SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K




(Mark
One)





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




For the
Fiscal Year Ended December 31, 2008


OR




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





Commission
File No.  001-31540




FLEXIBLE SOLUTIONS INTERNATIONAL, INC.


(Exact
name of registrant as specified in its charter)






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






Registrant's
telephone number, including Area Code: (250) 477-9969


Securities
registered pursuant to Section 12(b) of the Act:




Title of each
      class
            Name
      of each exchange on which registeredCommon Stock, $0.001
      par value
            NYSE Alternext
      US




Securities
registered pursuant to Section 12(g) of the Act:  None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   [
    ]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   [    
]





Indicate
by check mark whether the registrant (1) has filed all reports to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes [ X ] No
[     ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     [ X ]





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




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


i


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





As of
June 30, 2008 the aggregate market value of the Company’s common stock held by
non-affiliates was approximately $17,539,168 based on the closing price for
shares of the Company’s common stock on the NYSE Alternext US for that
date.





As of
March 15, 2009, the Company had 14,062,567 issued and outstanding shares of
common stock.





Documents
incorporated by reference:     None



































































ii


CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
Annual Report on Form 10-K for the year ended December 31, 2008 (“Annual
Report”), including the Notes to Audited Consolidated Financial Statements,
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.  Forward-looking statements include,
without limitation, those statements relating to development of new products,
our financial condition, our ability to increase distribution of our products,
integration of businesses we acquire and disposition of any of our current
business.  Forward-looking statements can be identified by the use of
forward-looking terminology, such as “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “continue,” “plans,” “intends,” or other similar
terminology.  These forward-looking statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict.  Therefore, actual outcomes and results may
differ materially from what is anticipated or forecasted in these
forward-looking statements due to numerous factors, including, but not limited
to, our ability to generate or obtain sufficient working capital to continue our
operations, changes in demand for our products, the timing of customer orders
and deliveries and the impact of competitive products and pricing.  In
addition, such statements could be affected by general industry and market
conditions and growth rates, and general domestic and international economic
conditions.





Although
we believe that the expectations reflected in these forward-looking statements
are reasonable and achievable, such statements involve risks and uncertainties
and no assurance can be given that our actual results will be consistent with
these forward-looking statements.  Except as otherwise required by
applicable securities laws, we undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, changed circumstances or any other reason, after the date of this
Annual Report.


























































iii


PART
I




Item
      1.
            Description
      of Business




We were
incorporated as Flexible Solutions, Ltd., a British Columbia corporation
inter-provincially registered in Alberta, on January 26, 1991.  On May
12, 1998, we merged Flexible Solutions Ltd. into Flexible Solutions
International, Inc., a Nevada corporation.  In connection with this
merger, we issued 7,000,000 shares of common stock to the former shareholders of
Flexible Solutions Ltd. in exchange for all of the outstanding shares of
Flexible Solutions Ltd.





In June
2004 we purchased 52 U.S. and 139 International patents, as well as a 56,780 sq.
ft. manufacturing plant near Chicago, Illinois from the bankruptcy estate of
Donlar Corporation (“Donlar”) for $6.15 million.  The patents we
acquired from Donlar relate to water-soluble chemicals (“TPAs”) which prevent
corrosion and scaling in water pipes used in the petroleum, chemical, utility
and mining industries.  TPAs are also used to enhance fertilizers and
improve crop yields and as additives for household laundry detergents, consumer
care products and pesticides.





We
operate through five wholly-owned subsidiaries: Flexible Solutions Ltd.,
WaterSavr Global Solutions Inc., NanoChem Solutions Inc., Nano Detect
Technologies Inc., and Seahorse Systems Inc.  Unless otherwise
indicated, all references to our business include the operations of these
subsidiaries.





In
November 2007, we purchased a building and 3.3 acres of land in Taber, Alberta,
Canada. The price paid was CDN$1,325,000 and was financed by cash of
$660,000 and an interest free mortgage that was paid in June
2008.  The building will be renovated and operated as a fermentation
facility for the production of aspartic acid, a key ingredient in
TPAs.  Aspartic acid made in Taber will be shipped to our plant in
Illinois for finishing.





Our website is
www.flexiblesolutions.com





Our
Products





HEAT$AVR®/ECO$AVR





Our
studies indicate that approximately 70% of the energy lost from a swimming pool
occurs through water evaporation.  HEAT$AVR® is a chemical product for
use in swimming pools and spas that forms a thin, transparent layer on the
water’s surface.  The transparent layer slows the evaporation of
water, allowing the water to retain a higher temperature for a longer period of
time and thereby reducing the energy required to maintain the desired
temperature of the water.   We have received reports from our
commercial customers documenting energy savings of between $2,400 to $6,000 per
year when using HEAT$AVR®.





ECO$AVR®
is a patented, disposable dispenser designed for the residential pool and spa
market.  ECO$AVR® is made of molded plastic in the form of a ten-inch
long colorful fish that is filled with enough HEAT$AVR® to cover the surface of
a 400 sq. ft. swimming pool for about one month.  The HEAT$AVR®
solution inside the ECO$AVR® escapes into the water and rises to the surface to
form a transparent layer on the water’s surface.  Once the ECO$AVR® is
empty the dispenser is removed and replaced.





In
outdoor pools, the HEAT$AVR® also provides convenience compared to pool
blankets.  Pool blankets are plastic covers, which are cut to the size
and shape of the surface of the pool or spa.  Pool blankets float on
the surface and, like the HEAT$AVR®, reduce energy costs by inhibiting water
evaporation.




1


However,
it is often inconvenient to use conventional pool blankets because a pool
blanket must be removed and stored before the pool can be used.  Pool
blankets do not provide any energy savings when not on the
pool.  Conversely, HEAT$AVR® eliminates the need to install, remove
and store the blanket and works 24 hours a day.  In addition, the use
of HEAT$AVR® in an indoor pool results in even greater energy savings since
indoor pool locations use energy not only to heat the pool water, but also to
air condition the pool environment.  By slowing the transfer of heat
and water vapor from the pool to the atmosphere of the pool enclosure, less
energy is required to maintain a pool at the desired temperature and there is a
reduced load on the air-conditioning system.





HEAT$AVR®
retails for between $200 and $300 per four gallon case in the United
States.  ECO$AVR® has a suggested retail price of between $11.95 and
$14.95 in the United States.  We market our HEAT$AVR® and ECO$AVR®
products to homeowners with swimming pools and spas as well as operators of
swimming pools and spas in hotels, motels, schools, and municipal and private
recreational facilities.





We also
manufacture and sell products which automatically dispense HEAT$AVR® into
commercial size swimming pools or spas at the rate of one ounce per 400 sq. ft.
of water surface per day.





We
have 18 non-exclusive distributorships in Canada and the United States for
the sale of bulk HEAT$AVR® (without the ECO$AVR® dispenser) and exclusive
distributorships in Australia, Chile, Korea, Argentina, Taiwan,
Romania and Weastern Europe.  We support our distributors and
seek additional market opportunities by annually attending the major pool
industry trade shows in the United States.  We also advertise in trade
magazines, maintain a semi-annual newsletter that is sent to buyer associations,
customers and potential customers, and maintain a website which has information
about our products.





WATER$AVR®





This
product utilizes our HEAT$AVR technology to reduce water evaporation in
reservoirs, potable water storage tanks, livestock watering ponds, aqueducts,
canals and irrigation ditches.  WATER$AVR may also be used for lawn
and turf care and potted and bedding plants.





WATER$AVR®
is sold in granulated form and can be applied by hand, by fully automated
scheduled metering, or by an automatic dispenser.





Tests
have indicated that WATER$AVR®:


- Reduces
  daily water evaporation as much as 54%
- Reduces
  monthly water evaporation as much as 37%
- Is
  odorless
- Has no
  effect on invertebrates or vertebrates
- Has no
  anticipated effect on any current drinking water treatment processes
  and
- Is
  biodegradable

We have
one full-time employee and one part-time employee who are involved in the sales
and marketing of WATER$AVR®.














2


WATER$AVR—BTITM





WATER$AVR—BTITM
combines evaporation control with an environmentally friendly method of killing
mosquito larvae during the first, second and third stages of
development.  Combined with our  original WATER$AVR®
product, WATER$AVR—BTITM can be quickly and evenly spread across large and small
water surfaces where larvae must go to obtain air.  Tests conducted by
the Entomology Department at the Louisiana State University Agricultural Center
showed that the use of WATER$AVR—BTITM resulted in a 100% kill rate of mosquito
larvae in contact with the product.





TPAs
(thermal polyaspartate biopolymers)





TPAs for
Oilfields.  TPAs are used to reduce scale and corrosion in
various “topside” water systems.  They are used in place of
traditional phosphate and other products when biodegradability is required by
environmental regulations.  We have the ability to custom manufacture
TPAs depending on the specific water conditions associated with any oil
well.





TPAs for the Agricultural
Industry.  TPAs have the ability to reduce fertilizer
crystallization before, during and after application and can also prevent
crystal formation between fertilizer and minerals present in the
soil.  Once crystallized, fertilizer and soil minerals are not
bio-available to provide plant nourishment.  As a result, in select
conditions the use of TPAs either blended with fertilizer or applied directly to
crops can increase yields significantly.  TPAs are designated for crop
nutrient management programs and should not be confused with crop protection and
pesticides or other agricultural chemical applications.  Depending on
the application, TPA products are marketed under a variety of brands including
Amisorb, LYNX, MAGNET, AmGro and VOLT.  Markets of significance
include potatoes, sugar beets, cotton, tomatoes, almonds and other high value
per acre crops.





TPAs for
Irrigation.  The crystallization prevention ability of TPAs can
also be useful in select irrigation conditions.  By reducing calcium
carbonate scale propagation, TPAs can prevent early plugging of drip irrigation
ports, reduce maintenance costs and lengthen the life of
equipment.  TPAs compete with acid type scale removers, but have the
advantage of a positive yield effect on the plant, as well as an easier
deployment formulation with liquid fertilizers when used as part of a
“fertigation” program.  Our TPAs for drip irrigation scale prevention
are at an early stage of commercialization and will be marketed and sold through
the same channels as TPAs used by the agricultural industry.





TPAs for
Detergent.  In detergents, TPAs are a biodegradable substitute
for poly-acrylic acid.  In select markets, the use of this substitute
outweighs the added cost of TPAs, which has allowed for the continued growth of
this TPA product line.  However, to increase penetration of this
market beyond specialty detergent manufacturers, we will need to decrease the
cost of this product or wait for legislative intervention regarding
biodegradability of detergent components.  In the meantime, we are
researching various methods to reduce production costs.





TPAs for Personal Care
Products.  TPAs can also be used in shampoo and cosmetic
products for increased hydration that improves the feel of the core product to
consumers.  TPA’s may also be used as an additive to toothpaste with
the documented effect of reducing decay bacteria adhesion to tooth enamel and
presumed reduction in total decay.  We do not currently sell TPAs for
use in personal care products.




















3


Competition





HEAT$AVR®
and ECO$AVRTM





We are
aware of two other companies that manufacture products that compete with
HEAT$AVR® and  ECO$AVR® and we believe our products are more effective
and safer.  We maintain fair pricing equal to or lower than our
competitors and protect our intellectual property carefully.  Our
products are expected to maintain or increase market share in the competitive
pool market.





HEAT$AVR®
also competes with plastic pool blanket products.  However, we believe
that HEAT$AVR® is more effective and convenient than pool blankets.





WATER$AVR®





Ultimate
Products (Aust) Pty Ltd. of Australia has a product called Aquatain that
directly competes with WATER$AVR®.  We believe our WATER$AVR® product
is superior for the following reasons: it is safer, much less expensive and has
much better test data.  Aquatain has not expended the capital to test
for environmental effects on insects and other aquatic life whereas WATER$AVR®
has recognized third party environmental safety documentation.





As water
conservation is an important priority throughout the world, numerous researchers
are working to develop solutions that may compete with, or be superior to,
WATER$AVR.





WATER$AVR—BTITM





Although
we are not aware of any direct competition with WATER$AVR—BTITM, the pest control
industry is very large and well funded and there are a multitude of alternative
methods and materials that can be used for mosquito control.  We
believe that we will be able to compete by providing an environmentally
sensitive product which is less expensive than traditional
products.





TPAs





Our TPA
products have direct competition with Lanxess AG (spun out of Bayer AG), a
German manufacturer of TPAs, which uses a patented process different from
ours.  We have cross-licensed each other’s processes and either
company can use either process for the term of the patents
involved.  We believe that Lanxess has approximately the same
production capacity and product costs as we do.  We believe that we
can compete effectively with Lanxess by offering excellent customer service in
oilfield sales, superior distributor support in the agricultural marketplace and
flexibility due to our relative size.  In addition, we intend to
continue to seek market niches that are not the primary targets of
Lanxess.





Our TPA
products face indirect competition from other chemicals in every market in which
we are active.  For purposes of oilfield scale prevention,
phosphonates, phosphates and molibdonates provide the same
effect.  For crop enhancement, increased fertilizer levels or reduced
concentrations can serve as a substitute for TPAs.  In irrigation
scale control, acid washes are our prime competitor.  In detergent,
poly-acrylic acid is most often used due to price
advantage.  Notwithstanding the above, we believe our competitive
advantages include:


- Biodegradability
  compared to competing oil field chemicals;
- Cost-effectiveness
  for crop enhancement compared to increased fertilizer use;
- Environmental
  considerations, ease of formulation and increased crop yield opportunities in
  irrigation scale markets; and
- Biodegradability
  compared to poly-acrylic acid for detergents.



4


Manufacturing





Our
HEAT$AVR® and ECO$AVR® products and dispensers are made from chemicals, plastic
and other materials and parts that are readily available from multiple
suppliers.  We have never experienced any shortage in the availability
of raw materials and parts for these products and we do not have any long term
supply contracts for any of these items.  We manufacture these
products in our plant in Taber, Alberta, Canada.





Our
WATER$AVR® products are manufactured by a third party.  We are not
required to purchase any minimum quantity of this product.





Our
56,780 sq. ft. facility in Peru, Illinois manufactures our TPA
products.  Raw materials for TPA production are sourced from various
manufacturers throughout the world and we believe they are available in
sufficient quantities for any increase in sales.  Raw materials are,
however, derived from crude oil and are subject to price fluctuations related to
world oil prices.





In
November 2007, we purchased a building and 3.3 acres of land in Taber, Alberta,
Canada. The price paid was CDN$1,325,000 and was financed by cash of $660,000
and an interest free mortgage that was paid in June 2008.  We expect
the building to be renovated by August 31, 2009.  Once renovated, the
building will operate as a fermentation facility for the production of aspartic
acid, a key ingredient in TPAs.  Aspartic acid made in Taber will be
shipped to our plant in Illinois for finishing.





Government
Regulations





HEAT$AVR® and
ECO$AVR®





Chemical
products for use in swimming pools are covered by a variety of governmental
regulations in all countries where we sell these products.  These
regulations cover packaging, labeling, and product safety.  We believe
our products are in compliance with these regulations.





WATER$AVR®





Our
WATER$AVR® product is subject to regulation in most countries, particularly for
agricultural and drinking water uses.  We do not anticipate that
governmental regulations will be an impediment to marketing WATER$AVR® because
the components in WATER$AVR® have historically been used in agriculture for many
years for other purposes.  Nevertheless, we will need to obtain
approval to sell WATER$AVR® in the United States for agricultural and drinking
water uses.  We have received National Sanitation Foundation approval
for the use of WATER$AVR in drinking water in the United States.





WATER$AVR—BTITM





As a
pesticide, WATER$AVR—BTITM was approved by the EPA for commercial sale in the
United States on November 30, 2005.  We began marketing this
product commercially in 2006.  While EPA approval applies only to
registration of the product in the United States, we believe EPA approval
may expedite product registration and approval processes in other parts of
the world.  We will apply for certification in any country where
significant markets are identified.





5


TPAs





In the
oil field and agricultural markets we have received government approval for all
TPAs currently sold.  In the detergent market, there are currently no
regulatory requirements for use of TPAs in detergent
formulations.  For personal care products such as shampoo and
toothpaste, there are various regulatory bodies, including the National
Sanitation Foundation and the United States Food and Drug Administration, that
regulate TPA use.  If we begin to market our TPA products to these
industries, we will need to satisfy applicable regulatory
requirements.





Proprietary
Rights





Our
success is dependent, in part, upon our proprietary technology.  We
rely on a combination of patent, copyright and trade secret laws and
nondisclosure agreements to protect our proprietary technology.  We
currently hold 56 U.S. patents and 139 International patents which expire at
various dates between 2011 and 2020. We also have three U.S. patent applications
pending and have applied to extend these pending patents to certain other
countries where we operate.  There can be no assurance that our
pending patent applications will be granted or that any issued patent will be
upheld as valid or prevent the development of competitive products, which may be
equivalent to or superior to our products.  We have not received any
claims alleging infringement of the intellectual property rights of others, but
there can be no assurance that we may not be subject to such claims in the
future.





Research
and Development





We spent
$80,381 for the year ended December 31, 2008 and $120,817 for the year ended
December 31, 2007 on research and development.  This work relates
primarily to the development of our water and energy conservation products, as
well as new research in connection with our TPA products.





Employees





As of
December 31, 2008 we had 34 employees, including one officer, thirteen sales and
customer support personnel, and twenty manufacturing personnel.  None
of our employees is represented by a labor union and we have not experienced any
work stoppages to date.





Item
1A.  Risk Factors





This Form
10-K contains forward-looking information based on our current
expectations.  Because our actual results may differ materially from
any forward-looking statements made by us, this section includes a discussion of
important factors that could affect our future operations and result in a
decline in the market price of our common stock.





We
have incurred significant operating losses since inception and may not sustain
profitability in the future.





We have
experienced operating losses and negative cash flow from operations since our
inception and we currently have an accumulated deficit.  If our
revenues do not increase, our results of operations and liquidity will be
materially adversely affected.  If we experience slower than
anticipated revenue growth or if our operating expenses exceed our expectations,
we may not be profitable.  Even if we become profitable in the future,
we may not remain profitable.








6


Fluctuations
in our operating results may cause our stock price to decline.





Given the
nature of the markets in which we operate, we cannot reliably predict future
revenues and profitability.  Changes in competitive, market and
economic conditions may cause us to adjust our operations.  A high
proportion of our costs are fixed, due in part to our sales, research and
development and manufacturing costs.  Thus, small declines in revenue
could disproportionately affect our operating results.  Factors that
may affect our operating results and the market price of our common stock
include:


- demand
  for and market acceptance of our products;
- competitive
  pressures resulting in lower selling prices;
- adverse
  changes in the level of economic activity in regions in which we do
  business;
- adverse
  changes in industries, such as swimming pool construction, on which we are
  particularly dependent;
- changes
  in the portions of our revenue represented by various products and
  customers;
- delays
  or problems in the introduction of new products;
- the
  announcement or introduction of new products, services or technological
  innovations by our competitors;
- variations
  in our product mix;
- the
  timing and amount of our expenditures in anticipation of future
  sales;
- increased
  costs of raw materials or supplies; and
- changes
  in the volume or timing of product orders.

Our
operations are subject to seasonal fluctuation.





The use
of our swimming pool products increases in summer months in most markets and
results in our sales from January to June being greater than in July through
December.  Markets for our WATER$AVR® product are also seasonal,
dependent on the wet versus dry seasons in particular countries.  We
attempt to sell into a variety of countries with different seasons on both sides
of the equator in order to minimize seasonality.  Our TPA business is
the least seasonal, however there is a small increase in the spring related to
inventory building for the crop season in the United States and a small slowdown
in December as oilfield customers run down stock in advance of year end, but
otherwise, little seasonal variation.  We believe we are able to
adequately respond to these seasonal fluctuations by reducing or increasing
production as needed.





7


Interruptions
in our ability to purchase raw materials and components may adversely affect our
profitability.





We
purchase certain raw materials and components from third parties pursuant to
purchase orders placed from time to time.  Because we do not have
guaranteed long-term supply arrangements with our suppliers, any material
interruption in our ability to purchase necessary raw materials or components
could have a material adverse effect on our business, financial condition and
results of operations.





Our
WATER$AVR® product has not proven to be a revenue producing product and we may
never recoup the cost associated with its development.





The
marketing efforts of our WATER$AVR® product may result in continued
losses.  We introduced our WATER$AVR® product in June 2002 and, to
date, we have delivered quantities for testing by potential customers, but only
a few customers have ordered the product for commercial use.  This
product can achieve success only if it is ordered in substantial quantities by
commercial customers who have determined that the water saving benefits of the
product exceed the costs of purchase and deployment of the
product.  We can offer no assurance that we will receive sufficient
orders of this product to achieve profits or cover the additional expenses
incurred to manufacture and market this product.  We expect to spend
$200,000 on the marketing and production of our WATER$AVR® product in fiscal
2009.





If
we do not introduce new products in a timely manner, our products could become
obsolete and our operating results would suffer.





Without
the timely introduction of new products and enhancements, our products could
become obsolete over time, in which case our revenue and operating results would
suffer.  The success of our new product offerings will depend upon
several factors, including our ability to:


- accurately
  anticipate customer needs;
- innovate
  and develop new products and applications;
- successfully
  commercialize new products in a timely manner;
- price
  our products competitively and manufacture and deliver our products in
  sufficient volumes and on time; and
- differentiate
  our products from our competitors’ products.

In
developing any new product, we may be required to make a substantial investment
before we can determine the commercial viability of the new
product.  If we fail to accurately foresee our customers’ needs and
future activities, we may invest heavily in research and development of products
that do not lead to significant revenues.





We
are dependent upon certain customers.





Among our
current customers, we have identified six that are sizable enough that the loss
of any one would be significant.  Any loss of one or more of these
customers could result in a substantial reduction in our revenues.





8


Economic,
political and other risks associated with international sales and operations
could adversely affect our sales.





Revenues
from shipments made outside of the United States accounted for approximately 79%
of our revenues in the year ended December 31, 2008, 79% in the year ended
December 31, 2007 and 79% in the year ended December 31,
2006.  Since we sell our products worldwide, our business is subject
to risks associated with doing business internationally.  We
anticipate that revenues from international operations will continue to
represent a sizable portion of our total revenue.  Accordingly, our
future results could be harmed by a variety of factors, including:


- changes
  in foreign currency exchange rates;
- changes
  in a country or region’s political or economic conditions, particularly in
  developing or emerging markets;
- longer
  payment cycles of foreign customers and difficulty of collecting receivables
  in foreign jurisdictions;
- trade
  protection measures and import or export licensing
  requirements;
- differing
  tax laws and changes in those laws;
- difficulty
  in staffing and managing widespread operations;
- differing
  protection of intellectual property and changes in that protection;
  and
- differing
  regulatory requirements and changes in those
requirements.

We
are subject to credit risk and may be subject to substantial write-offs if one
or more of our significant customers default on their payment obligations to
us.





We
currently allow our major customers between 30 and 45 days to pay for each
sale.  This practice, while customary, presents an accounts receivable
write-off risk in that if one or more of our significant customers defaulted on
their payment obligations to us, such write-off, if substantial, would have a
material adverse effect on our business and results of operations.





Our
products can be hazardous if not handled, stored and used properly; litigation
related to the handling, storage and safety of our products would have a
material adverse effect on our business and results of operations.





Some of
our products are flammable and must be stored properly to avoid fire
risk.  Additionally, some of our products may cause irritation to a
person’s eyes if they are exposed to the concentrated
product.  Although we label our products to warn of such risks, our
sales could be reduced if our products were considered dangerous to use or if
they are implicated in causing personal injury or property damage.  We
are not currently aware of any circumstances in which our products have caused
harm or property damage to consumers.  Nevertheless, litigation
regarding the handling, storage and safety of our products would have a material
adverse effect on our business and results of operations.








9


Our
failure to comply with environmental regulations may create significant
environmental liabilities and force us to modify our manufacturing
processes.





We are
subject to various federal, state and local environmental laws, ordinances and
regulations relating to the use, storage, handling and disposal of
chemicals.  Under such laws, we may become liable for the costs of
removal or remediation of these substances that have been used by our consumers
or in our operations.  Such laws may impose liability without regard
to whether we knew of, or caused, the release of such substances.  Any
failure by us to comply with present or future regulations could subject us to
substantial fines, suspension of production, alteration of manufacturing
processes or cessation of operations, any of which could have a material adverse
effect on our business, financial condition and results of
operations.





Our
failure to protect our intellectual property could impair our competitive
position.





While we
own certain patents and trademarks, some aspects of our business cannot be
protected by patents or trademarks.  Accordingly, in these areas there
are few legal barriers that prevent potential competitors from copying certain
of our products, processes and technologies or from otherwise entering into
operations in direct competition with us.  In particular, we have been
informed that our former exclusive agent for the sale of our products in North
America is now competing with us in the swimming pool and personal spa
markets.  As a former distributor, they were given access to many of
our sales, marketing and manufacturing techniques.





Our
products may infringe on the intellectual property rights of others, and
resulting claims against us could be costly and prevent us from making or
selling certain products.





Third
parties may seek to claim that our products and operations infringe their patent
or other intellectual property rights.  We may incur significant
expense in any legal proceedings to protect our proprietary rights or to defend
infringement claims by third parties.  In addition, claims of third
parties against us could result in awards of substantial damages or court orders
that could effectively prevent us from making, using or selling our products in
the United States or abroad.





A
claim for damages could materially and adversely affect our financial condition
and results of operations.





Our
business exposes us to potential product liability risks, particularly with
respect to our consumer swimming pool and consumer TPA
products.  There are many factors beyond our control that could lead
to liability claims, including the failure of our products to work properly and
the chance that consumers will use our products incorrectly or for purposes for
which they were not intended.  There can be no assurance that the
amount of product liability insurance that we carry will be sufficient to
protect us from product liability claims.  A product liability claim
in excess of the amount of insurance we carry could have a material adverse
effect on our business, financial condition and results of
operations.





Our
ongoing success is dependent upon the continued availability of certain key
employees.





Our
business would be adversely affected if the services of Daniel B. O’Brien ceased
to be available to us because we currently do not have any other employee with
an equivalent level of expertise in and knowledge of our industry.  If
Mr. O’Brien no longer served as our President and Chief Executive Officer, we
would have to recruit one or more new executives, with no real assurance that we
would be able to engage a replacement executive with the required skills on
satisfactory terms.  The market for skilled employees is highly
competitive, especially for employees in the fields in which we
operate.  While our compensation programs are intended to attract and
retain qualified employees, there can be no assurance that we will be able to
retain the services of all our key employees or a sufficient number to execute
on our plans, nor can there be any assurances that we will be able to continue
to attract new employees as required.





10


Item
      1B.
            Unresolved
      Staff Comments.





Not applicable.





Item
      2.
            Properties.





We lease
4,300 sq. ft. in Victoria, British Columbia for administration and sales and
research at $4,225 per month, effective through to June 2009, as well as 7,000
sq. ft. in Bedford Park, Illinois for offices and laboratories at a cost of
$6,548 per month with a month to month lease.  We own a 56,780 sq. ft.
facility in Peru, Illinois which is used to manufacture our TPA line of products
as well as a building and 3.3 acres of land in Taber, Alberta,
Canada.  Our building in Taber will be renovated and operated as a
fermentation facility for the production of aspartic acid, a key ingredient in
TPAs.  Aspartic acid made in Taber will be shipped to Illinois for
finishing as well as for manufacturing our swimming pool
products.  Our former manufacturing location in Calgary, AB, Canada
has been sublet through until the end of the lease, September
2009.  Our former sales office in Richmond, BC, Canada has been sublet
through the end of the lease pertaining to this location.





Item
      3.
            Legal
      Proceedings.





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





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





Not
applicable.





11


PART
II





Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchase of Equity Securities.




Our
common stock is traded on the NYSE Alternext US under the symbol
“FSI”.  The following is the range of high and low closing sales or
bid prices for our common stock for the periods indicated:


High
                    
                    
                    LowYear Ended December 31,
      2008
                    First
    Quarter
                    
                    $
                    2.40
                    
                    
                    $
                    1.30Second
    Quarter
                    
                    
                    2.84
                    
                    
                    
                    2.00Third
    Quarter
                    
                    
                    2.50
                    
                    
                    
                    1.40Fourth
    Quarter
                    
                    
                    2.29
                    
                    
                    
                    0.95High
                    
                    
                    LowYear Ended December 31,
      2007
                    First
    Quarter
                    
                    
                    3.55
                    
                    
                    
                    2.25Second
    Quarter
                    
                    
                    4.30
                    
                    
                    
                    2.45Third
    Quarter
                    
                    
                    3.25
                    
                    
                    
                    2.50Fourth
    Quarter
                    
                    
                    4.12
                    
                    
                    
                    2.80


Prices
represent high and low prices on the American Stock Exchange and NYSE as of
December 1, 2008.  As of December 31, 2008 we had approximately 1,700
shareholders.





Our
common stock also trades on the Frankfurt stock exchange under the symbol
“FXT.”





We have
not paid any dividends on our common stock, and it is not anticipated that any
dividends will be paid in the foreseeable future.  Our board of
directors intends to follow a policy of retaining earnings, if any, to finance
our growth.  The declaration and payment of dividends in the future
will be determined by the board of directors in light of conditions then
existing, including our earnings, financial condition, capital requirements and
other factors.





During the year ended December 31, 2008
we did not purchase any shares of our common stock from third parties in a
private transaction or as a result of any purchase in the open
market.  None of our officers or directors, nor any of our principal
shareholders purchased, on our behalf, any shares of our common stock from third
parties either in a private transaction or as a result of purchases in the open
market during the year ended December 31, 2008.








As of March 4, 2009 we had 14,062,567
outstanding shares of common stock.  The following table lists
additional shares of our common stock which may be issued as of March 4,
2009:









Number
                Of
      Shares
              Note
                ReferenceShares
      issuable upon the exercise of warrants
                held
      by private investors
              1,455,470
              AShares
      issuable upon exercise of options granted
                to
      our officers, directors, employees, consultants,
                and
      third parties
              1,910,700
              B




A.           In
2005 and in 2007, we sold shares of our common stock in private
transactions.  In some cases warrants were issued as part of the
financings.  In connection with these private offerings we paid
commissions to sales agents and also issued warrants which allow the sales
agents to collectively purchase 75,970 shares of our common
stock.  Information concerning these warrants is shown
below.





12




Shares
      Issuable
                            Upon
      Exercise
                            Of Warrants
                          Issue
                            Date
                          Exercise
                            Price
                          Expiration
                            Date900,000
      (1)
                          4/14/05
                          $
      4.50
                          7/31/0954,000
      (1) (2)
                          4/05
                          $
      4.00
                          7/31/0987,400
      (1)
                          6/08/05
                          $
      4.50
                          7/31/0921,970
      (2)
                          5/07
                          $
      4.50
                          5/30/10468,070
                          5/03/07
                          $
      4.50
                          5/03/10





(1)           In
February 2009, we lowered the exercise price of the warrants issued in 2005 to
$4.00 per share and extended the expiration date of these warrants to July 31,
2009.





(2)           Sales
agent warrants





B.           Options
are exercisable at prices ranging from $3.00 to $4.55 per share.  See
Item 11 of this report for more information concerning these
options.




Item
      6.
            Selected
      Financial Data.





Not applicable.





Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation.





Results
of Operations





We have
two product lines.





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





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





13


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




Year Ended December 31,
2008Item
                                                                                        
                                                                                        Increase
      (I) or
                                                                                          Decrease (D)
                                                                                        
                                                                                        ReasonSalesEWCP
                                                                                        
                                                                                        D
                                                                                        
                                                                                        Sales
      in our EWCP Division in 2008 were approximately the same as they were in
      2007.TPAs
                                                                                        
                                                                                        I
                                                                                        
                                                                                        Sales increasesin oilfield services, detergents
      and agriculture.  The oilfield shutdowns experienced in 2007
      were not repeated on the same scale in 2008.Cost
      of salesEWCP/TPAs
                                                                                        
                                                                                        I
                                                                                        
                                                                                        Cost
      of sales, as a percentage of gross profit, with respect to our EWCP and
      TPA products was virtually the same between 2008 and
  2007.WagesEWCP
                                                                                        
                                                                                        D
                                                                                        
                                                                                        Wages
      paid in 2008 were similar to those paid in 2007.TPAs
                                                                                        
                                                                                        I
                                                                                        
                                                                                        Renovation
      of our new facility in Alberta, Canada.Administrative
      salaries and benefits
                                                                                        
                                                                                        D
                                                                                        
                                                                                        In
      2006, we granted 5 year stock options to a few key
      employees.  The expense for financial reporting purposes added
      $204,602 to administrative salaries in 2007 but only $124,888 in
      2008.Advertising
      and promotion
                                                                                        
                                                                                        I
                                                                                        
                                                                                        Advertising
      was increased to better promote brand recognition.Investor
      relations and transfer agent fee
                                                                                        
                                                                                        D
                                                                                        
                                                                                        Costs
      incurred related to the May 2007 private placement did not recur in
      2008.Office
      and miscellaneous
                                                                                        
                                                                                        I
                                                                                        
                                                                                        Various
      costs associated with the renovation of the new facility in Alberta,
      Canada.  Once the facility is operational, these costs will be
      allocated to cost of sales. Costs also increased since more administration
      was required for higher sales levels.ConsultingTPAs
                                                                                        
                                                                                        I
                                                                                        
                                                                                        Increased
      sales resulted in the need to rely on consultants rather than adding more
      permanent staff.EWCP
                                                                                        
                                                                                        D
                                                                                        
                                                                                        Better
      allocation of staff resulted in less need for
  consultants.





14




Year Ended December 31,
2007Item
                                                                            
                                                                            Increase
      (I) orDecrease
      (D)
                                                                            
                                                                            ReasonSalesEWCP
                                                                            
                                                                            D
                                                                            
                                                                            Decrease
      sales in the Ecosavr division were the result of poor management which has
      since been let go.TPAs
                                                                            
                                                                            D
                                                                            
                                                                            Maintenance
      shutdowns in the oil extraction industry during 2007 reduced sales of
      TPAs.  It is understood that shutdowns did not occur in 2006
      because high oil prices encouraged the oil companies to continue
      production.WagesEWCP
                                                                            
                                                                            D
                                                                            
                                                                            Decrease
      in sales resulted in decrease in wages.TPAs
                                                                            
                                                                            I
                                                                            
                                                                            Renovation
      of our new facility in Alberta, Canada.Administrative
      salaries and benefits
                                                                            
                                                                            I
                                                                            
                                                                            In
      2006, we granted five-year stock options to several key
      employees.  The expense for financial reporting purposes added
      $369,992 to administrative salaries in 2006 but only $204,602 in
      2007.Advertising
      and promotion
                                                                            
                                                                            I
                                                                            
                                                                            Advertising
      was increased to better promote brand recognition.Investor
      relations and transfer agent fee
                                                                            
                                                                            I
                                                                            
                                                                            Upon
      the closing of our private placement in May 2007, the Company issued
      bonuses in the form of stock options and cash payments.Office
      and miscellaneous
                                                                            
                                                                            I
                                                                            
                                                                            Various
      administrative costs associated with the start up of the new facility have
      been allocated to this account.  Once the facility is
      operational, these costs will be allocated to overhead.Consulting
                                                                            
                                                                            I
                                                                            
                                                                            The
      expense, for financial reporting purposes, of stock options granted in
      2006 to consultants that did not recur in 2007.Professional
      fees
                                                                            
                                                                            D
                                                                            
                                                                            Resolution
      of several legal proceedings in the year 2007 reduced our
      costs.CommissionsEWCP/TPAs
                                                                            
                                                                            D
                                                                            
                                                                            Decreased
      sales led to a decrease in commission costs.Gain
      on sale of property
                                                                            
                                                                            I
                                                                            
                                                                            Sale
      of unused land at our plant in
Illinois.






15


Capital
Resources and Liquidity





Our
material sources and <uses> of cash during the year ended December 31,
2008 were:




Cash
      provided by operations
                    
                    $
                    (286,167
                    )Patent
      development
                    
                    
                    (21,113
                    )Equipment
      purchases, primarily related to our new facility in Alberta,
      Canada
                    
                    
                    (1,491,208
                    )Loans
                    
                    
                    1,683,815Exchange
      rate changes
                    
                    
                    (726,402
                    )Other
                    
                    
                    12,738
  Our
material sources and <uses> of cash during the year ended December 31,
2007 were:




Cash
      provided by operations
                    
                    $
                    242,451Patent
      development
                    
                    
                    (60,680
                    )Equipment
      purchases
                    
                    
                    (586,127
                    )Sale
      of common stock
                    
                    
                    3,164,481Exchange
      rate changes
                    
                    
                    142,990Other
                    
                    
                    (1,981
                    )


We are
committed to minimum rental payments for property and premises aggregating
approximately $136,329 over the term of three leases, the last expiring on
December 31, 2011.




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




2009
                        
                        $
                        108,4172010
                        
                        $
                        13,9562011
                        
                        $
                        13,956


Other
than as disclosed above, we do not anticipate any capital requirements for the
twelve months ending December 31, 2009.





We do not have any commitments or
arrangements from any person to provide us with any additional
capital.





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





Critical
Accounting Policies And Estimates





Allowances for Product
Returns.  We grant certain of our customers the right to return
product which they are unable to sell.  Upon sale, we evaluate the
need to record a provision for product returns based on our historical
experience, economic trends and changes in customer demand.





Allowances for Doubtful Accounts
Receivable.  We evaluate our accounts receivable to determine
if they will ultimately be collected.  This evaluation includes
significant judgments and estimates, including an analysis of receivables aging
and a review of large accounts.  If, for example, the financial
condition of our customers deteriorates resulting in an impairment of their
ability to pay or a pattern of late payment develops, allowances may be
required.





Provisions for Inventory
Obsolescence.  We may need to record a provision for estimated
obsolescence and shrinkage of inventory.  Our estimates would consider
the cost of inventory, the estimated market value, the shelf life of the
inventory and our historical experience.  If there are changes to
these estimates, provisions for inventory obsolescence may be
necessary.





16


Recent
Accounting Pronouncements




In
October 2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active("FSP
157-3"). FSP 157-3 clarifies the application of SFAS 157 in a market that is not
active, and demonstrates how the fair value of a financial asset is determined
when the market for the financial assets is inactive.  FSP 157-3 was
effective upon issuance, including prior periods for which financial statements
had not been issued.  The implementation of this standard did not have
an impact on our Consolidated Financial Statements.




In May
2008, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 162, The Hierarchy of Generally Accepted
Accounting Principles("SFAS 162").SFAS 162 defines
the order in which accounting principles that are generally accepted should be
followed. SFAS 162 is effective 60 days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting
Principles. We do not expect the adoption of SFAS 162 to have a
material impact on our Consolidated Financial Statements.





In
February 2008, the FASB issued FASB FSP 157-2, The Effective Date of FASB Statement
No. 157("SFAS 157-2"),which delays the
effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008 and interim periods within those
fiscal years. These nonfinancial items include assets and liabilities such as
reporting units measured at fair value in a goodwill impairment test and
nonfinancial assets acquired and liabilities assumed in a business
combination.  We do not expect the adoption of SFAS 157-2 to have
a material impact on our Consolidated Financial Statements.




Effective
January 1, 2008, we adopted the provisions of SFAS No. 157  for
financial assets and liabilities and any other assets and liabilities carried at
fair value.  This pronouncement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. In February 2008, the FASB agreed to a one-year deferral for the
implementation of SFAS 157 for other non-financial assets and liabilities. Our
adoption of SFAS 157 did not have a material effect on our Consolidated
Financial Statements for financial assets and liabilities and any other assets
and liabilities carried at fair value.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS
141R"), which replaces FASB Statement No. 141. SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquire and the goodwill acquired. The Statement
also establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. SFAS 141R is to be
applied prospectively to business combinations for which the acquisition date is
on or after an entity's fiscal year that begins after December 15, 2008. We will
assess the impact of SFAS 141R if and when a future acquisition
occurs.




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51 ("SFAS 160"), which establishes accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is effective as of the beginning of an entity's fiscal year that begins after
December 15, 2008. We are currently evaluating the potential impact, if any, of
the adoption of SFAS 160 on our Consolidated Financial Statements.





17


Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk.





Not
      applicable.






































































18


Item
      8.
            Financial
      Statements and Supplementary Data.





FLEXIBLE
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS




PageReport
      of Independent Registered Public Accounting Firm, Cinnamon Jang Willoughby
      & Company
                          F-1Consolidated
      Balance Sheet as of December 31, 2008 and 2007
                          F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
                          F-3Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
                          F-4Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2008
      and 2007
                          F-5Notes
      to Consolidated Financial Statements
                          F-6


















































19


Cinnamon Jang Willoughby &
Company


Chartered
Accountants


A
Partnership of Incorporated Professionals








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and Stockholders of


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.:




We have
audited the consolidated balance sheets of Flexible Solutions International,
Inc. (the “Company”) as of December 31, 2008 and 2007 and the consolidated
statements of operations, stockholders’ equity and cash flows for the years then
ended.  The consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the
consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.




In our
opinion the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2008 and 2007
and the consolidated results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles in the
United States of America.






/s/
      “Cinnamon Jang Willoughby & Company”Chartered
      Accountants




Burnaby,
Canada




F -
1


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
 Consolidated
Balance Sheet
 December
31, 2008 and 2007
 (U.S.
Dollars)


December
      31, 2008
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      December
      31, 2007AssetsCurrentCash
      and cash equivalents
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      1,894,045
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      3,355,854Accounts
      receivable (see note 3)
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      1,642,001
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      1,051,056Inventories
      (see Note 4)
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      3,591,112
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      2,361,270Prepaid
      expenses
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      109,459
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      115,3537,236,617
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      6,883,533Property,
      equipment and leaseholds, net (see Note 5)
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      5,882,223
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      4,612,571Patents
      (see Note 6)
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      204,203
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      230,438Long
      term deposits (see Note 8)
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      32,713
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      48,034Total
      Assets
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      13,355,756
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      11,774,576LiabilitiesCurrentAccounts
      payable and accrued liabilities
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      771,180
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      385,792Deferred
      revenue
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      -
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      9,870771,180
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      395,662Loan
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      1,546,836Mortgage
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      -
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      452,0182,318,016
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      847,680Stockholders’
      EquityCapital
      stockAuthorized50,000,000
      common shares with a par value of $0.001 each1,000,000  preferred
      shares with a par value of $0.01 eachIssued
      and outstanding:14,062,567
      (2007: 14,057,567) common shares
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      14,063
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      14,058Capital
      in excess of par value
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      16,259,614
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      15,914,303Other
      comprehensive income (see Note 11)
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      (244,788
                                                                                                                                                                                                      )
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      394,289Accumulated
      Deficit
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      (4,991,149
                                                                                                                                                                                                      )
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      (5,395,754
                                                                                                                                                                                                      )Total
      Stockholders’ Equity
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      11,037,740
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      10,926,895Total
      Liabilities and Stockholders’ Equity
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      13,355,756
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      11,774,576Commitments,
      Contingencies and Subsequent events(See
      Notes 18, 19 & 20)






See Notes
to Consolidated Financial Statements.
 F -
2


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.


Consolidated
Statements of Operations


For
the Years Ended December 31, 2008 and 2007


(U.S.
Dollars)





Years
      Ended December 31,2008
                                                
                                                
                                                2007Sales
                                                
                                                $
                                                10,756,654
                                                
                                                
                                                $
                                                7,431,791Cost
      of sales
                                                
                                                
                                                6,719,114
                                                
                                                
                                                
                                                4,738,143Gross
      profit
                                                
                                                
                                                4,037,540
                                                
                                                
                                                
                                                2,693,648Operating
      ExpensesWages
                                                
                                                
                                                1,270,309
                                                
                                                
                                                
                                                1,094,799Administrative
      salaries and benefits
                                                
                                                
                                                343,352
                                                
                                                
                                                
                                                447,516Advertising
      and promotion
                                                
                                                
                                                101,821
                                                
                                                
                                                
                                                63,126Investor
      relations and transfer agent fee
                                                
                                                
                                                161,040
                                                
                                                
                                                
                                                302,401Office
      and miscellaneous
                                                
                                                
                                                390,416
                                                
                                                
                                                
                                                201,810Insurance
                                                
                                                
                                                218,626
                                                
                                                
                                                
                                                230,656Interest
      expense
                                                
                                                
                                                18,696
                                                
                                                
                                                
                                                10,605Rent
                                                
                                                
                                                261,430
                                                
                                                
                                                
                                                227,431Consulting
                                                
                                                
                                                200,066
                                                
                                                
                                                
                                                338,728Professional
      fees
                                                
                                                
                                                216,566
                                                
                                                
                                                
                                                233,701Travel
                                                
                                                
                                                137,218
                                                
                                                
                                                
                                                134,011Telecommunications
                                                
                                                
                                                34,042
                                                
                                                
                                                
                                                38,163Shipping
                                                
                                                
                                                37,531
                                                
                                                
                                                
                                                67,834Research
                                                
                                                
                                                80,381
                                                
                                                
                                                
                                                120,817Commissions
                                                
                                                
                                                120,229
                                                
                                                
                                                
                                                119,790Bad
      debt expense
                                                
                                                
                                                3,393
                                                
                                                
                                                
                                                2,310Currency
      exchange
                                                
                                                
                                                (68,939
                                                )
                                                
                                                
                                                43,568Utilities
                                                
                                                
                                                11,631
                                                
                                                
                                                
                                                25,996Loss
      on sale of equipment
                                                
                                                
                                                29,048Total
      operating expenses
                                                
                                                
                                                3,556,857
                                                
                                                
                                                
                                                3,703,263Gain
      on sale of property
                                                
                                                
                                                -
                                                
                                                
                                                
                                                195,442Operating
      income (loss)
                                                
                                                
                                                470,683
                                                
                                                
                                                
                                                (814,172
                                                )Write
      down of investment
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (98,000
                                                )Other
      expenses
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (15,051
                                                )Interest
      income
                                                
                                                
                                                2,483
                                                
                                                
                                                
                                                3,996Income
      (loss) before income tax
                                                
                                                
                                                473,166
                                                
                                                
                                                
                                                (923,227
                                                )Income
      tax (recovery)
                                                
                                                
                                                68,561
                                                
                                                
                                                
                                                -Income
      (loss) for the year
                                                
                                                $
                                                404,605
                                                
                                                
                                                $
                                                (923,227
                                                )Net
      income (loss) per share (basic and diluted)
                                                
                                                $
                                                0.03
                                                
                                                
                                                $
                                                (0.07
                                                )Weighted
      average number of common shares (basic and diluted)
                                                
                                                
                                                14,058,033
                                                
                                                
                                                
                                                13,823,654






See Notes
to Consolidated Financial Statements.
 F -
3


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
 Consolidated
Statements of Cash Flows
 For
Years Ended December 31, 2008 and 2007
 (U.S.
Dollars)


Years
      Ended December 31,2008
                                                
                                                
                                                2007Operating
      activitiesNet
      income (loss)
                                                
                                                $
                                                404,605
                                                
                                                
                                                $
                                                (923,227
                                                )Adjustments
      to reconcile net loss to net cashStock
      compensation expense
                                                
                                                
                                                339,416
                                                
                                                
                                                
                                                651,405Shares
      issued for services
                                                
                                                
                                                5,900
                                                
                                                
                                                
                                                -Depreciation
                                                
                                                
                                                447,831
                                                
                                                
                                                
                                                526,127Write
      down of investment
                                                
                                                
                                                -
                                                
                                                
                                                
                                                98,000Write
      down of inventory
                                                
                                                
                                                41,440
                                                
                                                
                                                
                                                -Loss
      on sale of equipment
                                                
                                                
                                                29,048
                                                
                                                
                                                
                                                -Changes
      in non-cash working capital items:(Increase)
      Decrease in accounts receivable
                                                
                                                
                                                (651,757
                                                )
                                                
                                                
                                                300,065(Increase)
      Decrease in inventories
                                                
                                                
                                                (1,322,022
                                                )
                                                
                                                
                                                (337,532
                                                )(Increase)
      Decrease in prepaid expenses
                                                
                                                
                                                (3,730
                                                )
                                                
                                                
                                                16,852Increase
      (Decrease) in accounts payable
                                                
                                                
                                                432,280
                                                
                                                
                                                
                                                (78,550
                                                )Increase
      (Decrease) deferred revenue
                                                
                                                
                                                (9,178
                                                )
                                                
                                                
                                                (10,689
                                                )Cash
      provided by (used in) operating activities
                                                
                                                
                                                (286,167
                                                )
                                                
                                                
                                                242,451Investing
      activities(Increase)
      Decrease in long term deposits
                                                
                                                
                                                12,738
                                                
                                                
                                                
                                                1,981(Increase)
      Decrease in development of patents
                                                
                                                
                                                (21,113
                                                )
                                                
                                                
                                                (60,680
                                                )(Increase)
      Decrease in acquisition of equipment
                                                
                                                
                                                (1,491,208
                                                )
                                                
                                                
                                                (586,127
                                                )Cash
      provided by (used in) investing activities
                                                
                                                
                                                (1,499,583
                                                )
                                                
                                                
                                                (644,826
                                                )Financing
      activitiesMortgage
      repayment
                                                
                                                
                                                (633,472
                                                )
                                                
                                                
                                                -Proceeds
      from loan
                                                
                                                
                                                1,683,815
                                                
                                                
                                                
                                                -Proceeds
      from issuance of common stock
                                                
                                                
                                                -
                                                
                                                
                                                
                                                3,164,481Cash
      provided by financing activities
                                                
                                                
                                                1,050,343
                                                
                                                
                                                
                                                2,164,481Effect
      of exchange rate changes on cash
                                                
                                                
                                                (726,402
                                                )
                                                
                                                
                                                142,990Inflow
      (outflow) of cash
                                                
                                                
                                                (1,461,809
                                                )
                                                
                                                
                                                2,905,096Cash
      and cash equivalents, beginning
                                                
                                                
                                                3,355,854
                                                
                                                
                                                
                                                405,759Cash
      and cash equivalents, ending
                                                
                                                $
                                                1,894,045
                                                
                                                
                                                $
                                                3,355,854Supplemental
      disclosure of cash flow information:Income
      taxes to be paid
                                                
                                                
                                                68,651Interest
      paid
                                                
                                                
                                                18,696
                                                
                                                
                                                
                                                10,605Non
      cash investing activities:Mortgage
      assumed for acquisition of property
                                                
                                                
                                                -
                                                
                                                
                                                
                                                452,018






See Notes
to Consolidated Financial Statements.
 F -
4


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.


Consolidated
Statements of Stockholders’ Equity


For
the Years Ended December 31, 2008 and 2007


(U.S.
Dollars)





Capital
      in
                        
                        
                        Accumulated
                        
                        
                        Other
                        
                        
                        TotalExcess
      of
                        
                        
                        Earnings
                        
                        
                        Comprehensive
                        
                        
                        Stockholders’Shares
                        
                        
                        Par
      Value
                        
                        
                        Par
      Value
                        
                        
                        (Deficiency)
                        
                        
                        Income
      (Loss)
                        
                        
                        EquityBalance
      December 31, 2006
                        
                        
                        13,058,427
                        
                        
                        $
                        13,058
                        
                        
                        $
                        12,370,417
                        
                        
                        $
                        (4,472,527
                        )
                        
                        $
                        131,002
                        
                        
                        $
                        8,041,950Translation
      adjustment
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        263,288
                        
                        
                        
                        263,288Net
      loss
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (923,227
                        )
                        
                        
                        —
                        
                        
                        
                        (923,227
                        )Comprehensive
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (659,939
                        )Shares
      issued:Exercise
      of stock options
                        
                        
                        163,000
                        
                        
                        
                        163
                        
                        
                        
                        288,837
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        289,000Cancellation
      of stock
                        
                        
                        (100,000
                        )
                        
                        
                        (100
                        )
                        
                        
                        (270,000
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (271,000
                        )Private
      placement
                        
                        
                        936,140
                        
                        
                        
                        936
                        
                        
                        
                        2,874,546
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,875,482Stock
      option compensation
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        651,405
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        651,405Balance
      December 31, 2007
                        
                        
                        14,057,567
                        
                        
                        $
                        14,058
                        
                        
                        $
                        15,914,303
                        
                        
                        $
                        (5,395,754
                        )
                        
                        $
                        394,289
                        
                        
                        $
                        10,926,895Translation
      adjustment
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (639,077
                        )
                        
                        
                        (639,077
                        )Net
      loss
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        473,166
                        
                        
                        
                        —
                        
                        
                        
                        473,166Comprehensive
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (155,911
                        )Shares
      issued:Issue
      of stock for services
                        
                        
                        5,000
                        
                        
                        
                        5
                        
                        
                        
                        5,895
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        5,900Stock
      option compensation
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        339,416
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        339,416Balance
      December 31, 2008
                        
                        
                        14,062,567
                        
                        
                        $
                        14,063
                        
                        
                        $
                        16,259,614
                        
                        
                        $
                        (4,922,588
                        )
                        
                        $
                        (244,788
                        )
                        
                        $
                        11,116,300






See Notes
to Consolidated Financial Statements.
 F -
5


FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008 and 2007


(U.S.
Dollars)




1.
            Basis
      of Presentation.




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




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




On June
30, 1998, the Company completed the acquisition of all of the shares of Flexible
Ltd.  The acquisition was effected through the issuance of 7,000,000
shares of common stock by the Company with former shareholders of the subsidiary
receiving all of the total shares then issued and outstanding.  The
transaction has been accounted for as a reverse-takeover.  Flexible
Ltd. is accounted for as the acquiring party and the surviving
entity.  As Flexible Ltd. is the accounting survivor, the consolidated
financial statements presented for all periods are those of Flexible
Ltd.  The shares issued by the Company pursuant to the 1998
acquisition have been accounted for as if those shares had been issued upon the
organization of Flexible Ltd.




On May 2,
2002, the Company established WaterSavr Global Solutions Inc. through the
issuance of 100 shares of common stock from WaterSavr Global Solutions Inc. to
the Company.




On
February 7, 2005, the Company established Nano Detect Technologies Inc. through
the issuance of 1,000 shares of common stock from Nano Detect Technologies Inc.
to the Company.




On June
21, 2005, the Company established Seahorse Systems Inc. through the issuance of
1,000 shares of common stock from Seahorse Systems Inc. to the
Company.




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




F -
6


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




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




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




2.
            Significant
      Accounting Policies.




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




(a)           Cash and Cash
Equivalents.




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




(b)           Inventories and Cost of
Sales




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




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









F -
7


(c)           Allowance for Doubtful
Accounts




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




(d)           Property, Equipment and
Leaseholds.




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




Computer
      hardware
                
                30%
      Declining balanceAutomobile
                
                30%
      Declining balanceTrade
      show booth
                
                30%
      Declining balanceFurniture
      and fixtures
                
                20%
      Declining balanceManufacturing
      equipment
                
                20%
      Declining balanceOffice
      equipment
                
                20%
      Declining balanceBuilding
      and improvements
                
                10%
      Declining balanceLeasehold
      improvements
                
                Straight-line
      over lease term





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




Costs
capitalized on our self-constructed assets classified as plant under
construction, include contracted costs and supplies, but we do not capitalize
interest costs. We do not commence depreciating our plant under construction
until it becomes operational.




(e)           Impairment of Long-Lived
Assets.




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




(f)           Investments.




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




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





F -
8


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




(g)           Foreign
Currency.




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




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




(h)           Revenue
Recognition.




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




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




(i)           Stock Issued in Exchange for
Services.




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




(j)           Stock-based
Compensation.




SFAS No.
123(R), "Accounting for Stock-Based Compensation", as issued by the Financial
Accounting Standards Board (“FASB”), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - transition and disclosure", was adopted by the
company on January 1, 2006, which requires requires the cost of all share-based
payment transactions to be recognized in an entity’s financial statements,
establishes fair value as the measurement objective and requires entities to
apply a fair-value-based measurement method in accounting for share-based
payment transactions.  SFAS No. 123(R) applies to all awards granted,
modified, repurchased or cancelled after July 1, 2005, and unvested portions of
previously issued and outstanding awards.




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




F -
9


The fair
value at grant date of stock options is estimated using the Black-Scholes-Merton
option-pricing model.  Compensation expense is recognized on a
straight-line basis over the stock option vesting period based on the estimated
number of stock options that are expected to vest.




(k)           Comprehensive
Income.




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




(l)           Income (loss)Per Share.




Under
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), basic and diluted earnings (loss) per share are to be
presented.  Basic earnings (loss) per share is computed by dividing
income (loss) available to common stockholders by the weighted average number of
common shares outstanding in the period.  Diluted earnings (loss) per
share are calculated giving effect to the potential dilution of the exercise of
options and warrants.




(m)           Use of
Estimates.




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




(n)           Financial
Instruments.




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





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





The Company is exposed to
credit-related losses in the event of non-performance by counterparties to the
financial instruments. Credit exposure is minimized by dealing with only credit
worthy counterparties. Accounts receivable for the three primary customers
totals $961,931 (60%) as at December 31, 2008 (2007 - $630,296 or
60%).





(o)           Fair Value of Financial
Instruments




Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements
("SFAS 157"). SFAS 157 provides a definition of fair value, establishes a
hierarchy for measuring fair value under generally accepted accounting
principles, and requires certain disclosures about fair values used in the
financial statements.




F -
10


SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to
measure fair value under SFAS 157 must maximize the use of observable inputs and
minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value,
which are the following:


- Level 1
  – Quoted prices in active markets for identical assets or
  liabilities
- Level 2
  – Inputs other than Level 1 that are observable, either directly or
  indirectly, such as quoted prices for similar assets or liabilities; quoted
  prices in markets that are not active; or other inputs that are observable or
  can be corroborated by observable market data for substantially the full term
  of the assets or liabilities.
- Level 3
  — Unobservable inputs that are supported by little or no market activity and
  that are significant to the fair value of the assets or
  liabilities.

The fair
value of cash and cash equivalents; accounts receivable; accounts payable;
loans; and mortgages for all periods presented approximate their respective
carrying amounts.




(p)           Contingencies




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





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





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




3.
            Accounts
      Receivable




2008
                  
                  
                  2007Accounts
      receivable
                  
                  $
                  1,672,772
                  
                  
                  $
                  1,052,316Allowances
      for doubtful accounts
                  
                  
                  (30,771
                  )
                  
                  
                  (1,260
                  )$
                  1,642,001
                  
                  
                  $
                  1,051,056







F -
11


The company has pledged $268,123 of the
above listed accounts receivable as collateral for the Flexible Solutions Ltd.
loan from AAFC.




4.
            Inventories




2008
                  
                  
                  2007Completed
      goods
                  
                  $
                  2,394,723
                  
                  
                  $
                  1,664,777Works
      in progress
                  
                  
                  56,036
                  
                  
                  
                  198,172Raw
      materials
                  
                  
                  1,140,353
                  
                  
                  
                  498,321$
                  3,591,112
                  
                  
                  $
                  2,361,270




5.
            Property,
      Equipment and Leaseholds





2008
                  
                  
                  Accumulated
                  
                  
                  2008Cost
                  
                  
                  Depreciation
                  
                  
                  NetBuildings
                  
                  $
                  4,017,334
                  
                  
                  $
                  1,187,408
                  
                  
                  $
                  2,829,926Building
      Improvements
                  
                  
                  502,847
                  
                  
                  
                  —
                  
                  
                  
                  502,847Computer
      hardware
                  
                  
                  78,121
                  
                  
                  
                  50,962
                  
                  
                  
                  27,159Furniture
      and fixtures
                  
                  
                  19,884
                  
                  
                  
                  11,875
                  
                  
                  
                  8,009Office
      equipment
                  
                  
                  29,396
                  
                  
                  
                  21,262
                  
                  
                  
                  8,134Manufacturing
      equipment
                  
                  
                  3,335,089
                  
                  
                  
                  1,402,423
                  
                  
                  
                  1,932,666Trailer
                  
                  
                  23,040
                  
                  
                  
                  4,996
                  
                  
                  
                  18,044Leasehold
      improvements
                  
                  
                  23,665
                  
                  
                  
                  19,378
                  
                  
                  
                  4,287Technology
                  
                  
                  112,759
                  
                  
                  
                  -
                  
                  
                  
                  112,759Trade
      show booth
                  
                  
                  7,172
                  
                  
                  
                  5,709
                  
                  
                  
                  1,463Truck
                  
                  
                  9,814
                  
                  
                  
                  1,472
                  
                  
                  
                  8,342Land
                  
                  
                  428,587
                  
                  
                  
                  —
                  
                  
                  
                  428,587$
                  8,587,708
                  
                  
                  $
                  2,705,485
                  
                  
                  $
                  5,882,223






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





Amount of
depreciation expense for 2008: $447,831 (2007: $526,127)





F -
12


The
following carrying amount of capital assets held by Flexible Solutions Ltd.
serves as collateral for the AFSC loan:





Land
                
                $
                229,494Building
                
                
                870,125Building
      improvements
                
                
                502,847Manufacturing
      equipment
                
                
                1,191,772Trailer
                
                
                18,044Truck
                
                
                8,342Trade
      show booth
                
                
                1,463Technology
                
                
                112,758








6.
            Patents





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





Of the
patents costs listed below, $64,730 are not subject to amortization as of yet,
as the patents are still in the process of being approved.




2008
                  Cost
                
                
                Accumulated
                  Amortization
                
                
                2008
                  NetPatents
                
                $
                218,209
                
                
                $
                14,006
                
                
                $
                204,203




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





Decrease
in 2008 cost was solely due to currency conversion.  2008 cost in
Canadian dollars - $264,244 (2007 - $241, 737 in Canadian dollars).





Amount of
depreciation for 2008: $3,444





Estimated
depreciation expense over the next five years is as follows:





2009
                  
                  $
                  9,9622010
                  
                  
                  9,9622011
                  
                  
                  9,9622012
                  
                  
                  9,9622013
                  
                  
                  9,962





F -
13


7.
            Investments





On May
31, 2003, the Company acquired an option to purchase a 20% interest in the
outstanding shares of Tatko Inc. (“Tatko”) for consideration of the issuance of
100,000 shares of the Company’s common stock.  The option to purchase
the shares of Tatko expired on May 31, 2008.  The cost of the
investment has been accounted for based on the fair market value of the
Company’s common stock on May 31, 2003.  On January 4, 2008, the
lawsuit was dismissed pursuant to an agreement by Tatko to treat the Joint
Product Development Agreement as void.  As a result of the dismissal
of the lawsuit and the agreement of the parties, the 100,000 shares of
restricted stock was returned and cancelled.




In 2005,
NanoDetect purchased 32.7 shares of equity in Air Water Interface Delivery and
Detection Inc. (“AWD”) for a total cost of $98,000.  This investment
represents only 3.3% of the issued and outstanding shares of AWD and,
accordingly, was accounted for under the cost method.  While the
technology to be developed by AWD still has enormous potential and may be
commercialized in the future, management considers that those events are
sufficiently far in the future and not certain enough to maintain the investment
in the venture at the invested cost. Therefore, the investment in AWD was
written down to zero in 2007.




8.
            Long
      Term Deposits




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




2008
                
                
                2007Long
      term deposits
                
                $
                32,713
                
                
                $
                48,034




9.
            Long
      Term Debt




Flexible Solutions Ltd. has received a
non-interest bearing loan from the Department of Agriculture and Agri-Food
Canada (AAFC).  Eligible for up to $1,000,000 Canadian funds, the
Company has drawn $383,045 Canadian funds ($316,615US) as of December 31, 2008
and has pledged no securities.  If the full amount is drawn, the
repayment schedule is as follows:




Amount
      Due (in CDN funds)
                    Payment
      Due Date$
      200,000
                    January
      1, 2012$
      200,000
                    January
      1, 2013$
      200,000
                    January
      1, 2014$
      200,000
                    January
      1, 2015$
      200,000
                    January
      1, 2016




Flexible Solutions Ltd. has also
received a 5% simple interest loan from Agriculture Financial Services Corp.
(AFSC).  Eligible for up to $2,000,000 Canadian funds, the Company has
drawn $1,491,000 Canadian funds ($1,230,671 US) as of December 31, 2008 and has
until April 1, 2009 to draw the remainder.  The Company only has to
make interest payments until May 1, 2010 and then must pay down the principal in
equal payments until May 1, 2014.  The Company has pledged the assets
of the Taber, AB building, including equipment, inventory and accounts
receivable, as collateral as well as signed a promissory note guaranteeing the
amount of the loan by Flexible Solutions International Inc.




F -
14


10.
            Mortgage




Pursuant to the acquisition of the
plant and property in Taber, Alberta, the Company agreed to assume a mortgage of
$651,298 ($645,167 CAD) to the vendor to satisfy the balance of the purchase
price.  The mortgage was paid out in June 2008.




11.
            Comprehensive
      Income




2008
                  
                  
                  2007Net
      income (loss)
                  
                  $
                  404,605
                  
                  
                  $
                  (923,227
                  )Other
      comprehensive income
                  
                  
                  (726,402
                  )
                  
                  
                  263,287Comprehensive
      income (loss)
                  
                  $
                  (321,797
                  )
                  
                  $
                  (659,940
                  )Basic
      and diluted comprehensive loss per share
                  
                  
                  (0.02
                  )
                  
                  
                  (0.05
                  )




12.
            Income
      Tax




The
income tax expense (recovery) is compromised of the following:




2008
                
                
                2007Current
      tax, Federal
                
                $
                24,802
                
                
                $
                -Current
      tax, State
                
                
                43,759Current
      tax, Foreign
                
                
                -
                
                
                
                -Current
      tax, total
                
                $
                68,561
                
                
                $
                -







F -
15


Income
taxes vary from the amount that would be computed by applying the estimated
combined statutory income tax rate (34%) for the following reasons:




2008
                
                
                2007Income
      before taxes, domestic
                
                $
                1,309,221
                
                
                $
                (49,668
                )Income
      before taxes, foreign
                
                
                (836,054
                )
                
                
                (873,559
                )Income
      before taxes, total
                
                $
                473,167
                
                
                $
                (923,227
                )Expense
      (recovery) for income taxes at statutory rate (34%)
                
                $
                160,877
                
                
                $
                (313,897
                )Impact
      of lower statutory rates on foreign subsidiary
                
                
                37,622Permanent
      difference – stock based compensation
                
                
                115,401
                
                
                
                221,478Miscellaneous
                
                
                587
                
                
                
                36,401Valuation
      allowance
                
                
                (245,926
                )
                
                
                56,017Income
      tax expense (recovery)
                
                $
                68,561
                
                
                $
                -




Deferred
income taxes reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.  The Company’s deferred tax
assets and liability calculated at a 34% tax rate consists of the
following:




2008
                  
                  
                  2007Non-capital
      loss carry forwards
                  
                  $
                  917,030
                  
                  
                  $
                  1,123,203Property
      and equipment
                  
                  
                  (35,439
                  )
                  
                  
                  12,747Deferred
      tax asset on alternative minimum tax
                  
                  
                  8,433
                  
                  
                  
                  -Valuation
      allowance
                  
                  
                  (890,024
                  )
                  
                  
                  (1,135,950
                  )Net
      deferred tax asset (liability)
                  
                  
                  -
                  
                  
                  
                  -




The
Company's carried losses for income tax purposes are $3,034,495 (2007 -
$3,423,849), which may be carried forward to apply against future income tax,
expiring between 2010 and 2028.  The future tax benefit of these loss
carry-forwards has been offset with a full $3,034,495 (2007 - $3,423,849)
valuation allowance.  These losses expire as follows:





2010
                  
                  $
                  89,6702014
                  
                  
                  375,9532022
                  
                  
                  197,3432025
                  
                  
                  153,3452026
                  
                  
                  906,3602027
                  
                  
                  692,7462028
                  
                  
                  619,078







F -
16




13.
            Earnings
      (Loss) Per Share.




Net
      income (loss)
              
              
              Shares
                (denominator)
              
              
              Per
      share
                amount2008
      Basic net income
              
              $
              404,605
              
              
              
              14,058,033
              
              
              $
              0.032007
      Basic net loss
              
              $
              (923,227
              )
              
              
              13,823,654
              
              
              $
              (0.07
              )




Options
to purchase 1,910,700 shares of the Company’s common stock at prices ranging
from $3.00 to $4.55 per share were outstanding during the year ended December
31, 2008 (2007:  options to purchase 1,912,440 shares of the Company’s
common stock at prices ranging from $3.00 to $4.60 per share), but were excluded
from the computation of diluted earnings per share because the options’ exercise
prices were greater than the average market price of the Company’s common stock
and were anti-dilutive.  There were no preferred shares issued and
outstanding for the years ended December 31, 2008 or 2007.




14.
            Stock
      Options.




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




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




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




Number
      of shares
                
                
                Exercise
      price
                  per
      share
                
                
                Weighted
      average exercise priceBalance,
      December 31, 2006
                
                
                2,126,740
                
                
                $
                1.40
      - $4.60
                
                
                $
                3.44Granted
                
                
                235,700
                
                
                $
                1.50
      - $3.60
                
                
                $
                2.35Exercised
                
                
                (163,000
                )
                
                $
                1.50
      - $3.25
                
                
                $
                1.77Cancelled
      or expired
                
                
                (287,000
                )
                
                $
                3.00
      - $4.40
                
                
                $
                3.93Balance,
      December 31, 2007
                
                
                1,912,440
                
                
                $
                3.00
      - $4.60
                
                
                $
                3.38Granted
                
                
                203,000
                
                
                $
                3.60
                
                
                $
                3.60Cancelled
      or expired
                
                
                (204,740
                )
                
                $
                3.00
      - $4.60
                
                
                $
                3.74Balance,
      December 31, 2008
                
                
                1,910,700
                
                
                $
                3.00
      – 4.55
                
                
                $
                3.38




In
December 2004, the Financial Accounting Standards Board (“FASB”) issued revised
FAS No. 123(R), Share-Based
Payment, which replaces FAS No. 123, Accounting for Stock-Based
Compensation, which superseded APB Opinion No. 25, Accounting for Stock Issued to
Employees.  FAS No. 123(R) requires the cost of all share-based
payment transactions to be recognized in an entity’s financial statements,
establishes fair value as the measurement objective and requires entities to
apply a fair-value-based measurement method in accounting for share-based
payment transactions.




F -
17


FAS No.
123(R) applies to all awards granted, modified, repurchased or cancelled after
July 1, 2005, and unvested portions of previously issued and outstanding
awards.  The Company adopted this statement for its first quarter
starting January 1, 2006 and will continue to evaluate the impact of adopting
this statement.





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




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


During
the year ended December 31, 2008, the Company granted 41,000 (2007 – 200,700)
stock options to consultants and has applied FAS No. 123 using the Black-Scholes
option-pricing model, which resulted in additional expenses of $47,199 (2007 -
$129,882).  During the year ended December 31, 2008, employees were
granted 162,000 (2007 – 35,000) stock options, which resulted in additional
expenses of $48,350 (2007 – $20,069).




15.
            Warrants




On April 14, 2005, the Company raised
$3,375,000 pursuant to the private sale of 900,000 shares of the Company’s
common stock at a per share purchase price of $3.75, together with warrants to
purchase up to 900,000 additional shares of the Company’s common
stock.  The warrants have a four-year term and are immediately
exercisable at a price of $4.50 per share.




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




In May
2007 the Company raised $3,042,455 from the private sale of 936,140 units, at a
price of $3.25 per unit.  Each unit consists of one share of common
stock and one half warrant with a three year term and a strike price of $4.50
per share.  The Company also issued 21,970 warrants with the same
terms for investment banking services related to this transaction.




F -
18


The
following table summarizes the Company’s warrant activity for the two years
ended December 31, 2007 (no subsequent activity).




Number
      of shares
                
                
                Exercise
      price
                  per
      share
                
                
                Weighted
      average exercise priceBalance,
      December 31, 2005
                
                
                987,400
                
                
                $
                4.50
                
                
                $
                4.50Granted
                
                
                —
                
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Cancelled
                
                
                —
                
                
                
                —
                
                
                
                —Balance,
      December 31, 2006
                
                
                987,400
                
                
                $
                4.50
                
                
                $
                4.50Granted
                
                
                490,040
                
                
                $
                4.50
                
                
                $
                4.50Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Cancelled
                
                
                —
                
                
                
                —
                
                
                
                —Balance,
      December 31, 2007 & 2008
                
                
                1,455,470
                
                
                $
                4.50
                
                
                $
                4.50





16.
            Capital
      Stock.




During
the year ended December 31, 2007 the Company issued 163,000 shares of common
stock upon the exercise of stock options.  The strike price varied
from $1.50 – 3.25 per share.




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




During
the year ended December 31, 2008, the company issued 5,000 shares of common
stock for services, recognizing an expense of $5,900.




17.
            Segmented,
      Significant Customer Information and Economic
  Dependency.




The
Company operates in two segments:




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




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




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




F -
19


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




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




Year
ended December 31, 2008:




EWCP
                
                
                TPA
                
                
                TotalRevenue
                
                $
                1,203,333
                
                
                $
                9,553,321
                
                
                $
                10,756,654Interest
      revenue
                
                
                2,358
                
                
                
                125
                
                
                
                2,483Interest
      expense
                
                
                14,563
                
                
                
                4,133
                
                
                
                18,696Depreciation
      and Amortization
                
                
                46,155
                
                
                
                401,676
                
                
                
                447,831Segment
      profit (loss)
                
                
                (1,501,903
                )
                
                
                1,906,508
                
                
                
                404,605Segment
      assets
                
                
                2,975,588
                
                
                
                2,906,635
                
                
                
                5,882,223Expenditures
      for
                  segment
      assets
                
                
                1,709,979
                
                
                
                36,552
                
                
                
                1,746,531




Year
ended December 31, 2007:




EWCP
                  
                  
                  TPA
                  
                  
                  TotalRevenue
                  
                  $
                  1,217,365
                  
                  
                  $
                  6,214,425
                  
                  
                  $
                  7,431,791Interest
      revenue
                  
                  
                  3,142
                  
                  
                  
                  907
                  
                  
                  
                  4,049Interest
      expense
                  
                  
                  7,412
                  
                  
                  
                  3,193
                  
                  
                  
                  10,605Depreciation
      and Amortization
                  
                  
                  62,832
                  
                  
                  
                  463,295
                  
                  
                  
                  526,127Segment
      profit (loss)
                  
                  
                  (1,868,458
                  )
                  
                  
                  945,231
                  
                  
                  
                  (923,227
                  )Segment
      assets
                  
                  
                  1,340,812
                  
                  
                  
                  3,271,759
                  
                  
                  
                  4,612,571Expenditures
      for
                    segment
      assets
                  
                  
                  1,004,938
                  
                  
                  
                  33,204
                  
                  
                  
                  1,038,142




Sales by
territory are shown below:




2008
                
                
                2007Canada
                
                $
                229,000
                
                
                $
                934,757United
      States and abroad
                
                
                10,527,654
                
                
                
                6,497,034Total
                
                $
                10,756,654
                
                
                $
                7,431,791





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





2008
                  
                  
                  2007Canada
                  
                  $
                  3,167,063
                  
                  
                  $
                  1,331,166United
      States
                  
                  
                  2,909,651
                  
                  
                  
                  3,511,843Total
                  
                  $
                  6,076,714
                  
                  
                  $
                  4,843,009






F -
20


Three
customers accounted for $4,928,678 (46%) of sales made in the year (2007 -
$3,544,123 or 48%).





18.
            Commitments.




We are
committed to minimum rental payments for property and premises aggregating
approximately $136,329 over the term of three leases, the last expiring on
December 31, 2011.




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




2009
                108,4172010
                13,9562011
                13,956




19.
            Contingencies.




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




20.
            Subsequent
      Events.




Subsequent to the year ended December
31, 2008:





On
January 1, 2009, the Company issued 61,000 stock options to employees and 61,000
stock options to consultants.  All have a term of five years, a
vesting date of December 31, 2009 and a strike price of $2.25.




On
February 2, 2009 the Board of Directors ratified the warrants granted in 2005 to
an exercise price of $4.00 from $4.50 per warrant and an extension to exercise
to July 31, 2009.




21.
            Comparative
      Figures




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




F -
21




Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.





None.





Item
      9A.
            Controls
      and Procedures.





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our periodic reports to the SEC is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and regulations, and that such information is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.  Our disclosure controls and procedures are
designed to provide a reasonable level of assurance of reaching our desired
disclosure control objectives.





As of the
end of the period covered by this Annual Report on Form 10-K for the year ended
December 31, 2008, we carried out an evaluation, under the supervision and
with the participation of management, including our principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined under Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended).  Based upon that evaluation, our principal executive officer
and principal financial officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to us (including our consolidated subsidiaries) that is required to be
included in our periodic reports.





There was
no change in our internal control over financial reporting that occurred during
the period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the Securities and
Exchange Commission, internal control over financial reporting is a process
designed by, or under the supervision of our principal executive officer
and principal financial officer and implemented by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our financial
statements in accordance with U.S. generally accepted accounting
principles.





Our
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of our financial statements in accordance with U.S. generally
accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




18


In
connection with the preparation of our annual financial statements, management
has undertaken an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or the COSO Framework. Management’s
assessment included an evaluation of the design of our internal control over
financial reporting and testing of the operational effectiveness of those
controls.




Based on
this evaluation, management has concluded that our internal control over
financial reporting was effective as of December 31, 2008.




This
annual report does not include an attestation report of our
independent registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject to attestation by
our independent registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only management’s report on internal
control in this annual report.





Item
      9B.
            Other
      Information.





None.







Item
      10.
            Directors,
      Executive Officers and Corporate
Governance.







Name
                Age
                PositionDaniel
      B. O’Brien
                52
                President,
      DirectorJohn
      H. Bientjes
                55
                DirectorDr.
      Robert N. O’Brien
                87
                DirectorDale
      Friend
                52
                DirectorEric
      Hodges
                60
                Director




Daniel B.
O’Brien has served as the President and Chief Executive Officer, as well as a
director, of our company since June 1998.  He has been involved in the
swimming pool industry since 1990, when he founded our subsidiary, Flexible
Solutions Ltd., which was purchased by us in 1998.  From 1990 to 1998,
Mr. O’Brien was also a teacher at Brentwood College where he was in charge of
outdoor education.




John H.
Bientjes has been a member of our board of directors since February
2000.  Since 1984, Mr. Bientjes has served as the manager of the
Commercial Aquatic Supplies Division of D.B. Perks & Associates, Ltd.,
located in Vancouver, British Columbia, a company that markets supplies and
equipment to commercial swimming pools which are primarily owned by
municipalities.  Mr. Bientjes graduated in 1976 from Simon Fraser
University in Vancouver, British Columbia with a Bachelor of Arts Degree in
Economics and Commerce.




Dr.
Robert N. O’Brien has been a member of our board of directors since June
1998.  Dr. O’Brien was a Professor of Chemistry at the University of
Victoria from 1968 until 1986 at which time he was given the designation of
Professor Emeritus.  He held various academic positions since 1957 at
the University of Alberta, the University of California at Berkley, and the
University of Victoria.  While teaching, Dr. O’Brien acted as a
consultant and served on the British Columbia Research Council from 1968 to
1990.  In 1987, Dr. O’Brien founded the Vancouver Island Advanced
Technology and Research Association.  Dr. O’Brien received his
Bachelor of Applied Science in Chemical Engineering from the University of
British Columbia in 1951; his Masters of Applied Science in Metallurgical
Engineering from the University of British Columbia in 1952; his Ph.D. in
Metallurgy from the University of Manchester in 1955; and was a Post Doctoral
Fellow in Pure Chemistry at the University of Ottawa from 1955 through
1957.  Dr. Robert N. O’Brien and Daniel B. O’Brien are father and
son.




19


Dale
Friend was elected a Director in December 2002. She has a diversified background
in the area of accounting and her experience has been primarily in business,
offering a wide range of accounting knowledge. Ms. Friend is currently working
for Novas Capital Corp. with her main duties being
accounting.  Previous to that, she was an accounting manager of DB
Perks and Associates, comptroller for a Lock and Security firm in Vancouver and
a Senior Trust Analyst for Alderwoods Group, formerly The Loewen Group. Prior to
that, she was with Telus, formerly BC Tel, for almost a decade in various
accounting,auditing and financial planning positions.





Eric
Hodges was elected a director in September 2004.  Mr. Hodges is an
accountant from Victoria who has over three decades of experience.  He
received his financial education from the University of Washington in Seattle
where he played for the Huskies football program.  Mr. Hodges
continued playing football after college, with a successful, multiyear
professional career with the British Columbia Lions of the Canadian Football
League.  In the past five years, Mr. Hodges has owned and operated
Eric G. Hodges & Associates, a Victoria-based accounting firm with both
Canadian and U.S. clientele.  Eric is extremely familiar with both
Canadian and United States generally accepted accounting principles (“GAAP”),
since he has clients in both countries.  Furthermore, his wide range
of experience with small and quickly growing companies is an asset to the board
of directors.





Directors
are elected annually and hold office until the next annual meeting of our
stockholders and until their successors are elected and
qualified.  There have been no material changes to the procedures by
which security holders may recommend nominees to our board of
directors.  All executive offices are chosen by the board of directors
and serve at the board’s discretion.





John
Bientjes, Dale Friend, and Eric Hodges are independent directors as that term is
defined in section 803 of the listing standards of the NYSE Alternext
US.





Our Audit
Committee, consisting of John Bientjes, Dale Friend and Eric Hodges, all of whom
are independent directors and have strong financial backgrounds, facilitates and
maintains open communications among our board of directors, our Audit Committee,
senior management and our independent auditors.  Our Audit Committee
also serves as an independent and objective party to monitor our financial
reporting process and internal control system.  In addition, our Audit
Committee reviews and appraises the efforts of our independent
auditors.  Our Audit Committee meets periodically with management and
our independent auditors.  Mr. Bientjes meets the SEC’s definition of
audit committee financial expert.  Each member of the Audit Committee
is “independent” as that term is defined in Section 803 of the listing standards
of the NYSE Alternext US.





Our
Compensation Committee, consisting of Dr. Robert O’Brien and John Bientjes,
establishes salary, incentive and other forms of compensation for our Chief
Executive Officer and administers our Stock Option Program.  None of
our officers participated in deliberations of the compensation committee
concerning executive officer compensation.  Dr. O’Brien is not an
independent member of the compensation committee as that term is defined in
Section 803 of the listing standards of the NYSE Alternext US.  During
the year ended December 31, 2008, no director was also an executive officer of
another entity, which had one of our executive officers serving as a director of
such entity or as a member of the compensation committee of such
entity.





We have
adopted a Code of Ethics that applies to our Chief Executive Officer, our Chief
Financial Officer and our Principal Accounting Officer, as well as our other
senior management and financial staff.  Interested persons may also
obtain a copy of our Code of Ethics from our website at
www.flexiblesolutions.com.





20


Item
      11.
            Executive
      Compensation.




Summary Compensation
Table





The
following table shows in summary form the compensation earned by (i) our Chief
Executive Officer and (ii) by each other executive officer who earned in excess
of $100,000 during the two fiscal years ended December 31, 2008.




Name
      and Principal
      Position
                Fiscal
                  Year
                
                Salary
                  (1)
                
                
                Bonus
                  (2)
                
                
                Restricted
                  Stock
                  Awards
                  (3)
                
                
                Options
                  Awards
                  (4)
                
                
                All
                  Other
                  Annual
                  Compensation
                  (5)
                
                
                TotalDaniel
      B. O’Brien
                2008
                
                $
                112,492
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                $
                112,492President
      and Chief
                  Executive
      Officer
                2007
                
                $
                140,154
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                140,154




(1)
            The
      dollar value of base salary (cash and non-cash)
  earned.





(2)
            The
      dollar value of bonus (cash and non-cash)
  earned.





(3)
            During
      the periods covered by the table, the value of the shares of restricted
      stock issued as compensation for services to the persons listed in the
      table.





(4)
            The
      value of all stock options granted during the periods covered by the
      table.





(5)
            All
      other compensation received that we could not properly report in any other
      column of the table.





Stock Option
Program





Our Stock
Option Program involves the issuance of options, from time to time, to our
employees, directors, officers, consultants and advisors.  Options are
granted by means of individual option agreements.  Each option
agreement specifies the shares issuable upon the exercise of the option, the
exercise price and expiration date and other terms and conditions of the
option.





If the option holder is an employee,
and if he or she ceases to be employed by us, the option holder may, during the
30-day period following termination of employment, exercise the option to the
extent the option was exercisable on the date of termination.  In the
case of death or disability, the option holder (or his or her administrator) has
twelve months from the date of death or disability to exercise the option to the
extent the option was exercisable on the date of death or
disability.





The
options are subject to adjustment by reason of a recapitalization,
reclassification, stock split, combination of shares, dividend or other
distribution payable in capital stock.  Upon a merger, liquidation,
dissolution or other consolidation, we will provide each option holder with
one-months’ prior written notice informing the option holder that he or she may
exercise the option in full (to the extent it has not been previously exercised)
within the one-month period.  Following the expiration of the one
month period, the options will terminate.





21


The
options may not be transferred, assigned, pledged or hypothecated in any way
(except by will or the laws of descent) and are not subject to execution,
attachment or similar process.





All of
the options granted have terms of between one and five years after the date of
grant and reflect exercise prices equal to the fair market value of a share of
our common stock as determined by our board of directors on the date of
grant.  All of the options contain vesting provisions pursuant to
which the options are 100% exercisable within a fixed number of months after the
date of grant.





All option grants made during a fiscal
year are submitted for shareholder approval at the next annual shareholder
meeting.  To date, our shareholders have approved all of the
grants.





The
following table shows the weighted average exercise price of the outstanding
options granted pursuant to our Stock Option Program as of December 31, 2008,
our most recently completed fiscal year.





Plan
      Category
                
                Number
      of Securities to be Issued Upon Exercise of Outstanding
      Options,
                    Warrants
      and Rights
                
                
                Weighted-Average
                    Exercise
      Price of
                    Outstanding
      Options,
                    Warrants
      and Rights
                
                Number
      of Securities
                  Remaining
      Available for
                  Future
      Issuance Under
                  Equity
      Compensation
                  Plans
      (Excluding Securities Reflected
                  in
      Column (a))(a)
                
                
                (b)
                
                (c)Stock
      Option Program
                
                
                1,910,700
                
                
                $
                3.38
                
                Not
      ApplicableTotal
                
                
                
                
                
                $
                3.38




As of
March 10, 2009 options to purchase 1,910,700 shares of our common stock were
outstanding under our Stock Option Program.  The exercise price of
these options varies between $3.00 and $4.55 per share.  The options
expire at various dates between March 15, 2009 and July, 1, 2013.





The
following tables show, during the fiscal year ended December 31, 2008, the
options granted to, and the options exercised and held by, the persons named
below.  All options were granted pursuant to our Stock Option
Program.




Options GrantedName
                                        Grant
                                          Date
                                        Options
                                          Granted (#)
                                        Exercise
                                          Price
      Per
                                          Share
                                        Expiration
                                          DateDaniel
      O’Brien
                                        --
                                        --
                                        --
                                        --


Options
      ExercisedName
                                                Shares
                                                  Acquired
      On
                                                  Exercise (1)
                                                Value
                                                  Realized (2)Daniel
      O’Brien
                                                --
                                                --




(1)
            The
      number of shares received upon exercise of options during the fiscal year
      ended December 31, 2008.




22




(2)
            With
      respect to options exercised during the fiscal year ended December 31,
      2008, the dollar value of the difference between the option exercise price
      and the market value of the option shares purchased on the date of the
      exercise of the options.


Shares
      underlying unexercised
                                                    options which
      are:Name
                                                  Exercisable
                                                  Unexercisable
                                                  Exercise
                                                    Price
                                                  Expiration
                                                    DateDaniel
      O’Brien
                                                  50,000
                                                  --
                                                  3.00
                                                  11/26/09300,000
                                                  --
                                                  3.25
                                                  01/05/11--
                                                  200,000
                                                  3.25
                                                  01/05/11


Director
Compensation





We
reimburse directors for any expenses incurred in attending board
meetings.  We also compensate directors $2,000 annually and grant our
directors options to purchase shares of our common stock each year that they
serve.





Our
directors received the following compensation in 2008:





Name
                Paid in Cash
                Stock Awards (1)
                Option Awards (2)Robert
      N. O’Brien
                --
                --
                --John
      H. Bientjes
                $2,000
                --
                --Dale
      Friend
                $2,000
                --
                --Eric
      Hodges
                $2,000
                --
                --





(1)
            The
      fair value of stock issued for services computed in accordance with FAS
      123R on the date of grant.





(2)
            The
      fair value of options granted computed in accordance with FAS 123R on the
      date of grant.





23


The terms
of outstanding options granted to our directors are shown below.











Name
                                Option
      Price
                                No.
      of Options
                                Expiration
      DateRobert
      N. O’Brien
                                $3.00
                                25,000
                                November
      26, 2009Robert
      N. O’Brien
                                $3.25
                                250,000
                                January
      5, 2011John
      H. Bientjes
                                $3.00
                                5,000
                                November
      26, 2009John
      H. Bientjes
                                $3.25
                                5,000
                                January
      5, 2011John
      H. Bientjes
                                $3.60
                                5,000
                                December
      18, 2012John
      H. Bientjes
                                $3.60
                                5,000
                                January
      31, 2013Dale
      Friend
                                $3.00
                                5,000
                                November
      26, 2009Dale
      Friend
                                $3.25
                                5,000
                                January
      5, 2011Dale
      Friend
                                $3.60
                                5,000
                                December
      18, 2012Dale
      Friend
                                $3.60
                                5,000
                                January
      31, 2013Eric
      Hodges
                                $3.60
                                5,000
                                September
      24, 2009Eric
      Hodges
                                $3.00
                                5,000
                                November
      26, 2009Eric
      Hodges
                                $3.25
                                5,000
                                January
      5, 2011Eric
      Hodges
                                $3.60
                                5,000
                                December
      18, 2012Eric
      Hodges
                                $3.60
                                5,000
                                January
      31,
2013




Daniel B.
O’Brien is not compensated for serving as a director.





Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.




The
following table shows the beneficial ownership of our common stock as of March
10, 2009 by (i) each stockholder who is known by us to own beneficially more
than five percent of our outstanding common stock, (ii) each of our officers and
directors, and (iii) by all of our executive officers and directors as a
group.




Shares
      (1)
                                        Percentage
      OwnershipDaniel
      B. O’Brien
                                          2614
      Queenswood Dr.
                                          Victoria,
      BC V8N 1X5
                                        4,971,900
                                        35.4%Dr.
      Robert N. O’Brien
                                          2614
      Queenswood Dr.
                                          Victoria,
      BC V8N 1X5
                                        2,000,000
                                        14.2%John
      Bientjes
                                          #1-230
      West 13th Street,
                                            North
      Vancouver, B.C. V7M 1N7
                                        35,000
                                        0.2%Dale
      Friend
                                          3009
      E. Kent Ave,
                                          Vancouver,
      BC V5S 4P6
                                        20,000
                                        0.1%  24
 Eric
      Hodges
                                          #110
      - 4252 Commerce Circle
                                          Victoria,
      BC  V8Z 4M2
                                        20,000
                                        0.1%All
      officers and directors
                                          as
      a group (5 persons)
                                        7,046,900
                                        50.0%




(1)
            Includes
      shares which may be acquired on the exercise of the stock options, all of
      which were exercisable as of December 31, 2008, listed
    below.




Name
                    No. of Options
                    Exercise
                      Price
                    Expiration DateDaniel
      O’Brien
                    50,000
                    $3.00
                    November
      26, 2009100,000
                    $3.25
                    January
      5, 2011100,000
                    $3.25
                    January
      5, 2011100,000
                    $3.25
                    January
      5, 2011Dr.
      Robert O’Brien
                    25,000
                    $3.00
                    November
      26, 200950,000
                    $3.25
                    January
      5, 201150,000
                    $3.25
                    January
      5, 201150,000
                    $3.25
                    January
      5, 2011John
      Bientjes
                    5,000
                    $3.00
                    November
      26, 20095,000
                    $3.25
                    January
      5, 20115,000
                    $3.60
                    December
      18, 20125,000
                    $3.60
                    January
      31, 2013Dale
      Friend
                    5,000
                    $3.00
                    November
      26, 20095,000
                    $3.25
                    January
      5, 20115,000
                    $3.60
                    December
      18, 2012Eric
      Hodges
                    5,000
                    $3.00
                    November
      26, 20095,000
                    $3.25
                    January
      5, 20115,000
                    $3.60
                    December
      18, 2012





25


Item
      13.
            Certain
      Relationships and Related Transactions, Director
    Independence.




Our
director, Dr. Robert N. O’Brien, developed substantially all of our products and
has assigned the patent rights to these products to us.  We have no
agreement with Dr. O’Brien requiring him to conduct any research and development
activities for us, but we anticipate that any future inventions which may be of
interest to us will continue to be assigned to us by Dr. O’Brien, although he
has no legal obligation to do so.  Dr. O’Brien does not receive any
salary or royalties from us for any research and development activities,
although our board of directors does consider such activities undertaken by Dr.
O’Brien when it grants stock options to Dr. O’Brien.  Dr. O’Brien is a
member of our board of directors, but abstains from all proceedings of the board
concerning his stock option grants.  Please refer to Item 10 of this
report for further information.  Dr. O’Brien is the father of our
Chief Executive Officer, Daniel B. O’Brien.




Item
      14.
            Principal
      Accountant Fees and Services.





Cinnamon
Jang Willoughby & Company, Certified Public Accountants (“CJW”), are our
independent auditors and have examined our financial statements for the fiscal
years ended December 31, 2008 and 2007.





Audit
Fees




CJW was
paid $51,596 and $55,484 for the for the fiscal years ended December 31, 2008
and 2007, respectively, for professional services rendered in the audit of our
annual financial statements and for the reviews of the financial statements
included in our quarterly reports on Form 10-QSB during these fiscal
years.




Audit-Related
Fees




CJW was
paid $7,130 and $12,106 for the fiscal years ended December 31, 2008 and 2007,
respectively, for assurance and related services related to the performance of
the audit or review of our financial statements.




Tax Fees




CJW was
paid $28,143 and $2,176 for the fiscal years ended December 31, 2008 and 2007,
respectively, for professional services rendered for the preparation and filing
of our income tax returns for the fiscal years ended December 31, 2007 and
2006.




All Other
Fees




CJW was
paid no other fees for professional services during the fiscal years ended
December 31, 2008 and 2007.




Audit Committee Pre-Approval
Policies




Rules
adopted by the SEC in order to implement requirements of the Sarbanes-Oxley Act
of 2002 require public company audit committees to pre-approve audit and
non-audit services.  Our Audit Committee has adopted a policy for the
pre-approval of all audit, audit-related and tax services, and permissible
non-audit services provided by our independent auditors.  The policy
provides for an annual review of an audit plan and budget for the upcoming
annual financial statement audit, and entering into an engagement letter with
the independent auditors covering the scope of the audit and the fees to be
paid.  Our Audit Committee may also from time-to-time review and
approve in advance other specific audit, audit-related, tax or permissible
non-audit services.  In addition, our Audit Committee may from
time-to-time give pre-approval for audit services, audit-related services, tax
services or other non-audit services by setting forth such pre-approved services
on a schedule containing a description of, budget for and time period for such
pre-approved services.




26


The
policies require our Audit Committee to be informed of each service and the
policies do not include any delegation of our Audit Committee’s responsibilities
to management.  Our Audit Committee may delegate pre-approval
authority to one or more of its members.  The member to whom such
authority is delegated will report any pre-approval decisions to our Audit
Committee at its next scheduled meeting.




During
the year ended December 31, 2008 our Audit Committee approved all of the fees
paid to CJW.  Our Audit Committee has determined that the rendering of
all other non-audit services by CJW is compatible with maintaining CJW’s
independence.  During the year ended December 31, 2008, none of the
total hours expended on our financial audit by CJW were provided by persons
other than CJW’s full-time permanent employees.





Item
      15.
            Exhibits,
      Financial Statement Schedules.





Number
                Description3.1
                Articles
      of Incorporation of the Registrant. (1)3.2
                Bylaws
      of the Registrant. (1)21.1
                Subsidiaries.
      (2)23.1
                Consent
      of Independent Accountants.31.1
                Certification
      of Principal Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act
      of 2002.31.2
                Certification
      of Principal Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act
      of 2002.32.1
                Certification
      of Principal Executive and Principal Financial Officer Pursuant
      to 18 U.S.C. §1350 and §906 of the Sarbanes-Oxley Act of
      2002.





(1)
            Previously
      filed as an exhibit to our Registration Statement on Form 10-SB filed with
      the Commission on February 22, 2000, and incorporated herein by
      reference.


(2)
            Previously
      filed as an exhibit to our Registration Statement on Form SB-2 filed with
      the Commission on January 22, 2003, and incorporated herein by
      reference.








27


SIGNATURES




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






Flexible
      Solutions International, Inc.Dated:  March
      26, 2009.
              By:
              /s/
      Daniel
      B. O’BrienDaniel
      B. O’BrienPresident
      and Chief Executive Officer




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:




Signature
                                              
                                              Title
                                              
                                              Date/s/
      Daniel B. O’BrienDaniel
      B. O’Brien
                                              
                                              President,
      Chief Executive Officer, Principal Financial and Accounting Officer
      and  a Director
                                              
                                              March
      26, 2009/s/ John
      H. BientjesJohn
      H. Bientjes
                                              
                                              Director
                                              
                                              March
      26, 2009/s/
      Robert
      N. O’BrienRobert
      N. O’Brien
                                              
                                              Director
                                              
                                              March
      26, 2009/s/  Dale
      FriendDale
      Friend
                                              
                                              Director
                                              
                                              March
      26, 2009/s/
      Eric
      G. HodgesEric
      G. Hodges
                                              
                                              Director
                                              
                                              March
      26,
2009