UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q





[ X
      ]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended June 30, 2008





OR





[  
        ]
            TRANSITION
      REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ________ to  ________





Commission
File Number:  000-2969







FLEXIBLE
SOLUTIONS INTERNATIONAL INC.


(Exact
Name of Issuer as Specified in Its Charter)








Nevada
            
            91-1922863(State or other
      jurisdiction of incorporation or
      organization)
            
            (I.R.S. Employer
      Identification No.)615
      Discovery St.
              Victoria,
      British Columbia, Canada
            
            V8T
      5G4(Address of Issuer's
      Principal Executive Offices)
            
            (Zip
      Code)




Issuer’s
telephone number:     (250) 477-9969








N/A





(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) had been subject to such filing requirements for
the past 90 days.





Yes X  No





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




Large accelerated
      filer [  ]
            
            Accelerated filer
      [  ]Non-accelerated
      filer [  ]
            
            Smaller reporting
      company [X](Do not check if a
      smaller reporting company)




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


Yes   No X




Class of
      Stock
            No.
      Shares Outstanding
            DateCommon
            14,057,567
            August 8,
    2008









FORM
10-Q






Index




PART
      I.
            FINANCIAL
      INFORMATIONItem
      1.
            Financial
      Statements.(a)
            Unaudited Consolidated Balance Sheets at June
      30, 2008 and December 31, 2007.
            1(b)
            Unaudited Consolidated Statements of
      Operations for the Three Months Ended
              June 30, 2008 and 2007.
            2


(c)
            Unaudited Consolidated Statements of
      Operations for the Six Months Ended
              June 30, 2008 and 2007.
            3


(d
            Unaudited Consolidated Statements of Cash Flows
      for the Six Months Ended
              June 30, 2008 and 2007.
            4(e)
            Notes to Unaudited
      Consolidated Financial Statements for the Period
      Ended
              June 30, 2008.
            5Item 2.
            Management’s
      Discussion and Analysis or Plan of Operation.
            18Item
      4T.
            Controls and Procedures.
            22PART II.
            OTHER INFORMATIONItem 1.
            Legal
      Proceedings.
            23Item 2.
            Unregistered Sales of Equity Securities and
      Use of Proceeds.
            23Item 3.
            Defaults Upon
      Senior Securities.
            23Item 4.
            Submission of
      Matters to a Vote of Security Holders.
            23Item 5.
            Other
      Information.
            24Item 6.
            Exhibits.
            24SIGNATURES
            25






i


CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
document contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995.  All statements other than
statements of historical fact are “forward-looking statements” for the purposes
of the federal and state securities laws, including, but not limited to any
projections of earnings, revenue or other financials items; any statements of
the plans, strategies and objectives of management for future operations; any
statements concerning proposed new services or developments; any statements
regarding future economic conditions or performance; any statements regarding
future economic conditions or performance; any statements of belief; and any
statements of assumptions underlying any of the foregoing.




Forward-looking
statements may include the words “may,” “could,” “will,” “estimate,” “intend,”
“continue,” “believe,” “expect” or “anticipate” or other similar
words.  These forward-looking statements present our estimates and
assumptions only as of the date of this report.  Except for our
ongoing obligation to disclose material information as required by the federal
securities laws, we do not intend, and undertake no obligation, to update any
forward-looking statement.




Although
we believe that the expectations reflected in any of our forward-looking
statements are reasonable, actual results could differ materially from those
projected or assumed in any of our forward-looking statements.  Our
future financial condition and results of operations, as well as any
forward-looking statements, are subject to change and inherent risks and
uncertainties.  The factors impacting these risks and uncertainties
include but are not limited to:


- Increased
  competitive pressures from existing competitors and new
  entrants;

- Increases
  in interest rate or our cost of borrowing or a default under any material debt
  agreement;

- Deterioration
  in general or regional economic conditions;

- Adverse
  state or federal legislation or regulation that increases the costs of
  compliance, or adverse findings by a regulator with respect to existing
  operations;

- Loss of
  customers or sales weakness;

- Inability
  to achieve future sales levels or other operating
results;

- The
  unavailability of funds for capital expenditures; and

- Operational
  inefficiencies in distribution or other systems.

For a
detailed description of these and other factors that could cause actual results
to differ materially from those expressed in any forward-looking statement,
please see “Risk Factors” in our Annual Report on Form 10-KSB for the year ended
December 31, 2007.









ii


PART
I                      FINANCIAL
INFORMATION




Item
      1.
            Financial
      Statements.




FLEXIBLESOLUTIONS INTERNATIONAL, INC.


CONSOLIDATED
BALANCE SHEETS


At
June 30, 2008


(U.S.
Dollars)




June
      30,
              2008
            
            
            December
      31,
              2007(Unaudited)AssetsCurrentCash
      and cash equivalents
            
            $
            1,107,960
            
            
            $
            3,355,854Accounts
      receivable
            
            
            2,202,205
            
            
            
            1,051,056Inventory
            
            
            2,914,164
            
            
            
            2,361,270Prepaid
      expenses
            
            
            86,061
            
            
            
            115,3536,310,390
            
            
            
            6,883,533Property,
      equipment and leaseholds
            
            
            5,687,371
            
            
            
            4,612,571Patents
            
            
            224,288
            
            
            
            230,438Long
      term deposits
            
            
            34,900
            
            
            
            48,034$
            12,256,949
            
            
            $
            11,774,576LiabilitiesCurrentAccounts
      payable and accrued liabilities
            
            $
            584,876
            
            
            $
            385,792Deferred
      revenue
            
            
            -
            
            
            
            9,870584,876
            
            
            
            395,662Mortgage
            
            
            -
            
            
            
            452,018$
            584,876
            
            
            $
            847,680Stockholders’
      EquityCapital
      stockAuthorized50,000,000
      Common shares with a par value of $0.001 each1,000,000
      Preferred shares with a par value of $0.01 eachIssued
      and outstanding14,057,567
      (2007: 14,057,567) common shares
            
            
            14,058
            
            
            
            14,058Capital
      in excess of par value
            
            
            16,079,694
            
            
            
            15,914,303Other
      comprehensive income
            
            
            316,279
            
            
            
            394,289Deficit
            
            
            (4,737,958
            )
            
            
            (5,396,754
            )Total
      Stockholders’ Equity
            
            
            11,672,073
            
            
            
            10,926,896Total
      Liabilities and Stockholders’ Equity
            
            $
            12,256,949
            
            
            $
            11,774,576


Commitments,
Contingencies and Subsequent events (Notes 12, 13 & 14)




-- See
Notes to Unaudited Consolidated Financial Statements
--
 1


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.


CONSOLIDATEDSTATEMENTS OF OPERATIONS


For
the Three Months Ended June 30, 2008 and 2007


(U.S.
Dollars -- Unaudited)




Three
      Months Ended June 30,2008
            
            
            2007Sales
            
            $
            2,922,616
            
            
            $
            2,143,107Cost
      of sales
            
            
            1,648,373
            
            
            
            1,260,324Gross
      profit
            
            
            1,274,243
            
            
            
            882,783Operating
      expensesWages
            
            
            322,029
            
            
            
            259,272Administrative
      salaries and benefits
            
            
            80,885
            
            
            
            124,485Advertising
      and promotion
            
            
            28,780
            
            
            
            6,146Investor
      relations and transfer agent fee
            
            
            42,191
            
            
            
            119,647Office
      and miscellaneous
            
            
            118,577
            
            
            
            65,578Insurance
            
            
            53,049
            
            
            
            52,236Interest
      expense
            
            
            (12,178
            )
            
            
            159Rent
            
            
            67,268
            
            
            
            56,738Consulting
            
            
            37,661
            
            
            
            62,682Professional
      fees
            
            
            44,669
            
            
            
            42,477Travel
            
            
            40,405
            
            
            
            48,287Telecommunications
            
            
            9,728
            
            
            
            9,845Shipping
            
            
            10,913
            
            
            
            15,151Research
            
            
            47,821
            
            
            
            22,974Commissions
            
            
            52,445
            
            
            
            38,894Bad
      debt expense (recovery)
            
            
            362
            
            
            
            775Currency
      exchange
            
            
            (16,682
            )
            
            
            19,683Utilities
            
            
            235
            
            
            
            4,439928,157
            
            
            
            949,468Income
      (loss) before other items and income tax
            
            
            346,086
            
            
            
            (66,685
            )Other
      expenses
            
            
            -
            
            
            
            (5,570
            )Interest
      income
            
            
            1,537
            
            
            
            1,778Income
      (loss) before income tax
            
            
            347,623
            
            
            
            (70,477
            )Net
      income (loss)
            
            
            347,623
            
            
            
            (70,477
            )Net
      income (loss) per share (basic and diluted)
            
            $
            0.02
            
            
            $
            (0.01
            )Weighted
      average number of  common shares
            
            
            14,057,567
            
            
            
            13,841,489




-- See
Notes to Unaudited Consolidated Financial Statements
--
 2


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.


CONSOLIDATEDSTATEMENTS OF OPERATIONS


For
the Six Months Ended June 30, 2008 and 2007


(U.S.
Dollars -- Unaudited)




Six
      Months Ended June 30,2008
            
            
            2007Sales
            
            $
            6,421,089
            
            
            $
            4,433,008Cost
      of sales
            
            
            3,934,104
            
            
            
            2,726,675Gross
      profit
            
            
            2,486,985
            
            
            
            1,706,333Operating
      expensesWages
            
            
            605,755
            
            
            
            516,458Administrative
      salaries and benefits
            
            
            172,110
            
            
            
            256,282Advertising
      and promotion
            
            
            68,580
            
            
            
            38,024Investor
      relations and transfer agent fee
            
            
            88,031
            
            
            
            177,838Office
      and miscellaneous
            
            
            191,275
            
            
            
            103,506Insurance
            
            
            102,535
            
            
            
            107,065Interest
      expense
            
            
            1,963
            
            
            
            1,184Rent
            
            
            135,110
            
            
            
            111,031Consulting
            
            
            87,852
            
            
            
            127,679Professional
      fees
            
            
            66,407
            
            
            
            81,271Travel
            
            
            68,019
            
            
            
            82,030Telecommunications
            
            
            18,929
            
            
            
            19,461Shipping
            
            
            23,214
            
            
            
            23,244Research
            
            
            67,782
            
            
            
            55,668Commissions
            
            
            81,571
            
            
            
            75,597Bad
      debt expense (recovery)
            
            
            482
            
            
            
            1,851Currency
      exchange
            
            
            (23,464
            )
            
            
            9,590Utilities
            
            
            4,577
            
            
            
            10,0461,760,728
            
            
            
            1,797,825Income
      (loss) before other items and income tax
            
            
            726,257
            
            
            
            (91,492
            )Other
      expenses
            
            
            -
            
            
            
            (5,570
            )Loss
      on sale of equipment
            
            
            (29,048
            )
            
            
            -Write
      down of inventory
            
            
            (41,440
            )
            
            
            -Interest
      income
            
            
            2,027
            
            
            
            2,371Income
      (loss) before income tax
            
            
            657,796
            
            
            
            (94,691
            )Income
      tax (recovery)
            
            
            -
            
            
            
            -Net
      income (loss)
            
            
            657,796
            
            
            
            (94,691
            )Net
      income (loss) per share (basic and diluted)
            
            $
            0.05
            
            
            $
            (0.01
            )Weighted
      average number of  common shares
            
            
            14,057,567
            
            
            
            13,485,482





-- See
Notes to Unaudited Consolidated Financial Statements
--
 3


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.


CONSOLIDATEDSTATEMENTS OF CASH FLOWS


For
the Six Months Ended June 30, 2008 and 2007


(U.S.
Dollars -- Unaudited)




Six
      Months Ended June 30,2008
            
            
            2007Operating
      activitiesNet
      income (loss)
            
            $
            657,796
            
            
            $
            (94,691
            )Stock
      compensation expense
            
            
            165,399
            
            
            
            278,976Depreciation
            
            
            227,864
            
            
            
            256,2061,051,059
            
            
            
            440,491Changes
      in non-cash working capital items:(Increase)
      Decrease in accounts receivable
            
            
            (1,151,149
            )
            
            
            (56,621
            )(Increase)
      Decrease in inventory
            
            
            (552,894
            )
            
            
            (12,207
            )(Increase)
      Decrease in prepaid expenses
            
            
            29,292
            
            
            
            (12,280
            )Increase
      (Decrease) in accounts payable
            
            
            199,084
            
            
            
            (117,472
            )Increase
      (Decrease) in deferred revenue
            
            
            9,870
            
            
            
            (20,559
            )Cash
      provided by (used in) operating activities
            
            
            (434,478
            )
            
            
            221,353Investing
      activitiesLong
      term deposits
            
            
            13,134
            
            
            
            (1,408
            )Development
      of patents
            
            
            6,150
            
            
            
            (34,772
            )Acquisition
      of property and equipment
            
            
            (1,754,682
            )
            
            
            (20,390
            )Cash
      provided by (used in) investing activities
            
            
            (1,735,398
            )
            
            
            (56,570
            )Financing
      activitiesProceeds
      from issuance of common stock
            
            
            -
            
            
            
            3,164,481Cash
      provided by financing activities
            
            
            -
            
            
            
            3,164,481Effect
      of exchange rate changes on cash
            
            
            (78,018
            )
            
            
            133,072Inflow
      (outflow) of cash
            
            
            (2,247,894
            )
            
            
            3,462,336Cash
      and cash equivalents, beginning
            
            
            3,335,854
            
            
            
            450,759Cash
      and cash equivalents, ending
            
            $
            1,107,960
            
            
            $
            3,913,094Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            1,963
            
            
            $
            1,184




-- See
Notes to Unaudited Consolidated Financial Statements
--
 4


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.


NOTESTO CONSOLIDATED FINANCIAL STATEMENTS


For
the Period Ended June 30, 2008


(U.S.
Dollars)




1.           Basis
of Presentation.




These
unaudited consolidated financial statements of Flexible Solutions International,
Inc (the “Company”) have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial
information.  These financial statements are condensed and do not
include all disclosures required for annual financial statements.  The
organization and business of the Company, accounting policies followed by the
Company and other information are contained in the notes to the Company’s
audited consolidated financial statements filed as part of the Company’s
December 31, 2007 Annual Report on Form 10-KSB.  This quarterly report
should be read in conjunction with such annual report.




In the
opinion of the Company’s management, these consolidated financial statements
reflect all adjustments necessary to present fairly the Company’s consolidated
financial position at June 30, 2008, and the consolidated results of operations
and the consolidated statements of cash flows for the six months ended June 30,
2008 and 2007.  The results of operations for the six months ended
June 30, 2008 are not necessarily indicative of the results to be expected for
the entire fiscal year.




These
consolidated financial statements include the accounts of Flexible Solutions
International, Inc. (the “Company”), and its wholly-owned subsidiaries Flexible
Solutions, Ltd. (“Flexible Ltd.”), NanoChem Solutions Inc., WaterSavr Global
Solutions Inc., NanoDetect Technologies Inc. and Seahorse Systems
Inc.  All inter-company balances and transactions have been
eliminated.  The Company was incorporated May 12, 1998 in Nevada and
had no operations until June 30, 1998.




Flexible
Solutions International, Inc. and its subsidiaries develop, manufactures and
markets specialty chemicals which slow down the evaporation of
water.  The Company’s primary product, HEAT$AVR®, is marketed for use
in swimming pools and spas where its use, by slowing the evaporation of water,
allows the water to retain a higher temperature for a longer period of time and
thereby reduces the energy required to maintain the desired temperature of the
water in the pool.  Another product, WATER$AVR®, is marketed for water
conservation in irrigation canals, aquaculture, and reservoirs where its use
slows down water loss due to evaporation.  In addition to the water
conservation products, the Company also manufacturers and markets water-soluble
chemicals utilizing thermal polyaspartate biopolymers (referred to as “TPAs”),
which are beta-proteins manufactured from the common biological amino acid,
L-aspartic.  TPAs can be formulated to prevent corrosion and scaling
in water piping within the petroleum, chemical, utility and mining
industries.  TPAs are also used as proteins to enhance fertilizers in
improving crop yields and as additives for household laundry detergents,
consumer care products and pesticides.




On May 2,
2002, the Company formed WaterSavr Global Solutions Inc.




On
February 7, 2005, the Company formed Nano Detect Technologies Inc.




On June
21, 2005, the Company formed Seahorse Systems Inc.




Pursuant
to a purchase agreement dated May 26, 2004, the Company acquired the assets of
Donlar Corporation (“Donlar”) on June 9,2004
and created a new company, NanoChem Solutions Inc. as the operating entity for
such assets.  The purchase price of the transaction was $6,150,000
with consideration being a combination of cash and debt.  Under the
purchase agreement and as part of the consideration, the Company issued a
promissory note bearing interest at 4% to Donlar’s largest creditor to satisfy
$3,150,000 of the purchase price.  This note was paid June 2, 2005 and
upon payment, all former Donlar assets that were pledged as security were
released from their mortgage.  The remainder of the consideration
given was cash.




5




The
following table summarizes the estimated fair value of the assets acquired at
the date of acquisition (at June 9, 2004):




Current
      assets
            
            $
            1,126,805Property
      and equipment
            
            
            5,023,195$
            6,150,000Acquisition
      costs assigned to property and equipment
            
            
            314,724Total
      assets acquired
            
            $
            6,464,724




There was
no goodwill or other intangible assets accept certain patents recorded at nil
fair value, acquired as a result of the acquisition.  The
acquisition costs assigned to property and equipment include all direct costs
incurred by the Company to purchase the Donlar assets.  These costs
include due diligence fees paid to outside parties investigating and identifying
the assets, legal costs directly attributable to the purchase of the assets,
plus applicable transfer taxes.  These costs have been assigned to the
individual assets based on their proportional fair values and will be amortized
based on the rates associated with the related assets.




2.           Significant
Accounting Policies.




These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern and reflect the policies outlined below.




(a)           Cash and Cash
Equivalents.




The
Company considers all highly liquid investments purchased with an original or
remaining maturity of less than three months at the date of purchase to be cash
equivalents.  Cash and cash equivalents are maintained with several
financial institutions.




(b)           Inventories and Cost of
Sales




The
Company has three major classes of inventory:  finished goods, works
in progress, raw materials and supplies.  In all classes, inventory is
valued at the lower of cost and market.  Cost is determined on a
first-in, first-out basis.  Cost of sales includes all expenditures
incurred in bringing the goods to the point of sale.  Inventory costs
and costs of sales include direct costs of the raw material, inbound freight
charges, warehousing costs, handling costs (receiving and purchasing) and
utilities and overhead expenses related to the Company’s manufacturing and
processing facilities.




In 2004,
the FASB issued SFAS No. 151, “Inventory Costs”, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material.  This standard requires that such items be recognized as
current-period charges.  The standard also establishes the concept of
“normal capacity” and requires the allocation of fixed production overhead to
inventory based on the normal capacity of the production
facilities.  Any unallocated overhead must be recognized as an expense
in the period incurred.  This standard is effective for inventory
costs incurred starting January 1, 2006.  The adoption of this
standard did not have a material impact on the Company’s financial position,
results of operations or cash flows for 2007 or 2008.




6




(c)           Allowance for Doubtful
Accounts




The
Company provides an allowance for doubtful accounts when management estimates
collectibility is uncertain.  Accounts receivable are continually
reviewed to determine which, if any, accounts are doubtful of
collection.  In making the determination of the appropriate allowance
amount, the Company considers current economic and industry conditions,
relationships with each significant customer, overall customer credit-worthiness
and historical experience.




(d)           Property, Equipment and
Leaseholds.




The
following assets are recorded at cost and depreciated using the following
methods and annual rates:




Computer
      hardware
            
            30%
      Declining balanceTruck
            
            30%
      Declining balanceTrailers
            
            30%
      Declining balanceFurniture
      and fixtures
            
            20%
      Declining balanceManufacturing
      equipment
            
            20%
      Declining balanceOffice
      equipment
            
            20%
      Declining balanceBuilding
            
            10%
      Declining balanceLeasehold
      improvements
            
            Straight-line
      over lease term





Depreciation
is recorded at half for the year the assets are first
purchased.  Property and equipment are written down to net realizable
value when management determines there has been a change in circumstances which
indicates its carrying amount may not be recoverable.  No write-downs
have been necessary to date.




(e)           Impairment of Long-Lived
Assets.




In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, the Company reviews long-lived assets, including, but not
limited to, property and equipment, patents and other assets, for impairment
annually or whenever events or changes in circumstances indicate the carrying
amounts of assets may not be recoverable.  The carrying value of
long-lived assets is assessed for impairment by evaluating operating performance
and future undiscounted cash flows of the underlying assets.  If the
sum of the expected future cash flows of an asset, is less than its carrying
value, an impairment measurement is indicated.  Impairment charges are
recorded to the extent that an asset’s carrying value exceeds its fair
value.  Accordingly, actual results could vary significantly from such
estimates.  There were no impairment charges during the periods
presented.




(f)           Investments.




Investment
in corporations subject to significant influence and investments in partnerships
are recorded using the equity method of accounting.  On this basis, the
Company’s share of income and losses of the corporations and partnerships is
included in earnings and the Company’s investment therein adjusted by a like
amount.  Dividends received from these entities reduce the investment
accounts.  Portfolio investments not subject to significant influence are
recorded using the cost method.




The fair
value of a cost method investment is not estimated if there are no identified
events or changes in circumstances that may have a significant adverse effect on
the fair value of the investment.





The
Company currently does not have any investments that require use of the equity
method of accounting.





7




(g)           Foreign
Currency.




The
functional currency of one of the subsidiaries is the Canadian
Dollar.  The translation of the Canadian Dollar to the reporting
currency of the U.S. Dollar is performed for assets and liabilities using
exchange rates in effect at the balance sheet date.  Revenue and
expense transactions are translated using average exchange rates prevailing
during the year.  Translation adjustments arising on conversion of the
financial statements from the Company’s functional currency, Canadian Dollars,
into the reporting currency, U.S. Dollars, are excluded from the determination
of loss and are disclosed as other comprehensive income (loss) in stockholders’
equity.




Foreign
exchange gains and losses relating to transactions not denominated in the
applicable local currency are included in the operating loss if realized during
the year and in comprehensive income if they remain unrealized at the end of the
year.




(h)           Revenue
Recognition.




Revenue
from product sales is recognized at the time the product is shipped since title
and risk of loss is transferred to the purchaser upon delivery to the
carrier.  Shipments are made F.O.B. shipping point.  The
Company recognizes revenue when there is persuasive evidence of an arrangement,
delivery has occurred, the fee is fixed or determinable, collectibility is
reasonably assured and there are no significant remaining performance
obligations.  When significant post-delivery obligations exist,
revenue is deferred until such obligations are fulfilled.  To date
there have been no such significant post-delivery obligations.




Provisions
are made at the time the related revenue is recognized for estimated product
returns.  Since the Company’s inception, product returns have been
insignificant; therefore no provision has been established for estimated product
returns.




(i)           Stock Issued in Exchange for
Services.




The
valuation of the Company’s common stock issued in exchange for services is
valued at an estimated fair market value as determined by officers and directors
of the Company based upon trading prices of the Company’s common stock on the
dates of the stock transactions.  The corresponding expense of the
services rendered is recognized over the period that the services are
performed.




(j)           Stock-based
Compensation.




In
December 2004, the Financial Accounting Standards Board (“FASB”) issued revised
SFAS No. 123(R), Share-Based
Payment, which replaces SFAS No. 123, “Accounting for Stock-Based
Compensation”, which superseded APB Opinion No. 25, “Accounting for Stock Issued to
Employees”.  FAS No. 123(R) requires the cost of all
share-based payment transactions to be recognized in an entity’s financial
statements, establishes fair value as the measurement objective and requires
entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions.  SFAS No. 123(R) applies to all
awards granted, modified, repurchased or cancelled after July 1, 2005, and
unvested portions of previously issued and outstanding awards.  The
Company adopted this statement for its first quarter starting January 1, 2006
and will continue to evaluate the impact of adopting this
statement.




Prior to
2006, the Company adopted the disclosure provisions of SFAS No. 123 for stock
options granted to employees and directors.  The Company disclosed on
a supplemental basis, the pro-forma effect of accounting for stock options
awarded to employees and directors, as if the fair value based method had been
applied, using the Black-Scholes option-pricing model.  The Company
has always recognized the fair value of options granted to
consultants.




8




(k)           Comprehensive
Income.




Other
comprehensive income refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income,
but are excluded from net income as these amounts are recorded directly as an
adjustment to stockholders’ equity.  The Company’s other comprehensive
income is primarily comprised of unrealized foreign exchange gains and
losses.




(l)           Income (Loss) Per
Share.




Income
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of shares outstanding.  Diluted loss per share is
computed by giving effect to all potential dilutive options that were
outstanding during the year. For the periods ended
June 30, 2008 and 2007, all outstanding options were anti-dilutive.




(m)           Use of
Estimates.




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those estimates and would
impact the results of operations and cash flows.




(n)           Financial
Instruments.




The fair market value of the
Company’s financial instruments comprising cash, short-term investment, accounts
receivable, income tax recoverable, loan receivable, accounts payable and
accrued liabilities and amounts due to shareholders were estimated to
approximate their carrying values due to immediate or short-term maturity of
these financial instruments.  The Company maintains cash balances at
financial institutions which at times, exceed federally insured amounts. The
Company has not experienced any material losses in such accounts.





The Company is exposed to foreign
exchange and interest rate risk to the extent that market value rate
fluctuations materially differ from financial assets and liabilities, subject to
fixed long-term rates.





The Company is exposed to
credit-related losses in the event of non-performance by counterparties to the
financial instruments. Credit exposure is minimized by dealing with only credit
worthy counterparties. Accounts receivable for the three primary customers
totals $1,428,166 (65%) as at June 30, 2008 (2007 - $466,031 or
64%).





(o)           Contingencies




Certain conditions may exist as of the
date the financial statements are issued, which may result in a loss to the
Company but which will only be resolved when one or more future events occur or
fail to occur. The Company's management and its legal counsel assess such
contingent liabilities, and such assessment inherently involves an exercise of
judgment. In assessing loss contingencies related to legal proceedings that are
pending against the Company or unasserted claims that may result in such
proceedings, the Company's legal counsel evaluates the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.





If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, the
estimated liability would be accrued in the Company's financial statements. If
the assessment indicates that a potentially material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be
disclosed.




9




Loss
contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the guarantees would be disclosed.




(p) Recent
Accounting Pronouncements





Business
Combinations


In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“FAS”) No. 141 (Revised 2007),
“Business Combinations” (“FAS 141(R)”). FAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired,
liabilities assumed, and any noncontrolling interests in the acquiree, as well
as the goodwill acquired. Significant changes from current practice resulting
from FAS 141(R) include the expansion of the definitions of a “business” and a
“business combination.” For all business combinations (whether partial, full or
step acquisitions), the acquirer will record 100% of all assets and liabilities
of the acquired business, including goodwill, generally at their fair values;
contingent consideration will be recognized at its fair value on the acquisition
date and, for certain arrangements, changes in fair value will be recognized in
earnings until settlement; and acquisition-related transaction and restructuring
costs will be expensed rather than treated as part of the cost of the
acquisition. FAS 141(R) also establishes disclosure requirements to enable users
to evaluate the nature and financial effects of the business combination. FAS
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption is not permitted. The Company is
currently evaluating the potential impact of this statement.





Noncontrolling Interests in
Consolidated Financial Statements


In
December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — An amendment of ARB No. 51” (“FAS 160”). FAS
160 amends Accounting Research Bulletin 51, “Consolidated Financial Statements,”
to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary, which is sometimes referred to as
minority interest, is a third-party ownership interest in the consolidated
entity that should be reported as a component of equity in the consolidated
financial statements. Among other requirements, FAS 160 requires the
consolidated statement of income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. FAS 160
also requires disclosure on the face of the consolidated statement of income of
the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. FAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is not permitted. The Company is currently evaluating the
potential impact of this statement.





Fair Value
Measurements


In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (“FSP 157-2”), to partially defer FASB Statement
No. 157, “Fair Value Measurements” (“FAS 157”). FSP 157-2 defers the effective
date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), to fiscal years, and interim periods
within those fiscal years, beginning after November 15, 2008. The Company is
currently evaluating the impact of adopting the provisions of FAS 157 as it
relates to non-financial assets and liabilities.




10





Disclosures about Derivative
Instruments and Hedging Activities


In March
2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities” (“FAS 161”). FAS 161 amends and expands the disclosure
requirements of FAS 133, “Accounting for Derivative Instruments and Hedging
Activities” and requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. This statement
is effective for financial statements issued for fiscal periods beginning after
November 15, 2008. Earlier adoption is not permitted. The Company does not
believe the adoption of FAS 161 will have a material impact on its consolidated
financial statements.





Determination of Useful Life
of Intangible Assets


In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also
requires expanded disclosure related to the determination of intangible asset
useful lives. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is not permitted. The Company is currently
evaluating the potential impact the adoption of FAS FSP 142-3 will have on its
consolidated financial statements.




3.           Inventories




2008
            
            
            2007Completed
      goods
            
            $
            1,184,858
            
            
            $
            1,664,777Works
      in progress
            
            
            347,099
            
            
            
            198,172Raw
      materials
            
            
            1,382,207
            
            
            
            498,321$
            2,914,164
            
            
            $
            2,361,270





4.Property, Plant
& equipment





2008
            
            
            Accumulated
            
            
            2008Cost
            
            
            Depreciation
            
            
            NetBuildings
            
            $
            4,181,583
            
            
            $
            1,079,085
            
            
            $
            3,102,498Building
      Improvements
            
            
            352,297
            
            
            
            —
            
            
            
            352,297Computer
      hardware
            
            
            79,902
            
            
            
            52,062
            
            
            
            27,840Furniture
      and fixtures
            
            
            21,621
            
            
            
            12,861
            
            
            
            8,761Office
      equipment
            
            
            32,277
            
            
            
            22,682
            
            
            
            9,595Manufacturing
      equipment
            
            
            2,880,631
            
            
            
            1,345,448
            
            
            
            1,535,183Trailer
            
            
            27,571
            
            
            
            5,675
            
            
            
            21,896Leasehold
      improvements
            
            
            28,117
            
            
            
            21,750
            
            
            
            6,367Technology
            
            
            139,152
            
            
            
            -
            
            
            
            139,152Trade
      show booth
            
            
            8,522
            
            
            
            6,412
            
            
            
            2,110Truck
            
            
            11,660
            
            
            
            1,749
            
            
            
            9,911Land
            
            
            471,761
            
            
            
            —
            
            
            
            471,761$
            8,235,094
            
            
            $
            2,547,723
            
            
            $
            5,687,371





11




2007
            
            
            Accumulated
            
            
            2007Cost
            
            
            Depreciation
            
            
            NetBuildings
            
            $
            4,011,826
            
            
            $
            970,854
            
            
            $
            3,040,972Computer
      hardware
            
            
            75,458
            
            
            
            48,284
            
            
            
            27,174Furniture
      and fixtures
            
            
            21,788
            
            
            
            12,154
            
            
            
            9,634Office
      equipment
            
            
            32,905
            
            
            
            22,035
            
            
            
            10,870Manufacturing
      equipment
            
            
            2,313,363
            
            
            
            1,280,943
            
            
            
            1,032,420Trailer
            
            
            3,854
            
            
            
            1,863
            
            
            
            1,990Leasehold
      improvements
            
            
            46,304
            
            
            
            36,480
            
            
            
            9,825Trade
      show booth
            
            
            8,766
            
            
            
            6,212
            
            
            
            2,554Land
            
            
            477,133
            
            
            
            —
            
            
            
            477,133$
            6,991,397
            
            
            $
            2,378,829
            
            
            $
            4,612,571





5.           Patents





In fiscal
2005, the Company started the patent process for additional WATER$AVR®
products.  Patents associated with these costs were granted in 2006
and they have been amortized over their legal life of 17 years.





Of the
patents costs listed below, $72,786 are not subject to amortization as of yet,
as the patents are still in the process of being approved.





2008
              Cost
            
            
            Accumulated
              Amortization
            
            
            2008
              NetPatents
            
            $
            239,061
            
            
            $
            14,773
            
            
            $
            224,288





2007
              Cost
            
            
            Accumulated
              Amortization
            
            
            2007
              NetPatents
            
            $
            243,853
            
            
            $
            13,415
            
            
            $
            230,438





6.           Long
Term Deposits




The Company has reclassified certain
security deposits to better reflect their long term nature.  Long term
deposits consist of damage deposits held by landlords and security deposits held
by various vendors.




2008
            
            
            2007Long
      term deposits
            
            $
            34,900
            
            
            $
            48,034







7.           Stock
Options




The Company adopted
a stock option plan ("Plan").  The purpose of this Plan is to 
provide  additional  incentives  to  key  employees,
officers, directors and consultants  of  the  Company  and
its subsidiaries in order to help attract and retain  the  best 
available  personnel  for  positions  of 
responsibility  and otherwise promoting the success of the business
activities.  It is intended that options issued
under this Plan constitute non-qualified stock options.
The general terms of awards under the option plan are that 100%
of the options granted will vest the year following the grant. 
The maximum term of options granted is 5 years.




12




The
Company may issue stock options and stock bonuses for shares of its common stock
to provide incentives to directors, key employees and other persons who
contribute to the success of the Company.  The exercise price of all
incentive options are issued for not less than fair market value at the date of
grant.




The
following table summarizes the Company’s stock option activity for the years
ended December 31, 2006, 2007 and the period ended June 30, 2008:




Number
      of shares
            
            
            Exercise
      price
              per
      share
            
            
            Weighted
      average exercise priceBalance,
      December 31, 2005
            
            
            1,060,740
            
            
            $
            1.40
      - $4.60
            
            
            $
            3.44Granted
            
            
            1,191,000
            
            
            $
            3.25
      - $3.60
            
            
            $
            3.25Exercised
            
            
            (46,000
            )
            
            $
            1.40
            
            
            $
            1.40Cancelled
      or expired
            
            
            (79,000
            )
            
            $
            1.40
      - $4.25
            
            
            $
            2.46Balance,
      December 31, 2006
            
            
            2,126,740
            
            
            $
            1.40
      - $4.60
            
            
            $
            3.44Granted
            
            
            235,700
            
            
            $
            1.50
      - $3.60
            
            
            $
            2.35Exercised
            
            
            (163,000
            )
            
            $
            $1.50
      - $3.25
            
            
            $
            1.77Cancelled
      or expired
            
            
            (287,000
            )
            
            $
            3.00
      - $4.40
            
            
            $
            3.93Balance,
      December 31, 2007
            
            
            1,912,440
            
            
            $
            3.00
      – 4.60
            
            
            $
            3.38Granted
            
            
            83,000
            
            
            $
            3.60
            
            
            $
            3.60Balance,
      June 30, 2008
            
            
            1,995,440
            
            
            $
            3.00
      - 4.55
            
            
            $
            3.39




The fair
value of each option grant is calculated using the following weighted average
assumptions:




2008
            
            
            2007Expected
      life – years
            
            
            5.0
            
            
            
            1.0
      - 5.0Interest
      rate
            
            
            2.27%
            
            
            
            4.18
      – 5.18%Volatility
            
            
            99%
            
            
            
            86.0
      – 115.0%Dividend
      yield
            
            
            —%
            
            
            
            —%Weighted
      average fair value of options granted
            
            $
            1.15
            
            
            $
            1.37
      – 2.67





During
the six months ended June 30, 2008 the Company granted 46,000 options to
consultants that resulted in $26,478 in expenses this period.  During
the same period, 37,000 options were granted to employees, resulting in $21,298
in expenses this period.  Options granted in previous quarters
resulted in additional expenses in the amount of $40,850 for consultants and
$76,773 for employees during the six months ended June 30, 2008.  No
stock options were exercised during the period.




During
the six months ended June 30, 2007, the Company granted 150,000 stock options to
a third party as a part of the litigation settlement made January 3,
2007.  As the options were previously granted and expensed in 2001, no
expense was recorded in this period related to this
transaction.  During the same period, the Company granted 50,700
options to consultants and has applied FAS No. 123(R) using the Black-Scholes
option-pricing model, which resulted in additional expenses of $29,130 during
the three months ended June 30, 2007.  Options granted in previous
quarters but not yet vested realized expenses of $94,128 for third parties and
$155,718 for employees for the six months ended June 30, 2007.




8.           Warrants




On April 14, 2005, the Company
announced that it had raised $3,375,000 pursuant to a private placement of up to
1,800,000 shares of its common stock.  The investors collectively
purchased 900,000 shares of the Company’s common stock at a per share purchase
price of $3.75, together with warrants to purchase up to 900,000 additional
shares of the Company’s common stock.  The warrants have a four-year
term and are exercisable at a price of $4.50 per share.




13




On June 8, 2005, the Company
announced that it had raised an additional $327,750 pursuant to a private
placement.  An investor purchased 87,400 shares of the Company’s
common stock at a per share price of $3.75, together with a warrant to purchase
up to 87,400 additional shares of the Company’s common stock.  The
warrant has a four-year term and is immediately exercisable at a price of $4.50
per share.




In May
2007 the Company closed a $3,042,455 private placement with institutional
investors.  The terms are 936,140 units with each unit consisting of
one share at $3.25 and one half warrant with a three year term and a strike
price of $4.50 per share.  The Company also issued 21,970 warrants
with the same terms for investment banking services related to this
transaction.




The
following table summarizes the Company’s warrant option activity for the three
years ended December 30, 2007 (no subsequent activity):




Number
      of shares
            
            
            Exercise
      price
              per
      share
            
            
            Weighted
      average exercise priceBalance,
      December 31, 2004
            
            
            —
            
            
            
            —
            
            
            
            —Granted
            
            
            987,400
            
            
            $
            4.50
            
            
            $
            4.50Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled
            
            
            —
            
            
            
            —
            
            
            
            —Balance,
      December 31, 2005
            
            
            987,400
            
            
            $
            4.50
            
            
            $
            4.50Granted
            
            
            —
            
            
            
            —
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled
            
            
            —
            
            
            
            —
            
            
            
            —Balance,
      December 31, 2006
            
            
            987,400
            
            
            $
            4.50
            
            
            $
            4.50Granted
            
            
            490,040
            
            
            $
            4.50
            
            
            $
            4.50Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled
            
            
            —
            
            
            
            —
            
            
            
            —Balance,
      December 30, 2007
            
            
            1,477,440
            
            
            $
            4.50
            
            
            $
            4.50




9.           Capital
Stock.




During
the six months ended June 30, 2007, the Company issued 200,700 shares of common
stock upon the exercise of stock options.  The strike price varied
from $1.50 – 3.25 per share.




In May
2007 the Company closed a $3,042,455 private placement with institutional
investors.  The terms are 936,140 units with each unit consisting of
one share at $3.25 and one half warrant with a three year term and a strike
price of $4.50 per share.  The proceeds will be used to build a
biomass conversion facility that will use renewable agriculture crops to produce
aspartic acid.




No stock
was issued during the six months ended June 30, 2008.




10.         Segmented,
Significant Customer Information and Economic Dependency.




The
Company operates in two segments:




(a)   Development
and marketing of two lines of energy and water conservation products (as shown
under the column heading “EWCP” below), which consists of a (i) liquid swimming
pool blanket which saves energy and water by inhibiting evaporation from the
pool surface, and (ii) food-safe powdered form of the active ingredient within
the liquid blanket and which is designed to be used in still or slow moving
drinking water sources.




14




(b)    Manufacture
of biodegradable polymers and chemical additives used within the petroleum,
chemical, utility and mining industries to prevent corrosion and scaling in
water piping (as shown under the column heading “BPCA” below).  These
chemical additives are also manufactured for use in laundry and dish detergents,
as well as in products to reduce levels of insecticides, herbicides and
fungicides.




The
Company’s traditional operating activities related to the production and sale of
its energy conversation product line.  Upon acquiring the Donlar
assets, the Company formed NanoChem, which was formed as its wholly-owned
subsidiary in exchange for the capital contribution necessary to purchase the
Donlar assets.  The assets the Company acquired from Donlar include
domestic and international patents and business processes relating to the
production of TPAs and other environmental products and technologies, as well as
a manufacturing plant.  These assets are currently used by NanoChem
for its revenue-producing activities.




The
accounting policies of the segments are the same as those described in Note 2,
Significant Accounting
Policies.  The Company evaluates performance based on profit or
loss from operations before income taxes, not including nonrecurring gains and
losses and foreign exchange gains and losses.




The
Company’s reportable segments are strategic business units that offer different,
but synergistic products and services.  They are managed separately
because each business requires different technology and marketing
strategies.




EWCP
            
            
            BPCA
            
            
            TotalRevenue
            
            $
            792,640
            
            
            $
            5,628,449
            
            
            $
            6,421,089Interest
      revenue
            
            
            1,318
            
            
            
            709
            
            
            
            2,027Interest
      expense
            
            
            382
            
            
            
            1,581
            
            
            
            1,963Depreciation
      and
              amortization
            
            
            27,208
            
            
            
            200,656
            
            
            
            227,864Segment
      profit (loss)
            
            
            (641,006
            )
            
            
            1,298,802
            
            
            
            657,796Segment
      assets
            
            
            2,582,140
            
            
            
            3,105,231
            
            
            
            5,687,371Expenditures
      for
              segment
      assets
            
            
            1,720,270
            
            
            
            34,128
            
            
            
            1,754,398




The sales
generated in the United States and Canada are as follows:




2008
            
            
            2007Canada
            
            $
            187,983
            
            
            $
            58,587United
      States and abroad
            
            
            6,233,106
            
            
            
            4,374,421Total
            
            $
            6,421,089
            
            
            $
            4,433,008




The
Company’s long-lived assets are located in Canada and the United States as
follows:




2008
            
            
            2007Canada
            
            $
            2,803,003
            
            
            $
            1,331,166United
      States
            
            
            3,108,656
            
            
            
            3,511,843Total
            
            $
            5,911,659
            
            
            $
            4,843,009




15




Three
customers account for $3,158,923 (49%) of sales made in the period (2007 -
$1,799,725 or 41%).





11.           Commitments.




The
Company is committed to minimum rental payments for property and premises
aggregating approximately $252,347 over the term of four leases, the last
expiring on December 31, 2011.




Commitments
in each of the next five years are approximately as follows:




2008
            
            $
            91,3802009
            
            
            128,0112010
            
            
            16,4782011
            
            
            16,4782012
            
            
            -




12.           Contingencies.




On May 1,
2003, the Company filed a lawsuit in the Supreme Court of British Columbia,
Canada, against John Wells and Equity Trust, S.A. seeking the return of 100,000
shares of the Company’s common stock and the repayment of a $25,000 loan, which
were provided to defendants for investment banking services consisting of
securing a $5 million loan and a $25 million stock offering.  Such
services were not performed and in the proceeding the Company seeks return of
such shares after defendant’s failure to both return the shares voluntarily and
repay the note.  On May 7, 2003, the Company obtained an injunction
freezing the transfer of the shares.  On May 24, 2004, there was a
hearing on defendant’s motion to set aside the injunction, which motion was
denied by the trial court on May 29, 2004.  On the date of issuance,
the share transaction was recorded as shares issued for services at fair market
value, a value of $0.80 per share.  No amounts have been recorded as
receivable in the Company’s consolidated financial statements as the outcome of
this claim is not determinable.




As of
January 3, 2007 all litigation between the Company and Patrick Grant has been
settled. As part of the settlement the Company permitted Mr. Grant to exercise
an option to purchase 100,000 shares of the Company’s common stock at a price of
$1.50 per share and to exercise a second option to purchase 50,000 shares of the
Company’s common stock at a price of $2.00 per share.  The Company
also forgave a loan to Mr. Grant and related parties in the amount of
approximately $46,177. This amount has been recorded as a bad debt expense in
2006.  The Company, its subsidiaries and officers face no further
liability in regard to the Grant lawsuit.




On July
23, 2004, the Company filed a lawsuit in the Circuit Court of Cook County,
Illinois against Tatko Biotech Inc. (“Tatko”).  The action arose from a
Joint Product Development Agreement with Tatko in which the Company agreed to
invest $10,000 toward the product development venture and granted to Tatko
100,000 shares of the Company’s restricted common stock.  In return, Tatko
granted us a five-year option to purchase 20% of Tatko’s outstanding capital
stock.  Tatko refused to collaborate on the agreement and, therefore, the
Company filed the lawsuit to have the court declare that Tatko is not entitled
to the 100,000 shares of the Company’s restricted common stock. On January
4, 2008, the lawsuit was dismissed pursuant to an agreement by Tatko to treat
the Joint Product Development Agreement as void. As a result of the dismissal of
the lawsuit and the agreement of the parties, the 100,000 shares of restricted
stock will be returned or cancelled.




13.           Subsequent
Events.




There
have been no subsequent events.




16




14.           Comparative
Figures.




Certain
of the comparative figures have been reclassified to conform with the current
year’s presentation.


























































17




Item2.
            Management’s
      Discussion and Analysis or Plan of
Operation.




Overview




Flexible
Solutions International, Inc. (“we,” “us,” and “our”) develops, manufactures and
markets specialty chemicals that slow the evaporation of water.  Our
initial product, HEAT$AVR®, is marketed for use in swimming pools and spas where
its use, by slowing the evaporation of water, allows the water to retain a
higher temperature for a longer period of time and thereby reduces the energy
required to maintain the desired temperature of the water in the
pool.  Using the same technology, WATER$AVR®, is marketed for water
conservation in irrigation canals, aquaculture, and reservoirs where its use
slows water loss due to evaporation.  We also manufacture and market
TPA’s for use in the oilfields to reduce scale and corrosion in many ‘topside’
water systems and in the agriculture industry to reduce fertilizer crystallization
before, during and after application.




Results
of Operations




Material
changes in our Statement of Operations for the periods presented are discussed
below:





Six Months Ended June 30,
2008


Item
            Increase
      (I) or
              Decrease
      (D)
            ReasonSales
            I
            Maintenance
      shutdowns in the oil extraction industry during 2007 had a comparative
      year-over-year effect.Wages
            I
            Increased
      sales required increased support on all levels.Administrative
      salaries and benefits
            D
            Five
      year stock option plans granted to several long term employees in 2006
      resulted in higher expenses in 2007.  Granting of stock options
      resulted in an expense of $102,301 in first six months of 2007 as compared
      to $62,443 in the same period 2008.Investor
      relations and transfer agent fee
            D
            Options
      granted in relation to the private placement in May 2007 increased our
      investor relations costs during that period.Office
      and miscellaneous
            I
            Various
      administrative costs associated with the start up of the new facility have
      been allocated to this account.  Once the facility is
      operational, these costs will be allocated to
    overhead.Consulting
            D
            The
      granting of stock options to long term consultants in 2006 resulted in a
      stock option expense of $40,851 in the six month ended June 30, 2008 as
      compared to $65,609 in the same period
  2007.




18




Six Months Ended June 30,
2007






Item
            Increase (I) or
              Decrease (D)
            ReasonGross
      profit
            I
            Increased
      due to sales consisting of a different product
  mix.Wages
            D
            Five
      year stock options plans granted to several key employees in 2006 resulted
      in higher expenses in 2006.  Granting of stock options plans
      resulted in an expense of $38,077 in first six months of 2007 as compared
      to $58,718 in the same period 2006.Administrative
      salaries and benefits
            D
            Five
      year stock option plans granted to several long term employees in 2006
      resulted in higher expenses in 2006.  Granting of stock options
      plans resulted in an expense of $102,301 in first six months of 2007 as
      compared to $184,996 in the same period 2006.Investor
      relations and transfer agent fee
            I
            Increase
      in external investor relations and transfer agent fees as well as options
      granted in relation to the private placement in May 2007 increased our
      investor relations costs.Consulting
            D
            The
      granting of stock options to long term consultants in 2006 resulted in a
      stock option expense of $122,304 in first quarter 2006 as compared to
      $65,609 in the same period 2007.Professional
      fees
            D
            The
      Company experienced reduced professional fees after the conclusion of two
      lawsuits in December 2006 and January 2007.Travel
            I
            Increased
      international sales have required increased
  travel.




19




Quarter Ended June 30,
2008


Item
            Increase (I) or
              Decrease (D)
            ReasonSales
            I
            Maintenance
      shutdowns in the oil extraction industry during 2007 had a comparative
      year-over-year effect.Wages
            I
            Increased
      sales required increased support on all
      levels.Administrative
      salaries and benefits
            D
            Five
      year stock option plans granted to several long term employees in 2006
      resulted in higher expenses in 2007 than 2008.  Granting of
      stock options plans resulted in an expense of $51,150 in second quarter
      2007 as compared to $31,222 in the same period
      2008.Investor
      relations and transfer agent fee
            D
            Options
      granted in relation to the private placement in May 2007 increased our
      investor relations costs during that
      period.Consulting
            D
            The
      granting of stock options to long term consultants in 2006 resulted in a
      stock option expense of $14,590 in first quarter 2008 as compared to
      $32,805 in the same period 2007.Commissions
            I
            Increased
      sales for the quarter resulted in increased
      commissions.





20


Quarter Ended June 30,
2007


Item
            Increase (I) or
              Decrease (D)
            ReasonWages
            D
            Five
      year stock options plans granted to several key employees in 2006 resulted
      in higher expenses in 2006.  Granting of stock options plans
      resulted in an expense of $19,038 in second quarter 2007 as compared to
      $29,359 in the same period
      2006.Administrative
      salaries and benefits
            D
            Five
      year stock option plans granted to several long term employees in 2006
      resulted in higher expenses in 2006.  Granting of stock options
      plans resulted in an expense of $51,150 in second quarter 2007 as compared
      to $92,498 in the same period
      2006.Investor
      relations and transfer agent fee
            I
            Increased
      international sales have required increased
      travel.Consulting
            D
            The
      granting of stock options to long term consultants in 2006 resulted in a
      stock option expense of $61,152 in second quarter 2006 as compared to
      $32,805 in the same period
      2007.Professional
      fees
            D
            The
      Company experienced reduced professional fees after the conclusion of two
      lawsuits in December 2006 and January
      2007.






Capital
Resources and Liquidity





The sources and uses of funds are
directly obtainable from the Consolidated Statement of Cash Flows included as
part of the financial statements filed with this report.





The Company has sufficient cash
resources to meets its future commitments and cash flow requirements for the
coming year.  As of June 30, 2008 working capital was $5,725,514 (2007
- $7,036,894) and the Company has no substantial commitments that require
significant outlays of cash over the coming fiscal year.





The
Company is committed to minimum rental payments for property and premises
aggregating approximately $252,347 over the term of four leases, the last
expiring on December 31, 2011.




21




Commitments
in each of the next five years are approximately as follows:




2008
            
            $
            91,3802009
            
            
            128,0112010
            
            
            16,4782011
            
            
            16,4782012
            
            
            -





The
Company doesn’t anticipate any capital requirements for the twelve months ending
December 31, 2008.





The Company does not have any
commitments or arrangements from any person to provide with any additional
capital.





See Note 2 to the financial statements
included as part of this report for a description of our significant accounting
policies and recent accounting pronouncements.





Item4T.
            Controls
      and Procedures.




Daniel
O’Brien, Flexible Solution International Inc.’s Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by this report; and
in his opinion the Company’s disclosure controls and procedures were
effective.  There were no changes in the Company’s internal controls
over financial reporting that occurred during the quarter ended June 30, 2008
that have affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.





Management’s
Report on Internal Control Over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as required by Sarbanes-Oxley (SOX)
Section 404.A.  The Company’s internal control over financial
reporting is a process designed under the supervision of its Chief Executive and
Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of their financial statements for
external purposes in accordance with Generally Accepted Accounting
Principles.





As of the
end of the period covered by this report, the Company’s management assessed the
effectiveness of its internal control over financial reporting based on the
criteria for effective internal control over financial reporting established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting
such assessments.  Based on that evaluation, the Company’s management
concluded that during the period covered by this report its internal controls
and procedures were effective.




22




PART
II                      OTHER
INFORMATION




Item1.
            Legal
      Proceedings.




On May 1,
2003, the Company filed a lawsuit in the Supreme Court of British Columbia,
Canada, against John Wells and Equity Trust, S.A. seeking the return of 100,000
shares of the Company’s common stock and the repayment of a $25,000 loan, which
were provided to defendants for investment banking services consisting of
securing a $5 million loan and a $25 million stock offering.  Such
services were not performed and in the proceeding the Company seeks return of
such shares after defendant’s failure to both return the shares voluntarily and
repay the note.  On May 7, 2003, the Company obtained an injunction
freezing the transfer of the shares.  On May 24, 2004, there was a
hearing on defendant’s motion to set aside the injunction, which motion was
denied by the trial court on May 29, 2004.  On the date of issuance,
the share transaction was recorded as shares issued for services at fair market
value, a value of $0.80 per share.  No amounts have been recorded as
receivable in the Company’s consolidated financial statements as the outcome of
this claim is not determinable.




Item2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds.




None.




Item
      3.
            Defaults
      Upon Senior Securities.




None.




Item
      4.
            Submission
      of Matters to a Vote of Security
Holders.




The
annual meeting of the Company’s shareholders was held on June 26,
2008.  At the meeting the following persons were re-elected as
directors for the upcoming year:





Name
            
            Votes
      For
            
            
            Votes
      Against
            
            
            Votes
      AbstainedDaniel
      B. O’Brien
            
            
            9,942,926
            
            
            
            13,872
            
            
            
            32,112Dr.
      Robert O’Brien
            
            
            9,777,193
            
            
            
            177,262
            
            
            
            34,365John
      H. Bientjes
            
            
            9,939,123
            
            
            
            15,332
            
            
            
            34,365Dale
      Friend
            
            
            9,939,123
            
            
            
            15,332
            
            
            
            34,365Eric
      Hodges
            
            
            9,940,876
            
            
            
            13,579
            
            
            
            34,365








At the
meeting, the following proposals were ratified by the shareholders:





1.           Vote
to approve the granting of the following options to officers and
directors:








A)
            John H.
      Bientjes
            5,000
      options to buy common shares with a strike price of $3.60/share, vesting
      on December 31, 2008 and expiring on December 18,
    2013.B)
            Dale
      Friend
            5,000
      options to buy common shares with a strike price of $3.60/share, vesting
      on December 31, 2008 and expiring on December 18,
    2013.C)
            Eric
Hodges
            5,000
      options to buy common shares with a strike price of $3.60/share, vesting
      on December 31, 2008 and expiring on December 18,
    2013.




2.           Approval
of Annual Report




23




3.           Vote
to ratify the selection of Cinnamon Jang Willoughby & Company as the
Company’s independent registered public accountants for the year ending December
31, 2008.




The
following is a tabulation of the votes cast with respect to these
proposals:




Proposal
            
            Votes
      For
            
            
            Votes
      Against
            
            
            Votes
      Abstained1A
            
            
            7,798,628
            
            
            
            34,448
            
            
            
            5,2601B
            
            
            7,797,828
            
            
            
            34,948
            
            
            
            5,5601C
            
            
            7,797,328
            
            
            
            35,748
            
            
            
            5,2602
            
            
            9,975,357
            
            
            
            10,696
            
            
            
            2,7703
            
            
            9,939,156
            
            
            
            21,896
            
            
            
            27,769





Item5.
            Other
      Information.




None.




Item
      6.
            Exhibits.




Number
            Description3.1
            Amended
      and Restated Certificate of Incorporation of the registrant.
      (1)3.2
            Bylaws
      of the registrant. (1)31.1
            Certification
      of Principal Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act
      of 2002.*31.2
            Certification
      of Principal Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act
      of 2002.*32.1
            Certification
      of Principal Executive Officer Pursuant to 18 U.S.C. §1350 and §906 of the
      Sarbanes-Oxley Act of 2002.*32.2
            Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. §1350 and §906 of the
      Sarbanes-Oxley Act of 2002.*


______________


*           Filed
with this report.




(1)           Incorporated
by reference to the registrant’s Registration Statement on Form 10-SB (SEC File.
No. 000-29649) filed February 22, 2000.




24




SIGNATURES




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




Flexible
      Solutions International, Inc.August
      14, 2008
              By:
              /s/ Daniel
      B. O’BrienName:
              Daniel
      B. O’BrienTitle:
              President
      and Chief Executive OfficerBy:
              /s/ Daniel
      B. O’BrienName:
              Daniel
      B. O’BrienTitle:
              President
      and Chief Executive Officer