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 September 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
            November 10,
      2008


FORM
10-Q




Index




PART
      I.
                                          FINANCIAL
      INFORMATIONItem 1.
                                          Financial Statements.
                                          1(a)
                                          Unaudited Consolidated Balance Sheets at September 30,
      2008 and December 31, 2007.
                                          1(b)
                                          Unaudited Consolidated Statements of Operations for the
      Three Months Ended
                                            September 30, 2008 and 2007.
                                          2(c)
                                          Unaudited Consolidated Statements of Operations for
      the Nine Months Ended
                                            September 30, 2008 and 2007.
                                          3(d)
                                          Unaudited Consolidated Statements of Cash Flows for the
      Nine Months Ended
                                            September 30, 2008 and 2007.
                                          4(e)
                                          Notes to Unaudited
      Consolidated Financial Statements for the Period
      Ended
                                            September 30, 2008.
                                          5Item
2.
                                          Management’s Discussion and
      Analysis or Plan of Operation.
                                          18Item 4T.
                                          Controls and Procedures.
                                          21PART II.
                                          OTHER INFORMATIONItem
6.
                                          Exhibits.
                                          22SIGNATURES
                                          
                                          23


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.




FLEXIBLE SOLUTIONS INTERNATIONAL, INC.


CONSOLIDATED
BALANCE SHEETS


At
September 30, 2008


(U.S.
Dollars)




September
      30,
                          2008
                          (Unaudited)
                        
                        
                        December
      31,
                          2007AssetsCurrentCash
      and cash equivalents
                        
                        $
                        669,782
                        
                        
                        $
                        3,355,854Accounts
      receivable
                        
                        
                        1,785,100
                        
                        
                        
                        1,051,056Inventory
                        
                        
                        3,753,026
                        
                        
                        
                        2,361,270Prepaid
      expenses
                        
                        
                        101,631
                        
                        
                        
                        115,3536,309,539
                        
                        
                        
                        6
      ,883,533Property,
      equipment and leaseholds
                        
                        
                        6,042,908
                        
                        
                        
                        4,612,571Patents
                        
                        
                        220,080
                        
                        
                        
                        230,438Long
      term deposits
                        
                        
                        34,323
                        
                        
                        
                        48,034$
                        12,606,850
                        
                        
                        $
                        11,774,576LiabilitiesCurrentAccounts
      payable and accrued liabilities
                        
                        $
                        461,923
                        
                        
                        $
                        385,792Deferred
      revenue
                        
                        
                        -
                        
                        
                        
                        9,870461,923
                        
                        
                        
                        395,662Loan
                        
                        
                        359,947
                        
                        
                        
                        -Mortgage
                        
                        
                        -
                        
                        
                        
                        52,018$
                        821,870
                        
                        
                        $
                        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
                        
                        
                        16,162,493
                        
                        
                        
                        15,914,303Other
      comprehensive income
                        
                        
                        201,957
                        
                        
                        
                        394,289Deficit
                        
                        
                        (4,593,528
                        )
                        
                        
                        (5,395,754
                        )Total
      Stockholders’ Equity
                        
                        
                        11,784,980
                        
                        
                        
                        10,926,896Total
      Liabilities and Stockholders’ Equity
                        
                        $
                        12,606,850
                        
                        
                        $
                        11,774,576Commitments,
      Contingencies and Subsequent events (Notes 12, 13 &
14)






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


FLEXIBLE SOLUTIONS INTERNATIONAL, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the Three Months Ended September 30, 2008 and 2007


(U.S.
Dollars -- Unaudited)




Three
      Months Ended September 30,2008
                        
                        
                        2007Sales
                        
                        $
                        2,097,351
                        
                        
                        $
                        1,297,425Cost
      of sales
                        
                        
                        1,111,547
                        
                        
                        
                        910,915Gross
      profit
                        
                        
                        985,804
                        
                        
                        
                        386,510Operating
      expensesWages
                        
                        
                        330,657
                        
                        
                        
                        283,978Administrative
      salaries and benefits
                        
                        
                        99,162
                        
                        
                        
                        119,798Advertising
      and promotion
                        
                        
                        13,612
                        
                        
                        
                        3,746Investor
      relations and transfer agent fee
                        
                        
                        24,238
                        
                        
                        
                        74,244Office
      and miscellaneous
                        
                        
                        138,957
                        
                        
                        
                        31,869Insurance
                        
                        
                        59,675
                        
                        
                        
                        60,914Interest
      expense
                        
                        
                        1,445
                        
                        
                        
                        1,690Rent
                        
                        
                        66,517
                        
                        
                        
                        59,187Consulting
                        
                        
                        53,645
                        
                        
                        
                        60,811Professional
      fees
                        
                        
                        28,000
                        
                        
                        
                        50,239Travel
                        
                        
                        23,179
                        
                        
                        
                        16,033Telecommunications
                        
                        
                        7,929
                        
                        
                        
                        7,818Shipping
                        
                        
                        6,412
                        
                        
                        
                        8,057Research
                        
                        
                        7,219
                        
                        
                        
                        23,117Commissions
                        
                        
                        20,899
                        
                        
                        
                        12,936Bad
      debt expense (recovery)
                        
                        
                        0
                        
                        
                        
                        210Currency
      exchange
                        
                        
                        (40,072
                        )
                        
                        
                        59,960Utilities
                        
                        
                        279
                        
                        
                        
                        4,851841,753
                        
                        
                        
                        879,458Operating
      Income (loss)
                        
                        
                        144,051
                        
                        
                        
                        (492,948
                        )Other
      expenses
                        
                        
                        -
                        
                        
                        
                        (9,481
                        )Other
      income
                        
                        
                        -
                        
                        
                        
                        195,442Interest
      income
                        
                        
                        378
                        
                        
                        
                        1,025Income
      (loss) before income tax
                        
                        
                        144,429
                        
                        
                        
                        (305,962
                        )Net
      income (loss)
                        
                        
                        144,429
                        
                        
                        
                        (305,962
                        )Net
      income (loss) per share (basic and diluted)
                        
                        $
                        0.01
                        
                        
                        $
                        (0.02
                        )Weighted
      average number of  common shares
                        
                        
                        14,057,567
                        
                        
                        
                        14,157,567


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


FLEXIBLE SOLUTIONS INTERNATIONAL, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the Nine Months Ended September 30, 2008 and 2007


(U.S.
Dollars -- Unaudited)




Nine
      Months Ended September 30,2008
                      
                      
                      2007Sales
                      
                      $
                      8,518,441
                      
                      
                      $
                      5,730,432Cost
      of sales
                      
                      
                      5,087,051
                      
                      
                      
                      3,637,590Gross
      profit
                      
                      
                      3,431,390
                      
                      
                      
                      2,092,842Operating
      expensesWages
                      
                      
                      936,412
                      
                      
                      
                      800,436Administrative
      salaries and benefits
                      
                      
                      271,272
                      
                      
                      
                      376,080Advertising
      and promotion
                      
                      
                      82,193
                      
                      
                      
                      41,771Investor
      relations and transfer agent fee
                      
                      
                      112,269
                      
                      
                      
                      252,083Office
      and miscellaneous
                      
                      
                      330,232
                      
                      
                      
                      135,375Insurance
                      
                      
                      162,210
                      
                      
                      
                      167,979Interest
      expense
                      
                      
                      3,407
                      
                      
                      
                      2,874Rent
                      
                      
                      201,627
                      
                      
                      
                      170,218Consulting
                      
                      
                      141,498
                      
                      
                      
                      188,490Professional
      fees
                      
                      
                      94,407
                      
                      
                      
                      131,509Travel
                      
                      
                      91,197
                      
                      
                      
                      98,063Telecommunications
                      
                      
                      26,858
                      
                      
                      
                      27,280Shipping
                      
                      
                      29,626
                      
                      
                      
                      31,301Research
                      
                      
                      75,001
                      
                      
                      
                      78,785Commissions
                      
                      
                      102,470
                      
                      
                      
                      88,533Bad
      debt expense (recovery)
                      
                      
                      482
                      
                      
                      
                      2,061Currency
      exchange
                      
                      
                      (63,496
                      )
                      
                      
                      69,549Loss
      on sale of equipment
                      
                      
                      29,048
                      
                      
                      
                      -Utilities
                      
                      
                      4,856
                      
                      
                      
                      14,8972,631,569
                      
                      
                      
                      2,677,284Operating
      Income (loss)
                      
                      
                      799,821
                      
                      
                      
                      (584,442
                      )Other
      expenses
                      
                      
                      -
                      
                      
                      
                      (15,051
                      )Other
      income
                      
                      
                      -
                      
                      
                      
                      195,442Interest
      income
                      
                      
                      2,405
                      
                      
                      
                      3,396Income
      (loss) before income tax
                      
                      
                      802,226
                      
                      
                      
                      (400,656
                      )Income
      tax (recovery)
                      
                      
                      -
                      
                      
                      
                      -Net
      income (loss)
                      
                      
                      802,226
                      
                      
                      
                      (400,656
                      )Net
      income (loss) per share (basic and diluted)
                      
                      $
                      0.06
                      
                      
                      $
                      (0.03
                      )Weighted
      average number of  common shares
                      
                      
                      14,057,567
                      
                      
                      
                      13,656,633


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


FLEXIBLE SOLUTIONS INTERNATIONAL, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Nine Months Ended September 30, 2008 and 2007


(U.S.
Dollars -- Unaudited)




Nine
      Months Ended September 30,2008
                      
                      
                      2007Operating
      activitiesNet
      income (loss)
                      
                      $
                      802,226
                      
                      
                      $
                      (400,655
                      )Stock
      compensation expense
                      
                      
                      248,097
                      
                      
                      
                      419,975Depreciation
                      
                      
                      341,433
                      
                      
                      
                      386,214Changes
      in non-cash working capital items:(Increase)
      Decrease in accounts receivable
                      
                      
                      (734,044
                      )
                      
                      
                      369,214(Increase)
      Decrease in inventory
                      
                      
                      (1,391,756
                      )
                      
                      
                      (385,304
                      )(Increase)
      Decrease in prepaid expenses
                      
                      
                      13,722
                      
                      
                      
                      (11,417
                      )Increase
      (Decrease) in accounts payable
                      
                      
                      76,131
                      
                      
                      
                      (142,958
                      )Increase
      (Decrease) in deferred revenue
                      
                      
                      (9,870
                      )
                      
                      
                      (10,825
                      )Cash
      provided by (used in) operating activities
                      
                      
                      (654,061
                      )
                      
                      
                      224,244Investing
      activitiesLong
      term deposits
                      
                      
                      13,711
                      
                      
                      
                      (618
                      )Development
      of patents
                      
                      
                      10,358
                      
                      
                      
                      (53,186
                      )Acquisition
      of property and equipment
                      
                      
                      (2,223,788
                      )
                      
                      
                      161,401Cash
      provided by (used in) investing activities
                      
                      
                      (2,199,719
                      )
                      
                      
                      107,597Financing
      activitiesLoan
                      
                      
                      359,947Proceeds
      from issuance of common stock
                      
                      
                      -
                      
                      
                      
                      3,164,481Cash
      provided by financing activities
                      
                      
                      359,947
                      
                      
                      
                      3,164,481Effect
      of exchange rate changes on cash
                      
                      
                      (192,239
                      )
                      
                      
                      262,104Inflow
      (outflow) of cash
                      
                      
                      (2,686,072
                      )
                      
                      
                      3,758,426Cash
      and cash equivalents, beginning
                      
                      
                      3,355,854
                      
                      
                      
                      450,759Cash
      and cash equivalents, ending
                      
                      $
                      669,782
                      
                      
                      $
                      4,209,185Supplemental
      disclosure of cash flow information:Interest
      paid
                      
                      $
                      3,407
                      
                      
                      $
                      2,874




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


FLEXIBLE SOLUTIONS INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


For
the Period Ended September 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 September 30, 2008, and the consolidated results of
operations and the consolidated statements of cash flows for the nine months
ended September 30, 2008 and 2007.  The results of operations for the
nine months ended September 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 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.




The
Company 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
September 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 $864,849 (48%) as at September 30, 2008 (2007 - $648,538 or
68%).





(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
                      
                      $
                      2,187,341
                      
                      
                      $
                      1,664,777Works
      in progress
                      
                      
                      132,625
                      
                      
                      
                      198,172Raw
      materials
                      
                      
                      1,433,060
                      
                      
                      
                      498,321$
                      3,753,026
                      
                      
                      $
                      2,361,270





4. Property,
Plant & equipment





2008
                        
                        
                        Accumulated
                        
                        
                        2008Cost
                        
                        
                        Depreciation
                        
                        
                        NetBuildings
                        
                        $
                        4,138,235
                        
                        
                        $
                        1,133,377
                        
                        
                        $
                        3,004,858Building
      Improvements
                        
                        
                        465,407
                        
                        
                        
                        —
                        
                        
                        
                        465,407Computer
      hardware
                        
                        
                        81,367
                        
                        
                        
                        53,253
                        
                        
                        
                        28,114Furniture
      and fixtures
                        
                        
                        21,081
                        
                        
                        
                        12,920
                        
                        
                        
                        8,161Office
      equipment
                        
                        
                        31,923
                        
                        
                        
                        22,643
                        
                        
                        
                        9,280Manufacturing
      equipment
                        
                        
                        3,288,018
                        
                        
                        
                        1,384,793
                        
                        
                        
                        1,903,225Trailer
                        
                        
                        26,419
                        
                        
                        
                        7,289
                        
                        
                        
                        19,130Leasehold
      improvements
                        
                        
                        26,942
                        
                        
                        
                        21,451
                        
                        
                        
                        5,491Technology
                        
                        
                        128,373
                        
                        
                        
                        -
                        
                        
                        
                        128,373Trade
      show booth
                        
                        
                        8,165
                        
                        
                        
                        6,322
                        
                        
                        
                        1,843Truck
                        
                        
                        11,173
                        
                        
                        
                        2,514
                        
                        
                        
                        8,659Land
                        
                        
                        460,367
                        
                        
                        
                        —
                        
                        
                        
                        460,367$
                        8,687,470
                        
                        
                        $
                        2,644,562
                        
                        
                        $
                        6,042,908





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
                        
                        
                        
                        9,824Trade
      show booth
                        
                        
                        8,766
                        
                        
                        
                        6,212
                        
                        
                        
                        2,554Land
                        
                        
                        477,133
                        
                        
                        
                        —
                        
                        
                        
                        477,133$
                        6,991,397
                        
                        
                        $
                        2,378,825
                        
                        
                        $
                        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, $70,861 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
                      
                      $
                      235,080
                      
                      
                      $
                      15,000
                      
                      
                      $
                      220,080





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
                        
                        $
                        34,323
                        
                        
                        $
                        48,034





7. Loan




The Company has received the first draw
in the amount of $359,947 from the Agri-Opportunities Program by the Government
of Canada.  The Company has been approved for a $1,000,000CDN interest
free loan repayable over five years, starting in 2012.









12


8. 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.




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 September 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
                        
                        
                        203,000
                        
                        
                        
                        $3.60
                        
                        
                        
                        $3.60Cancelled
      or expired
                        
                        
                        (20,000
                        )
                        
                        
                        $4.25
                        
                        
                        
                        $4.25Balance,
      September 30, 2008
                        
                        
                        2,095,440
                        
                        
                        
                        $3.00
      - 4.55
                        
                        
                        
                        $3.40






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 nine months ended September 30, 2008 the Company granted 46,000 options to
consultants that resulted in $39,717 in expenses this period.  During
the same period, 37,000 options were granted to employees, resulting in $31,947
in expenses this period.  An additional 120,000 options were granted
to two key employees with special vesting requirements.  Once the
requirements have been met, the Company will recognize the expense associated
with these options.  Options granted in previous quarters resulted in
additional expenses in the amount of $61,275 for consultants and $115,158 for
employees during the nine months ended September 30, 2008.  No stock
options were exercised during the period.




13


During
the nine months ended September 30, 2007, the Company granted 150,000 stock
options to Mr. Grant 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 $58,259 during
the nine months ended September 30, 2007.  Options granted in previous
quarters but not yet vested realized expenses of $140,031 for outsiders and
$229,411 for employees for the nine months ended September 30,
2007.  During the three months ended September 30, 2007, the Company
granted 35,000 stock options to employees, which resulted in additional expenses
of $5,004 for the period.  During the same period, the company
cancelled 25,000 stock options written to employees and this resulted in a
recoup of $12,730 in expenses.




9. 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.




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






14


10.Capital
Stock.




During
the nine months ended September 30, 2007, the Company issued 163,000 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 nine months ended September 30, 2008.




11.           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.




(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.




15


Nine
months ended September 30, 2008:




EWCP
                      
                      
                      BPCA
                      
                      
                      TotalRevenue
                      
                      $
                      980,431
                      
                      
                      $
                      7,538,010
                      
                      
                      $
                      8,518,441Interest
      revenue
                      
                      
                      1,696
                      
                      
                      
                      709
                      
                      
                      
                      2,405Interest
      expense
                      
                      
                      550
                      
                      
                      
                      2,857
                      
                      
                      
                      3,407Depreciation
      andamortization
                      
                      
                      40,176
                      
                      
                      
                      301,257
                      
                      
                      
                      341,433Segment
      profit (loss)
                      
                      
                      (1,027,410
                      )
                      
                      
                      1,829,636
                      
                      
                      
                      802,226Segment
      assets
                      
                      
                      3,255,934
                      
                      
                      
                      3,007,054
                      
                      
                      
                      6,262,988Expenditures
      forsegment
      assets
                      
                      
                      2,187,236
                      
                      
                      
                      36,552
                      
                      
                      
                      2,223,788




Nine
months ended September 30, 2007:




EWCP
                      
                      
                      BPCA
                      
                      
                      TotalRevenue
                      
                      $
                      1,080,729
                      
                      
                      $
                      4,649,703
                      
                      
                      $
                      5,730,432Interest
      revenue
                      
                      
                      2,542
                      
                      
                      
                      854
                      
                      
                      
                      3,396Interest
      expense
                      
                      
                      783
                      
                      
                      
                      2,091
                      
                      
                      
                      2,874Depreciation
      andamortization
                      
                      
                      41,056
                      
                      
                      
                      345,158
                      
                      
                      
                      386,214Segment
      profit (loss)
                      
                      
                      (1,155,336
                      )
                      
                      
                      754,680
                      
                      
                      
                      (400,656
                      )Segment
      assets
                      
                      
                      194,974
                      
                      
                      
                      3,357,964
                      
                      
                      
                      3,552,938Expenditures
      forsegment
      assets
                      
                      
                      36,419
                      
                      
                      
                      (197,820
                      )
                      
                      
                      (161,401
                      )




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




2008
                      
                      
                      2007Canada
                      
                      $
                      226,632
                      
                      
                      $
                      73,759United
      States and abroad
                      
                      
                      8,291,809
                      
                      
                      
                      5,656,673Total
                      
                      $
                      8,518,441
                      
                      
                      $
                      5,730,432




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




2008
                      
                      
                      2007Canada
                      
                      $
                      3,252,713
                      
                      
                      $
                      1,331,166United
      States
                      
                      
                      3,010,275
                      
                      
                      
                      3,511,843Total
                      
                      $
                      6,262,988
                      
                      
                      $
                      4,843,009





Three
customers account for $4,083,436 (48%) of sales made in the period (2007 -
$3,598,777 or 63%).


16
 12.           Commitments.




The
Company is committed to minimum rental payments for property and premises
aggregating approximately $198,730 over the term of three leases, the last
expiring on December 31, 2011.




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




2008
                      
                      $
                      44,3822009
                      
                      
                      122,7472010
                      
                      
                      15,8002011
                      
                      
                      15,8002012
                      
                      
                      -





13.           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.




14.           Subsequent
Events.




The
Company has been approved for a 5% simple interest loan of $2,000,000CDN offered
by Agriculture Financial Services Corporation, a Province of Alberta Crown
corporation.  The loan has a 6 year term, with interest only payments
made during the first term and the Company received the first draw of
$1,500,000CDN on October 10, 2008.




17


15.           Comparative
Figures.




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




Item 2. 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




The
Company has two product lines:




The first
is a chemical (“EWCP”) used in swimming pools and spas.  The product forms
a thin, transparent layer on the water’s surface.  The transparent layer
slows the evaporation of water, allowing the water to retain a higher
temperature for a longer period of time and thereby reducing the energy required
to maintain the desired temperature of the water.  A modified version of
the product can also be used in reservoirs, potable water storage tanks,
livestock watering ponds, canals, and irrigation ditches.






The
second product (“BPCA”) combines biodegradable polymers and chemical additives
and is used by the petroleum, chemical, utility and mining industries to prevent
corrosion and scaling in water piping.  This product can also be used in
detergent to increase biodegradability and in agriculture to increase crop
yields by enhancing fertilizer uptake.







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





Nine Months Ended September
30, 2008




Increase
      (I) orItem
                                    
                                    Decrease
      (D)
                                    
                                    ReasonSalesEWCP
      products
                                    
                                    D
                                    
                                    During
      the nine months ended September 30, 2008 a drought in Australia eased,
      which reduced sales of energy and water conservation products. In
      addition, energy and water conservation products for use in swimming pools
      decreased due to real estate foreclosures in the United
      States.BPCA
      products
                                    
                                    I
                                    
                                    Maintenance
      shutdowns in the oil extraction industry during 2007 reduced sales during
      the nine months ended September 30,
2007.
   18
  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 $153,451 in first nine months of 2007 as
      compared to $93,665 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 $56,720 in the nine months ended September 30,
      2008 as compared to $108,747 in the same period
  2007.




Three MonthsEnded September 30,
2008




Increase
      (I) orItem
                                                
                                                Decrease
      (D)
                                                
                                                ReasonSalesEWCP
      products
                                                
                                                I
                                                
                                                The
      Company believes that lower volume commitments by large customers hoping
      to control inventory in Q1 and Q2 resulted in orders pushed forward
      into Q3, leading to increased sales over the same period in the past
      year.BPCA
      products
                                                
                                                I
                                                
                                                Maintenance
      shutdowns in the oil extraction industry during 2007 reduced sales during
      the three months ended September 30, 2007.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 third quarter
      2007 as compared to $31,222 in the same period
  2008.


19


Investor
      relations and transfer agent fee
                      
                      D
                      
                      The
      Company relied less on third party investor relations consultants during
      the three months ending September 30, 2008.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, which vest over a five
      year period beginning in 2006, resulted in a stock option expense of
      $15,869 in third quarter 2008 as compared to $43,138 in the same period
      2007.Commissions
                      
                      I
                      
                      Increased
      sales for the quarter resulted in increased
  commissions.





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 September 30, 2008 working capital was $5,481,845
(2007 - $7,295,137) 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 $198,730 over the term of three leases, the last
expiring on December 31, 2011.




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




2008
                    
                    $
                    44,3822009
                    
                    
                    122,7472010
                    
                    
                    15,8002011
                    
                    
                    15,8002012
                    
                    
                    -





The
Company does not 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 it with any additional
capital.





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


20


Item
4T.Controls
and Procedures.




Daniel
O’Brien, the Company’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 September 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.









































21


PART
II OTHER
INFORMATION




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.









































22


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.November
      13, 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:
                              Chief
      Financial Officer






































23