UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549











FORM
10-Q





(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934.





For the quarterly period ended
            DECEMBER
      31, 2008





OR





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934.





For the
transition period from ___________________________ to
___________________________





Commission
file number 000-29483





Pacific Sands,
Inc.


(Exact
Name of Registrant as specified in its charter)





Nevada
              88-0322882(State
      or Other Jurisdiction of Incorporation or
      Organization)
              (IRS
      Employer Identification
No.)





1509
      Rapids Drive
                Racine,
      WI
              53404(Address
      of Principal Executive Offices)
              (Zip
      Code)





Issuer’s
Telephone Number, Including Area Code:  (262)619-3261





N/A





(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)




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




Indicate
by check mark whether the registrant is a larger accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one)




Large
      accelerated filer  o
            Accelerated
      filer oNon-accelerated
      filer   o
            Smaller
      reporting company x




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




Yes o            
No x




The
numbers of shares outstanding of each of the issuer's classes of common equity,
as of February 17, 2009, are as follows:




Class
      of Securities
              
              Shares
      OutstandingCommon
      Stock, $0.001 par value
              
              40,236,182




Transitional
Small Business Disclosure Format (check one):  Yes  o         
No x











TABLE OF CONTENTS




PagePART IFINANCIAL
      INFORMATIONItem
      1.
                          Financial Statements
                          3Balance Sheet as of December 31, 2008 (unaudited) and June 30,
      2008
                          3Statements of Operations for the Three and Six Months
      Ended December 31, 2008 and 2007 (unaudited)
                          4Statements of Cash Flows for the Six Months
      Ended December 31, 2008 and 2007 (unaudited)
                          5Notes to Financial Statements
(unaudited)
                          7Item
      2.
                          Management Discussion and Analysis of Financial Condition and
      Results of Operation
                          16Item
      3.
                          Quantitative and Qualitative Disclosers About Market
      Risk
                          21Item
      4.
                          Controls and Procedures
                          22PART IIOTHER
      INFORMATIONITEM
      1.
                          LEGAL PROCEEDINGS
                          22ITEM
      2.
                          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
                          22ITEM
      3.
                          DEFAULTS UPON SENIOR SECURITIES
                          22ITEM
      4.
                          SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
                          22ITEM
      5.
                          OTHER INFORMATION
                          23ITEM
      6.
                          EXHIBITS
                          23SIGNATURES
                          23EX-31.1 (Certifications required
      under Section 302 of the Sarbanes-Oxley Act of 2002)EX-31.2 (Certifications required
      under Section 302 of the Sarbanes-Oxley Act of 2002)EX-32.1 (Certifications required
      under Section 906 of the Sarbanes-Oxley Act of 2002)EX-32.2 (Certifications required
      under Section 906 of the Sarbanes-Oxley Act of 2002)






2




PACIFIC SANDS, INC.BALANCE
      SHEETSDECEMBER
      31, 2008 AND JUNE 30, 2008ASSETSDecember
      31,
                                                                                    2008
                                                                                  
                                                                                  
                                                                                  June
      30,
                                                                                    2008Current
      assets:
                                                                                  
                                                                                  (Unaudited)Cash
      and cash equivalents
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  7,487Trade
      receivables, net of allowances for doubtful accounts of
      $13,602
                                                                                  
                                                                                  
                                                                                  207,775
                                                                                  
                                                                                  
                                                                                  
                                                                                  256,427Inventories
                                                                                  
                                                                                  
                                                                                  134,188
                                                                                  
                                                                                  
                                                                                  
                                                                                  135,282Prepaid
      expenses
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  948Other
      current assets
                                                                                  
                                                                                  
                                                                                  12,104
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,268Total
      Current Assets
                                                                                  
                                                                                  
                                                                                  354,067
                                                                                  
                                                                                  
                                                                                  
                                                                                  402,412Property
      and equipment, net
                                                                                  
                                                                                  
                                                                                  68,372
                                                                                  
                                                                                  
                                                                                  
                                                                                  78,311Other
      assets:Security
      deposits
                                                                                  
                                                                                  
                                                                                  5,341
                                                                                  
                                                                                  
                                                                                  
                                                                                  816Goodwill
                                                                                  
                                                                                  
                                                                                  877,854
                                                                                  
                                                                                  
                                                                                  
                                                                                  861,862883,195
                                                                                  
                                                                                  
                                                                                  
                                                                                  862,678Total
      Assets
                                                                                  
                                                                                  $
                                                                                  1,305,634
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,343,401LIABILITIES AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable
                                                                                  
                                                                                  $
                                                                                  332,914
                                                                                  
                                                                                  
                                                                                  $
                                                                                  331,824Current
      maturities of capital lease obligations
                                                                                  
                                                                                  
                                                                                  17,449
                                                                                  
                                                                                  
                                                                                  
                                                                                  21,598Accrued
      expenses
                                                                                  
                                                                                  
                                                                                  230,557
                                                                                  
                                                                                  
                                                                                  
                                                                                  154,469Deferred
      compensation
                                                                                  
                                                                                  
                                                                                  139,732
                                                                                  
                                                                                  
                                                                                  
                                                                                  139,732Current
      portion of notes payable
                                                                                  
                                                                                  
                                                                                  505,106
                                                                                  
                                                                                  
                                                                                  
                                                                                  361,221Total
      Current Liabilities
                                                                                  
                                                                                  
                                                                                  1,225,758
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,008,844Capital
      leases, less current portion
                                                                                  
                                                                                  
                                                                                  27,212
                                                                                  
                                                                                  
                                                                                  
                                                                                  33,215Notes
      payable - net of discount of $39,702 and $61,942, less current
      portion
                                                                                  
                                                                                  
                                                                                  392,139
                                                                                  
                                                                                  
                                                                                  
                                                                                  522,558Total
      Liabilities
                                                                                  
                                                                                  
                                                                                  1,645,109
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,564,617Stockholders'
      deficitCommon
      stock (50,000,000 shares authorized, 46,845,369 and
      45,308,958shares issued and 40,236,182 and 38,699,771 shares
      outstanding)
                                                                                  
                                                                                  
                                                                                  46,846
                                                                                  
                                                                                  
                                                                                  
                                                                                  45,309Additional
      paid in capital
                                                                                  
                                                                                  
                                                                                  4,024,519
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,898,363Treasury
      stock, at cost
                                                                                  
                                                                                  
                                                                                  (132,030
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (132,030
                                                                                  )Accumulated
      deficit
                                                                                  
                                                                                  
                                                                                  (4,278,810
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (4,032,858
                                                                                  )Total
      Stockholders' Deficit
                                                                                  
                                                                                  
                                                                                  (339,475
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (221,216
                                                                                  )Total
      Liabilities and Stockholders' Deficit
                                                                                  
                                                                                  $
                                                                                  1,305,634
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,343,401








Return to Table of Contents
 3




PACIFIC SANDS, INC.STATEMENTS
      OF OPERATIONSFOR
      THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007(UNAUDITED)Three
      months ended
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Six
      months endedDecember
      31,
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          December
      31,2008
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2007
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2008
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2007Net
      sales
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          176,999
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          153,234
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          529,805
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          333,041Cost
      of sales
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          120,411
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          68,580
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          282,361
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          131,443Gross
      profit
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          56,588
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          84,654
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          247,444
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          201,598Selling
      and administrative expenses
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          216,105
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          241,955
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          455,785
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          409,761Loss
      from operations
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (159,517
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (157,301
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (208,341
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (208,163
                                                                                                                                          )Other
      expenseInterest
      expense
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (21,522
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (5,910
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (37,610
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (8,878
                                                                                                                                          )Other
      income
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          5,000
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          5,000Loss
      before income taxes
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (181,039
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (158,211
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (245,951
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (212,041
                                                                                                                                          )Income
      taxes
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -Net
      loss
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          (181,039
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          (158,211
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          (245,951
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          (212,041
                                                                                                                                          )Basic
      and diluted net loss per share
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          (0.005
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          (0.005
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          (0.006
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          (0.006
                                                                                                                                          )Basic
      and diluted weighted average shares outstanding
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          40,117,486
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          34,830,931
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          39,673,500
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          34,606,286


Return to Table of Contents
 4
  PACIFIC SANDS, INC.STATEMENTS
      OF CASH FLOWSFOR
      THE SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007(UNAUDITED)2008
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    2007Cash
      flows from operating activitiesNet
      loss
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    (245,951
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    (212,041
                                                                                                                                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities -Depreciation
      and amortization
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    13,085
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    7,080Amortization
      of debt discount
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    23,755
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -Common
      shares issued for services  and compensation
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    18,350
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    51,275Changes
      in assets and liabilities -Trade
      accounts receivable
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    36,661
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (57,479
                                                                                                                                    )Inventories
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    1,094
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    22,131Prepaid
      expenses
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    948
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    4,608Other
      assets
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (9,836
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    4,145Accounts
      payable and other current liabilities
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    73,300
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    43,829Net
      Cash Used in Operating Activities
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (88,594
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (136,452
                                                                                                                                    )Cash
      flows from investing activitiesPurchases
      of equipment
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (3,146
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -Increase
      in security deposits
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (4,525
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -Net
      Cash Used in Investing Activities
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (7,671
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -Cash
      flows from financing activitiesProceeds
      from common stock issued
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    41,169
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    67,000Proceeds
      from notes payable
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    135,201
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    119,826Repayment
      of notes payable and long term obligations
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (87,592
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (48,846
                                                                                                                                    )Deferred
      compensation payments
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (12,799
                                                                                                                                    )Net
      Cash Provided by Financing Activities
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    88,778
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    125,181Net
      decrease in cash and cash equivalents
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (7,487
                                                                                                                                    )
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    (11,271
                                                                                                                                    )Cash
      and cash equivalents:Beginning
      of period
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    7,487
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    13,969End
      of period
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    -
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    2,698
  Return to Table of Contents
 5
  PACIFIC
      SANDS, INC.STATEMENTS
      OF CASH FLOWSFOR
      THE SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007(UNAUDITED)Supplemental
      disclosures of cash flow information:2008
                                                                                  
                                                                                  
                                                                                  2007Cash
      paid during the period for:Interest
                                                                                  
                                                                                  $
                                                                                  8,242
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,630Income
      taxes
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Supplemental
      disclosure of non cash financing and
      investing activitiesConversion
      of debt to equity
                                                                                  
                                                                                  $
                                                                                  50,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -Deposit on
      acquisition utilizing common stock
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  50,000Convertible
      notes discount with corresponding increase to paid in capital for value of
      the beneficial conversion feature
                                                                                  
                                                                                  $
                                                                                  18,174
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -


Return to Table of Contents
 6


FORM 10-Q
              DECEMBER
      31, 2008PACIFIC
      SANDS, INCNOTES
      TO FINANCIAL STATEMENTS





1.         BASIS
OF PRESENTATION





The
accompanying unaudited interim financial statements of Pacific Sands, Inc., have
been prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange Commission
(“SEC”), and should be read in conjunction with the audited financial statements
and notes thereto contained in Pacific Sands, Inc’s Annual Report filed with the
SEC on Form 10-KSB for the year ended June 30, 2008.  In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected
herein.  The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full
year.  Notes to the financial statements which would substantially
duplicate the disclosure contained in the audited financial statements for
fiscal 2008 as reported elsewhere in this Form 10-Q have been
omitted.







2.         DESCRIPTION
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES





Nature of Business - Pacific
Sands, Inc. with the right to do business as Natural Water Technologies (the
"Company" or "Pacific Sands") was incorporated in Nevada on July 7,
1994.





Pacific
Sands develops, manufactures, markets and sells a range of nontoxic,
environmentally friendly cleaning and water-treatment products based on
proprietary blended botanical, nontoxic and natural chemical technologies. The
Company’s products have applications ranging from water maintenance (spas,
swimming pools, fountains, decorative ponds) to cleaning (nontoxic household and
industrial) and pet care.





In mid
February of 2008, the Company acquired Natural Choices Home Safe Products, LLC
(“Natural Choices”), a developer and manufacturer of environmentally friendly
cleaning and laundry products. The acquisition added dozens of new products to
the Pacific Sands portfolio of earth, health, pet and kid-friendly offerings,
including Oxy-BoostTM an oxygen-bleach based, chlorine-free bleach alternative.
The Company now has a large selection of oxygen- bleach based formulations
available both for retail distribution under its ecoone®, e-2 elemental earth®
and Natural ChoicesTM brands as well as for contract manufacturing and
re-label.





The
Company markets and sells its product lines directly, over the Internet and
through pool, spa, hardware, specialty and other retail outlets in the US,
Canada and Europe. The products are also sold via Pacific Sands distributors,
manufacturers’ representatives and internationally established pool and spa
industry distribution networks. The Company’s products are also sold through
numerous popular pool and spa websites.  The Company’s Natural Choices
branded product are sold in numerous retail outlets around the country and in
Europe as well as dozens of the top environmentally-oriented
websites.




Inventories - Inventories are
stated at the lower of cost or market on the first-in, first-out (FIFO)
basis.





Return to Table of Contents
 7


FORM
      10-Q
            DECEMBER
      31, 2008PACIFIC
      SANDS, INCNOTES
      TO FINANCIAL STATEMENTS




Depreciation and Amortization - For
financial reporting purposes, depreciation and amortization of property and
equipment has been computed over estimated useful lives of two to seven years
primarily using the straight-line method.  Depreciation and
amortization charges totaled $13,085 and $7,080 during the six months ended
December 31, 2008 and 2007, respectively.





Revenue Recognition - Revenue
is recognized when the related products are shipped.





Advertising and Promotional
Costs - Advertising and promotion costs are expensed as
incurred.  During the six months ended December 31, 2008 and 2007
advertising and promotion costs totaled $1,483 and $10,323,
respectively.





Income Taxes - The Company
accounts for income taxes under Statement of Financial Accounting Standards
(SFAS) 109.  Under the asset and liability method of SFAS 109,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future years to
the difference between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.





Effective
July 1 2007, the Company adopted FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109, which clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes.The interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return





Accounts Receivable - The
Company makes judgments as to the collectibility of trade and other accounts
receivable based on historic trends and future
expectations.  Management estimates an allowance for doubtful
receivables, which reflects its current assessment of the collectibility of the
receivables.  Management believes that the current specific and
general receivable reserves aggregating $13,602 is adequate as of December 31,
2008.





Basic and Diluted Net Loss Per
Share - Net loss per share is calculated in accordance with Statement of
Financial Accounting Standards 128, Earnings
Per Share("SFAS 128"). Basic net loss per share is based upon the
weighted average number of common shares outstanding.  Diluted net
loss per share is based on the assumption that all dilutive convertible shares
and stock options were converted or exercised.  Dilution is computed
by applying the treasury stock method.  Under this method, options and
warrants are assumed to be exercised at the beginning of the period (or at the
time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the
period.





Use of Accounting Estimates -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from these
estimates.





Return to Table of Contents
 8


FORM
      10-Q
            DECEMBER
      31, 2008PACIFIC
      SANDS, INCNOTES
      TO FINANCIAL STATEMENTS




Statement of Cash Flows - For
purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an initial maturity of three months or
less to be cash equivalents.





Recent Accounting
Pronouncements - The following is a summary of recent authoritative
pronouncements that affect accounting, reporting and disclosure of financial
information by the Company.




In
September 2006 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS
No. 157 provides enhanced guidance for using fair value to measure assets
and liabilities. SFAS No. 157 applies whenever other standards require or
permit assets or liabilities to be measured at fair value. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position
(“FSP”) No. 157-2, Effective Date of FASB Statement
No. 157, which defers the effective date of SFAS No. 157 for
one year for non-financial assets and liabilities, except for items that are
recognized or disclosed at fair value in an entity’s financial statements on a
recurring basis (at least annually). In October 2008, the FASB issued FSP
No. 157–3, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active, which clarifies the application of SFAS No. 157 in a market
that is not active. On July 1, 2008, the Company adopted the provisions of SFAS
No. 157 for financial assets and liabilities recognized or disclosed at
fair value on a recurring and non–recurring basis and the provisions FSP
No. 157-3. The adoption of SFAS 157 did not have a material
impact on the Company’s financial statements.  Consistent with the
provisions of FSP No. 157–2, the Company elected to defer the adoption of
SFAS No. 157 for non–financial assets and liabilities measured at fair
value on a non–recurring basis. The Company is in the process of evaluating
these portions of the standard and therefore has not yet determined the impact
that the adoption will have on its financial statements.




In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159).  SFAS 159
allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value (“fair value option”).  The fair value option may
be elected on an instrument-by-instrument basis and is irrevocable, unless a new
election date occurs.  If the fair value option is elected for an
instrument, SFAS 159 specifies that unrealized gains and losses for that
instrument be reported in earnings at each subsequent reporting date. 
SFAS 159 was effective for the Company on July 1, 2008.  The
Company did not apply the fair value option to any of its outstanding
instruments and, therefore, SFAS 159 did not have an impact on the
Company’s financial statements.
  In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations–Revised, that improves the
relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects. To accomplish that, this statement establishes
principles and requirements how the acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree, recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination.
The changes to current practice resulting from the application of SFAS No.
141(R) are effective for financial statements issued for fiscal years beginning
after December 15, 2008. The adoption of SFAS No. 141(R) before December 15,
2008 is prohibited. The Company has not determined the effect, if any, that may
result from the adoption of SFAS No. 141(R) on its financial
statements.





Return to Table of Contents
 9


FORM
      10-Q
            DECEMBER
      31, 2008PACIFIC
      SANDS, INCNOTES
      TO FINANCIAL STATEMENTS




In March
2008, the FASB issued FASB Statement No. 161Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No. 133
("SFAS No. 161"), which changes the disclosure requirements for derivative
instruments and hedging activities.  Pursuant to SFAS No.161, Entities
are required to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows.  SFAS No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008 with early application encouraged.
SFAS No. 161 encourages but does not require disclosures for earlier periods
presented for comparative purposes at initial adoption.  In years
after initial adoption, this Statement requires comparative disclosures only for
periods subsequent to initial adoption.  The Company does not expect
the adoption of SFAS No. 161 to have a material impact on the financial results
of the Company.





Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.








3.         GOING
CONCERN





The
accompanying financial statements have been presented assuming that the Company
will continue as a going concern.  This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of its
liabilities in the normal course of business.  Through December 31,
2008, the Company has incurred cumulative losses of $4,278,810.  The
Company's successful transition to attaining profitable operations is dependent
upon obtaining financing adequate to fulfill its development, marketing and
sales activities and achieving a level of revenues adequate to support the
Company's cost structure.  Management's plan of operations anticipates
that the cash requirements of the Company for the next twelve months will be met
by obtaining capital contributions through the sale of common stock, debt
financings and from current operations.  However, there is no
assurance that the Company will be able to fully implement its plan in order to
generate the funds needed on a going concern basis.





Return to Table of Contents
 10


FORM
      10-Q
            DECEMBER
      31, 2008PACIFIC
      SANDS, INCNOTES
      TO FINANCIAL STATEMENTS




4.         INVENTORIES





Inventories
at December 31, 2008 and June 30, 2008 consisted of the following:





December
      31,
                              2008
                            
                            
                            June
      30,
                              2008Raw
      materials
                            
                            $
                            109,660
                            
                            
                            $
                            106,862Finished
      goods
                            
                            
                            24,528
                            
                            
                            
                            28,420Total
                            
                            $
                            134,188
                            
                            
                            $
                            135,282








5.         PROPERTY
AND EQUIPMENT





Property
and equipment at December 31, 2008 and June 30, 2008 consisted of the
following:





December
      31,
                                      2008
                                    
                                    
                                    June
      30,
                                      2008Furniture
      and office equipment
                                    
                                    $
                                    33,596
                                    
                                    
                                    $
                                    30,450Manufacturing
      equipment
                                    
                                    
                                    61,604
                                    
                                    
                                    
                                    61,604Leasehold
      improvements
                                    
                                    
                                    3,035
                                    
                                    
                                    
                                    3,035Computer
      software
                                    
                                    
                                    15,277
                                    
                                    
                                    
                                    15,277113,512
                                    
                                    
                                    
                                    110,366Less
      accumulated depreciation and amortization
                                    
                                    
                                    (45,140
                                    )
                                    
                                    
                                    (32,055
                                    )Property
      and equipment, net
                                    
                                    $
                                    68,372
                                    
                                    
                                    $
                                    78,311








6.         GOODWILL




Under
FASB Statement No. 142, Goodwill and Other Intangible Assets("SFAS 142"), goodwill and certain intangible assets are deemed to have
indefinite lives and are no longer amortized, but are reviewed at least annually
for impairment.  SFAS 142 requires that goodwill be tested for impairment
annually, utilizing the “fair value” methodology.  The Company has
adopted December 31st as the date of the annual impairment test for
goodwill.
 
 Goodwill
impairment is determined using a two-step process. The first step of the
goodwill impairment test is used to identify potential impairment by comparing
the fair value of a reporting unit with the net book value (or carrying amount),
including goodwill. If the fair value of the reporting unit exceeds the carrying
amount, goodwill of the reporting unit is considered not impaired and the second
step of the impairment test is unnecessary.
 
 As of
December 31, 2008 the Company performed its initial goodwill impairment test of
the goodwill recorded with the acquisition of Natural Choices and determined
that there was no impairment. As such, there was no write-down of the goodwill
balance.





For the three months ended
December 31, 2008, there has been no change to the Company’s goodwill
balance of $877,854.





Return to Table of Contents
 11


FORM
      10-Q
            DECEMBER
      31, 2008PACIFIC
      SANDS, INCNOTES
      TO FINANCIAL STATEMENTS




7.         ACCRUED
EXPENSES





Accrued
expenses at December 31, 2008 and June 30, 2008 consisted of the
following:





December
      31,
                          2008
                        
                        
                        June
      30,
                          2008Accrued
      compensation
                        
                        $
                        146,616
                        
                        
                        $
                        71,484Accrued
      payroll withholding taxes
                        
                        
                        45,286
                        
                        
                        
                        33,497Accrued
      professional fees
                        
                        
                        31,500
                        
                        
                        
                        38,964Accrued
      other
                        
                        
                        7,155
                        
                        
                        
                        10,524Total
                        
                        $
                        230,557
                        
                        
                        $
                        154,469








8.         NOTES
PAYABLE AND CAPITAL LEASE OBLIGATIONS





Notes
payable at December 31, 2008 and June 30, 2008 consisted of the
following:




December
      31,
                            2008
                          
                          
                          June
      30,
                            2008Dell
      Financial Services – line of credit
                          
                          $
                          14,039
                          
                          
                          $
                          10,632J.P.
      Morgan Chase –  business line of credit
                          
                          
                          99,842
                          
                          
                          
                          99,589Notes
      payable stockholders and directors
                          
                          
                          45,225
                          
                          
                          
                          25,000Notes
      payable – settlement obligation
                          
                          
                          62,500
                          
                          
                          
                          80,500Notes
      payable – acquisition, net of discount
                          
                          
                          610,298
                          
                          
                          
                          668,058Notes
      payable – investors, net of discount
                          
                          
                          65,341
                          
                          
                          
                          --897,245
                          
                          
                          
                          883,779Less
      current maturities
                          
                          
                          505,106
                          
                          
                          
                          361,221$
                          392,139
                          
                          
                          $
                          522,558




On
October 1, 2008, the Company executed convertible notes payable (the “Notes”) to
eight investors for a total of $82,000. Interest accrues at a rate of 12% per
annum and is payable quarterly.   The Notes mature on October 1,
2011 at which time all outstanding principal is payable in full in the form of
freely tradable common stock of the Company at an agreed upon conversion price
of $0.10 (ten cents) per share.  The Company shall have the right, but
not the obligation, to pay up to one half of the principle balance in cash.
Pursuant to a Stock Pledge Agreement dated October 1, 2008, each Note is secured
by the number of shares of common stock of the Company necessary to satisfy the
entire principal amount at the agreed upon price of $0.10 per
share.
  The
Company allocated the proceeds received to the principal amount of the Notes and
the beneficial conversion feature based upon the relative fair value which was
determined using a Black Scholes pricing model. The fair value of the beneficial
conversion feature has been recorded as debt discount and additional paid in
capital.  The debt discount recorded of $18,174 is being amortized
over the three-year term of the Notes and the carrying amount is presented
net of the unamortized discount.


The
scheduled annual maturities for notes payable and capital lease obligations were
as follows at December 31,





2009
                    
                    $
                    522,5552010
                    
                    
                    379,1962011
                    
                    
                    93,4112012
                    
                    
                    3,105




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 12


FORM
      10-Q
            DECEMBER
      31, 2008PACIFIC
      SANDS, INCNOTES
      TO FINANCIAL STATEMENTS




9.         STOCKHOLDERS’
EQUITY




On August
5, 2008, the Company issued 100,000 shares of its common stock to a consultant
for services performed. The fair market value of the shares on the date issued
was $0.0725 per share. The Company recorded consulting fee expense of $7,250
related to the issuance of these shares.


On August
5, 2008 the Company issued 80,000 shares of its common stock  to its
four directors and 40,000 shares of its common stock to a consultants for
services performed. The fair market value of the shares on the date issued was
$0.075 per share.  The Company recorded compensation expense of $8,700
related to the issuance of these shares.





On August
5, 2008, the Company issued 625,000 shares of its common stock as partial
payment of the note payable for the purchase price for the acquisition of
Natural Choices Home Safe Products, LLC. The shares had a value of $50,000 on
the date they were issued.





On
September 30, 2008, the Company issued 372,724 shares of its common stock to an
unrelated investor for a cash investment of $26,863.





On
September 30, 2008, the Company issued 198,687 shares of its common stock to an
employee for a cash investment of $14,305.





On
December 31, 2008 the Company issued 80,000 shares of its common stock to its
four directors and 40,000 shares of its common stock to a director for
consulting  services provided to the Company. The fair market value of
the shares on the date issued was $0.02 per share.  The Company
recorded compensation expense of $2,400 related to the issuance of these
shares.








10.       LEASE
COMMITTMENTS





The
Company entered into a two year operating lease expiring March 31, 2010 for
approximately 12,000 square feet of office and warehouse space for $3,750 per
month.  The Company is responsible for insuring the
premises.  Rent expense was approximately $11,250 and $11,919 for the
six months ended December 31, 2008 and 2007, respectively.





Minimum
future annual payments under operating leases were as follows at December
31,





2009
                    
                    $
                    45,0002010
                    
                    
                    11,250








11.       LOSS
PER SHARE





Basic
loss per common share is based on the weighted average number of common shares
outstanding in each period and net earnings.  Diluted earnings per
common assumes that outstanding common shares were increased by shares issuable
upon exercise of those stock options for which market price exceeds exercise
price, less shares which could have been purchased by the Company with related
proceeds.





Return to Table of Contents
 13


FORM
      10-Q
            DECEMBER
      31, 2008PACIFIC
      SANDS, INCNOTES
      TO FINANCIAL STATEMENTS





The
following table sets forth the computation of basic and diluted earnings per
share.





Three
      Months Ended
                              
                              
                              Six
      Months EndedDecember 31,
                                2008
                              
                              
                              December 31,
                                2007
                              
                              
                              December 31,
                                2008
                              
                              
                              December 31,
                                2007NumeratorBasic
      and diluted loss
                              
                              $
                              (181,039
                              )
                              
                              $
                              (158,211
                              )
                              
                              $
                              (245,951
                              )
                              
                              $
                              (212,041
                              )DenominatorBasic
      and diluted earnings per share- weighted average shares
      outstanding
                              
                              
                              40,117,486
                              
                              
                              
                              34,830,931
                              
                              
                              
                              39,673,500
                              
                              
                              
                              34,606,286Basic
      and diluted loss per
                                common
      share
                              
                              $
                              (0.005
                              )
                              
                              $
                              (0.005
                              )
                              
                              $
                              (0.006
                              )
                              
                              $
                              (0.006
                              )





Outstanding
      stock options were not included in the computation of diluted earnings per
      common share for the six month periods ended December 31, 2008 and 2007
      since it would have resulted in an antidilutive
  effect.





Anti-dilutive
      securities not included in the net loss per share
    calculation:





December
      31, 2008
                December
      31, 2007Stock
      options
                3,000,000
                3,000,000








12.       INCOME
TAXES





The
Company recognizes deferred tax assets and liabilities for temporary differences
between the financial reporting and tax bases of its assets and
liabilities.  Deferred assets are reduced by a valuation allowance
when deemed appropriate.





Return to Table of Contents
 14


FORM
      10-Q
            DECEMBER
      31, 2008PACIFIC
      SANDS, INCNOTES
      TO FINANCIAL STATEMENTS




The tax
effects of existing temporary differences that give rise to significant portions
of deferred tax assets at December 31, 2008 and June 30, 2008 are as
follows:




December
      31,
                          2008
                        
                        
                        June
      30,
                          2008Net
      operating loss carryforwards
                        
                        $
                        1,345,000
                        
                        
                        $
                        1,242,000Deferred
      compensation
                        
                        
                        85,000
                        
                        
                        
                        92,000Accounts
      receivable allowance
                        
                        
                        6,000
                        
                        
                        
                        6,000Valuation
      allowance
                        
                        
                        (1,436,000
                        )
                        
                        
                        (1,340,000
                        )Net
      deferred tax asset
                        
                        $
                        --
                        
                        
                        $
                        --





At December 31, 2008, the Company has
net operating loss carryforwards for Federal tax purposes of approximately
$3,202,000 which, if unused to offset future taxable income, will expire in
years beginning in 2018.








13.       RELATED
PARTY TRANSACTION




Two of
the current officers of the Company have agreed to defer a substantial portion
of their salaries until such time as it may be paid.  As of December
31, 2008, the deferred compensation for these two officers was
$139,732.  In addition, accrued salaries and wages include
approximately $87,000 owed to the two officers. Prior to accepting the position
as an officer of the Company, one of the current officers agreed to defer
$11,500 of his professional consulting services which is still unpaid as of
December 31, 2008.  No amounts were charged to deferred compensation during
the three and six months ended December 31, 2008 and 2007 and no deferred
compensation payments were made during the three and six months ended December
31, 2008.  Deferred compensation payments for the three and six months
ended December 31, 2007 were $9,999 and $12,799, respectively.





14.       CONCENTRATIONS





For the
six months ended December 31, 2008 and 2007, one customer accounted for
approximately 16% and 37% of the Company's sales,
respectively.  At December 31, 2008 and 2007, one customer’s balance
represented approximately 37% and 53% of the Company’s trade receivables,
respectively.





Return to Table of Contents
 15


Item 2.    Management Discussion and Analysis of
Financial Condition and Results of Operation
 
 
 THIS
REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY
UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING
FUTURE EVENTS OR FUTURE PERFORMANCE OF THE COMPANY. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH ARE ONLY
PREDICTIONS AND SPEAK ONLY AS OF THE DATE HEREOF. FORWARD-LOOKING STATEMENTS
USUALLY CONTAIN THE WORDS "ESTIMATE," "ANTICIPATE," "BELIEVE," "EXPECT," OR
SIMILAR EXPRESSIONS, AND ARE SUBJECT TO NUMEROUS KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY REVIEW VARIOUS RISKS AND UNCERTAINTIES IDENTIFIED BELOW, AS WELL AS
THE MATTERS SET FORTH IN THE COMPANY'S ANNUAL REPORT ON 10-KSB FOR THE YEAR
ENDED JUNE 30, 2007 AND ITS OTHER SEC FILINGS. THESE RISKS AND UNCERTAINTIES
COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED IN THE FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE OR PUBLICLY ANNOUNCE REVISIONS TO ANY FORWARD-LOOKING
STATEMENTS TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
  General
 
 Pacific
Sands, Inc. (the "Company" or "Pacific Sands") was incorporated in the State of
Nevada on July 7, 1994. The Company's fiscal year ends June 30. The Company is a
C-Corporation for federal income tax purposes. The Company does not have
subsidiaries or affiliated entities. The Company also does business as "Natural
Water Technologies" and ecoONE Marketing Group.
 
 The
Company develops, manufactures, markets and sells a range of non-toxic,
environment friendly cleaning and water-treatment products based on proprietary
blended botanical and nontoxic chemical technologies. The Company's products
have applications ranging from water installation maintenance (spas, swimming
pools, fountains, decorative ponds) to cleaning (non-toxic household and
industrial) and pet care.
 
 The
Company has a mature, actively marketed product line known as the ecoONE® Spa
Treatment system as well as ecoONE® Pool conditioner and the Pacific Sands
All-Purpose Hose Filter. Pacific Sands is also the master distributor for Rain
Forest Blue, an EPA Registered chlorine and bromine free, non irritating, odor
free, bactericide / algaecide alternative for the treatment of pool
water.
 
 In mid
February of 2008, the Company acquired Natural Choices Home Safe Products, LLC
(“Natural Choices”), a developer and manufacturer of environmentally friendly
cleaning and laundry products. The acquisition added dozens of new products to
the Pacific Sands portfolio of earth, health, pet and kid-friendly offerings,
including Oxy-BoostTM an oxygen-bleach based, chlorine-free bleach alternative.
The Company now has a large selection of oxygen- bleach based formulations
available both for retail distribution under its ecoone®, e-2 elemental earth®
and Natural ChoicesTM brands as well as for contract manufacturing and
re-label.
  Return to Table of Contents
 16
 
 The
Company markets and sells its product lines directly, over the Internet and
through pool, spa, hardware, specialty and other retail outlets in the US,
Canada and Europe. The products are also sold via Pacific Sands distributors,
manufacturers’ representatives and internationally established pool and spa
industry distribution networks. The Company’s products are also sold through
numerous popular pool and spa websites.  The Company’s Natural Choices
branded product are sold in numerous retail outlets around the country and in
Europe as well as dozens of the top environmentally-oriented
websites.
 
 The
Company's goal is to achieve sustained and significant profitability through
revenues achieved by marketing and sale of its nontoxic, earth, health and
kid-friendly, ecoONE® Pool, Spa, Household Cleaning and other product
lines.
 
 In July
of 2004, management began the implementation of a three year market saturation
strategy for the ecoONE® line of pool and spa products. The strategy has been
very successful to date, resulting in sharp increases in sales, dealer and
distributor outlets and industry recognition.
 
 Management
intends to continue the aggressive marketing and sale of its products through
direct retail and a widening base of retail outlets, distribution centers and
OEM arrangements in order to achieve its goals.
 
 The
Company's ability to achieve its objectives is dependent on its ability to
sustain and enhance its revenue stream and to continue to raise funds through
loans, credit and the private placement of restricted securities until such time
as the Company achieves sustained fiscal profitability.
 
 To date,
the Company has funded operations through a combination of revenues from the
sale of its products, established credit with vendors, a bank line of credit and
the sale of rule 144 stocks through private placement. The Company's failure to
continue to raise adequate financing to fund operations may jeopardize its
existence. (See “Liquidity and Capital Resources”)
 
 Management
knows of no additional trends or uncertainties beyond those discussed that are
reasonably likely to have a material impact on the Company's short or long-term
liquidity.
  
 RESULTS
OF OPERATIONS
 
 Results
for the three months ending December 31, 2008 compared to the three months
ending December 31, 2007.
  For the
three months ending December 31, 2008 net sales were $176,999, an increase of
16% over net sales of $153,234 for the same period in 2007. Sales of the Natural
Choices products accounted for approximately $92,000 of the total sales for the
three months ended December 31, 2008. Therefore, sales of pool and spa products
decreased 44% since net sales for the three months ended December 31, 2007 was
entirely from pool and spa products as Natural Choices was acquired in February
2008.  The decrease in pool and spa products is attributable primarily
to general economic conditions. Many of the Company’s retail customers,
including its largest customer, cut back on stocking orders due to cash flow
concerns. As a result sales volume for the quarter was down
considerably.
 
 For the
three months ended December 31, 2008, cost of goods sold was $120,411 compared
to $68,580 for the same period in the previous fiscal year.  The
Company’s gross margin decreased from 55% for the three months ended December
31, 2007 to 32% for the current fiscal quarter. The significant decrease is due
in large part to lower gross margins recognized on the products acquired from
Natural Choices.  This is particularly true of many of the private
label products which constitute a significant portion of the Natural Choices
product sales.   Prior to the acquisition, Natural Choices
manufactured the majority of their liquid and powder cleaning and laundry
products through contract manufacturers, adding significantly to the cost of
manufacturing those products. In the fourth quarter of fiscal 2008, the Company
made significant capital expenditures, including building an in-house powder
filling facility, and is in the process of moving away from contract
manufacturers.  However, during the three months ended December 31,
2008, products representing a significant percentage of the Company’s sales were
still being manufactured by third parties contributing to the margin
decrease.  Management believes that as the Company moves away from
contract manufacturers it will enjoy higher margins on the Natural Choices
product line.
  Return to Table of Contents
 17
  For the
three months ending December 31, 2008 and 2007, selling and general
administrative expenses were $216,105 and $241,955, respectively. The decrease
in operating expenses is explained in large part by a decrease in accounting,
professional and legal fees. Overall, these expenses decreased by approximately
$30,000 for the three months ended December 31, 2008 compared to the three month
period ended December 31, 2007.  Accounting and consulting fees
charged by independent contractors dropped by $9,000.  Legal fees
incurred during the three months ended December 31, 2007 totaled $23,000 and
were almost entirely related to the litigation involving the Company’s former
CEO which was settled in December 2007. Legal fees for the three months ended
December 31, 2008 were approximately $1,600.  Additionally,
advertising expenses decreased from $6,000 in the first quarter in fiscal 2008
to $1,000 in the first quarter in fiscal 2009.  These decreases in
operating expenses were partially offset by the salary additions of the former
officers of Natural Choices Home Products, both of whom are now employees of the
Company.
 Interest
expense for the three months ended December 31, 2008 was $21,522 compared to
$5,910 for the three months ended December 31, 2007.  During the three
months ended December 31, 2008, the Company amortized $10,915 of the discount of
the note payable recorded upon the acquisition of Natural Choices in February
2008 and amortized an additional $1,515 of debt discount for the convertible
notes. The Company also recorded accrued interest of approximately $2,500 for
the convertible notes, which is payable quarterly.
 
 Net loss
for the three months ended December 31, 2008 was $181,039 or $0.005 per share
compared to a net loss of $158,211 or $0.005 per share for the same period in
fiscal 2007.
 Results for the six months
ending December 31, 2008 compared to the six months ending December 31,
2007
 
 For the
six months ending December 31, 2008 net sales were $529,805 compared to net
sales of $333,041 for the same period in 2007. The increase 0f 59% in sales is
attributable to the additional sales recorded as a result of the acquisition of
Natural Choices.  Sales of Natural Choices products totaled
approximately $231,000 during the six months ended December 31,
2008.
  Gross
profit for the six months ending December 31, 2008 was $247,444 or 47% compared
to $201,598 or 60% for the six months ending December 31, 2007.  The
decrease of 13% is due in large part to lower gross margins recognized on the
products acquired from Natural Choices.  This is particularly true of
many of the private label products which constitute a significant portion of the
Natural Choices product sales.   Prior to the acquisition,
Natural Choices manufactured the majority of their liquid and powder cleaning
and laundry products through contract manufacturers, adding significantly to the
cost of manufacturing those products. In the fourth quarter of fiscal 2008, the
Company made significant capital expenditures, including building an in-house
powder filling facility, and is in the process of moving away from contract
manufacturers.  However, during the six months ended December 31,
2008, products representing a significant percentage of the Company’s sales were
still being manufactured by third parties contributing to the margin
decrease.  Management believes that as the Company moves away from
utilizing contract manufacturers it will enjoy higher margins on sales of the
Natural Choices products.
 
 Return to Table of Contents
 18
  For the
six months ending December 31, 2008, selling and general administrative expenses
were $455,785 compared to $409,761 for the six months ending December 31, 2007.
During the six months ended December 31, 2008 salaries and wage expense charged
to operations was approximately $272,000 compared to $197,000 for the same
period last year.  A significant amount of the salary increases come
from the addition of the two former officers of Natural Choice Home Products who
became employees of the Company upon the acquisition in February of
2008.  In addition, the Company hired additional warehouse personnel
after the acquisition to accommodate the additional sales
volume.  Although salaries increased $75,000, the over all increase in
operating expenses for the six months ended December 31, 2008 over December 31,
2007 was only $46,000.  Legal and professional fees decreased nearly
$40,000 during the six months ended December 31, 2008 compared to the same
period last year. As discussed previously, operating expenses during the six
months ended December 31, 2007 included legal fees incurred for the litigation
involving the Company’s former CEO which was settled in December
2007.
 Interest
expense of $37,610 for the six months ended December 31, 2008 includes $22,240
discount amortization for the note payable recorded upon the acquisition of
Natural Choices in February 2008 and amortized an additional $1,515 of debt
discount for the convertible notes. The Company also recorded accrued interest
of approximately $2,500 for the convertible notes, which is payable
quarterly.  Interest expense for the six months ended December 31,
2007 was $8,878. Additionally, during the six months ended December 31, 2007 the
Company recorded other income of $5,000 for the reversal of accrued interest on
deferred compensation owed to a former officer. The accrued interest was reduced
by $5,000 in December 2007 pursuant to the terms of a settlement agreement
between the Company and the former officer.
 Net loss
for the six months ended December 31, 2008 was $245,951 or $0.006 per share
compared to a net loss of $212,041 or $0.006 per share for the same period in
fiscal 2008.
 
 LIQUIDITY AND CAPITAL
RESOURCES
 Management
believes that the Company is positioned for sales growth but will require
additional funding to continue operations. The Company's ability to achieve its
objectives is dependent on its ability to sustain and enhance its current
revenue stream and to continue to raise funds through loans, vendor credit and
the private placement of restricted securities until such time as the Company
sustains fiscal profitability. To date, the Company has funded operations and
expansion through a combination of revenues from the sale of its products,
established credit with vendors, deferred salaries and the sale of rule 144
stock through private placement. The Company's failure to continue to raise
adequate financing to fund planned expansion may jeopardize its plans for
growth.
  At
December 31, 2008, the Company had current assets of $354,067 and total assets
of $1,305,364, compared to June 30, 2008 when current assets were $402,412 and
total assets were $1,343,401. The decrease in current assets is attributable
primarily to decreases in accounts receivable from $256,427 at June 30, 2008 to
$207,775 at December 31, 2008.  Non current assets include goodwill
resulting from the acquisition of Natural Choices in the amount of $877,854
which increased from $861,862 at June 30, 2008 as a result of adjustments to
purchase price allocations during the six months ended December 31,
2008,
 Current
liabilities at December 31, 2008 were $1,225,758. Current liabilities include
accounts payable, capital lease obligations and accrued expenses totaling
approximately $578,000. At December 31, 2008, the Company had outstanding line
of credit balances with banks totaling $114,000. Current liabilities also
include $36,000 in payments due to a former officer pursuant to a settlement
agreement executed in December 2007. The current portion of the debt obligation
incurred for the acquisition of Natural Choices was $310,000 at December 31,
2008.  The non current portion of the debt is $340,000.  The
remaining debt is payable in cash and the Company’s restricted common stock over
a two year period.
  Return to Table of Contents
 19
  Long term
liabilities at December 31, 2008 include amounts due pursuant to the settlement
agreement involving the Company’s former CEO of $26,500, and the non-current
portion of the debt incurred to acquire Natural Choices of approximately
$300,000, net of unamortized debt discount.  Long-term capital lease
obligations were $27,212 at December 31, 2008. Additionally, on
October 1, 2008, the Company executed notes payable (the “Notes”) to eight
investors for a total of $82,000. Interest accrues at a rate of 12% per annum
and is payable quarterly.  The Notes mature on October 1, 2011 at
which time all outstanding principal is payable in full in the form of freely
tradable common stock of the Company at an agreed upon conversion price of $0.10
(ten cents) per share.  The Company shall have the right, but not the
obligation, to pay up to one half of the principal balance in cash. Pursuant to
a Stock Pledge Agreement dated October 1, 2008, each Note is secured by the
number of shares of common stock of the Company necessary to satisfy the entire
principal amount at the agreed upon price of $0.10 per share. The Company used
the proceeds from the debt to fund current operations.
 Net cash
used in operating activities during the six months ended December 31, 2008 was
$88,594 compared to $136,452 used in operating activities during the three
months ended December 31, 2007. The increase in operating cash flow is due in
large part to cash being provided by accounts receivable in the amount of
approximately $37,000 during the six months ended December 31, 2008 as compared
to approximately $57,000 of cash being used during the same period last
year.
  Net cash
used in investing activities was $7,671 during the six months ended December 31,
2008.  The Company purchased computer equipment totaling approximately
$3,200 and paid security deposits of $4,500.  The Company did not use
any cash for investing during the six months ended December 31,
2007.
 
 Net cash
provided by financing activities was $88,778 and $125,181 for the six months
ended December 31, 2008 and 2007, respectively. During the six months ended
December 31, 2008, the Company issued restricted common stock for cash totaling
$41,169 and also received proceeds from borrowings in the amount of
$135,201.  During the six months ended December 31, 2007, the Company
executed a bank line of credit for $100,000. Proceeds from financing activities
were used to fund operations and to meet current obligations of notes
payable.
  On
December 31, 2008 the Company had an accumulated deficit of $4,278,810 and total
stockholders’ deficit of $339,475.
 The
Company's ability to achieve its objectives is dependent on its ability to
sustain and enhance its revenue stream and to continue to raise funds through
loans, credit and the private placement of restricted securities until such time
as the Company achieves profitability. To date, management has been successful
in raising cash on an as-needed basis for the continued operations of the
Company. There is no guarantee that management will be able to continue to raise
needed cash in this fashion.
 
 The
Company has no material commitments for capital expenditures at this time. The
Company has no “off balance sheet” source of liquidity
arrangements.
  Return to Table of Contents
 20
 
 Item 3.     Quantitative and Qualitative
Disclosures About Market Risk
 
 An
investment in the common stock of the Company involves a high degree of risk. In
addition to the other information in this report, the following risk factors
should be considered carefully in evaluating the Company and its business. This
Report contains forward-looking statements. All forward-looking statements are
inherently uncertain as they are based on current expectations and assumptions
concerning future events or future performance of the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
are only predictions and speak only as of the date hereof. Forward-looking
statements usually contain the words "estimate," "anticipate," "believe,"
"plan," "expect," or similar expressions, and are subject to numerous known and
unknown risks and uncertainties. In evaluating such statements, prospective
investors should review carefully various risks and uncertainties identified in
this report, including the matters set below and in the Company's other SEC
filings. These risks and uncertainties could cause the Company's actual results
to differ materially from those indicated in the forward-looking statements. The
Company undertakes no obligation to update or publicly announce revisions to any
forward-looking statements to reflect future events or
developments.
  THE
COMPANY HAS EXPERIENCED LOSSES FROM OPERATIONS SINCE COMMENCING
OPERATIONS:
 With the
exception of 4th
quarters of fiscal 2007 and 2006, the Company since commencing operations, has
not been profitable on an annual or quarterly basis. The Company cannot
guarantee that recent quarterly profitability will continue on a quarter by
quarter basis. The Company may not, in the future, generate sufficient revenues
to achieve sustainable profitability.
  POSSIBLE
DIFFICULTY FINANCING PLANNED GROWTH:
 The
Company's present plans require an amount of expenditure and working capital. In
the future the Company will require financing in addition to the cash generated
from operations to fund planned growth. If additional resources are unavailable
the Company may be unable to grow according to its present plan.
  MANAGEMENT'S
ASSUMPTIONS REGARDING THE FUTURE MARKET MAY BE FAULTY:
 Management
assumes there will be a continuing and increased desirability in the retail
market for nontoxic, environment and health friendly products for cleaning and
water treatment use. Should management's assumptions as to this increased
desirability be faulty, the Company may have difficulty achieving its planned
growth.
  THE LOSS
OF KEY PERSONNEL COULD ADVERSELY AFFECT THE COMPANY:
 The
Company is run by a small number of key personnel. Should the Company experience
a loss of these key people due to their inability or unwillingness to continue
in their present positions, the Company's business and financial results could
be adversely affected.
  Return to Table of Contents
 21
 
 Item 4.   Controls and
Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 Based
upon an evaluation of the effectiveness of disclosure controls and procedures,
our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q our disclosure controls and procedures (as defined in Rules 13a-15(e)
or 15d-15(e) under the Exchange Act) were effective to provide reasonable
assurance that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified by the rules and forms of the SEC and is accumulated and communicated
to management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure.
 
 Changes
in Internal Control over Financial Reporting
 
 As
reported in our Annual Report on Form 10-KSB for the year ended June 30, 2008,
management is aware that there is a significant deficiency in our internal
control over financial reporting. The significant deficiency relates to a lack
of segregation of duties due to the small number of employees involvement with
general administrative and financial matters. However, management believes that
compensating controls are in place to mitigate the risks associated with the
lack of segregation of duties. Compensating controls include outsourcing certain
financial functions to an independent contractor. Management concluded that
internal controls over financial reporting were effective as of June 30,
2008.
 
 There
have not been any changes in the Company's internal control over financial
reporting during the quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting
 
 
 
 
 PART
II OTHER INFORMATION
 
 ITEM 1 – LEGAL PROCEEDINGS
 
 None
 
 ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 None
 
 ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
 
 None
 
 ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 None
  Return to Table of Contents
 22
 
 ITEM 5 – OTHER INFORMATION
 
 None
 
 ITEM 6 – EXHIBITS
 
 (a)
              Exhibit
      Index
 
 Exhibit
                Description of the Exhibit31.1
                Chairman of the Board Certification
      of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
  31.2
              Chief Financial Officer
      Certification of Periodic Financial Report Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
  32.1
              Chairman of the Board Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
  32.2
              Chief Financial Officer
      Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes Oxley Act of
  2002.
 
 
 
 SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 
 PACIFIC
      SANDS, INC.Dated:
      February 17, 2009
                  By:
                  /s/ Michael
      WynhoffMichael
      WynhoffChief
      Executive OfficerDated:
      February 17, 2009
                  By:
                  /s/ Michael
      MichieMichael
      MichieChief
      Financial Officer
   Return to Table of Contents
 23