PREHEAT oven to 350° F. Grease 13 x 9-inch baking pan; line with wax paper.
HEAT water to boiling in a small saucepan; remove from heat. Stir in potato buds until moistened. Cool to room temperature. Combine flour, baking powder, salt, cinnamon and nutmeg in a medium bowl.
BEAT sugar and butter until crumbly. Add eggs one at a time, beating well after each addition; beat in potatoes. Gradually beat in flour mixture alternately with milk. Stir in morsels. Spoon into prepared baking pan.
BAKE for 45 to 55 minutes or until wooden pick inserted in center comes out clean. Cool in pan for 15 minutes. Invert onto wire rack to cool completely. Transfer to serving platter.
FROST sides and top of cake with whipped topping. Arrange strawberry slices and blueberries on top of cake to represent the American Flag.