12             Form of Independent Non-Executive Director Agreement, dated as
                  of June 15, 2004, between HQ Sustainable  Maritime  Industries
                  Inc. and Fred Bild (incorporated by reference to the Report on
                  Form 10-QSB (Commission file No. 0-18980), filed with the
                  Commission on August 13, 2004.)

10.13             Independent Non-Executive Director Agreement, dated as of June
                  15, 2004, between HQ Sustainable  Maritime Industries Inc. and
                  Jacques  Vallee  (incorporated  by  reference to the Report on
                  Form  10-QSB  (Commission  file No.  0-18980),  filed with the
                  Commission on August 13, 2004.)

10.14             Amendment No. 1 to  Employment  Agreement,  dated July,  2005,
                  between HQ Sustainable Maritime  Industries,  Inc. and Norbert
                  Sporns.  (incorporated  by  reference  to the  Report  on Form
                  10-KSB   (commission  File  Number  18980),   filed  with  the
                  Commission on April 11, 2005.)

10.15             Amendment No. 1 to  Employment  Agreement,  dated July,  2005,
                  between HQ Sustainable Maritime  Industries,  Inc. and Lillian
                  Wang.  (incorporated by reference to the Report on Form 10-KSB
                  (commission  File Number 18980),  filed with the Commission on
                  April 11, 2005.)


10.16             Amendment No. 1 to  Employment  Agreement,  dated July,  2005,
                  between HQ  Sustainable  Maritime  Industries,  Inc. and Harry
                  Wang.  (incorporated by reference to the Report on Form 10-KSB
                  (commission  File Number 18980),  filed with the Commission on
                  April 11, 2005.)

10.17             Agreement   with   Amalgamated   Resources   Holdings,    Inc.
                  (incorporated   by   reference  to  the  Report  on  Form  8-K
                  (commission  File Number 18980),  filed with the Commission on
                  October 24, 2005.)


14                Code of Ethics  (incorporated  by  reference  to the Report on
                  Form 10- KSB  (commission  File Number 18980),  filed with the
                  Commission on April 11, 2005.)



                                      -77-
<PAGE>

16                Letter,  dated May 18,  2004 from Baum &  Company,  P.A.,  the
                  Registrant's former principal  accountants,  to the Securities
                  and  Exchange   Commission   pursuant  to  Item  304(a)(3)  of
                  Regulation  S-B  (incorporated  by  reference to the Report on
                  Form 8-K  (commission  File  Number  0-18980),  filed with the
                  Commission on May 18, 2004.)

21.               Subsidiaries*

23.1              Consent of Rotenberg & Co. LLP*

31.1              Certification  of Chief Executive  Officer Pursuant to Section
                  302 of the Sarbanes-Oxley Act.*

31.2              Certification  of Principal  Financial and Accounting  Officer
                  Pursuant to Section 302 of the Sarbanes-Oxley Act.*

32.1              Certification  of Chief Executive  Officer Pursuant to Section
                  906 of the Sarbanes-Oxley Act.*

32.2              Certification of Chief Accounting  Officer Pursuant to Section
                  906 of the Sarbanes-Oxley Act.*

*Filed herewith



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

(a) Audit Fees

Our principal accountant,  Rotenberg & Co., LLP, billed us aggregate fees in the
amount of  approximately  $210,000  and  $440,000  for the  fiscal  years  ended
December 31, 2005 and December 31, 2004, respectively. These amounts were billed
for  professional  services that Rotenberg  provided for the audit of our annual
financial  statements,  review of our  securities  offerings and other  services
typically  provided by an accountant in connection with statutory and regulatory
filings or engagements for those fiscal years.

(b)  Audit-Related  Fees

Rotenberg  billed us  aggregate  fees in the amount of $0 for the  fiscal  years
ended  December 31, 2005 and December 31, 2004,  and for  assurance  and related
services that were reasonably  related to the performance of the audit or review
of our financial statements.

(c) Tax Fees

Rotenberg  billed us  aggregate  fees in the amount of $0 for the  fiscal  years
ended  December  31, 2005 and December 31,  2004,  and for tax  compliance,  tax
advice, and tax planning.



                                      -78-
<PAGE>

(d) All Other Fees

Rotenberg  billed us  aggregate  fees in the amount of $0 for the  fiscal  years
ended December 31, 2005 and December 31, 2004, and for all other fees.


                                   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 31, 2006

By: /s/ Jean-Pierre Dallaire
   --------------------------------------------
   Name: Jean-Pierre Dallaire
   Title: Principal Accounting Officer


March 31, 2006


Pursuant to the  requirements of the Securities Act of 1933,  this  registration
statement has been signed by the following  persons in the capacities and on the
dates indicated.

SIGNATURE                    TITLE                                DATE
---------                    -----                                ----

 /s/ Norbert Sporns          Chief Executive Officer, President   March 31, 2006
-------------------------    and Director
Norbert Sporns               (Principal Executive Officer)


 /s/ Lillian Wang            Secretary, Chairman of the Board     March 31, 2006
-------------------------    of Directors, and Director
Lillian Wang

 /s/ Harry Wang              Chief Operating Officer and          March 31, 2006
-------------------------    Director
Harry Wang

 /s/ Jacque Vallee           Director                             March 31, 2006
-------------------------
Jacque Vallee

/s/ Fred Bild                Independent Non-executive Director   March 31, 2006
-------------------------
Fred Bild

 /s/ Daniel Too              Independent Non-executive Director   March 31, 2006
-------------------------
Daniel Too



                                      -79-
<PAGE>

 /s/ Jean-Pierre Dallaire    Chief Financial Officer and          March 31, 2006
-------------------------    Financial Controller
Jean-Pierre Dallaire         (Principal Financial Officer)

 /s/ Fusheng Wang            Honorary Chairman and Director       March 31, 2006
-------------------------
Fusheng Wang
















                                      -80-