UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549






FORM
10-KSB/A




(Mark
      one)ý
            Annual
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      The Fiscal Year Ended December 31, 2007.o
            Transition
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from ____________ to
____________.Commission
      File Number 000-29649








FLEXIBLE SOLUTIONS INTERNATIONAL,
      INC.(Name
      of Small Business Issuer in Its
Charter)





Nevada
            
            91-1922863(State
      of Incorporation)
            
            (IRS
      Employer Identification No.)615
      Discovery Street
              Victoria,
      British Columbia, CANADA
            
            V8T
      5G4(Address
      of Principal Executive Offices)
            
            (Zip
      Code)


(250)
477-9969


(Issuer’s
      Telephone Number)


None


(Securities
registered under Section 12(b) of the Exchange Act)





Common Stock, $0.001 par
value


(Securities
registered under Section 12(g) of the Exchange Act)







Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.   o




Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.


Yes ýNo o




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.   ý







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


Yes oNo ý




State
issuer’s revenues for its most recent fiscal
year:  $7,431,791.




State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days:  As of March 4, 2007, the
aggregate market value of the Company’s common stock held by non-affiliates was
approximately $22,390,584 based on the closing price for shares of the
registrant’s common stock on the American Stock Exchange for that
date.




State the
number of shares outstanding of each of the issuer’s class of common equity, as
of the latest practicable date:  As of March 4, 2008, there were
14,057,567 shares of the Company’s common stock outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




No
documents are incorporated by reference.




Transitional
Small Business Disclosure Format (check
one):


Yes oNo ý














































FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.







INDEX
TO ANNUAL REPORT ON FORM 10-KSB/A


For
the Fiscal Year Ended December 31, 2007




PagePART
      IItem
      1.
            Description of Business.
            1Item
      2.
            Description of Property.
            11Item
      3.
            Legal Proceedings.
            11Item
      4.
            Submission of Matters to a Vote of Security
      Holders.
            12PART
      IIItem
      5.
            Market for Common Equity and Related Stockholder
      Matters.
            13Item
      6.
            Management’s Discussion and Analysis or Plan of
      Operation.
            14Item
      7.
            Financial Statements.
            17Item
      8.
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure.
            18Item 8A.
            Controls and Procedures.
            18Item 8B.
            Other Information.
            18PART
      IIIItem
      9.
            Directors, Executive Officers, Promoters and Control
      Persons; Compliance With Section 16(a) of the Exchange
      Act.
            19Item
      10.
            Executive Compensation.
            21Item
      11.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters.
            24Item
      12.
            Certain Relationships and Related
      Transactions.
            25Item
      13.
            Exhibits.
            26Item
      14.
            Principal Accountant Fees and Services.
            26SIGNATURES
            27






















CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
Annual Report on Form 10-KSB for the year ended December 31, 2007 (“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.





















































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 that 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 which is due on Nov 30,
2012.  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 IL 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$AVR® also provides convenience compared to pool
blankets.  Pool blankets are plastic cover, which are cut to the size
and shape of the surface of the pool or spa.  Pool blankets float on
the surface and, like the HEAT$AVR®, reduce energy cost 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
make 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 7
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, Japan, Korea, Spain, South Africa, Switzerland and Great
Britain.  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 is 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
two full-time employees and one part-time employee who are involved in the sales
and marketing of WATER$AVR®.




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.




2


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





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.  It 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.





Competition





HEAT$AVR®
and ECO$AVRTM





We are
aware of only one other company that manufactures a product that competes with
HEAT$AVR®.  This other product has had limited sales to date and does
not have the important convenience factor of our ECO$AVR® product.  In
addition to this existing competitor, our previous distributor, Sun Solar Energy
Technologies Inc. ( “Sun Solar”), has recently begun selling a product that
directly competes with our ECO$AVR® product.




3


This
product, while having a higher price point and limited sales history to date,
must be taken seriously because of the expertise Sun Solar derived from working
with us between 1998 and 2004 as our North American distributor.





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®





Aegis
Chemical Industries Ltd. of India directly competes with
WATER$AVR®.  We believe our WATER$AVR® product is
superior for the following reasons:





●
            Easier
      Application.  WATER$AVR® may be applied directly to the
      water surface by hand or machine.  Our competition requires
      premixing to dilute the product to usable strength, followed by extensive
      pumping.





●
            Cost.  In
      order to achieve comparable water savings levels, other products cost more
      than WATER$AVR®.





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 (recently 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;




4




●
            Environmental
      considerations, ease of formulation and increased crop yield opportunities
      in irrigation scale markets; and


●
            Biodegradability
      compared to poly-acrylic acid for
detergents.





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 Calgary, Alberta, Canada.





Our
WATER$AVR® products are manufactured under contract with Ondeo Nalco Company
(“Ondeo”) under an agreement which expires April 2007, with a five-year
extension available.  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 which is due on Nov 30,2012.  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 IL 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
$120,817 for the year ended December 31, 2007 and $127,254 for the year ended
December 31, 2006 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, 2007 we had 24 employees, including one officer, thirteen sales and
customer support personnel, and ten manufacturing personnel.  None of
our employees is represented by a labor union and we have experienced no work
stoppages to date.





Risk
Factors





This Form
10-KSB/A 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.





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.





7


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
$400,000 on the marketing and production of our WATER$AVR® product in fiscal
2008.





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.





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





8


In the
year ended December 31, 2007, revenues from shipments made outside of the
United States accounted for approximately 79% of our revenues, 79% in the year
ended December 31, 2006 and 80% in the year ended December 31,
2005.  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.





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.




9


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
      2.
            Description of
Property.





We lease
4,300 sq. ft. in Victoria, British Columbia for administration and sales and
research at $5,135 per month.  This lease is effective through June
2009.  We lease an 11,000 sq. ft. building in Calgary, Alberta for
$8,925per month which we use to manufacture our swimming pool
products.  This lease is effective through September
2009.  We lease 1,488 sq. ft. in Richmond, British Columbia for sales
and customer support at a cost of $1,414 per month.  This lease is
effective through December 2011.  We lease 7,000 sq. ft. in Bedford
Park, Illinois for offices and laboratories at a cost of $6,548 per month and
the lease is currently month to month.  We also own a 56,780 sq. ft.
facility in Peru, Illinois which is used to manufacture our TPA line of
products.





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 which is due on Nov 30, 2012.  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 IL for finishing.





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 or cancelled.





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





Not
applicable.































11


PART
II





Item
      5.
            Market for Common Equity and Related Stockholder
      Matters.





Market
for Securities





Our
common stock is traded on the American Stock Exchange 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,
      2006
            First
      Quarter
            
            $
            3.55
            
            
            $
            2.25Second
      Quarter
            
            
            4.30
            
            
            
            2.45Third
    Quarter
            
            
            3.25
            
            
            
            2.50Fourth
      Quarter
            
            
            4.12
            
            
            
            2.80




High
              
              
              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.  As of
December 31, 2007 we had approximately 1,700 shareholders.





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





Shares
Which May Be Issued





As of March 15, 2008 we had 14,157,567
outstanding shares of common stock.  The following table lists
additional shares of our common stock which may be issued as of March 15,
2008:




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
            
            
            1,912,440
            
            
            
            B




A.           Between
April 14th and
June 8th, 2005
and again in May 2007, we sold shares of our common stock in private
transactions.  In some cases warrants were issued as part of the
financings.  Information concerning the outstanding warrants are shown
below.




Shares
      Issuable
              Upon
      Exercise
              Of
      Warrants
            
            Issue
              Date
            
            Exercise
              Price
            
            Expiration
              Date900,000
            
            4/14/05
            
            $4.50
            
            4/14/0987,400
            
            6/08/05
            
            $4.50
            
            6/08/09468,070
            
            5/03/07
            
            $4.50
            
            5/03/10




12


B.           Options
are exercisable at prices ranging from $3.00 to $4.60 per share.  See
Item 10 of this report for more information concerning these
options.





Dividend
Policy





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.





Item
      6.
            Management’s Discussion and Analysis or Plan of
      Operation.





Results
of Operations




The
Company has two product lines:
  The first
is a chemical (“EWCP”) used in swimming pools and spas.  The product forms
a thin, transparent layer on the water’s surface.  The transparent layer
slows the evaporation of water, allowing the water to retain a higher
temperature for a longer period of time and thereby reducing the energy required
to maintain the desired temperature of the water.  A modified version of
the product can also be used in reservoirs, potable water storage tanks,
livestock watering ponds, canals, and irrigation ditches.
  The
second product (“BPCA”) combines biodegradable polymers and chemical additives
and is used by the petroleum, chemical, utility and mining industries to prevent
corrosion and scaling in water piping.  This product can also be used in
detergent to increase biodegradability and in agriculture to increase crop
yields by enhancing fertilizer uptake.


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





Year Ended December 31,
2007




Item
                          
                          Increase
      (I) or
                            Decrease
      (D)
                          
                          ReasonSalesEWCP
      products
                          
                          D
                          
                          Poor
      execution by the Ecosavr swimming pool sales team resulted in market
      share loss to competing products.BPCA
      products
                          
                          D
                          
                          Maintenance
      shutdowns in the oil extraction industry during 2007 reduced sales of BPCA
      products.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
      $369,992 to administrative salaries in 2006 but only $204,602 in
      2007.Professional
      fees
                          
                          D
                          
                          Resolution
      of several legal proceedings in the year 2007 reduced our
      costs.Consulting
                          
                          D
                          
                          The
      expense, for financial reporting purposes, of stock options granted in
      2006 to consultants that did not reoccur in 2007.Commissions
                          
                          D
                          
                          Decreased
      sales led to a decrease in commission costs.Gain
      on sale of property
                          
                          I
                          
                          One-time
      gain on sale of unused land at our plant in
  Illinois.





13


Year Ended December 31,
2006
  Item
                      
                      Increase
      (I) or
                        Decrease
      (D)
                      
                      ReasonSalesEWCP
      products
                      
                      I
                      
                      Increased
      product recognition in the market place led to increased
      sales.BPCA
      products
                      
                      I
                      
                      High
      oil prices encouraged the oil companies to increase production,
      limit shutdowns and need additional BPCA
    products.Wages
                      
                      I
                      
                      In
      2005 we were not required to record the expense of stock
      options.  The expense, for financial reporting purposes for
      employee stock options, added $131,517 to wages in
    2006.


Administrative
      salaries and benefits
            
            I
            
            In
      2005 we were not required to record the expense of stock
      options.  The expense, for financial reporting purposes for
      employee stock options, added $369,992 to administrative salaries in
      2006.Investor
      relations and transfer agent fee
            
            D
            
            Upon
      the closing of our private placements in 2005, some stock options granted
      in 2004 vested and incurred expenses in this category by
      $422,500.Insurance
            
            I
            
            Increase
      is comparable to what others are experiencing in the
    industry.Consulting
            
            I
            
            The
      expense, for financial reporting purposes, of stock option grants in 2006
      to consultants.Research
            
            I
            
            Increased
      spending on development.





Capital
Resources and Liquidity





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
              )


Our
material sources and <uses> of cash during the year ended December 31,
2006 were:




Cash
      provided by operations
              
              $
              17,539Collection
      of loan
              
              
              35,228Patent
      development
              
              
              (29,116
              )Equipment
      purchases
              
              
              (37,160
              )Sale
      of common stock
              
              
              15,285Exchange
      rate changes
              
              
              (22,152
              )Other
              
              
              (2,147
              )Cash
      on hand at January 1, 2006
              
              
              22,523




We are
committed to minimum rental payments for property and premises aggregating
approximately $355,022 over the term of three leases, the last expiring on
December 31, 2011.




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




2008
            
            
            186,9062009
            
            
            134,1922010
            
            
            16,9622011
            
            
            16,962





We don’t
anticipate any capital requirements for the twelve months ending December 31,
2008.





14


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.









































15




Item
      7.
            Financial
Statements.





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, 2007 and
      2006
            F-2Consolidated Statements of Operations for the Years
      Ended December 31, 2007 and 2006
            F-3Consolidated Statements of Operations for the Three
      Months Ended December 31, 2007 and 2006
            F-4Consolidated Statements of Cash Flows for the Years
      Ended December 31, 2007 and 2006
            F-5Consolidated Statements of Stockholders’ Equity for the
      Years Ended December 31, 2007 and 2006
            F-6Notes to Consolidated Financial
    Statements
            F-7
















































16


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 accompanying consolidated balance sheets of Flexible Solutions
International, Inc. (the “Company”) as of December 31, 2007 and 2006 and the
related consolidated statements of operations, stockholders’ equity and
comprehensive income, and cash flows for each of the two years in the period
ended December 31, 2007.  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 audit 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 also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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
opinions the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Flexible Solutions
International, Inc. as at December 31, 2007 and 2006 and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2007 in conformity with generally accepted accounting
principles in the United States of America.
  
 
 “Cinnamon
Jang Willoughby & Company”
 Chartered
Accountants
 
 Burnaby,
Canada
 March 27,
2008




F-1


FLEXIBLE SOLUTIONS INTERNATIONAL, INC.


Consolidated
Balance Sheet


December
31, 2007 and 2006


(U.S.
Dollars)





December
      31, 2007
              
              
              December
      31, 2006AssetsCurrentCash
      and cash equivalents
              
              $
              3,355,854
              
              
              $
              450,759Accounts
      receivable (Note 3)
              
              
              1,051,056
              
              
              
              1,319,575Inventories
      (see Note 4)
              
              
              2,361,270
              
              
              
              1,904,315Prepaid
      expenses
              
              
              115,353
              
              
              
              124,3606,883,533
              
              
              
              3,799,009Property,
      equipment and leaseholds, net (see Note 5)
              
              
              4,612,571
              
              
              
              4,100,553Patents
      (see Note 6)
              
              
              230,438
              
              
              
              169,758Investment
      (see Note 7)
              
              
              -
              
              
              
              369,000Long
      term deposits (see Note 8)
              
              
              48,034
              
              
              
              47,220Total
      Assets
              
              $
              11,774,576
              
              
              $
              8,485,540LiabilitiesCurrentAccounts
      payable and accrued liabilities
              
              $
              385,792
              
              
              $
              423,030Deferred
      revenue
              
              
              9,870
              
              
              
              20,559395,662
              
              
              
              443,589Mortgage
      (Note 15)
              
              
              452,018
              
              
              
              -847,680
              
              
              
              443,
      589Stockholders’
      EquityCapital
      stock (Note 14)Authorized50,000,000
      common shares with a par value of $0.001 each1,000,000  preferred
      shares with a par value of $0.01 eachIssued
      and outstanding:14,057,567
      (2006: 13,058,427) common shares
              
              
              14,058
              
              
              
              13,058Capital
      in excess of par value
              
              
              15,914,303
              
              
              
              12,370,418Other
      comprehensive income (see Note 9)
              
              
              394,289
              
              
              
              131,002Accumulated
      Deficit
              
              
              (5,395,754
              )
              
              
              (4,472,527
              )Total
      Stockholders’ Equity
              
              
              10,926,895
              
              
              
              8,041,951Total
      Liabilities and Stockholders’ Equity
              
              $
              11,774,576
              
              
              $
              8,485,540Commitments,
      Contingencies and Subsequent events
              
              (See
      Notes 16, 17 & 18)







See
Notes to Consolidated Financial Statements.
 F-2


FLEXIBLE SOLUTIONS INTERNATIONAL, INC.


Consolidated
Statements of Operations


For
the Years Ended December 31, 2007 and 2006


(U.S.
Dollars)




Years
      Ended December 31,2007
                                                                    
                                                                    
                                                                    2006Sales
                                                                    
                                                                    $
                                                                    7,431,791
                                                                    
                                                                    
                                                                    $
                                                                    8,373,597Cost
      of sales
                                                                    
                                                                    
                                                                    4,738,143
                                                                    
                                                                    
                                                                    
                                                                    5,401,350Gross
      profit
                                                                    
                                                                    
                                                                    2,693,648
                                                                    
                                                                    
                                                                    
                                                                    2,972,247Operating
      ExpensesWages
                                                                    
                                                                    
                                                                    1,094,799
                                                                    
                                                                    
                                                                    
                                                                    1,069,736Administrative
      salaries and benefits
                                                                    
                                                                    
                                                                    447,516
                                                                    
                                                                    
                                                                    
                                                                    666,542Advertising
      and promotion
                                                                    
                                                                    
                                                                    63,126
                                                                    
                                                                    
                                                                    
                                                                    45,215Investor
      relations and transfer agent fee
                                                                    
                                                                    
                                                                    302,401
                                                                    
                                                                    
                                                                    
                                                                    258,072Office
      and miscellaneous
                                                                    
                                                                    
                                                                    201,810
                                                                    
                                                                    
                                                                    
                                                                    157,755Insurance
                                                                    
                                                                    
                                                                    230,656
                                                                    
                                                                    
                                                                    
                                                                    209,864Interest
      expense
                                                                    
                                                                    
                                                                    10,605
                                                                    
                                                                    
                                                                    
                                                                    3,136Rent
                                                                    
                                                                    
                                                                    227,431
                                                                    
                                                                    
                                                                    
                                                                    232,820Consulting
                                                                    
                                                                    
                                                                    338,728
                                                                    
                                                                    
                                                                    
                                                                    383,965Professional
      fees
                                                                    
                                                                    
                                                                    233,701
                                                                    
                                                                    
                                                                    
                                                                    324,359Travel
                                                                    
                                                                    
                                                                    134,011
                                                                    
                                                                    
                                                                    
                                                                    136,049Telecommunications
                                                                    
                                                                    
                                                                    38,163
                                                                    
                                                                    
                                                                    
                                                                    34,041Shipping
                                                                    
                                                                    
                                                                    67,834
                                                                    
                                                                    
                                                                    
                                                                    41,517Research
                                                                    
                                                                    
                                                                    120,817
                                                                    
                                                                    
                                                                    
                                                                    123,254Commissions
                                                                    
                                                                    
                                                                    119,790
                                                                    
                                                                    
                                                                    
                                                                    171,380Registration
      rights penalty
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    326,710Bad
      debt expense
                                                                    
                                                                    
                                                                    2,310
                                                                    
                                                                    
                                                                    
                                                                    90,747Currency
      exchange
                                                                    
                                                                    
                                                                    43,568
                                                                    
                                                                    
                                                                    
                                                                    (23,417
                                                                    )Utilities
                                                                    
                                                                    
                                                                    25,996
                                                                    
                                                                    
                                                                    
                                                                    18,064Total
      operating expenses
                                                                    
                                                                    
                                                                    3,703,262
                                                                    
                                                                    
                                                                    
                                                                    4,266,809Gain on sale of property
                                                                    
                                                                    
                                                                    (195,442
                                                                    )
                                                                    
                                                                    
                                                                    -Operating
      income (loss)
                                                                    
                                                                    
                                                                    (814,172
                                                                    )
                                                                    
                                                                    
                                                                    (1,294,562
                                                                    )Write
      down of investment
                                                                    
                                                                    
                                                                    (98,000
                                                                    )
                                                                    
                                                                    
                                                                    -Other
      expenses
                                                                    
                                                                    
                                                                    (15,051
                                                                    )
                                                                    
                                                                    
                                                                    -Interest
      income
                                                                    
                                                                    
                                                                    3,996
                                                                    
                                                                    
                                                                    
                                                                    3,114Loss
      before income tax
                                                                    
                                                                    
                                                                    (923,227
                                                                    )
                                                                    
                                                                    
                                                                    (1,291,448
                                                                    )Income
      tax (recovery)
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (127,049
                                                                    )Loss
      for the year
                                                                    
                                                                    $
                                                                    (923,227
                                                                    )
                                                                    
                                                                    $
                                                                    (1,164,369
                                                                    )Net
      loss per share (basic and diluted)
                                                                    
                                                                    $
                                                                    (0.07
                                                                    )
                                                                    
                                                                    $
                                                                    (0.09
                                                                    )Weighted
      average number of common shares (basic and diluted)
                                                                    
                                                                    
                                                                    13,823,654
                                                                    
                                                                    
                                                                    
                                                                    12,994,430






See
Notes to Consolidated Financial Statements.
 F-3
 FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
 Consolidated
Statements of Operations
 For
Three Months Ended December 31, 2007 and 2006
 (U.S.
Dollars)
  Three
      Months Ended December 31,2007
              
              
              2006(unaudited)
              
              
              (unaudited)Sales
              
              $
              1,701,359
              
              
              $
              1,700,806Cost
      of sales
              
              
              1,162,160
              
              
              
              1,155,807Gross
      profit
              
              $
              539,199
              
              
              $
              544,999Operating
      ExpensesWages
              
              
              294,363
              
              
              
              217,991Administrative
      salaries and benefits
              
              
              71,436
              
              
              
              190,561Advertising
      and promotion
              
              
              21,355
              
              
              
              9,381Investor
      relations and transfer agent fee
              
              
              50,319
              
              
              
              112,064Office
      and miscellaneous
              
              
              57,790
              
              
              
              30,050Insurance
              
              
              62,677
              
              
              
              48,814Interest
      expense
              
              
              7,731
              
              
              
              1,161Rent
              
              
              57,213
              
              
              
              55,841Consulting
              
              
              60,217
              
              
              
              93,106Professional
      fees
              
              
              102,192
              
              
              
              111,922Travel
              
              
              33,475
              
              
              
              54,832Telecommunications
              
              
              10,883
              
              
              
              9,598Shipping
              
              
              8,815
              
              
              
              7,682Research
              
              
              42,032
              
              
              
              21,195Commissions
              
              
              31,258
              
              
              
              41,184Bad
      debt expense
              
              
              249
              
              
              
              90,557Currency
      exchange
              
              
              (27,456
              )
              
              
              (28,695
              )Utilities
              
              
              6,715
              
              
              
              4,806890,634
              
              
              
              1,072,050Loss
      before other items and income tax
              
              $
              (351,435
              )
              
              $
              (527,051
              )Write
      down of investment
              
              
              (98,000
              )
              
              
              -Interest
      income
              
              
              600
              
              
              
              430Loss
      before income tax
              
              $
              (448,835
              )
              
              $
              (526,621
              )Income
      tax (recovery)
              
              
              -
              
              
              
              -Loss
      for the three months
              
              $
              (448,835
              )
              
              $
              (526,621
              )Net
      loss per share (basic and diluted)
              
              $
              (0.03
              )
              
              $
              (0.04
              )Weighted
      average number of shares (basic and diluted)
              
              
              14,156,480
              
              
              
              13,010,514







See
Notes to Consolidated Financial Statements.
 F-4
 FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
 Consolidated
Statements of Cash Flows
 For
Years Ended December 31, 2007 and 2006
 (U.S.
Dollars)
  Years
      Ended December 31,2007
                                                              
                                                              
                                                              2006Operating
      activitiesNet
      loss
                                                              
                                                              $
                                                              (923,227
                                                              )
                                                              
                                                              $
                                                              (1,164,369
                                                              )Adjustments
      to reconcile net loss to net cashStock
      compensation expense
                                                              
                                                              
                                                              651,405
                                                              
                                                              
                                                              
                                                              858,585Shares
      issued for services
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              74,306Depreciation
                                                              
                                                              
                                                              526,127
                                                              
                                                              
                                                              
                                                              597,170Write
      down of investment
                                                              
                                                              
                                                              98,000
                                                              
                                                              
                                                              
                                                              -Changes
      in non-cash working capital items:(Increase)
      Decrease in accounts receivable
                                                              
                                                              
                                                              300,065
                                                              
                                                              
                                                              
                                                              (553,174
                                                              )(Increase)
      Decrease in inventories
                                                              
                                                              
                                                              (337,532
                                                              )
                                                              
                                                              
                                                              410,664(Increase)
      Decrease in prepaid expenses
                                                              
                                                              
                                                              16,852
                                                              
                                                              
                                                              
                                                              12,955Increase
      (Decrease) in accounts payable
                                                              
                                                              
                                                              (78,550
                                                              )
                                                              
                                                              
                                                              (268,075
                                                              )Increase
      (Decrease) deferred revenue
                                                              
                                                              
                                                              (10,689
                                                              )
                                                              
                                                              
                                                              20,559Increase
      (Decrease) in income taxes
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              28,918Cash
      provided by (used in) operating activities
                                                              
                                                              
                                                              242,451
                                                              
                                                              
                                                              
                                                              17,539Investing
      activities(Increase)
      Decrease in long term deposits
                                                              
                                                              
                                                              1,981
                                                              
                                                              
                                                              
                                                              (2,147
                                                              )(Increase)
      Decrease in loan receivable
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              35,228(Increase)
      Decrease in development of patents
                                                              
                                                              
                                                              (60,680
                                                              )
                                                              
                                                              
                                                              (29,116
                                                              )(Increase)
      Decrease in acquisition of equipment
                                                              
                                                              
                                                              (586,127
                                                              )
                                                              
                                                              
                                                              (37,160
                                                              )Cash
      provided by (used in) investing activities
                                                              
                                                              
                                                              (644,826
                                                              )
                                                              
                                                              
                                                              (33,195
                                                              )Financing
      activitiesProceeds
      from issuance of common stock
                                                              
                                                              
                                                              3,164,481
                                                              
                                                              
                                                              
                                                              15,285Cash
      provided by financing activities
                                                              
                                                              
                                                              3,164,481
                                                              
                                                              
                                                              
                                                              15,285Effect
      of exchange rate changes on cash
                                                              
                                                              
                                                              142,990
                                                              
                                                              
                                                              
                                                              (22,152
                                                              )Inflow
      (outflow) of cash
                                                              
                                                              
                                                              2,905,096
                                                              
                                                              
                                                              
                                                              (22,523
                                                              )Cash
      and cash equivalents, beginning
                                                              
                                                              
                                                              450,759
                                                              
                                                              
                                                              
                                                              473,282Cash
      and cash equivalents, ending
                                                              
                                                              $
                                                              3,355,854
                                                              
                                                              
                                                              $
                                                              450,759Supplemental
      disclosure of cash flow information:Registration
      rights penalty
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              (326,710
                                                              )Interest
      paid
                                                              
                                                              
                                                              10,605
                                                              
                                                              
                                                              
                                                              3,136Non
      Cash Investing Activities:Mortgage
      assumed for acquisition of property
                                                              
                                                              $
                                                              452,018
                                                              
                                                              
                                                              $
                                                              -


See
Notes to Consolidated Financial Statements.
 F-5
 
 FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
 Consolidated
Statements of Stockholders’ Equity
 For
the Years Ended December 31, 2007 and 2006
 (U.S.
Dollars)





Capital
      in
            
            
            Accumulated
            
            
            Other
            
            
            TotalExcess
      of
            
            
            Earnings
            
            
            Comprehensive
            
            
            Stockholders’Shares
            
            
            Par
      Value
            
            
            Par
      Value
            
            
            (Deficiency)
            
            
            Income
      (Loss)
            
            
            EquityBalance
      December 31, 2005
            
            
            12,981,316
            
            
            $
            12,981
            
            
            $
            11,422,218
            
            
            $
            (3,308,158
            )
            
            $
            153,254
            
            
            $
            8,280,295Translation
      adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (22,495
            )
            
            
            (22,495
            )Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,164,369
            )
            
            
            —
            
            
            
            (1,164,369
            )Comprehensive
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,210,081
            )Shares
      issued:Exercise
      of stock options
            
            
            46,000
            
            
            
            46
            
            
            
            64,354
            
            
            
            —
            
            
            
            —
            
            
            
            64,400Issue
      of stock for services
            
            
            31,111
            
            
            
            31
            
            
            
            74,306
            
            
            
            —
            
            
            
            —
            
            
            
            74,337Private
      placement
            
            
            —
            
            
            
            —
            
            
            
            (49,046
            )
            
            
            —
            
            
            
            —
            
            
            
            (49,046
            )Stock
      option compensation
            
            
            —
            
            
            
            —
            
            
            
            858,585
            
            
            
            —
            
            
            
            —
            
            
            
            882,015Balance
      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
            )
            
            
            (270,900
            )
            
            
            —
            
            
            
            —
            
            
            
            (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
            
            
            $
            10,926,895








See
Notes to Consolidated Financial Statements.
 F-6
 FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2007 and 2006


(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-7


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




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




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




2.           Significant
Accounting Policies.




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




(a)           Cash and Cash
Equivalents.




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




(b)           Inventories and Cost of
Sales




The
Company has 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 2006 or 2007.









F-8


(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 balanceFurniture
      and fixtures
            
            20%
      Declining balanceManufacturing
      equipment
            
            20%
      Declining balanceOffice
      equipment
            
            20%
      Declining balanceBuilding
            
            10%
      Declining balanceLeasehold
      improvements
            
            Straight-line
      over lease term





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




(e)           Impairment of Long-Lived
Assets.




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




(f)           Investments.




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




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





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












F-9


(g)           Foreign
Currency.




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




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




(h)           Revenue
Recognition.




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




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




(i)           Stock Issued in Exchange for
Services.




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




(j)           Stock-based
Compensation.




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




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









F-10


(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)           Loss Per Share.




Basic
loss per share data is computed by dividing the net loss applicable to common
stock by the weighted average number of common shares outstanding during the
year. Diluted earnings per share, which includes the dilutive effect of the
exercise of options and warrants has not been presented because, due to the net
losses recorded by the Company for all periods presented, their inclusion would
be anti-dilutive.




(m)           Use of
Estimates.




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period.  Significant areas requiring the use of management estimates
relate to the determination of allowance for doubtful accounts, assumptions used
in determining stock-based compensation, future income tax valuation allowances,
impairment of long lived assets, and rates for amortization of property, plant
and equipment.  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, accounts
receivable, accounts payable and accrued liabilities 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 $630,296 (60%) as at December 31, 2007 (2006 - $483,682 or
37%).





(o)           Contingencies




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





F-11


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.


(p) Income
Taxes
 
 Potential
benefits of income tax losses are not recognized in the accounts until
realization is more likely than not.  The Company has adopted SFAS No.
109 as of its inception.  Pursuant to SFAS No. 109 the Company is
required to compute tax asset benefits for net operating losses carried
forward.  Potential benefits of net operating losses have not been
recognized in these financial statements because the Company cannot be assured
that it is more likely than not that it will utilize the net operating losses
carried forward in future years; and accordingly is offset by a valuation
allowance
 
 (q) Recent
Accounting Pronouncements
 
 Fair value measurement
 
 In September 2006, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 157, "Fair Value
Measurement" ("SFAS 157"). The Statement provides guidance for using fair value
to measure assets and liabilities. The Statement also expands disclosures about
the extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value measurement
on earnings. This Statement applies under other accounting pronouncements that
require or permit fair value measurements. This Statement does not expand the
use of fair value measurements in any new circumstances. Under this Statement,
fair value refers to the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants in
the market in which the entity transacts. SFAS 157 is effective for the Company
for fair value measurements and disclosures made by the Company in its fiscal
year beginning on January 1, 2008. The Company is currently reviewing the impact
of this statement.
 
 Employers
accounting for defined benefit pension and other postretirement
plans
 
 In September 2006, the FASB issued SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and
132(R)" (SFAS 158"). SFAS 158 requires an employer that sponsors one or more
single-employer defined benefit plans to (a) recognize the overfunded or
underfunded status of a benefit plan in its statement of financial position, (b)
recognize as a component of other comprehensive income, net of tax, the gains or
losses and prior service costs or credits that arise during the period but are
not recognized as components of net periodic benefit cost pursuant to SFAS 87,
"Employers' Accounting for Pensions", or SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", (c) measure defined benefit plan
assets and obligations as of the date of the employer's fiscal year-end, and (d)
disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that arise
from delayed recognition of the gains or losses, prior service costs or credits,
and transition asset or obligation. SFAS 158 is effective for the Company's
fiscal year ending December 31, 2007. The adoption of SFAS No. 158 is not
expected to have a material impact on the Company's financial position, results
of operations or cash flows.
 
 F-12
 Accounting
for servicing of financial assets
 
 In March 2006, the FASB issued SFAS
No. 156, "Accounting for
Servicing of Financial Assets", which amends SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS
No. 156 may be adopted as early as 1 January 2006, for calendar year-end
entities, provided that no interim financial statements have been issued. Those
not choosing to early adopt are required to apply the provisions as of the
beginning of the first fiscal year that begins after 15 September 2006 (e.g. 1
January 2007, for calendar year-end entities).  The intention of the new
statement is to simplify accounting for separately recognized servicing assets
and liabilities, such as those common with mortgage securitization activities,
as well as to simplify efforts to obtain hedge-like
accounting.
 
 Specifically, the FASB said SFAS No.
156 permits a service using derivative financial instruments to report both the
derivative financial instrument and related servicing asset or liability by
using a consistent measurement attribute, or fair value.  The adoption of
SFAS No. 156 is not expected to have a material impact on the Company's
financial position, results of operations or cash flows.
 
 Accounting
for certain hybrid instruments
 
 In February 2006, the FASB issued SFAS
No. 155, "Accounting for
Certain Hybrid Financial Instruments", which amends SFAS No. 133,
"Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 140. SFAS
No. 155 permits fair value measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or hybrid financial
instruments containing embedded derivatives. The adoption of SFAS No. 155
is not expected to have a material impact on the Company's financial position,
results of operations or cash flows.
 
 The Fair
Value Option for Financial Assets
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115.”  SFAS No. 159 permits entities to measure eligible
assets and liabilities at fair value.  Unrealized gains and losses on
items for which the fair value option has been elected are reported in
earnings.  SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007.  The Company is currently investigating the impact
of this pronouncement and has not yet determined the impact on the consolidated
financial statements.
 
 Business
Combinations
 
 In
December 2007, the FASB issued Statement No. 141(Revised 2007), “Business
Combinations” (SFAS No. 141(R)).  SFAS No. 141(R) requires an
acquiring entity to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited
exceptions.  SFAS No. 141(R) also changes the accounting treatment for
certain specific items.  SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the first
annual reporting period beginning on or after December 15, 2008.  The
Company is currently investigating the impact of this pronouncement and has not
yet determined the impact on the consolidated financial statements.
 
 F-13
 Noncontrolling
Interests in Consolidated Financial Statements
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51.”  SFAS
No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  This statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity.  SFAS No.
160 is effective for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008.  The Company does not expect
adoption of this pronouncement to have a material impact on the consolidated
financial statements.
 
 Accounting
for Collaborative Arrangements Related to the Development and Commercialization
of Intellectual Property
 
 In
December 2007, the FASB ratified the consensus reached on EITF 07-1, “Accounting
for Collaborative Arrangements Related to the Development and Commercialization
of Intellectual Property.”  EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties.  EITF 07-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years.  The Company does not expect
adoption of this pronouncement to have a material impact on the consolidated
financial statements
 
 3.           Accounts
Receivable
  2007
                      
                      
                      2006Accounts
      receivable
                      
                      $
                      1,052,316
                      
                      
                      $
                      1,344,155Allowance
      for doubtful accounts
                      
                      
                      (1,260
                      )
                      
                      
                      (24,580
                      )$
                      1,051,056
                      
                      
                      $
                      1,319,575


4.           Inventories




2007
            
            
            2006Completed
      goods
            
            $
            1,664,777
            
            
            $
            970,780Works
      in progress
            
            
            198,172
            
            
            
            397,995Raw
      materials
            
            
            498,321
            
            
            
            535,540$
            2,361,270
            
            
            $
            1,904,315






F-14


5.           Property,
Plant and Equipment




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








2006
              
              
              Accumulated
              
              
              2006Cost
              
              
              Depreciation
              
              
              NetBuildings
              
              $
              3,144,259
              
              
              $
              724,752
              
              
              $
              2,419,507Computer
      hardware
              
              
              60,576
              
              
              
              34,200
              
              
              
              26,376Furniture
      and fixtures
              
              
              18,576
              
              
              
              8,608
              
              
              
              9,968Office
      equipment
              
              
              29,533
              
              
              
              17,488
              
              
              
              12,045Manufacturing
      equipment
              
              
              2,207,781
              
              
              
              990,959
              
              
              
              1,216,822Trailer
              
              
              1,991
              
              
              
              1,411
              
              
              
              580Leasehold
      improvements
              
              
              39,517
              
              
              
              25,551
              
              
              
              13,966Trade
      show booth
              
              
              7,456
              
              
              
              4,353
              
              
              
              3,103Land
              
              
              398,186
              
              
              
              --
              
              
              
              398,186$
              5,907,875
              
              
              $
              1,807,322
              
              
              $
              4,100,553





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.





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











2006
              Cost
            
            
            Accumulated
              Amortization
            
            
            2006
              NetPatents
            
            $
            172,938
            
            
            $
            3,180
            
            
            
            169,758








F-15


7.Investments.





2007
            
            
            2006Tatko
      Inc.
            
            $
            -
            
            
            $
            271,000Air-Water
      Interface Delivery and Detection Inc.
            
            
            -
            
            
            
            98,000$
            -
            
            
            $
            369,000





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 expires 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.  For further information on
this option, see Contingencies (Note 16) below.




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, will be accounted for under the cost method.  While the
technology to be developed by AWD still has enormous potential and may be
commerialized in the future, management consideres 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 will be
written down to zero.





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.




2007
            
            
            2006Long
      term deposits
            
            $
            48,034
            
            
            $
            47,220




9.           Comprehensive
Income




2007
                      
                      
                      2006Net
      loss
                      
                      $
                      (923,227
                      )
                      
                      $
                      (1,164,369
                      )Other
      comprehensive income
                      
                      
                      263,287
                      
                      
                      
                      (22,495
                      )Comprehensive
      income
                      
                      $
                      (659,940
                      )
                      
                      $
                      (1,186,864
                      )Basic
      and diluted comprehensive loss per share
                      
                      
                      (0.05
                      )
                      
                      
                      (0.09
                      )






F-16


10.           Income
Tax




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




2007
            
            
            2006Current
      tax, domestic
            
            
            -
            
            
            
            -Current
      tax, foreign
            
            
            -
            
            
            $
            (127,079
            )Current
      tax, total
            
            
            -
            
            
            $
            (127.079
            )




Income
taxes vary from the amount that would be computed by applying the estimated
combined statutory income tax rate (35%) for the following reasons:




2006
            
            
            2006Income
      before taxes, domestic
            
            $
            (49,668
            )
            
            $
            (427,661
            )Income
      before taxes, foreign
            
            
            (873,559
            )
            
            
            (863,787
            )Income
      before taxes, total
            
            $
            (923,227
            )
            
            $
            (1,291,448
            )Expense
      (recovery) for income taxes at statutory rate (35%)
            
            $
            (323,129
            )
            
            $
            (452,007
            )Permanent
      difference – stock based compensation
            
            
            227,992
            
            
            
            326,523Depreciation
            
            
            112,200
            
            
            
            104,543Miscellaneous
            
            
            37,492
            
            
            
            -Tax
      refund from application of losses to prior periods
            
            
            -
            
            
            
            (127,079
            )Application
      of losses from prior periods
            
            
            (198,858
            )
            
            
            (139,308
            )Losses
      carried forward
            
            
            144,287
            
            
            
            160,249Income
      tax expense (recovery)
            
            $
            -
            
            
            $
            (127,079
            )




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
liability calculated at a 35% tax rate consists of the
following:




2006
            
            
            2006Non-capital
      loss carry forwards
            
            $
            1,198,347
            
            
            $
            950,037Book
      over tax value of property and equipment
            
            
            404,188
            
            
            
            220,502Valuation
      allowance
            
            
            (1,602,535
            )
            
            
            (1,170,539
            )Net
      deferred tax asset (liability)
            
            
            -
            
            
            
            -




The
Company's carried losses for income tax purposes are $3,423,849 (2006 -
$2,714,390), which may be carried forward to apply against future income tax,
expiring between 2013 and 2026.  The future tax benefit of these loss
carry-forwards has been offset with a full valuation allowance.  These
losses expire as follows:






F-17




2013
                        
                        $
                        107,6852014
                        
                        
                        451,5072016
                        
                        
                        926,4332017
                        
                        
                        412,2492022
                        
                        
                        125,7222023
                        
                        
                        256,1192024
                        
                        
                        813,5032025
                        
                        
                        195,4852027
                        
                        $
                        135,146







11.           Loss
Per Share.




Net
      loss
            
            
            Shares
              (denominator)
            
            
            Per
      Share
              amount2007
      Basic net loss
            
            $
            (923,227
            )
            
            
            13,823,654
            
            
            $
            (0.07
            )2006
      Basic net loss
            
            $
            (1,164,369
            )
            
            
            12,994,430
            
            
            $
            (0.09
            )




Options
to purchase 1,912,440 shares of the Company’s common stock at prices ranging
from $3.00 to $4.60 per share were outstanding during the year ended December
31, 2007 (2006:  options to purchase 2,126,410 shares of the Company’s
common stock at prices ranging from $1.40 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, 2007 or 2006.




12.           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.




F-18


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




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








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.  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:




2007
              
              
              2006Expected
      life – years
              
              
              1.0
      - 5.0
              
              
              
              5.0Interest
      rate
              
              
              4.18 
      - 5.18%
              
              
              
              4.50%Volatility
              
              
              86.0
      - 115.0%
              
              
              
              52.0%Dividend
      yield
              
              
              --
      %
              
              
              
              --
      %Weighted
      average fair value of options granted
              
              $
              1.37
      - 2.67
              
              
              $
              1.49




During
the year ended December 31, 2007, the Company granted 200,700 (2006 – 410,000)
stock options to consultants and has applied FAS No. 123 using the Black-Scholes
option-pricing model, which resulted in additional expenses of $129,882 (2006 -
$362,005).  During the year ended December 31, 2007, employees were
granted 35,000 (2006 – 781,000) stock options, which resulted in additional
expenses of $20,069 (2006 – 496,580).




13.           Warrants




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




F-19


On
June 8, 2005, the Company announced that it had raised an additional
$327,750 pursuant to a private placement of up to 174,800 shares of its common
stock.  An investor purchased 87,400 shares of the Company’s common
stock at a per share price of $3.75, together with a warrant to purchase up to
87,400 additional shares of the Company’s common stock.  The warrant
has a four-year term and is immediately exercisable at a price of $4.50 per
share.
 
 In May
2007 the Company closed a $3,042,455 private placement with 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 for total of 468,070 warrants.  The Company
also issued 16,154 warrants with the same terms for investment banking services
related to this transaction.
 
 The
following table summarizes the Company’s warrant option activity for the year
ended December 31, 2007 (no prior or 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
            
            
            484,244
            
            
            $
            4.50
            
            
            $
            4.50Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled
            
            
            —
            
            
            
            —
            
            
            
            —Balance,
      December 31, 2007
            
            
            1,471,644
            
            
            $
            4.50
            
            
            $
            4.50







14.           Capital
Stock.




The
$326,710 registration rights penalty recorded in the quarter ended September 30,
2006 is a one time occurrence that management believes should have been recorded
directly against the corresponding capital, which was raised in
2005.  However, at the date of issuance of the capital, it was deemed
to be very unlikely that any obligation would arise and as such, we were not
able to make a reasonable estimate of a potential liability.  Given
these circumstances, GAAP measures require we record the payment as another item
on our income statement.  All contractual obligations related to the
equity raised in 2005 are now complete and no more amounts will become
due.




During
the year ended December 31, 2006 the Company issued 46,000 shares of common
stock at $1.40 per share upon exercise of stock options.




F-20


During
the year ended December 31, 2006 the Company issued 31,111 shares of common
stock for services, recognizing an expense of $74,337.




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.




15.           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 debt bears no interest, is secured by a first charge over the plant
and property acquired, and is repayable by November 2012.
 
 The debt
has been discounted for financial reporting purposes to its fair
value.  The rate used to discount the debt to its fair value was 7%
which was based on the cost of borrowing of similar companies for the same
purpose
 
 Repayments
of mortgage principal over the next five years are as follows:
  2008
                                    
                                    $
                                    -2009
                                    
                                    
                                    -2010
                                    
                                    
                                    -2011
                                    
                                    
                                    -2012
                                    
                                    
                                    651,298




16.           Segmented,
Significant Customer Information and Economic Dependency.




The
Company operates in two segments:




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




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




F-21


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




The
accounting policies of the segments are the same as those described in Note 2 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, 2007:
  EWCP
                
                
                BPCA
                
                
                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
      forsegment assets
                
                
                1,004,938
                
                
                
                33,204
                
                
                
                1,038,142
 Year
ended December 31, 2006:
  EWCP
                
                
                BPCA
                
                
                TotalRevenue
                
                $
                1,410,842
                
                
                $
                6,963,320
                
                
                $
                8,374,162Interest
      revenue
                
                
                3,114
                
                
                
                --
                
                
                
                3,114Interest
      expense
                
                
                788
                
                
                
                2,348
                
                
                
                3,136Depreciation
      and Amortization
                
                
                59,695
                
                
                
                537,475
                
                
                
                597,170Segment
      profit (loss)
                
                
                (1,975,029
                )
                
                
                810,660
                
                
                
                (1,164,369
                )Segment
      assets
                
                
                199,230
                
                
                
                3,901,180
                
                
                
                4,100,553Expenditures
      forsegment assets
                
                
                9,004
                
                
                
                31,336
                
                
                
                40,340
  F-22
  The sales
generated in the United States and Canada are as follows:
  2007
                
                
                2006Canada
                
                $
                934,757
                
                
                $
                202,763United
      States and abroad
                
                
                6,497,034
                
                
                
                8,171,399Total
                
                $
                7,431,791
                
                
                $
                8,374,162
 The
Company’s long-lived assets are located in Canada and the United States as
follows:
 2007
                  
                  
                  2006Canada
                  
                  $
                  1,331,166
                  
                  
                  $
                  364,487United
      States
                  
                  
                  3,511,843
                  
                  
                  
                  3,905,824Total
                  
                  $
                  4,843,009
                  
                  
                  $
                  4,270,311
 Two
customers account for $3,544,123 (48%) of sales made in the year (2006 -
$4,727,042).






17.           Commitments.




We are
committed to minimum rental payments for property and premises aggregating
approximately $355,022 over the term of three leases, the last expiring on
December 31, 2011.




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




2008
            186,9062009
            134,1922010
            16,9622011
            16,962






18.           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.




F-23


On
November 13, 2003, Patrick Grant, an ex-employee, filed a lawsuit in the Circuit
Court of Cook County, Illinois against the Company, WaterSavr Global Solutions
Inc. (“WGS”), the wholly-owned subsidiary of the Company and Daniel B. O’Brien,
the Company’s Chief Executive Officer.  The plaintiff claims damages
for breach of contract, tortious interference with an agreement and various
wrongful discharge claims. As of January 3, 2007 all litigation between FSI and
Patrick Grant has been settled. As part of the settlement FSI permited Mr. Grant
to exercise an option to purchase 100,000 shares of FSI’s common stock at a
price of $1.50 per share and to exercise a second option to purchase 50,000
shares of FSI’s common stock at a price of $2.00 per share.  FSI also
forgave a loan to Mr. Grant and related parties in the amount of approximately
$46,177. This amount has been recorded as a bad debt expense in
2006.  FSI, its subsidiaries and officers face no further liability in
regard to the Grant lawsuit.
 
 On July
23, 2004, the Company filed a lawsuit in the Circuit Court of Cook County,
Illinois against Tatko Biotech Inc. (“Tatko”).  The action arose from 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 or cancelled.




19.           Subsequent
Events.




Subsequent
to the year ended December 31, 2007:
 
 The
Company obtained a loan for $1 million Canadian at zero percent of interest from
an unrelated third party. The repayment term of the loan is 5 years beginning in
2012.
 
 The
Company has approved to grant incentive options for total of 83,000 shares to
various employees with a strike price of $3.60 and vesting on December 31st, 2008.
The estimated value of the options granted is $11,832.





18.           Comparative
Figures.




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
















































F-24




Item
      8.
            Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure.





None.





Item8A(T).
            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-KSB for the year
ended December 31, 2007, 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, 2007, 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, 2007.




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
      8B.
            Other Information.





None.







Item
      9.
            Directors and Executive
Officers.




Name
            Age
            PositionDaniel
      B. O’Brien
            51
            President,
      DirectorJohn
      H. Bientjes
            54
            DirectorDr.
      Robert N. O’Brien
            86
            DirectorDale
      Friend
            51
            DirectorEric
      Hodges
            59
            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
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.  Ms. Friend is
currently an Accounting Manager of DB Perks & Associates.  She
served as the company comptroller for a Lock and Security firm in Vancouver from
2004 to 2006 and was a Senior Trust Analyst for Alderwoods Group, a company
engaged in funeral and mortuary services, from August 2002 to February
2003.  She also served as an Advanced Accountant for such firm from
1999 to August 2002.  From 1979 to 1998, Ms. Friend was with Telus 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 121(a) of the listing standards of the American Stock
Exchange.





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 121(a) of the listing
standards of the American Stock Exchange.





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 121(a) of the listing standards of the American Stock
Exchange.  During the year ended December 31, 2007, 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
      10.
            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 earmed in excess
of $100,000 during the two fiscal years ended December 31, 2007.




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
              2007
              
              $
              140,154
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              $
              140,154President
      and Chief
              2006
              
              $
              150,109
              
              
              
              --
              
              
              
              --
              
              
              
              340,217
              
              
              
              --
              
              
              
              490,326Executive
      Officer


(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, 2007,
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
            
            
            1,912,440
            
            
            $
            3.38
            
            Not
      ApplicableTotal
            
            
            1,912,440
            
            
            $
            3.38






As of February 15, 2008 options to
purchase 1,912,440 shares of our common stock were outstanding under our Stock
Option Program.  The exercise price of these options varies between
$3.00 and $4.60 per share.  The options expire at various dates
between April 23, 2008 and December 18, 2012.





The
following tables show, during the fiscal year ended December 31, 2007, 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
              OptionsGranted
      (#)
              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, 2007.




22




(2)
            With
      respect to options exercised during the fiscal year ended December 31,
      2007, 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:
                Exercise
                ExpirationName
                Exercisable
                Unexercisable
                Price
                DateDaniel
      O’Brien
                50,000
                
                $4.25
                07/01/0720,000
                
                3.60
                12/31/0850,000
                
                3.00
                11/26/09200,000
                
                3.25
                01/05/11300,000
                3.25
                01/05/11




Director
Compensation





We
reimburse directors for any expenses incurred in attending board
meetings.  We also compensate directors $1,000 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 2007:




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


(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.





The terms
of the options granted to our directors in 2006 are shown below.




Name
              Option
      Price
              No. of
      Options
              Expiration DateRobert
      N. O’Brien
              $3.25
              250,000
              January
      5, 2011John
      H. Bientjes
              $3.25
              5,000
              January
      5, 2011John
      H. Bientjes
              $3.60
              5,000
              December
      18, 2012Dale
      Friend
              $3.25
              5,000
              January
      5, 2011Dale
      Friend
              $3.60
              5,000
              December
      18, 2012Eric
      Hodges
              $3.25
              5,000
              January
      5, 2011Eric
      Hodges
              $3.60
              5,000
              December
      18, 2012
 Daniel B. O’Brien is not compensated
for serving as a director.




23




Item
      11.
            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
February 15, 2008 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
              4,891,900
              34.6%Dr.
      Robert N. O’Brien
                2614
      Queenswood Dr.
                Victoria,
      BC V8N 1X5
              1,970,000
              13.9%
 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
                -
                -Eric
      Hodges
                  #110
      - 4252 Commerce Circle
                  Victoria,
      BC  V8Z 4M2
                -
                -All
      officers and directors
                  as
      a group (5 persons)
                6,896,900
                48.7%





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




Name
              No.
      of Options
              Exercise
                Price
              Expiration
      DateDaniel
      O’Brien20,000
              $3.60
              December
      31, 200850,000
              $3.00
              November
      26, 2009100,000
              $3.25
              January
      5, 2011100,000
              $3.25
              January
      5, 2011Dr.
      Robert O’Brien20,000
              $3.60
              December
      31, 200825,000
              $3.00
              November
      26, 200950,000
              $3.25
              January
      5, 201150,000
              $3.25
              January
      5, 2011
  24
  John
      Bientjes5,000
              $3.60
              December
      31, 20085,000
              $3.00
              November
      26, 20095,000
              $3.25
              January
      5, 2011Dale
      Friend5,000
              $3.60
              December
      31, 20085,000
              $3.00
              November
      26, 20095,000
              $3.25
              January
      5, 2011Eric
      Hodges5,000
              $3.60
              December
      31, 20085,000
              $3.00
              November
      26, 20095,000
              $3.25
              January
      5, 2011


Item
      12.
            Certain Relationships and Related
      Transactions.




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
      13.
            Exhibits.




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 Chief 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
            Certification of Chief 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.





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, 2007 and 2006.




25


Audit
Fees




CJW was
paid $55,484 and $62,731 for the for the fiscal years ended December 31, 2007
and 2006, 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 $12,106 and $10,712 for the fiscal years ended December 31, 2007 and 2006,
respectively, for assurance and related services related to the performance of
the audit or review of our financial statements.




Tax
Fees




CJW was
paid $2,176 and $2,150 for the fiscal years ended December 31, 2007 and 2006,
respectively, for professional services rendered for the preparation and filing
of our income tax returns for the fiscal years ended December 31, 2006 and
2005.




All
Other Fees




CJW was
paid no other fees for professional services during the fiscal years ended
December 31, 2007 and 2006.




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.  Effective as of December 2002, 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.  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, 2007 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, 2007, none of the
total hours expended on our financial audit by CJW were provided by persons
other than CJW’s full-time permanent employees.




26


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:  January
      20, 2009.
              By:
              /s/ DANIEL
      B. O'BRIENName:
              Daniel
      B. O’BrienTitle:
              President
      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'BRIEN
              Daniel
      B. O’Brien
            President,
      Chief Executive Officer, Principal Financial and Accounting Officer
      and a Director
            January
      20, 2009/s/
      JOHN H. BIENTJES
              John
      H. Bientjes
            Director
            January
      20, 2009/s/
              Robert
      N. O’Brien
            Director
            January
      __, 2009/s/
      DALE FRIEND
              Dale
      Friend
            Director
            January
      20, 2009/s/
      ERIC G. HODGES
              Eric
      G. Hodges
            Director
            January
      20, 2009















27