**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**






**FORM
      10-QSB**





(Mark
                one)ý
            Quarterly
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934**For
                the quarterly period ended September 30, 2006.**o
            Transition
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934For
                the transition period fromto.Commission
                File Number 000-29649








**FLEXIBLE
                SOLUTIONS INTERNATIONAL, INC.**(Name
                of Small Business Issuer as Specified 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, Including Area Code)







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 **ý** No **o**




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes **o** No **ý**




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: The Company had 12,998,427 shares of Common
      Stock, par value $0.001 per share, outstanding as of October 23,
      2006.




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







**Index**


**FORM
      10-QSB**






Index


**PART
                    I.**
                **FINANCIAL
                    INFORMATION**Item
                    1.
                Financial
                    Statements.(a)
                UnauditedConsolidated
                    Balance Sheets at September 30, 2006
                    and December 31, 2005.
                1(b)
                Unaudited
                    Consolidated Statements of Operations for the
                    Three Months Ended
                  September
                    30, 2006 and 2005.
                2(c)
                Unaudited
                    Consolidated Statements of Operations for
                    the Nine Months Ended September 30, 2006 and 2005.
                3(d)
                Unaudited
                    Consolidated Statements of Cash Flows for the
                    Nine Months Ended September 30, 2006 and 2005.
                4(e)
                Notes
                    to Unaudited Consolidated Financial Statementsfor the Period Ended
                  September
                    30, 2006.
                5Item
                    2.
                Management’s
                    Discussion and Analysis or Plan of Operation.
                17Item
                    3.
                Controls
                    and Procedures.
                23**PART
                    II.**
                **OTHER
                    INFORMATION**Item
                    1.
                Legal
                    Proceedings.
                24Item
                    2.
                UnregisteredSales of Equity Securities and Use of Proceeds.
                25Item
                    3.
                Defaults
                    Upon Senior Securities.
                25Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders.
                25Item
                    5.
                Other
                    Information.
                25Item
                    6.
                Exhibits.
                26**SIGNATURES**
                
                27


i


**Index**


**CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




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




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




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




·
            Increased
                competitive pressures from existing competitors and new
                entrants;




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




·
            Deterioration
                in general or regional economic
                conditions;




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




·
            Loss
                of customers or sales weakness;




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




·
            The
                unavailability of funds for capital expenditures;
                and




·
            Operational
                inefficiencies in distribution or other
                systems.




For
      a
      detailed description of these and other factors that could cause actual results
      to differ materially from those expressed in any forward-looking statement,
      please see “Risk Factors” in our Annual Report on Form 10-KSB for the year ended
      December 31, 2005.














ii
 
 **Index**


**PART
      I** **FINANCIAL
      INFORMATION**




**Item
      1.**   **Financial
      Statements.**




**FLEXIBLE
      SOLUTIONS INTERNATIONAL, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**At
      September 30, 2006**


**(U.S.
      Dollars)**




**September
                30,**
              **2006**
              **(Unaudited)**
            
            **December
                31,**
              **2005****Assets****Current**Cash
                and cash equivalents
            
            $
            418,425
            
            $
            526,292Accounts
                receivable
            
            
            1,243,413
            
            
            758,463Income
                tax receivable
            
            
            -
            
            
            28,918Loan
                receivable
            
            
            36,385
            
            
            35,228Inventory
            
            
            1,958,553
            
            
            2,314,979Prepaid
                expenses
            
            
            169,628
            
            
            137,3153,826,404
            
            
            3,801,195**Property,
                equipment and leaseholds**
            
            
            4,250,682
            
            
            4,657,383**Patents**
            
            
            154,526
            
            
            143,822**Investment**
            
            
            369,000
            
            
            369,000$
            8,600,612
            
            $
            8,971,400**Liabilities****Current**Accounts
                payable and accrued liabilities
            
            $
            283,406
            
            $
            691,105283,406
            
            
            691,105**Stockholders’
                Equity****Capital
                stock**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 outstanding12,998,427
                (2005: 12,981,316) common shares
            
            
            12,998
            
            
            12,981**Capital
                in excess of par value**
            
            
            12,038,749
            
            
            11,422,219**Other
                comprehensive income**
            
            
            211,364
            
            
            153,253**Deficit**
            
            
            (3,945,905
            )
            
            (3,308,158
            )**Total
                Stockholders’ Equity**
            
            
            8,317,206
            
            
            8,280,295**Total
                Liabilities and Stockholders’ Equity**
            
            $
            8,600,612
            
            $
            8,971,400**Commitments
                and Contingencies (Notes 13 & 14)**


--
      See
      Notes to Unaudited Consolidated Financial Statements --




1
 
 **Index**


**FLEXIBLE
      SOLUTIONS INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the Three Months Ended September 30, 2006 and 2005**


**(U.S.
      Dollars -- Unaudited)**




**Three
                Months Ended September 30,****2006**
            
            **2005**
              **(Restated)**
              **See
                Note 3****Sales**
            
            $
            1,913,958
            
            $
            1,302,089**Cost
                of sales**
            
            
            1,027,274
            
            
            737,938**Gross
                profit**
            
            
            886,684
            
            
            564,151**Operating
                expenses**Wages
            
            
            253,253
            
            
            202,776Administrative
                salaries and benefits
            
            
            155,841
            
            
            56,760Advertising
                and
                promotion
            
            
            3,450
            
            
            17,246Investor
                relations and transfer agent fee
            
            
            82,676
            
            
            41,897Office
                and miscellaneous
            
            
            29,815
            
            
            57,456Insurance
            
            
            67,342
            
            
            42,087Interest
                expense
            
            
            931
            
            
            -Rent
            
            
            59,179
            
            
            64,889Consulting
            
            
            94,811
            
            
            26,069Professional
                fees
            
            
            51,564
            
            
            107,257Travel
            
            
            28,729
            
            
            26,318Telecommunications
            
            
            9,417
            
            
            9,097Shipping
            
            
            8,251
            
            
            11,272Research
            
            
            21,795
            
            
            20,843Commissions
            
            
            40,206
            
            
            24,161Bad
                debt expense (recovery)
            
            
            (234
            )
            
            -Currency
                exchange
            
            
            752
            
            
            64,653Utilities
            
            
            3,628
            
            
            3,161Depreciation
            
            
            151,849
            
            
            157,6431,063,255
            
            
            933,585**Income
                (loss) before other items and income tax**
            
            
            (176,571
            )
            
            (369,434
            )**Registration
                rights penalty**
            
            
            (326,710
            )
            
            -**Interest
                income**
            
            
            832
            
            
            528**Income
                (loss) before income tax**
            
            
            (502,449
            )
            
            (368,906
            )**Income
                tax (recovery)**
            
            
            -
            
            
            -**Net
                income (loss)**
            
            
            (502,449
            )
            
            (368,906
            )**Deficit,
                beginning**
            
            
            (3,443,456
            )
            
            (2,555,526
            )**Deficit,
                ending**
            
            $
            (3,945,905
            )
            $
            (2,924,432
            )**Net
                income (loss) per share**
            
            $
            (0.04
            )
            $
            (0.03
            )**Weighted
                average number of shares**
            
            
            12,987,799
            
            
            12,840,446




2
 
 **Index**


**FLEXIBLE
      SOLUTIONS INTERNATIONAL,
      INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the Nine Months Ended September 30, 2006 and 2005**


**(U.S.
      Dollars -- Unaudited)**




**Nine
                Months Ended September 30,****2006**
            
            **2005**
              **(Restated)**
              **See
                Note 3****Sales**
            
            $
            6,672,791
            
            $
            5,189,803**Cost
                of sales**
            
            
            3,797,649
            
            
            2,869,883**Gross
                profit**
            
            
            2,875,142
            
            
            2,319,920**Operating
                expenses**Wages
            
            
            851,744
            
            
            639,601Administrative
                salaries and benefits
            
            
            475,982
            
            
            165,836Advertising
                and
                promotion
            
            
            35,834
            
            
            61,931Investor
                relations and transfer agent fee
            
            
            146,009
            
            
            551,486Office
                and miscellaneous
            
            
            127,706
            
            
            126,987Insurance
            
            
            161,050
            
            
            104,874Interest
                expense
            
            
            1,974
            
            
            62,189Rent
            
            
            176,978
            
            
            168,560Consulting
            
            
            290,859
            
            
            117,855Professional
                fees
            
            
            212,438
            
            
            233,708Travel
            
            
            78,217
            
            
            105,185Telecommunications
            
            
            24,442
            
            
            31,987Shipping
            
            
            33,835
            
            
            34,308Research
            
            
            102,059
            
            
            39,247Commissions
            
            
            130,196
            
            
            112,159Bad
                debt expense (recovery)
            
            
            190
            
            
            -Currency
                exchange
            
            
            5,277
            
            
            57,786Utilities
            
            
            13,258
            
            
            14,662Depreciation
            
            
            447,894
            
            
            488,7293,315,942
            
            
            3,117,090**Income
                (loss) before other items and income tax**
            
            
            (440,800
            )
            
            (797,170
            )**Registration
                rights penalty**
            
            
            (326,710
            )
            
            -**Interest
                income**
            
            
            2,684
            
            
            4,145**Income
                (loss) before income tax**
            
            
            (764,826
            )
            
            (793,025
            )**Income
                tax (recovery)**
            
            
            (127,079
            )
            
            -**Net
                income (loss)**
            
            
            (637,747
            )
            
            (793,025
            )**Deficit,
                beginning**
            
            
            (3,308,158
            )
            
            (2,131,407
            )**Deficit,
                ending**
            
            $
            (3,945,905
            )
            $
            (2,924,432
            )**Net
                income (loss) per share**
            
            $
            (0.05
            )
            $
            (0.06
            )**Weighted
                average number of shares**
            
            
            12,984,028
            
            
            12,446,647


--
      See
      Notes to Unaudited Consolidated Financial Statements --




3
 
 **Index**


**FLEXIBLE
      SOLUTIONS INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the Nine Months Ended September 30, 2006 and 2005**


**(U.S.
      Dollars -- Unaudited)**




**Nine
                Months Ended September 30,****2006**
            
            **2005**
              **(Restated)**
              **See
                Note 3****Operating
                activities**Net
                income (loss)
            
            $
            (637,747
            )
            $
            (793,025
            )Stock
                compensation expense
            
            
            641,358
            
            
            527,050Depreciation
            
            
            447,894
            
            
            488,729451,505
            
            
            222,754Changes
                in non-cash working capital items:(Increase)
                Decrease in accounts receivable
            
            
            (484,950
            )
            
            (301,238
            )(Increase)
                Decrease in income taxes
            
            
            28,918
            
            
            64,044(Increase)
                Decrease in inventory
            
            
            356,426
            
            
            (755,743
            )(Increase)
                Decrease in prepaid expenses
            
            
            (32,313
            )
            
            11,713Increase
                (Decrease) in accounts payable
            
            
            (407,699
            )
            
            (44,858
            )**Cash
                provided by (used in) operating activities**
            
            
            (88,113
            )
            
            (803,328
            )**Investing
                activities**Short-term
                investments
            
            
            -
            
            
            559,440Investments
            
            
            -
            
            
            (98,000
            )Loan
                receivable
            
            
            (1,157
            )
            
            (1,157
            )Development
                of
                patents
            
            
            (10,704
            )
            
            -Acquisition
                of
                property and equipment
            
            
            (41,193
            )
            
            (130,661
            )**Cash
                provided by (used in) investing activities**
            
            
            (53,054
            )
            
            329,622**Financing
                activities**Short-term
                loan
            
            
            -
            
            
            (3,150,000
            )Proceeds
                from
                issuance of common stock
            
            
            (24,809
            )
            
            3,426,094**Cash
                provided by financing activities**
            
            
            (24,809
            )
            
            276,094Effect
                of exchange rate changes on cash
            
            
            58,109
            
            
            132,709**Inflow
                (outflow) of cash**
            
            
            (107,867
            )
            
            (64,903
            )Cash
                and cash equivalents, beginning
            
            
            526,292
            
            
            558,795**Cash
                and cash equivalents, ending**
            
            $
            418,425
            
            $
            493,892**Supplemental
                disclosure of cash flow information:**Registration
                rights penalty
            
            $
            (326,710
            )
            
            -Interest
                received
            
            $
            2,684
            
            $
            528


--
      See
      Notes to Unaudited Consolidated Financial Statements --




4
 
 **Index**


**FLEXIBLE
      SOLUTIONS INTERNATIONAL INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**For
      the Period Ended September 30, 2006**


**(U.S.
      Dollars)**




**1.**  **Basis
      of Presentation.**




These
      unaudited consolidated financial statements of Flexible Solutions International,
      Inc (the “Company”) have been prepared in accordance with accounting principles
      generally accepted in the United States for interim financial information.
      These
      financial statements are condensed and do not include all disclosures required
      for annual financial statements. The organization and business of the Company,
      accounting policies followed by the Company and other information are contained
      in the notes to the Company’s audited consolidated financial statements filed as
      part of the Company’s December 31, 2005 Annual Report on Form 10-KSB. This
      quarterly report should be read in conjunction with such annual
      report.




In
      the
      opinion of the Company’s management, these consolidated financial statements
      reflect all adjustments necessary to present fairly the Company’s consolidated
      financial position at September 30, 2006, and the consolidated results of
      operations and the consolidated statements of cash flows for the nine months
      ended September 30, 2006 and 2005. The results of operations for the nine months
      ended September 30, 2006 are not necessarily indicative of the results to be
      expected for the entire fiscal year.




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




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 the former shareholders of Flexible Ltd.
      receiving all of the shares then issued and outstanding of the Company. 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 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 its common stock.




Pursuant
      to a purchase agreement dated May 26, 2004, the Company acquired the assets
      of
      Donlar Corporation on June 9,  2004
      and
      created a new company, NanoChem Solutions Inc. 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 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.




5
 
 **Index**


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
            
            
            5,023,1956,150,000Acquisition
                costs assigned to property and equipment
            
            
            314,724Total
                assets acquired
            
            $
            6,464,724




The
      acquisition costs assigned to property and equipment are all direct costs
      incurred by the Company to purchase the 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.




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.




**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)  *Inventory
      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 net realizable value. 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.




(c)  *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




6
 **Index**




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.




(d)  *Impairment
      of Long Lived Assets* .




The
      Company assesses the recoverability of its long lived assets by determining
      whether the carrying value of the long lived assets can be recovered over their
      remaining lives through undiscounted future operating cash flows using a
      discount rate reflecting the Company’s average cost of funds. The assessment of
      the recoverability will be impacted if estimated future operating cash flows
      are
      not achieved. For the quarters ended September 30, 2006 and 2005, no impairment
      charges have been recognized.




(e)  *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)  *Foreign
      Currency* .




The
      functional currency of the Company 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 income 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 income if realized during the year
      and
      in comprehensive income if they remain unrealized at the end of the
      year.




(g)  *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.




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.







**Index**




(h)  *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.




(i)  *Stock-based
      Compensation* .




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 has adopted this statement for its first quarter starting January
      1,
      2006 and will continue to evaluate the impact of adopting this
      statement.




(j)  *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.




(k)  *Income
      (Loss) Per Share* .




Income
      (loss) per share is calculated by dividing net income (loss) by the weighted
      average number of shares outstanding. Diluted loss per share is computed by
      giving effect to all potential dilutive options that were outstanding during
      the
      year. **** For
      the
      three quarters ended September 30, 2006 and the years ended December 31, 2005,
      2004 and 2003, all outstanding options were anti-dilutive.




(l)  *Use
      of Estimates* .




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




(m)  *Financial
      Instruments* .




The
      fair
      market value of the Company’s financial instruments comprising cash and cash
      equivalents, short-term investments, accounts receivable, loan receivable,
      accounts payable and accrued liabilities and amounts due to shareholders were
      estimated to approximate their carrying values due to immediate or short-term
      maturity of these financial instruments.




The
      Company 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.





**Index**




**3.**  **Restatements
      as a Result of Correcting Inventory Levels** **.**




In
      January 2006, while preparing financials for the year ended December 31, 2005,
      the Company discovered a material inventory error in the financial statements
      filed as part of the Company’s form 10Q-SB for the quarter ended September
      30 th 2005.
      During the inventory count of September 30 th 2005 at
      the factory belonging to our NanoChem Solutions subsidiary, the inventory was
      overstated by $183,398 due entirely to a clerical error. Reliance on the
      inventory data led directly to the inaccuracies since identified in the
      Company’s financials contained in its 10Q-SB for the period ended September
      30 th 2005.




**Statement
      of operations for the nine months ended September 30, 2005
      -**




**Previously**
            
            **Increase****Reported**
            
            **(Decrease)**
            
            **Restated****Cost
                of Goods Sold**
            
            $
            2,686,485
            
            $
            183,398
            
            $
            2,869,883**Gross
                Margin**
            
            
            2,503,318
            
            
            (183,398
            )
            
            2,319,920**Net
                Income (Loss)**
            
            
            (609,627
            )
            
            (183,398
            )
            
            (793,025
            )**Earnings
                per Share**
            
            
            (0.05
            )
            
            (0.01
            )
            
            (0.06
            )**Deficit,
                beginning**
            
            $
            (2,131,407
            )
            
            -
            
            $
            (2,131,407
            )**Deficit,
                ending**
            
            
            (2,741,034
            )
            
            (183,398
            )
            
            (2,924,432
            )





**Statement
      of operations for the three months ended September 30, 2005
      -**




**Previously**
            
            **Increase****Reported**
            
            **(Decrease)**
            
            **Restated****Cost
                of Goods Sold**
            
            $
            554,540
            
            $
            183,398
            
            $
            (737,938
            )**Gross
                Margin**
            
            
            747,549
            
            
            (183,398
            )
            
            564,151**Net
                Income (Loss)**
            
            
            (185,508
            )
            
            (183,398
            )
            
            (368,906
            )**Earnings
                per Share**
            
            
            (0.01
            )
            
            (0.02
            )
            
            (0.03
            )**Deficit,
                beginning**
            
            $
            (2,555,526
            )
            $
            -
            
            $
            (2,555,526
            )**Deficit,
                ending**
            
            
            (2,741,034
            )
            
            (183,398
            )
            
            (2,924,432
            )





**Balance
      sheet as at September 30, 2005 -**





**Previously**
            
            **Increase****Reported**
            
            **(Decrease)**
            
            **Restated****Inventory**
            
            $
            2,355,729
            
            $
            (183,398
            )
            $
            2,172,331**Deficit,
                beginning**
            
            $
            (2,131,407
            )
            
            -
            
            $
            (2,131,407
            )**Deficit,
                ending**
            
            
            (2,741,034
            )
            
            (183,398
            )
            
            (2,924,432
            )




**4.**  **Loan
      Receivable** **.**




2006
            20055%
                loan receivable due on demand
            $
                36,385
            $
                35,228




**5.**  **Prepaid
      Expenses** **.**




2006
            2005Security
                deposit and prepaids
            $
                169,628
            $
                137,315







**Index**




**6.**  **Property,
      Equipment and Leaseholds** **.**




Cost
            
            Accumulated
              Amortization
            
            2006
              Net
            
            2005
              NetBuildings
            
            $
            3,144,259
            
            $
            657,543
            
            $
            2,486,716
            
            $
            2,688,341Computer
                hardware
            
            
            58,407
            
            
            32,587
            
            
            25,820
            
            
            29,962Furniture
                and fixtures
            
            
            18,383
            
            
            8,287
            
            
            10,096
            
            
            10,965Office
                equipment
            
            
            30,398
            
            
            17,221
            
            
            13,177
            
            
            15,081Manufacturing
                equipment
            
            
            2,224,122
            
            
            927,752
            
            
            1,296,370
            
            
            1,488,208Trailer
            
            
            2,080
            
            
            1,409
            
            
            671
            
            
            831Leasehold
                improvements
            
            
            41,295
            
            
            25,242
            
            
            16,053
            
            
            21,362Trade
                show booth
            
            
            7,792
            
            
            4,199
            
            
            3,593
            
            
            4,447Land
            
            
            398,186
            
            
            -
            
            
            398,186
            
            
            398,186$
            5,924,922
            
            $
            1,674,240
            
            $
            4,250,682
            
            $
            4,657,383





**7.**  **Patents**




In
      fiscal
      2005, the Company started the patent process for additional WATER$AVR® products.
      The amounts recorded represent the fees paid to date. As the patent process
      is
      not yet completed, amortization has not yet been recognized. Patents are
      amortized over their useful lives once granted .





2006
            
            2005Patents
            
            $
            154,526
            
            
            143,822




**8.**  **Investment** **.**




2006
            
            2005Tatko
                Inc.
            
            $
            271,000
            
            $
            271,000Air
                Water Interface Delivery & Detection Inc.
            
            $
            98,000
            
            
            98,000$
            369,000
            
            $
            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 our 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 original fair market value of our common stock on May 31, 2003. See
      Contingencies (Note 14).




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.




**9.**  **Stock
      Options** **.**




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




The
      following table summarizes stock option activity for the years ended December
      31, 2005 and 2004 and for the nine months ended September 30, 2006:







**Index**




Number
                  of shares
              
              Exercise
                  price
                per
                  share
              
              Weighted
                  average exercise priceBalance,
                  December 31, 2003
              
              
              1,711,000
              
              $1.00
                  - $4.25
              
              $
              2.84Granted
              
              
              572,740
              
              $3.00
                  - $4.60
              
              $
              3.46Exercised
              
              
              (37,000
              )
              $1.00
                  - $2.50
              
              $
              1.55Expired
              
              
              (5,000
              )
              $4.25
              
              $
              4.25Cancelled
              
              
              (1,000,000
              )
              $1.50
                  - $3.50
              
              $
              2.50Balance,
                  December 31, 2004
              
              
              1,241,740
              
              $1.00
                  - $4.60
              
              $
              2.87Granted
              
              
              30,000
              
              $3.58
                  - $4.40
              
              $
              4.17Exercised
              
              
              (162,000
              )
              $1.40
              
              $
              1.40Expired
              
              
              (49,000
              )
              $3.00
                  - $4.25
              
              $
              3.52Balance,
                  December 31, 2005
              
              
              1,060,740
              
              $1.00
                  - $4.55
              
              $
              3.44Granted
              
              
              1,115,000
              
              $3.25
                  - $3.50
              
              $
              3.25Cancelled
              
              
              (65,889
              )
              $1.20
                  - $4.25
              
              $
              2.66Exercised
              
              
              (17,111
              )
              $1.40
              
              $
              1.40Balance,
                  September 30, 2006
              
              
              2,092,740
              
              $1.00
                  - 4.55
              
              $
              3.37




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




2005
            2004
            2003Expected
                life - years
            5.0
            5.0
            5.0Interest
                rate
            3.65%
            3.5%
            2.87%Volatility
            52.0%
            49.0%
            49.0%Dividend
                yield
            -
                %
            -
                %
            -
                %







During
      the nine months ended September 30, 2006, the Company granted 440,000 options
      to
      purchase common stock to outsiders and has applied FAS No. 123(R) using the
      Black-Scholes option-pricing model, which resulted in additional expenses of
      $104,451 this quarter (recorded as consulting and investor relations expense),
      for a total of $263,494 recognized year to date. During the period ended March
      31, 2006, the Company granted 675,000 options to employees, resulting in an
      additional $125,955 in wages and administrative expenses in each quarter ended
      March 31, 2006, June 30, 2006 and September 30, 2006. During the year ended
      December 31, 2005, the Company granted 30,000 (2004 - 275,400) stock options
      to
      consultants and has applied FAS No. 123 using the Black-Scholes option-pricing
      model, which resulted in additional expenses of $9,350 (2004 - $299,345). During
      the year ended December 31, 2005, the Company recognized $93,600 in expenses
      for
      90,000 options granted in the year ended December 31, 2004, but which vested
      in
      the year ended December 31, 2005. During the year ended December 31, 2005,
      250,000 options, which were granted in 2004, vested according to the fulfillment
      of certain milestones, which resulted in additional expenses of $422,500.




**10.**  **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.




**Index**


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.




The
      following table summarizes the Company’s warrant option activity for the year
      ended December 31, 2005 (no prior or subsequent activity):




Number
                of shares
            
            Exercise
                price
              per
                share
            
            Weighted
                average exercise priceBalance,
                December 31, 2004
            —
            
            —
            
            —Granted
            
            987,400
            
            $4.50
            
            $4.50Exercised
            
            —
            
            —
            
            —Cancelled
            
            —
            
            —
            
            —Balance,
                December 31, 2005
            
            987,400
            
            $4.50
            
            $4.50







**11.**   **Capital
      Stock** **.**




During
      the quarter ended September 30, 2006, the Company amended a stock option
      contract issued in 2001. The Company initially issued 20,000 common stock
      options with an exercise price of $1.40 to a consultant in exchange for
      services, which resulted in a consulting expense of $19,840 in the 2001
      financial statements. On September 23, 2006, the Company amended these stock
      options and instead issued 11,111 common shares to the consultant for past
      services rendered and no other consideration was received. The market value
      of
      the common shares issued was calculated using the then-current trading price
      of
      $3.22 per share and totals $35,777. A consulting expense of $15,937, which
      represents the difference between the market value of the shares issued and
      the
      expense recognized in 2001, was recognized in the financial
      statements.




During
      the quarter ended June 30, 2006, the Company issued 6,000 shares of common
      stock
      at $1.40 per share upon exercise of stock options.




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.




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.




The
      purpose of these transactions was to provide sufficient working capital for
      the
      Company to retire the debt remaining from its acquisition of certain assets
      from
      Donlar Corporation in June 2004. Costs associated with these two capital raises,
      including the registration rights penalty payment of $326,710, were $847,110,
      making the net proceeds $2,855,640.




During
      the year ended December 31, 2005 the Company issued 162,000 shares of common
      stock at $1.40 per share upon exercise of stock options.




**Index**


**12.**  **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 storing evaporation from
      the pool surface, and (ii) food-safe powdered form of the active ingredient
      within the liquid blanket 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).
      Chemical additives are manufactured for use in laundry and dish detergents,
      as
      well as in products to reduce levels of insecticides, herbicides and
      fungicides.




The
      accounting policies of the segments are the same as those described in Note
      2 to
      these 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.




13
 
 **Index**







Nine
                Months Ended September 30th2006
            
            2005RevenueEWCP
            
            $
            1,226,550
            
            $
            862,537BPCA
            
            
            5,446,241
            
            
            4,327,266Consolidated
            
            
            6,672,791
            
            
            5,189,803Interest
                revenueEWCP
            
            
            2,684
            
            
            4,088BPCA
            
            
            0
            
            
            57Consolidated
            
            
            2,684
            
            
            4,145Interest
                expenseEWCP
            
            
            301
            
            
            6,611BPCA
            
            
            1,673
            
            
            55,578Consolidated
            
            
            1,974
            
            
            62,189Depreciation
                and amortizationEWCP
            
            
            42,792
            
            
            42,452BPCA
            
            
            405,102
            
            
            446,277Consolidated
            
            
            447,894
            
            
            488,729Segment
                profit (loss) prior to other itemsEWCP
            
            
            (1,084,519
            )
            
            (1,417,298
            )BPCA
            
            
            643,719
            
            
            620,128Consolidated
            
            
            (440,800
            )
            
            (797,170
            )Segment
                assetsEWCP
            
            
            374,305
            
            
            311,577BPCA
            
            
            4,030,903
            
            
            4,580,700Consolidated
            
            
            4,405,208
            
            
            4,892,277Expenditures
                for segment assetsEWCP
            
            
            12,270
            
            
            118,245BPCA
            
            
            28,923
            
            
            12,416Consolidated
            
            
            41,193
            
            
            130,661


The
      EWCP
      shows a reduction in expenditures for segment assets due to a credit being
      issued on costs associated with development of new patents.







**Index**




The
      sales
      generated in the United States of America and Canada is as follows:




2006
            
            2005Canada
            
            $
            199,312
            
            $
            154,063United
                States and abroad
            
            
            6,473,479
            
            
            5,035,740Total
            
            $
            6,672,791
            
            $
            5,189,803







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




2006
            
            2005Canada
            
            $
            369,086
            
            $
            311,576United
                States
            
            
            4,036,122
            
            
            4,580,701Total
            
            $
            4,405,208
            
            $
            4,892,277


**13.**  **Commitments.**




The
      Company is committed to minimum rental payments for property and premises
      aggregating approximately $468,757 over the term of four leases, the last
      expiring on September 30, 2009.




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




2006
            
            $
            69,1082007
            
            
            147,9482008
            
            
            150,2172009
            
            
            101,484







**14.**  **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.




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. The plaintiff seeks monetary damages in excess of $1,020,000
      for the breach of contract and tortious interference claims and unspecified
      compensatory and punitive damages in the wrongful discharge claims. The parties
      completed mandatory mediation ordered by the Circuit Court and will next appear
      in court for case management, at which time the court will set discovery
      deadlines. The Company considers the case without merit and is vigorously
      disputing the claims. In addition, the Company intends to file counterclaims
      against the plaintiff for failure to repay financial obligations owed to the
      Company of almost $40,000, as well as unspecified damages arising out of the
      plaintiff’s disclosure of confidential information to a client during his
      employment at WGS. No amounts have been recorded as receivable and no accrual
      has been made for any loss in the Company’s consolidated financial statements as
      the outcome of the claim filed by the plaintiff is not determinable




**Index**


On
      May
      28, 2004, Sun Solar Energy Technologies, Inc. (“Sun Solar”), filed a lawsuit in
      the Federal Court of Canada, against the Company, Flexible Solutions Ltd.,
      and
      Mr. O’Brien. Sun Solar is seeking: (a) a declaration that the trademark
“Tropical Fish” is available for use by Sun Solar; (b) injunctive relief against
      further use of the “Tropical Fish” trademark by the Company; and (c) monetary
      damages exceeding $7,000,000 for the alleged infringement by the Company,
      Flexible Ltd. and Mr. O’Brien of the “Tropical Fish” trademark, as well as any
      other “confusingly similar trademarks” or proprietary trade dresses. On August
      9, 2004, the Company, Flexible Solutions Ltd. and Mr. O’Brien filed their
      defense and filed a counterclaim against Sun Solar. The counterclaim seeks:
      (x)
      injunctive relief against further use of the “Tropical Fish” trademark by Sun
      Solar; (y) a declaration that the “Tropical Fish” trademark is owned by the
      Company, or, in the alternative, is not distinctive and should be struck from
      the trademark registry; and (z) monetary damages exceeding $50,000. The parties
      have completed documentary discovery and examinations for discovery of all
      parties. No amounts have been recorded as receivable in the Company’s
      consolidated financial statements and no amounts have been accrued as potential
      losses as the outcome of this claim is not determinable.




On
      July
      23, 2004, the Company filed a breach of contract suit in the Circuit Court
      of
      Cook County, Illinois against Tatko. The action arises out of a joint product
      development agreement entered into between the Company and Tatko in which the
      Company agreed to invest $10,000 toward the product development venture and
      granted to Tatko 100,000 shares of the Company’s restricted common stock. In
      return, Tatko granted the Company a five-year option to purchase 20% of Tatko’s
      outstanding capital stock. Tatko has since refused to collaborate on the
      agreement and the Company seeks declaratory relief stating that Tatko is not
      entitled to the 100,000 shares of the Company’s restricted common stock. The
      litigation is still pending at this time.




In
      addition, Tatko filed its own suit on September 24, 2004 in the Circuit Court
      of
      Cook County, Illinois seeking declaratory relief of its entitlement to the
      Company’s restricted common stock. On May 23, 2005, the Tatko suit was dismissed
      with prejudice by the Circuit Court. No amounts have been recorded as receivable
      in the Company’s consolidated financial statements and no amount has been
      accrued as a loss as the outcome of the claim against Tatko is not
      determinable.




On
      January 12, 2005, the Company filed a lawsuit in the Court of the Queen’s Bench
      of Alberta, in which our subsidiary, Flexible Solutions Ltd., is
      inter-provincially registered. The Company was seeking indeterminate damages
      resulting from a breach of contract by Calgary Diecast Corporation (“CDC”). The
      contract at issue was never completed and raw materials belonging to the Company
      remain in the possession of CDC. On April 25, 2005, the court ordered a judgment
      in favor of the Company in the amount of $47,495 and the intention is to collect
      on this judgment using all available means.




**15.**  **Comparative
      Figures** **.**




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




16
 
 **Index**


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




**Overview**




Flexible
      Solutions International, Inc. (“we,” “us,” and “our”) develops, manufactures and
      markets specialty chemicals that slow the evaporation of water. Our initial
      product, HEAT$AVR®, is marketed for use in swimming pools and spas where its
      use, by slowing the evaporation of water, allows the water to retain a higher
      temperature for a longer period of time and thereby reduces the energy required
      to maintain the desired temperature of the water in the pool. Our newest
      product, WATER$AVR®, is marketed for water conservation in irrigation canals,
      aquaculture, and reservoirs where its use slows water loss due to evaporation.
      We also make and sell dispensers which automate the deployment of our chemical
      products.




**Results
      of Operations**




The
      following analysis and discussion pertains to our results of operations for
      the
      three and nine month periods ended September 30, 2006, as compared to the
      results of operations for the three and nine month periods ended September
      30,
      2005, and to changes in our financial condition from December 31, 2005 to
      September 30, 2006.






**Nine
      Months Ended September 30, 2006, 2005 and 2004**




Separate
      financial data for each of our operating segments is provided below. We evaluate
      the performance of our operating segments based on the following:




Nine
                  Months Ended September 30,
              %
                  Change
              %
                  ChangeSales
              2006
              
              2005
              
              2004
              
              2006-2005
              
              2005-2004Energy
                  Segment
              $
              1,226,550
              
              $
              862,537
              
              $
              900,789
              
              42%
              
              (4%
              )Polymer
                  Segment
              $
              5,446,241
              
              
              4,327,266
              
              
              1,511,136
              *
              26%
              
              186%
              *Consolidated
              $
              6,672,791
              
              $
              5,189,803
              
              $
              2,411,925
              
              29%
              
              115%Gross
                  ProfitEnergy
                  Segment
              $
              632,562
              
              $
              393,344
              
              $
              458,152
              
              61%
              
              (14%
              )Polymer
                  Segment
              $
              2,242,580
              
              
              1,926,576
              
              
              1,124,459
              *
              16%
              
              71%
              *Consolidated
              $
              2,875,142
              
              $
              2,319,920
              
              $
              1,582,611
              
              24%
              
              47%SG&AEnergy
                  Segment
              $
              1,717,081
              
              $
              1,810,643
              
              $
              1,470,207
              
              (5%
              )
              23%Polymer
                  Segment
              $
              1,598,861
              
              
              1,306,447
              
              
              878,107
              *
              22%
              
              49%
              *Consolidated
              $
              3,315,942
              
              $
              3,117,090
              
              $
              2,348,314
              
              6%
              
              33%Net
                  Income (Loss) before other items
              $
              (440,800
              )
              $
              (797,170
              )
              $
              (765,703
              )*
              45%
              
              (4%
              )*Interest
                  IncomeEnergy
                  Segment
              $
              2,684
              
              $
              4,088
              
              $
              33,463
              
              (34%
              )
              (88%
              )Polymer
                  Segment
              $
              -
              
              
              57
              
              
              -
              *
              -
              
              -
              *Consolidated
              $
              2,684
              
              $
              4,145
              
              $
              33,463
              *
              (35%
              )
              (88%
              )*Registration
                  rights penalty
              $
              (326,710
              )
              
              -
              
              
              -
              
              -
              
              -Net
                  Income (Loss) after other items
              $
              (764,826
              )
              $
              (793,025
              )
              $
              (732,240
              )*
              4%
              
              (8%
              )*




*
      Full
      nine months of Polymer segment data is not available as indicated. Our polymer
      segment was formed after the acquisition of certain assets of the Donlar
      Corporation in June 2004.




**Index**


For
      the
      nine months ended September 30, 2006 we had a net loss before other items of
      $440,800 as compared to a net loss before other items of $797,170 for the nine
      months ended September 30, 2005. Due to a contractual agreement from the equity
      raise in the spring of 2005, we recorded $326,710 as a registration rights
      penalty in the nine months ended September 30, 2006, increasing our loss. After
      all other items, our GAAP net loss for the nine months ended September 30,
      2006
      was $637,747 as compared to a net loss after other items of $793,025 for the
      nine months ended September 30, 2005. The $326,710 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 an other
      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.




Increased
      brand recognition, increased sales of our residential swimming pool product,
      ECO$AVR®, and increased sales from our NanoChem division resulted in sales of
      $6,672,791 in the nine months ended September 30, 2006, as compared to
      $5,189,803 in the nine months ended September 30, 2005. Our Energy segment
      had
      sales of $1,226,550 for nine months ended September 30, 2006, as compared to
      $862,537 for the nine months ended September 30, 2005, an increase of 42%.
      Our
      Polymer segment had sales of $5,446,241 for the nine months ended September
      30,
      2006, as compared to sales of $4,327,266 for the nine months ended September
      30,
      2005, an increase of 26%.




Our
      management is satisfied with the effect of the acquisition of assets from Donlar
      Corporation (“Donlar”), as the NanoChem division (which is comprised of the
      former Donlar assets) has contributed greatly to sales and cash flow and is
      starting to replace the capital expended to acquire the assets. In addition,
      opportunities to synergistically cross-sell all of our divisions’ products have
      already generated leads to new business and the swimming pool division has
      discovered ways to help NanoChem increase utilization of its Peru, Illinois
      factory, while decreasing our costs as a whole. We maintained expenditures
      in
      the areas of WATER$AVR® product sales and marketing costs and production
      equipment development costs. The major factors that contributed to our increased
      revenue were greater sales from our HEAT$AVR® and ECO$AVR® swimming pool
      division and an increase in sales from our newly-formed NanoChem division.
      NanoChem sales are much less seasonal than those of our WATER$AVR® product and
      HEAT$AVR® and ECO$AVR® products divisions. As NanoChem sales increase, we
      anticipate that we will experience a reduction in the volatility of our sales
      over time.




Gross
      profit margin represents sales less cost of sales and producing. The major
      categories of costs included in cost of sales and producing are cost of goods,
      distribution costs, and costs of our buying department. Distribution costs
      consist of all warehouse receiving and inspection costs, warehousing costs,
      all
      transportation costs associated with shipping goods from our facilities to
      our
      customers, and other costs of distribution. We do not exclude any portion of
      distribution costs from cost of sales. Our gross margins may not be comparable
      to those of other entities because some entities include all of the costs
      related to their overhead in cost of sales. However, we exclude a portion of
      cost of sales from gross profit and instead include such costs as a line item
      in
      operating expenses.




Our
      operating expenses were $3,315,942 for the nine months ended September 30,
      2006
      as compared to $3,117,090 for the nine months ended September 30, 2005. As
      sales
      increased 29%, a modest increase in operating expenses of 6% is reasonable.
      Our
      largest increases were in research and development ($102,059 for the nine months
      ended September 30, 2006, as compared to $39,247 for the nine months ended
      September 30, 2005) and insurance ($161,050 for the nine months ended September
      30, 2006 as compared to $104,874 for the nine months ended September 30, 2005).
      The insurance increase was unavoidable and is comparable to what others are
      experiencing in the industry. Our increase in research is a result of more
      money
      being spent to better compete in the market with new or improved products.
      Consulting expenses increased ($290,859 for the nine months ended September
      30,
      2006, as




**Index**


compared
      to $117,855 for the nine months ended September 30, 2005) as a direct result
      of
      recognizing $188,890 for the nine months ended September 30, 2006 (2005 -
      $54,600) for stock options granted to consultants. The increase in wages and
      administrative salaries are in part due to the application of SFAS 123 (R)
      that
      now requires companies to apply a fair value based measurement method to
      employee stock options. After applying SFAS 123(R) to employee granted stock
      options, the company recognized an additional $277,864 in expenses for the
      nine
      months ended September 30, 2006. Our decreases in advertising ($35,834 for
      the
      nine months ended September 30, 2006, as compared to $61,931 for the nine months
      ended September 30, 2005), travel ($78,217 for the nine months ended September
      30, 2006 as compared to $105,185 for the nine months ended September 30, 2005)
      and telecommunications ($24,442 for the nine months ended September 30, 2006
      as
      compared to $31,987 for the nine months ended September 30, 2005) are the result
      of better cost-control in these areas instituted by management over the past
      year. The decrease in interest expense ($1,974 for the nine months ended
      September 30, 2006, as compared to $62,189 in the nine months ended September
      30, 2005) is a direct result of the Company paying off the short-term loan
      used
      for the purchase of assets to create the NanoChem division. The decrease in
      investor relations ($146,009 in the nine months ended September 30, 2006 as
      compared to $551,486 for the nine months ended September 30, 2005) is a direct
      result of large stock option expense in relation to our 2005 equity raise.
      During the nine months ended September 30, 2006, the company recognized $74,604
      (2005 - $463,100) for stock options granted in relation to investor
      relations.




Our
      Energy segment generated $1,717,081 in operating expenses in the nine months
      ended September 30, 2006, a decrease from $1,810,643 from the nine months ended
      September 30, 2005. This five percent decrease is partially attributable to
      the
      stock options that vested in our quarter ended June 30, 2005 but is not wholly
      transparent due to the application of SFAS 123(R) which started in January
      2006.
      Our Polymer segment generated $1,598,861 in operating expenses in the nine
      months ended September 30, 2006, an increase from $1,306,447 for the nine months
      ended September 30, 2005. This twenty two percent increase is attributable
      to
      the twenty six percent increase in sales as well as the application of SFAS
      123(R).




Our
      net
      loss before other items for the nine months ended September 30, 2006 was
      $440,800, a decrease from our net loss of $797,170 in the nine months ended
      September 30, 2005. The decrease in net loss is attributable to increased sales
      in all divisions, as compared to the nine months ended September 30, 2005,
      augmented by positive operating cash from our NanoChem division. Our Energy
      segment’s net loss before other items for the nine months ended September 30,
      2006 was $1,084,519, a decrease from our net loss of $1,417,298 in the nine
      months ended September 30, 2005, which is attributable to our increased brand
      recognition and sales. Our Polymer segment’s net profit for the nine months
      ended September 30, 2006 was $643,719, a modest increase over the net profit
      of
      $620,128 for the nine months ended September 30, 2005. This increase is not
      as
      high as could be expected for the 22 % increase of sales and is attributable
      to
      higher cost of goods sold, a result of the rise in oil prices worldwide, as
      well
      as the application of SFAS 123 (R).




Our
      net
      loss after other items and income tax is $637,747 for the nine months ended
      September 30, 2006 as compared to a net loss of $793,025 for the nine months
      ended September 30, 2005. The $326,710 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 an other 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.







**Index**




Our
      loss
      per share was $0.05 for the nine months ended September 30, 2006, as compared
      to
      a loss of $0.06 per share for the nine months ended September 30, 2005. Our
      loss
      per share prior to the registration rights penalty would have been
      $0.02.




**Three
      Months Ended September 30, 2006 and 2005**




For
      the
      three months ended September 30, 2006, we experienced a net loss before other
      items of $176,571, as compared to a net loss before other items of $369,434
      for
      the three months ended September 30, 2005. Due to a contractual agreement from
      the equity raise in the spring of 2005, we recorded $326,710 as a registration
      rights penalty in the three months ended September 30, 2006, increasing our
      loss. After all other items, our GAAP net loss for the three months ended
      September 30, 2006 was $502,449 as compared to a loss of $368,309 for the three
      months ended September 30, 2005. The $326,710 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 an other 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.




Increased
      brand recognition, increased sales of our residential swimming pool product,
      ECO$AVR®, and increased sales from our NanoChem division resulted in sales of
      $1,913,958 in the three months ended September 30, 2006, as compared to
      $1,302,089 in the three months ended September 30, 2005. Our Energy segment
      had
      sales of $229,431 for the three months ended September 30, 2006, as compared
      to
      $96,916 for the three months ended September 30, 2005, an increase of 137%.
      Our
      Polymer segment had sales of $1,684,527 for the three months ended September
      30,
      2006, as compared to sales of $1,205,173 for the three months ended September
      30, 2005, an increase of 40%.




Gross
      profit margin represents sales less cost of sales and producing. The major
      categories of costs included in cost of sales and producing are cost of goods,
      distribution costs, and costs of our buying department. Distribution costs
      consist of all warehouse receiving and inspection costs, warehousing costs,
      all
      transportation costs associated with shipping goods from our facilities to
      our
      customers, and other costs of distribution. We do not exclude any portion of
      distribution costs from cost of sales. Our gross margins may not be comparable
      to those of other entities because some entities include all of the costs
      related to their overhead in cost of sales. However, we exclude a portion of
      cost of sales from gross profit and instead include such costs as a line item
      in
      operating expenses.




Our
      operating expenses were $1,063,255 for the three months ended September 30,
      2006, a modest increase of $129,670 over the three months ended September 30,
      2005 considering the 47 % increase in sales. We continued our sales and
      marketing efforts for our WATER$AVR® product line, with the objective of closing
      major sales as soon as possible. The largest increases in operating expenses
      were in the areas of wages ($253,253 for the three months ended September 30,
      2006, as compared to $202,776 in the three months ended September 30, 2005),
      administrative salaries ($155,841 for the three months ended September 30,
      2006,
      as compared to $56,760 in the three months ended September 30, 2005), and
      investor relations ($82,676 for the three months ended September 30, 2006 as
      compared to $41,897 for the three months ended September 30, 2005). The increase
      in wages and administrative salaries are in part due to the application of
      SFAS
      123 (R) that now requires companies to apply a fair value based measurement
      method to employee stock options. After applying SFAS 123(R) to employee granted
      stock options, the company recognized an additional $125,955 in expenses this
      quarter. These increases are also partially accounted for by the increase in
      sales and represent a permanent increase in operating costs related to the
      new
      level of sales. The increase in consulting ($94,811 for the three months ended
      September 30, 2006 as compared to $26,069 for the three months ended September
      30, 2005) are a direct result of stock option expenses. The Company recognized
      $61,152 in stock option expenses related




**Index**


to
      consulting in the three months ended September 30, 2006 (2005 - $18,200). Our
      decreases in advertising ($3,450 for the three months ended September 30, 2006,
      as compared to $17,246 in the three months ended September 30, 2005) and office
      and miscellaneous ($29,815 for the three months ended September 30, 2006 as
      compared to $57,456 for the three months ended September 30, 2005) are the
      result of better cost-control in these areas instituted by management over
      the
      past year.




Our
      Energy segment generated $584,287 in operating expenses in the three months
      ended September 30, 2006, an increase from $516,723 for the three months ended
      September 30, 2005. This 13% increase is attributable to our increase of sales
      as well as the application of SFAS 123(R). Our Polymer segment generated
      $478,967 in operating expenses in the three months ended September 30, 2006,
      an
      increase of $62,103. This 15% increase is wholly attributable to the 40% percent
      increase in sales as well as the application of SFAS 123(R).




Our
      net
      loss before other items for the three months ended September 30, 2006 was
      $176,571, a decrease from our net loss before other items of $369,434 in the
      three months ended September 30, 2005. The decrease in net loss before other
      items is attributable to increased sales in all divisions, as compared to the
      three months ended September 30, 2005, augmented by positive operating cash
      from
      our NanoChem division. Our Energy segment’s net loss before other items for the
      three months ended September 30, 2006 was $494,698, an increase from our net
      loss of $433,933 in the three months ended September 30, 2005, which is
      attributable to the application of SFAS 123(R). Our Polymer segment’s net profit
      before other items for the three months ended September 30, 2006 was $318,127,
      an increase over the net profit before other items of $64,499 for the three
      months ended September 30, 2005. This 393% increase in profits is attributable
      to the 40% increase in sales, allowing the division to better obtain economies
      of scale.




Our
      net
      loss after other items is $502,449 for the three months ended September 30,
      2006
      as compared to a net loss after other items of $368,309 for the three months
      ended September 30, 2005. The $326,710 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 an other 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.




Our
      loss
      per share was $0.04 for the three months ended September 30, 2006, as compared
      to a loss of $0.03 per share for the three months ended September 30, 2005.
      Our
      loss per share prior to the registration rights penalty would have been
      $0.01.




**Liquidity
      and Capital Resources**




The
      following section discusses the effects of changes in our balance sheet and
      cash
      flow on our liquidity and capital resources. The following table summarizes
      our
      cash, cash equivalents and working capital that directly have an impact on
      our
      immediate and future cash needs and sources.


September
                  30, 2006
              
              December
                  31, 2005
              
              Increase
                  (Decrease)Cash
                  and cash equivalents
              $418,425
              
              $526,292
              
              $(107,867)Working
                  capital
              3,542,998
              
              3,110,090
              
              432,908




**Index**


We
      have
      cash on hand of $418,425 as of September 30, 2006, as compared to cash on hand
      of $526,292 at December 31, 2005. The overall decrease in cash and cash
      equivalents is a result of the increase in working capital.




As
      of
      September 30, 2006, we had working capital of $3,542,998, as compared to working
      capital of $3,101,090 on December 31, 2005. The increase in working capital
      is
      the result of sales revenue exceeding cash costs of producing the
      revenue.




We
      expect
      that cash provided by operating activities may fluctuate in future periods
      as a
      result of a number of factors, including the fluctuations in our operating
      results, shipments, accounts receivable collections, and inventory management.
      As our sales continue to build, our accounts receivable will increase and our
      overall inventory levels will also increase.




Because
      we repaid the short-term loan due in June 2005 (incurred in connection with
      our
      purchase of the Donlar assets, used to create the NanoChem division), we have
      no
      other commitments or guarantees in the next 12 months that will materially
      affect our cash position or needs. We believe we have sufficient capital to
      support our business and operations for at least the next 12 months. We
      anticipate utilizing approximately $500,000 in the next twelve months attempting
      to close sales in California, Spain and Australia and to extend certain core
      U.S. patents to select other countries. Approximately 80% of these expenditures
      will be related to expanding sales for our WATER$AVR® product.




There
      can
      be no assurance that any of the expenditures will result in additional sales.
      In
      the event that our capital resources are not sufficient for the continued
      expansion of the Company, new capital will be needed or marketing expenses
      will
      have to be curtailed until capital is available. There is no guarantee that
      capital will be available on terms acceptable to the Company or at all. We
      have
      no investment banking agreements in place at this time.




**Subsequent
      Events**




There
      were no subsequent events.




**Restatement
      of Financial Statements**




In
      January 2006, while preparing financials for the year ended December 31, 2005,
      the Company discovered a material inventory error in the financial statements
      filed as part of the Company’s form 10Q-SB for the quarter ended September
      30 th 2005.
      During the inventory count of September 30 th 2005 at
      the factory belonging to our NanoChem Solutions subsidiary, the inventory was
      overstated by $183,398 due entirely to a clerical error. Reliance on the
      inventory data led directly to the inaccuracies since identified in the
      Company’s financials contained in its 10Q-SB for the period ended September
      30 th 2005.






In
      light
      of the above, the net effect of the adjustments to the financials statements
      is
      as follows:






1.
            $183,398
                decrease in Inventory at September 30,
                2005.




2.
            $183,398
                increase in Cost of Goods Sold for the three months ended September
                30,
                2005.







We
      are
      presently unaware of any evidence that the restatements described above are
      due
      to any material noncompliance by us, as a result of misconduct, with any
      financial reporting requirement under the federal securities laws. Our audit
      committee of the board of directors is working with our management and our
      accountants to assure that we are taking the appropriate approach to resolving
      the




**Index**


issues
      related to the restatements, as well as any further issues that may be
      identified during the course of review.




**Item
      3.****Controls
      and Procedures.**




*Disclosure
      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 Securities
      and Exchange Commission (“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 Quarterly Report, 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.




The
      prior
      accounting treatment of our stock-based compensation expense was done in
      consultation and in accordance with the advice of our independent accountants.
      Accordingly, management does not believe that this restatement of our Quarterly
      Report indicates or results from a material weakness with respect to our
      disclosure controls and procedures or our internal controls over financial
      reporting.




*Changes
      in Internal Control Over Financial Reporting*




During
      the first quarter of 2006, upon recommendation of our audit committee, we
      implemented a new internal control protocol related to inventory
      counts.




As
      part
      of our internal control protocols our senior management selects for review
      in
      the next reporting period various numerical data from the previous period.
      During the compilation of data to be used in the financial statements contained
      in the our Annual Report for the year ended December 31, 2005, senior management
      discovered that the number assigned to inventory for the quarter ended September
      30, 2005 appeared to be suspect and immediately investigated the issue. Within
      fifteen days of senior management's review, a mis-transcription in the inventory
      number was identified and corrected.




Our
      investigation revealed that, due to a clerical error in transferring the
      inventory floor count to computerized spreadsheets, certain inventory data
      was
      misreported. After correction and disclosure, management referred this matter
      to
      the audit committee of our board of directors for review, and determination
      as
      to whether a change to our inventory control protocol was necessary or
      advisable. On January 25, 2006, the audit committee of the board of directors
      recommended a change to our internal controls related to inventory counts,
      which
      now requires that quarterly and annual inventory counts be conducted by plant
      managers, accompanied by either an equal or more senior level executive from
      a
      division reporting directly to our head office, or by an independent accountant
      reporting in the same manner. This change was implemented and made effective
      during the first quarter of 2006.




Although
      we modified our internal control procedures related to inventory matters in
      the
      first quarter of 2006, management, our board of directors, including its audit
      committee, and our independent




**Index**


auditor
      each concluded that no change in the assessment of the effectiveness of our
      internal controls was necessary based on an isolated event of human error.
      We
      believe that such errors are uncommon and that it is not possible to design
      a
      system of internal controls that absolutely prevents against human error.
      Nonetheless, we have implemented the protocol changes described above in an
      effort to further bolster the accuracy of our inventory data
      compilation.




**PART
      II**  **OTHER
      INFORMATION**




**Item
      1.**   **Legal
      Proceedings.**




On
      November 13, 2003, Patrick Grant, an ex-employee, filed a lawsuit in the Circuit
      Court of Cook County, Illinois against us, WaterSavr Global Solutions Inc.
      (“WGS”), our wholly-owned subsidiary, and Daniel B. O’Brien, our Chief Executive
      Officer. The plaintiff claims damages for breach of contract, tortious
      interference with an agreement and various wrongful discharge claims. The
      plaintiff seeks monetary damages in excess of $1,020,000 for the breach of
      contract and tortious interference claims and unspecified compensatory and
      punitive damages in the wrongful discharge claims. The parties completed
      mandatory mediation ordered by the Circuit Court and will next appear in court
      for case management, at which time the court will set discovery deadlines.
      We
      consider the case to be without merit, deny the plaintiffs claims and intend
      to
      file counterclaims against the plaintiff for failure to repay financial
      obligations owed to us of almost $40,000, as well as unspecified damages arising
      out of the plaintiff’s disclosure of confidential information to a client during
      his employment at WGS. No amounts have been recorded as receivable and no
      accrual has been made for any loss in our consolidated financial statements
      as
      the outcome of the claim filed by the plaintiff is not
      determinable.




On
      May 1,
      2003, we 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 our 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 we seek the return of such shares after defendants’ failure to
      both return the shares voluntarily and repay the note. On May 7, 2003, we
      obtained an injunction freezing the transfer of the shares. On May 24, 2004,
      there was a hearing on defendants’ 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 our consolidated financial statements as the outcome of this claim is not
      determinable.




On
      May
      28, 2004, Sun Solar Energy Technologies, Inc. (“Sun Solar”), filed a lawsuit in
      the Federal Court of Canada, against us, Flexible Ltd., and Mr. O’Brien. Sun
      Solar is seeking: (a) a declaration that the trademark “Tropical Fish” is
      available for use by Sun Solar; (b) injunctive relief against further use of
      the
“Tropical Fish” trademark by us; and (c) monetary damages exceeding $7,000,000
      for the alleged infringement by us, Flexible Ltd. and Mr. O’Brien of the
“Tropical Fish” trademark, as well as any other “confusingly similar trademarks”
or proprietary trade dresses. On August 9, 2004, we filed our defenses and
      filed
      a counterclaim against Sun Solar. The counterclaim seeks: (x) injunctive relief
      against further use of the “Tropical Fish” trademark by Sun Solar; (y) a
      declaration that the “Tropical Fish” trademark is owned by us, or, in the
      alternative, is not distinctive and should be struck from the trademark
      registry; and (z) monetary damages exceeding $50,000. The parties have completed
      documentary discovery and examinations for discovery of all parties. No amounts
      have been recorded as receivable in the Company’s consolidated financial
      statements and no amounts have been accrued as potential losses as the outcome
      of this claim is not determinable.







**Index**




On
      July
      23, 2004, we filed a breach of contract suit in the Circuit Court of Cook
      County, Illinois against Tatko. The action arises out of a joint product
      development agreement entered into between the us and 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 has
      since refused to collaborate on the agreement and we seek declaratory relief
      stating that Tatko is not entitled to the 100,000 shares of our restricted
      common stock. The litigation is still pending at this time.




In
      addition, Tatko filed its own suit on September 24, 2004 in the Circuit Court
      of
      Cook County, Illinois seeking declaratory relief of its entitlement to our
      restricted common stock. On May 23, 2005, the Tatko suit was dismissed with
      prejudice by the Circuit Court. No amounts have been recorded as receivable
      in
      our consolidated financial statements and no amount has been accrued as a loss
      as the outcome of the claim against Tatko is not determinable.




On
      January 12, 2005, we filed a lawsuit in the Court of the Queen’s Bench of
      Alberta, seeking indeterminate damages resulting from a breach of contract
      by
      Calgary Diecast Corporation (“CDC”). The contract at issue was never completed
      and our raw materials remain in the possession of CDC. On April 25, 2005, the
      court ordered a judgment in our favor in the amount of $47,495.




**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of
      Proceeds.**




None.




**Item
      3.**   **Defaults
      Upon Senior Securities.**




None.




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




None.




**Item
      5.**   **Other
      Information.**




None.




25
 
 **Index**


**Item
      6.****Exhibits.**




**Number**
            **Description**3.1
            Amended
                and Restated Certificate of Incorporation of the registrant.
                (1)3.2
            Bylaws
                of the registrant. (1)31.1
            Certification
                of Principal Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act
                of 2002.*31.2
            Certification
                of Principal Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act
                of 2002.*32.1
            Certification
                of Principal Executive Officer Pursuant to 18 U.S.C. §1350 and §906 of the
                Sarbanes-Oxley Act of 2002.*32.2
            Certification
                of Principal Financial Officer Pursuant to 18 U.S.C. §1350 and §906 of the
                Sarbanes-Oxley Act of 2002.*


**______________**


*  Filed
      with this report.




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




26
 
 **Index**


**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.




Dated:
      November 14, 2006.


**Flexible
                  Solutions International, Inc.**By:
              /s/
                  Daniel B.
                  O’BrienName:
              Daniel
                  B. O’BrienTitle:
              President
                  and Chief Executive OfficerBy:
              /s/
                  Daniel B.
                  O’BrienName:
              Daniel
                  B. O’BrienTitle:
              Chief
                  Financial and Accounting
                  Officer








27