**­UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      20-F**




**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**




For
      fiscal year ended: **December 31, 2006**


Commission
      File Number: **000-51180**




**Poly-Pacific
      International Inc.**


(Exact
      Name of the Registrant as Specified in its Charter)




**Alberta,
      Canada**


(Jurisdiction
      of Incorporation or Organization)




**4287B
      Dawson Street**


**Burnaby,
      BC**


**V5C
      4B3**


(Address
      of Principal Executive Offices)




Securities
      registered or to be registered pursuant to Section 12(b) of the Act:
**NONE**




Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act:




**Common  shares,
      no par value**


(Title
      of
      Class)




**Preferred  shares,
      no par value**


(Title
      of
      Class)




Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:
**NONE**




The
      number of outstanding shares of each of the issuer's classes of capital or
      common shares as of the close of the period covered by the annual
      report:


**25,237,740Common Shares and 0 (zero) Preferred Shares**




Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




Yes:****** ̈**********No:******x**




Indicate
      by check mark which financial statement item the registrant has elected to
      follow:




Item
      17:******x**Item
      18:****** ̈**




Indicate
      by check mark whether the registrant has filed all documents and reports
      required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
      Act
      of 1934 subsequent to the distribution of securities under a plan confirmed
      by a
      court.




**Not
      applicable**




1




**TABLE
      OF CONTENTS**




EXPLANATORY
                  NOTE REGARDING FORM 20-F
              5GENERAL
              5FORWARD
                  LOOKING STATEMENTS
              5PART
                  I
              6ITEM
                  1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
              6A.
                  Directors and Senior Management
              6Table
                  1.1--Company Directors and Officers
              6B.
                  Advisers
              6C.
                  Auditors
              6ITEM
                  2. OFFER STATISTICS AND EXPECTED TIME TABLE
              7ITEM
                  3. KEY INFORMATION
              7A.
                  Selected Financial Data
              7Table
                  3.1--Summary of Financial Statements in United States GAAP
              7Table
                  3.2--Effects of Currency Translation and Conversion
              8B.
                  Capitalization and Indebtedness
              9C.
                  Reasons for the Offer and Use of Proceeds
              9D.
                  Risk Factors
              9ITEM
                  4. INFORMATION ON THE COMPANY
              12A.
                  History and Development of the Company
              12B.
                  Business Overview
              14PLASTIC
                  BLASTING MEDIA
              15Plastic
                  Media Development and Testing
              15MultiCut
                  Blasting Media
              15Lease
                  and Recycle Blasting Media
              16Raw
                  Materials Supply
              16Competition
                  in the Blasting Media Industry
              16RECYCLED
                  PLASTIC LUMBER
              18Entry
                  to the Business
              18Recycled
                  Plastic Lumber Development and Testing
              18Recycled
                  Plastic Lumber Products
              18Markets
                  and Marketing
              18Manufacturing
              19Raw
                  Materials Supply
              19Competition
                  in the Recycled Plastic Lumber IndustryCompetition
                  with Wood LumberGovernmental
                  Regulations
              20General
                  Applicability
              20Our
                  Operations
              20


2




GENERAL
                  COMPANY INFORMATION
              22Warranties
              22Customer
                  Dependence
              22Seasonality
              22Property,
                  Plants and Equipment
              23Planned
                  Expansion DevelopmentITEM
                  5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
              25Company's
                  Critical Accounting PoliciesA.
                  Operating Results
              25Table
                  5.1--Summary of Operations for the Blasting Media
              31Table
                  5.2--Summary of Operations for the Plastic Lumber
              31B.
                  Liquidity and Capital Resources
              32C.
                  Research and Development, Patents and Licenses
              37D.
                  Trend Information
              38E.
                  Off Balance Sheet Arrangements
              38F.
                  Tabular Disclosure of Contractual Obligations
              38ITEM
                  6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
              38A.
                  Directors and Senior Management
              38B.
                  Compensation
              40C.
                  Board Practices
              40D.
                  Employees
              44E.
                  Share Ownership
              45ITEM
                  7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              46A.
                  Major Shareholders
              46B.
                  Related Party Transactions
              46C.
                  Interests of Experts and Counsel
              46ITEM
                  8. FINANCIAL INFORMATION
              47A.
                  Consolidated Financial Statements and Other Financial
                  Information
              47Consolidated
                  Financial Statements for December 31, 2004, 2003 and 2002
              48B.
                  Significant Changes
              82ITEM
                  9. THE OFFER AND LISTING
              83Table
                  9.1--History on TSX Venture Exchange (in Canadian Dollars)
              83ITEM
                  10. ADDITIONAL INFORMATION
              84A.
                  Share Capital
              84Common
                  Shares
              84Preferred
                  Shares
              84Share
                  Capital Changes
              87B.
                  Memorandum and Articles of Association
              89C.
                  Material Contracts
              91D.
                  Exchange Controls
              92E.
                  Taxation
              93F.
                  Dividend and Paying Agents
              97G.
                  Statement by Experts
              97H.
                  Documents on Display
              97I.
                  Subsidiary Information
              97


3




ITEM
                  11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              97ITEM
                  12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
              98PART
                  II
              98ITEM
                  13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
              98ITEM
                  14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
                  USE OF
                  PROCEEDS
              98ITEM
                  15. CONTROL AND PROCEDURES
              98ITEM
                  16. RESERVED
              98A.
                  Audit Committee Financial Expert
              98B.
                  Code Of Ethics
              98C.
                  Principal Accountant Fees And Services
              98D.
                  Exemption From Listing Standards For Audit Committees
              98E.
                  Purchases Of Equity Securities By The Issuer And Affiliated
                  Persons
              98PART
                  III
              99ITEM
                  17. FINANCIAL STATEMENTS
              99ITEM
                  18. FINANCIAL STATEMENTS
              99ITEM
                  19. EXHIBITS
              99SIGNATURE
              100


4




**EXPLANATORY
      NOTE REGARDING FORM 20-F**




This
      Form
      20-F is filed for the years ended December 31, 2006, 2005, and
      2004.




**GENERAL**




Unless
      the context otherwise requires, the "Registrant" means Poly-Pacific
      International Inc. and the "Company" means the Registrant.




The
      Registrant uses the Canadian dollar as its reporting currency. Unless otherwise
      indicated, all references in this document to "dollars" or "$" are expressed
      in
      Canadian dollars. Also, see Item 3 "Key Information" Table 3.2 for more detailed
      currency and conversion information.




**FORWARD
      LOOKING STATEMENTS**




Some
      of
      the statements contained in this Report that are not historical facts,
      including, statements made in the sections entitled Item 3-"Key Information,"
      Item 4-"Information on the Company," “New Opportunities/Direction for the
      Company,” and Item 5-"Operating and Financial Review and Prospects," are
      statements of future expectations and other forward-looking statements that
      are
      based on management's current views and assumptions and involve known and
      unknown risks and uncertainties that could cause actual results, performance
      or
      events to differ materially from those expressed or implied in the statements.
      Actual results, performance or events may differ materially from those in the
      statements due to, without limitation, (i) general economic conditions, (ii)
      performance of financial markets, (iii) interest rate levels, (iv) currency
      exchange rates, (v) changes in laws and regulations, (vi) changes in the
      policies of central banks and/or foreign governments, and (vii) competitive
      factors, in each case on a global, regional and/or national basis. See Item
      5-"Operating and Financial Review and Prospects."




The
      forward looking statements contained herein are based on the Company's
      assumptions regarding world economic and market conditions the price and supply
      of raw materials. Among the factors that have a direct bearing on the Company's
      future results of operations and financial conditions are the successful
      development of the Company's projects and a change in government regulations,
      leverage and debt service, competition, cost of certain raw materials, currency
      fluctuations and restrictions, technological changes, and other factors
      discussed herein. The Company's actual results of operations may vary
      significantly from the performance projected in the forward looking
      statements.




5




**PART
      I**




**ITEM
      1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS**




**A.
      Directors and Senior Management**





**Table
      1.1—Company Directors and Officers**





**Name**
            **Position**
            **Business
                Address**Randy
                Hayward
            President,
                Acting Chief Executive Officer and Acting Chief Financial Officer
                and
                Director
            4287
                B Dawson Street
              Burnaby,
                British Columbia V5C 453Richard
                Oravec
            Director
            New
                York, New York,
              USADavid
                Tam
            Director,
                Secretary and Canadian Counsel
            1500
                Manulife Place
              10180
                - 101 Street
              Edmonton,
                Alberta  T5J 4K1Mike
                Duff
            Director
            2380
                Commerce Place
              10155
                – 102 Street
              Edmonton,
                Alberta T5J 4G8Edward
                Chambers
            Director
            2835
                Lansdowne Road
              Victoria,
                British Columbia
              V3R
                3P8




**B.
      Advisers**




In
      California, the Company banks with East West Bank at 23670 Hawthorn Blvd.,
      Torrence, CA 90505   The telephone number for East West Bank is
      310-791-2800 and the contact person is Allen Huang. In Alberta, the Company
      banks with the Bank of Nova Scotia (ScotiaBank) at 11508 Jasper Avenue,
      Edmonton, Alberta T5K 0M8. The telephone number for the ScotiaBank is
      780-448-7930 and the contact person is Angela Yuen.  The Company’s
      Canadian corporate legal advisor is David Tam who is a partner in Parlee McLaws
      LLP. The address for Parlee McLaws is 1500 Manulife Place, 10180 – 101 Street,
      Edmonton, Alberta T5J 4K1. The telephone number for David Tam is
      780-423-8662.




**C.
      Auditors**




The
      Company’s auditor is Collins Barrow Edmonton LLP, Chartered Accountants, 1550,
      10250 – 101 Street, Edmonton, Alberta, Canada T5J 3P4, telephone
      780-428-1522.  The audit contact partner is Samuel C. H. Yeung, C.A.,
      C.F.A and Joseph Man, C.A.




6




Collins
      Barrow Edmonton LLP has memberships in the Canadian Public Accounting Board
      (CPAB), Canadian Institute of Chartered Accountants (CICA) and Institute of
      Chartered Accountants of Alberta (ICAA); and is registered with the Public
      Company Accounting Oversight Board (PCAOB).




**ITEM
      2. OFFER STATISTICS AND EXPECTED TIME TABLE**




Not
      applicable.




**ITEM
      3. KEY INFORMATION**




**A.
      Selected Financial Data**




The
      selected financial data set forth below have been derived from our audited
      consolidated financial statements. Our consolidated financial statements for
      fiscal years ended December 31 have been audited by Collins Barrow Edmonton
      LLP,
      Chartered Accountants. The selected financial data should be read in conjunction
      with and are qualified by reference to the Consolidated Financial Statements
      and
      notes thereto for the years ended December 31, 2006 and 2005 included elsewhere
      in the Exhibits to this Report.




Our
      financial statements have been prepared in accordance with the standards of
      the
      Public Company Accounting Oversight Board (PCAOB) pursuant to generally accepted
      accounting principles (GAAP) in the United States.




All
      amounts are shown in Canadian dollars, unless otherwise specified.




**Table
      3.1—Summary of Financial Statements in United States GAAP**




Summary
      of annual financial statements for the prior five years are presented in this
      table. All amounts are shown in Canadian dollars and prepared in accordance
      with
      U.S. GAAP.  The summaries for 2006, 2005, 2004, 2003 and 2002 are
      taken from the audited financial statements included elsewhere in this
      report.  The summary of 2001 is taken from financial statements that
      were previously audited in accordance with Canadian GAAP with unaudited
      adjustments made to convert the summaries to U.S. GAAP reporting
      requirements.




7





**Poly-Pacific
                International Inc.****Year****ended**
              **31/12/2006**
            
            
            **Year****ended**
              **31/12/2005**
            
            
            **Year
                ended**
              **31/12/2004**
            
            
            **Year
                ended**
              **31/12/2003**
            
            
            **Year
                ended**
              **31/12/2002**Total
                Consolidated Revenues
            
            
            1,470,357
            
            
            
            3,052,716
            
            
            
            3,819,057
            
            
            
            4,242,326
            
            
            
            3,719,163Total
                Operating Expenses
            
            
            2,281,996
            
            
            
            3,052,716
            
            
            
            4,041,414
            
            
            
            4554,582
            
            
            
            4,753,279Income
                tax expense (recovery)
            
            
            ---
            
            
            
            174,750
            
            
            
            19,392
            
            
            
            (154,134
            )
            
            
            (167,844
            )Net
                Loss
            
            
            (1,970,479
            )
            
            
            (1,161,662
            )
            
            
            (241,749
            )
            
            
            (158,122
            )
            
            
            (866,272
            )Discount
                on Redemption of Preferred Shares
            
            
            
            
            
            
            --
            
            
            
            --
            
            
            
            613,806
            
            
            
            --Net
                Income (Loss) available to Common Shareholders
            
            
            (1,970,479
            )
            
            
            (1,161,662
            )
            
            
            (241,749
            )
            
            
            455,684
            
            
            
            (866,272
            )Net
                Income (Loss) per share
            
            
            (0.086
            )
            
            
            (0.09
            )
            
            
            (0.03
            )
            
            
            0.05
            
            
            
            (0.09
            )Diluted
                Earnings (Loss) per share
            
            
            (0.086
            )
            
            
            (0.09
            )
            
            
            (0.03
            )
            
            
            0.04
            
            
            
            (0.09
            )Total
                Assets
            
            
            1,313,837
            
            
            
            2,111,503
            
            
            
            3,628,977
            
            
            
            3,911,897
            
            
            
            5,243,404Long
                term obligations
            
            
            2,045,778
            
            
            
            --
            
            
            
            137,820
            
            
            
            1,785,766
            
            
            
            187,260Additional
                Paid in Capital
            
            
            778,796
            
            
            
            731,170
            
            
            
            697,474
            
            
            
            672,202
            
            
            
            58,396Accumulated
                Comprehensive Income
            
            
            53,195
            
            
            
            53,195
            
            
            
            53,195
            
            
            
            53,195
            
            
            
            53,195Common
                Shares Capital
            
            
            2,467,602
            
            
            
            1,998,538
            
            
            
            865,584
            
            
            
            865,584
            
            
            
            865,584Preferred
                Shares Capital
            
            
            ---
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            2,967,036Accumulated
                Deficit
            
            
            (4,031,534
            )
            
            
            (2,061,055
            )
            
            
            (899,393
            )
            
            
            (657,644
            )
            
            
            (499,522
            )Total
                Shareholders Equity
            
            
            (731,941
            )
            
            
            721,848
            
            
            
            716,860
            
            
            
            933,337
            
            
            
            3,444,689Common
                Shares outstanding
            
            
            25,237,740
            
            
            
            18,885,456
            
            
            
            9,361,624
            
            
            
            9,361,624
            
            
            
            9,361,624Weighted
                Average – Diluted Shares
            
            
            22,817,241
            
            
            
            12,536,235
            
            
            
            9,361,624
            
            
            
            12,031,813
            
            
            
            9,361,624





**Table
      3.2--Effects of Currency Translation and Conversion**




The
      following tables set forth: (i) the rates of exchange for the Canadian dollar,
      expressed in U.S. dollars, in effect at each of the periods indicated; (ii)
      the
      average exchange rates in effect on the last day of each period; (iii) the
      high
      and low exchange rate during such periods, in each case based on the noon buying
      rate in New York City for cable transfers in Canadian dollars as certified
      for
      customs purposes by the Federal Reserve Bank of New York; (iv) annual prices
      based for the period January 1 to December 31 yearly; and (v) monthly prices
      based for the first to last reported day each month for the most recent six
      months, and quoted in U.S. dollars.




8





**Annual
                Periods**
            **2006**
            **2005**
            **2004**
            **2003**
            **2002**Rate
                at end of period
            0.8671
            0.8576
            0.8310
            0.7738
            0.6329Average
                rate during period
            0.8700
            0.8253
            0.7696
            0.7159
            0.6294High
                Rate
            0.8629
            0.8672
            0.8493
            0.7738
            0.6619Low
                Rate
            0.8700
            0.7853
            0.7158
            0.6349
            0.6200





**Monthly
                Periods**
            **May/07**
            **Apr/07**
            **Mar/07**
            **Feb/07**
            **Jan/07**
            **Dec/06**Rate
                at end of period
            0.8816
            0.8816
            0.8556
            0.8541
            0.8505
            0.8671Average
                rate during period
            0.9100
            0.8800
            0.8600
            0.8500
            0.8500
            0.8700High
                Rate
            0.9106
            0.8794
            0.8540
            0.8521
            0.8482
            0.8629Low
                Rate
            0.9150
            0.8834
            0.8576
            0.8559
            0.8523
            0.8700




On
      June
      20, 2007, the noon buying rate in New York City for cable transfer in Canadian
      dollars as certified for customs purposes by the Federal Reserve Bank of New
      York as $.9410 USD = $1.00 CDN.




**B.
      Capitalization and Indebtedness**





**Capitalization
                of Poly-Pacific International Inc. in Canadian
                Dollars****Description**
            **Authorized**
            **Balance
                at  December 31, 2006**Bank
                Line of Credit
            $500,000.
                USD
            $584,941Equipment
                Loan
            N/A
            $154,281.Debentures
            N/A
            $102,000Common
                Shares
            Unlimited
                (25,237,740 issued and outstanding
              as
                of December 31, 2006)
            $2,467,602




**C.
      Reasons for the Offer and Use of Proceeds**




Not
      applicable.




**D.
      Risk Factors**




The
      following is a brief discussion of those distinctive or special characteristics
      of the Company's operations and industry which may have a material impact on
      the
      Company's business development, or constitute risk factors in respect of the
      Company's financial performance.






9




***Inability
      to obtain our raw materials at commercially reasonable terms, our earnings
      may
      be reduced which could result in a decrease in ourshares
      price.***





The
      availability of low-cost raw materials, namely post-consumer and industrial
      plastic waste products, is a material factor in our costs of operations. The
      unavailability, scarcity, or increased cost of these raw materials could affect
      our profitability. We purchase most of our raw materials through generators
      of
      post-consumer and industrial recycled plastic materials. Disruption of our
      supply sources could reduce our earnings and result in a decrease in our shares
      price.




***Because
      the industries in which we operate are subject to extensive regulation, the
      cost
      of complying with those regulations, or the liability for not complying, couldbecome substantial which could reduce our revenues and result in a
      decrease in our shares price.***





Our
      business is subject to extensive laws and regulations designed to protect the
      environment from toxic wastes and hazardous substances or emissions and to
      provide a safe workplace for employees. Under current U.S. federal regulations,
      the Resource Conservation & Recovery Act, and Comprehensive Environmental
      Responsibility, Compensation, and Liability Act, the generator of toxic or
      hazardous waste is financially and legally responsible for that waste forever,
      and is strictly liable for the clean up and disposal costs. Canada has similar
      laws and regulations.  We estimate that the Company has spent over
      $500,000 for materials and products testing, applications for environmental
      approvals, and related matters over the past eight years.  We believe
      we are either in material compliance with all currently applicable laws and
      regulations or that we are operating in accordance with appropriate variances
      or
      similar arrangements, but we cannot be sure that we will always be deemed in
      compliance, nor can we be sure that compliance with current laws and regulations
      will not require significant capital expenditures that could have a material
      adverse effect on our operations. These laws and regulations are subject to
      change and could become more stringent in the future. Although state and federal
      legislation currently provides for procurement preferences for recycled
      materials, the preferences for materials containing waste plastics are dependent
      upon the eventual promulgation of product or performance standard guidelines
      by
      state or federal regulatory agencies. The guidelines for recycled plastic
      building materials may not be released or, if released, the product performance
      standards required by those guidelines may be incompatible with our
      manufacturing capabilities. It may be necessary to expend considerable time,
      effort and money to keep our existing or acquired facilities in compliance
      with
      applicable environmental, zoning, health, and safety regulations as to which
      there may not be adequate insurance coverage. In addition, due to the
      possibility of unanticipated factual or regulatory developments, the amounts
      and
      timing of future environmental expenditures and compliance could vary
      substantially from those currently anticipated. .





10


***We
      are authorized to issue preferred shares which, if issued, may reduce the price
      of the common shares.***





Although
      no preferred shares are currently issued and outstanding, our directors are
      authorized by our Articles of Incorporation, as amended, to issue preferred
      shares in series without the consent of our shareholders. Our preferred shares,
      if and when issued, may rank senior to common shares with respect to payment
      of
      dividends and amounts received by shareholders upon liquidation, dissolution
      or
      winding up. The issuance of preferred shares in series and the preferences
      given
      the preferred shares must be made by a Resolution of Directors, but do not
      need
      the approval of our shareholders. The existence of rights, which are senior
      to
      common shares, may reduce the price of our common shares.





***Because
      we do not have a compensation committee, shareholders will have to rely on
      the
      entire board of directors, two members of which are not independent, to perform
      this function.***





We
      do not
      have a compensation committee comprised of independent
      directors.  Indeed, we do not have a compensation
      committee.  This function is performed by the board of directors as a
      whole in respect of compensation of officers of the corporation.  Mr.
      Randy Hayward, President, and Mr. David Tam, Secretary and Corporate Counsel,
      as
      members of the board of directors are not independent directors.  The
      Board of Directors does not have a formally appointed compensation committee,
      but performs this function as a whole in respect of compensation of officers
      of
      the corporation, with any officer who is also a director being excluded from
      the
      deliberations of the other directors in respect of that officer’s
      compensation.  Thus, there is a potential conflict in that board
      members who are not independent may participate in discussions concerning
      management compensation other than their compensation and other issues that
      may
      affect management decisions.





***Penny
      Stocks.***





***Because
      our common shares are a penny stock, trading in the common shares involves
      increased risks­­ concerning price fluctuation, additional disclosure
      requirements and a lack of a liquid market.***





Our
      shares will be "penny stocks" as that term is generally defined in the
      Securities Exchange Act of 1934 to mean equity securities with a price of less
      than $5.00.  Our shares thus will be subject to rules that impose
      sales practice and disclosure requirements on broker-dealers who engage in
      certain transactions involving a penny stock.





Under
      the
      penny stock regulations, a broker-dealer selling a penny stock to anyone other
      than an established customer or accredited investor must make a special
      suitability determination regarding the purchaser and must receive the
      purchaser's written consent to the transaction prior to the sale, unless the
      broker-dealer is otherwise exempt.





Because
      of these regulations, broker-dealers may encounter difficulties in their attempt
      to sell shares of our common stock, which may affect the ability of selling
      shareholders or other holders to sell their shares in the secondary market
      and
      have the effect of reducing the level of trading activity in the secondary
      market.  These additional sales practice and disclosure requirements
      could impede the sale of our securities.  This lower trading volume
      can cause price fluctuations.  In addition, the liquidity for our
      securities will be decreased, with a corresponding decrease in the price of
      our
      securities.  Accordingly, our shareholders will, in all likelihood,
      find it difficult more to sell their securities.





11


***Because
      a portion of convertible debentures issued in 2003 remains outstanding as at
      the
      date of this  report, there is a potential for some dilution in share
      values.***





The
      holders of the $102,000 in convertible debentures outstanding as at the date
      of
      this  report might decide to act on the conversion if the common
      shares value rises above the conversion price.  If this event was to
      occur it would have the effect of diluting the earnings per share by about
      0.2%
      which could decrease the value of the Company’s common shares.





***Because
      a substantial portion of the Company’s revenues are derived in U.S. Dollars
      rather than Canadian dollars, changes in the exchange rate can result in
      substantial foreign exchange losses and result in a decrease in the price of
      our
      shares.***




A
      substantial portion of the Company's revenues are derived in
      currencies other than Canadian dollars.  This results in a financial
      risk due to fluctuations in the value of the Canadian dollar relative to those
      foreign currencies.  The primary currency exchange rate that impacts
      on the Company’s revenues and expenditures is the one for the Canadian dollar
      relative to the United States dollar.  Any significant increase in the
      value of the Canadian dollar relative to the United States dollar will result
      in
      a material foreign exchange loss which could decrease the value of the Company’s
      common shares.




**ITEM
      4. INFORMATION ON THE COMPANY**




**A.
      History and Development of the Company**





Poly-Pacific
      International Inc. is an Alberta Canada corporation number 20671721, which
      was
      registered on October 25, 1995 with the purpose of forming a Junior Capital
      Pool.  The initial public offer raised $300,000 in equity capital upon
      closing on January 22, 1996.  Our common shares currently
      trades only in Canada on the TSX Venture Exchange, symbol PMB.
      The Junior Capital Pool acquired the business of Poly-Pacific Inc., a privately
      held company that began operations in 1989, through an exchange of shares that
      brought in the $500,000 previously raised through private
      placements.





In
      1989
      the predecessor company, Poly-Pacific Inc., a plastics injection molder, had
      initiated research to develop plastic blasting media from the scrap by products
      of its production operations.  The intent was to reduce the quantities
      of scrap being buried in landfills, and to create products suitable to US
      Military needs for stripping paint from aircraft.  The research
      resulted in the development of MultiCut plastic blasting media that is made
      from
      scrap thermoset plastics and scrap acrylic thermoplastics.  By 1995
      the processes were refined to produce consistent quality products meeting US
      Military specifications as well as those of the defense industries in Canada
      and
      the U.K.  The media business was vended into Poly-Pacific
      International Inc. in 1996.





At
      the
      urging of the US military, in 1996 the plastic blasting media industry began
      moving away from simply selling the media by adding a service to take back
      the
      used media and recycle it into other products, saving the customers from having
      to find alternate means of disposal.  Through research in conjunction
      with the Alberta Research Council, the Company developed a process for
      incorporating spent media into recycled plastic lumber in a manner that
      satisfied regulatory control needs of government environmental departments
      and
      protection agencies.   The Company proceeded to acquire the
      equipment for producing recycled plastic lumber as a second product line to
      be
      marketed throughout Canada and the USA.  A wholly owned subsidiary,
      Everwood Agricultural Products International Inc., an Ontario, Canada
      corporation number 1308111, was formed on July 29, 1998 upon the purchase of
      the
      assets of Everwood Agricultural Products Inc.





12




The
      plastic blasting media contracts, whether for provision of product only or
      for
      lease and recycle sales, are issued on the same product performance and delivery
      terms for both commercial and government customers.  However, many of
      the commercial customer contract can be for one year or less, with some being
      for up to three years, while the US Military contracts are for five-year terms
      with agreed prices for each year.





The
      proprietary technology processes and the equipment used to manufacture both
      product lines have been further improved over the years.  The Company
      developed a continuous line process for producing MultiCut plastic blasting
      media to specified sizes.  Then, when the events of 9/11 resulted in
      more pressure for the military to buy primarily from US Small Business, the
      Company determined that it was advisable to relocate the media manufacturing
      to
      its second wholly owned subsidiary, Poly-Pacific Technologies Inc., a California
      corporation number C2045209, that was formed on June 24, 1999.  The
      new media line was installed and perfected at a leased plant facility in
      Ontario, California in 2002, and it became the primary facility for
      manufacturing and operations.  In October 2003 the Company added
      equipment to produce dimensional recycled plastic lumber at this
      plant.





**Stock
      listing Information:**





As
      discussed above, Poly-Pacific International Inc. is a junior industrial company
      that was first listed in Canada in 1995 and trades as a Tier 1 company on the
      TSX Canadian Venture Exchange (TSX-V:PMB).  Poly-Pacific was also
      listed on the USA on December 30, 2005, on the NASDAQ Over The Counter Bulletin
      Board (OTCBB: PLYPF), on the German Stock Exchange in January 2007 (POZ), and
      the Berlin Stock Exchange (AOLGDN) also in January 2007.





The
      address of our principal executive offices is 4287B Dawson Street; Burnaby,
      BC;
      V5C 4B3 Telephone:  (604) 263-8885.   The name and
      address of our registered agent in Canada is:  Parlee McLaws LLP, 1500
      Manulife Place, 10180 – 101 Street, Edmonton, Alberta T5J 4K1.





**Discontinued
      Operations**





At
      December 31, 2006, as a result of continued losses and Everwood’s inability to
      obtain an adequate supply of raw materials to make posts and attain
      cost-efficient production, the Company decided to permanently cease its
      operations in St. Thomas, Ontario, in order to mange costs and to focus its
      efforts in developing the McAdoo Nylon Reclamation Project in Kingston,
      Ontario





**Variable
      interest entity (Polyran Reclamation Inc.):**





PolyRan
      Reclamation Inc (“PolyRan”) was incorporated under the laws of Alberta on
      September 11, 2006.   PolyRan was founded with an intention to
      participate in a joint venture with Poly Pacific International Inc
      (“Poly-Pacific” or the “Company”).  Poly-Pacific was pursuing a nylon
      reclamation project near Kingston Ontario, and required assistance with respect
      to financing.  An agreement was reached between the companies whereby
      PolyRan would receive a 30 % financial interest in the Ontario named McAdoo
      landfill site, forproviding financial
      and
      technical contributions to the Company.




13




**B.
      Business Overview**





Poly-Pacific
                Technologies Inc. is a California based manufacturer of plastic blasting
                media.  Plastic blasting media products are used to strip paint
                and other coatings from aluminum, fiberglass and other similar materials,
                reducing the use of toxic and hazardous chemical strippers.  Our
                plastic blasting media is made from scrap thermoset plastics and
                scrap
                acrylic thermoplastics, which have been used to make products such
                as
                electrical switches and fittings, dice and game pieces, dinner ware,
                display signs, airplane windows, and automotive parts.





Our
      California subsidiary also makes recycled plastic lumber from spent blasting
      media and post consumer plastics using the process that was developed for our
      subsidiary in Canada.





Everwood
      Agricultural Products International Inc, prior to discontinuing the operations
      on December 31, 2006, was a manufacturer of recycled plastic lumber that is
      made
      from spent plastic blasting media taken back from blasting media customers,
      in
      combination with recyclable post consumer plastics.  The recycled
      plastic lumber products made were beams and fence posts that were sold to the
      agricultural industries.





Since
      inception, our initial focus has been on MultiCut plastic blasting media and
      developing the technology to provide these products to military, commercial
      and
      industrial customers.  Poly-Pacific entered the development of
      processes for recycled plastic lumber as the means to take back spent blasting
      media from its customers and recycle it.





We
      first
      obtained an International Standards Organization, or ISO, certification in
      1997,
      and are now ISO 9001:2000 certified for the production of MultiCut plastic
      blasting media. The ISO certification provides assurances to commercial
      customers in the USA, Canada and overseas that the products are made with strict
      adherence to international quality standards that determine how the products
      will perform.  This certification has only been sought for, and
      applied to, the plastic blasting media because it is used in servicing and
      manufacturing operations where the users want advance assurance that it will
      meet their specifications and perform as expected.  Subsequent to the
      fiscal year end, the Company did not renew their ISO 9001:2000 registration,
      as
      such, voluntarily de-registered from this program.





The
      most
      substantial proportion of our products, an average of 80% during the past five
      years, is sold in the USA.  A further 10% of our revenues are earned
      in Canada, with a similar proportion being realized from international export
      sales.





The
      Company is not dependent on patents or special licensing for the manufacturing
      and distribution of either the MultiCut plastic blasting media or the recycled
      plastic lumber products.  The equipment used in all of its production
      processes is generally available and is used by various manufacturers to produce
      different types of products.  The uniqueness of the Company’s products
      and their quality and performance characteristics is established through the
      closely held, proprietary technology that the Company has developed to modify
      the equipment to meet its specific product needs.  The proprietary
      technology is protected by strict confidentiality agreements that must be signed
      by all employees and agents of the Company, as well as any suppliers, customers,
      inspectors or visitors who are granted access to the production facilities
      for
      any reason whatsoever.





14




The
      Company relies upon product testing and periodic submissions to approving
      authorities to ensure that both of its product lines meet required
      standards.  This includes periodic performance testing to ensure that
      specific MultiCut media products meet the US Military standards, as well as
      testing on request to ensure that the recycling processes and products continue
      to meet all environmental protection agency requirements.  The
      Company’s manufacturing facilities are also subject to compliance inspections by
      governmental approving authorities at any time.  Since inception all
      such testing, inspection and other requirements for the Company have not only
      been met but have exceeded legal expectations continuously.





**PLASTIC
      BLASTING MEDIA**





**Plastic
      Media Development and Testing**





The
      predecessor company, Poly-Pacific Inc., began its plastic media product research
      in 1989, recognizing that special equipment had to be created to get consistent
      results.  From 1989 through 1992, the company undertook a joint
      venture project with the Alberta Research Council (ARC) to explore alternative
      materials and processes for creating contaminant-free
      products.  Research with scrap thermoset plastics determined which
      equipment was best to create the sizes and shapes needed for MultiCut media,
      and
      revealed how contaminants could be isolated to develop cleaning process that
      could extract virtually all foreign matter from the scrap plastics and the
      products.





From
      1992
      through 1995, when it was possible to produce a clean product, Poly-Pacific
      continued joint-venture research with the ARC, and with Canadian federal
      government funding assistance, to ensure the processes could consistently
      produce products meeting customer specifications.  Sizing distribution
      controls were established to maintain stripping capability.  Trials
      were conducted to formulate media with an acceptable breakdown
      rate.  Then, when physical traits were under control, extensive trials
      were conducted with the company’s initial customers to create a process that, by
      February 1995, enabled production of products that consistently meet customer
      specifications.





After
      Poly-Pacific International Inc. acquired the equipment and technology for the
      MultiCut plastic blasting media in 1996, research was continued to develop
      testing methodologies for quality controls to ensure production of
      on-specification media.  In addition, extensive testing of product
      material characteristics and performance is conducted at regular intervals
      by an
      independent laboratory recommended by the US Military, in order to ensure that
      specific MultiCut media products continue to meet their high
      standards.





**MultiCut
      Blasting Media**





This
      initial business established by Poly-Pacific starts with the purchase of scrap
      plastics for blasting media production; urea and melamine used to make products
      such as electric light switches and fittings, dice and other game pieces, and
      plates and other dishes primarily from China, and acrylic, used to make products
      such as such as signs, airplane windshields, and window and door panels,
      primarily from the USA.  These plastics are shaped, finished and
      packaged as MultiCut plastic blasting media.





15




The
      primary markets for plastic blasting media include the aviation, marine,
      automotive, other ground transport, petrochemical and equipment repair and
      servicing industries, and manufacturers of electronic, computer and other
      products that require cleaning or polishing before
      packaging.  Poly-Pacific sells product in all of these
      industries.  The initial users of plastic blasting  media
      were those wanting a replacement for chemical strippers, but further uses of
      this blasting media have been to replace silica sand, CO2 cold jet,
      high
      pressure water jet, and other types of blasting beads.  Based upon our
      experience in the industry, we believe that plastic blasting media has made
      advances because of the relative ease with which it can be contained and cleaned
      up compared to other types of blasting media such as sand, steel pellets and
      other heavy media particles.  This is because blasting with plastic
      media can be done in enclosed chambers or blasting rooms where the used media
      can be conveyed by vacuum suction into cyclonic containers to extract the
      microscopic paint and other particles so the plastic media can be returned
      to
      the blasting process for reuse.  Through this process, after repeated
      usages when the plastic media has broken down into fine particles, the spent
      media with its particles of paint and other coatings is collected for recycling
      and no further cleanup is needed.





**Lease
      and Recycle Blasting Media**





The
      lease
      and recycle business requires the supplier to take back the blasting media
      after
      use (when it is “spent”) for recycling.  After use, the products sold
      on the lease and recycle basis by Poly-Pacific are taken back and incorporated
      as an ingredient for the recycled plastic lumber manufactured at the plants
      in
      Canada and California.  The spent media provides added strength and
      rigidity, reduces the amount of dyes needed for uniform color, and acts as
      a
      necessary blowing or foaming agent for creating bubbles in the core of each
      plastic lumber piece.  It is the honeycombed core that makes it
      possible to use standard nails, screws and staples when attaching fencing or
      other materials to the recycled plastic lumber.





Poly-Pacific
      sells about 45% of its plastic blasting media on a lease and recycle basis,
      and
      the resulting recycled spent media accounts for an average of 15% of the weight
      for the recycled plastic lumber.





**Raw
      Materials Supply**





Raw
      materials are readily available world wide in the form of rejected plastic
      products or parts and scrap generated from high volume plastics manufacturing
      plants.  Therefore, the Company is not dependent upon any particular
      suppliers of raw materials.  We obtain our plastics feedstock for the
      blasting media from several sources.  The scrap urea and scrap
      melamine is purchased in China from several large brokers there who collect
      the
      materials from a very large number of manufacturing operations.  For
      these plastics Poly-Pacific requires two to three containers per month, which
      means we have good availability of these products as our requirements constitute
      a small proportion of the 55 to 65 containers of these materials exported from
      China monthly.  In addition, we have used suppliers in the USA, Canada
      and Europe for shorter delivery lead times when needed.  The scrap
      acrylic plastics are purchased primarily from suppliers in the southern USA
      who
      collect materials from manufacturing plants on both sides of the USA/Mexico
      border.  We have used these raw material supply sources for over eight
      years now, and believe they are dependable and adequate for long term media
      requirements. For the media production we generally maintain a raw material
      inventory sufficient to supply our manufacturing requirements for one to two
      months, and the prices are not volatile since they are normally only subject
      to
      change with general world wide economic shifts.





**Competition
      in the Blasting Media Industry**





The
      blasting media markets are held by a small number of companies.  The
      three largest competitors are US Technology Corporation (about 20 million
      pounds) in Canton, Ohio, Maxiblast Inc. (about 10 million pounds) in Indiana
      and
      Composition Materials Co. Inc. (about 6 million pounds) in Fairfield,
      Connecticut.  There are three other smaller competitors of comparable
      size to us, Solidstrip Composite Leasing Corporation, Pattern Plastics and
      Opti-Blast Inc. (each producing from 1 to 4 million pounds).





16




The
      three
      largest competitors were the first companies to develop plastic blasting media,
      and began as divisions of much larger, conglomerate
      corporations.   The sizes of the parent corporations helped those
      divisions to establish large market shares before they were each sold off in
      turn to form smaller, private corporations.  This gave those three
      companies the competitive advantage of long term customer familiarity before
      the
      smaller competitors, including Poly-Pacific, were established.





Poly-Pacific
      currently sells 1.0 to 1.5 million pounds of plastic blasting media annually,
      which we estimate represents 4% to 5% of the current markets.  We
      compete based on customer familiarity with the supplier, and the supplier’s
      ability to meet the user’s media specifications for their particular needs, plus
      either price, lead time for delivery and/or proven ability to
      recycle.






17




**RECYCLED
      PLASTIC LUMBER**




**Entry
      to the Business**





Poly-Pacific
      entered into the recycled plastic lumber business because it offered a process
      for recycling spent blasting media as an ingredient in the lumber.  In
      addition, a major raw material input to the lumber, about 85% of the weight,
      is
      post consumer plastics collected through programs promoted in the USA by the
      Ag
      Container Recycling Council and in Canada by CropLife Canada, and through
      residential Blue Box/Blue Bag programs in both countries.





**Recycled
      Plastic Lumber Development and Testing**





The
      Company began the search for a method of recycling spent media in
      1996.  Through research in conjunction with the Alberta Research
      Council (ARC), it discovered that spent media could be incorporated into a
      plastics extrusion process to make a stronger and more rigid form of recycled
      plastic lumber.  The ARC, through its contacts with other research
      institutes, introduced the Company to Plastic Plastic Inc. (operating as
      Everwood Agricultural Products) in Ontario.  The companies and the ARC
      worked together to refine the technology and create products with better
      strength characteristics that would be totally safe, beneficial to the
      environment and best suited to its intended uses.  When Everwood was
      acquired in 1998, Poly-Pacific became the sole owner of the technology that
      had
      been developed over the preceding four years.





From
      1998
      through 2004, the Company researched ideas for improving the equipment and
      the
      products.  Through this activity it developed extrusion methods and
      dies that can be used to produce “squared” lumber products, and improvements to
      the extrusion equipment that enable increased rates of material
      throughput.  In 2004, the Company’s research enabled the development
      and testing of process improvements to successfully incorporate mixed plastics
      collected through Blue Box/Blue Bag programs in to the recycled plastic lumber
      products.  The result is that the full range of post-consumer plastics
      can now be used in the Company’s processes.





Recycled
      plastic lumber product testing has been essential through all stages of the
      research and development, and for the finished products.  Because a
      large proportion of the materials being processed may be classed as hazardous
      materials, products must be tested regularly to ensure that they are
      environmentally safe for sale and use.  The testing is done through
      independent, certified laboratories.





**Recycled
      Plastic Lumber Products**





Our
      segment of the recycled plastic lumber business was in the agriculture
      industry.  The markets are for boards, planking and posts to be used
      on farms, ranches and orchards.  The company sold 5 inch diameter
      fence posts produced at the Everwood plant in Ontario, and 4 by 4 beams produced
      at the Poly-Pacific Technologies plant in California.





**Markets
      and Marketing**





Everwood’s
      products were now sold through over 125 locations in the USA with sales that
      have been recorded in 40 states and 9 of the provinces in Canada.





18




Everwood
      sold its products primarily through distributors and dealers, but some sales
      were made direct to large farming operations where the consumer purchases one
      or
      more truckloads, about 1,100 pieces per load, at a time.  There were
      five distributors who in turn supply dealers in 19 of the states in the
      USA.  However, beginning in 2001, Everwood granted additional sales
      rights to new dealers.  Except for the possibility of large individual
      customers who approach Everwood directly, each distributor had exclusive rights
      to sell the products in one or more states as established by
      agreement.  The states that served by distributors are Alabama,
      Arkansas, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Michigan,
      Minnesota, Mississippi, Missouri, Montana, Nebraska, North Carolina, South
      Dakota, Wisconsin and Wyoming.  Distributors make their own
      arrangements with dealers in their areas.





The
      markets for the recycled plastic lumber being produced by the Poly-Pacific
      Technologies plant in California are primarily in the western USA with the
      concentration being for states where the grape growing industry is
      substantial.  These main states included here are California, Oregon
      and Washington.  The marketing effort is concentrated on establishing
      dealers and attracting large orchard operations for direct sales in the western
      USA.  Sales are being made on the same basis as those of
      Everwood.





**Manufacturing**





The
      processes at the Everwood and California plants extrude the recycled plastic
      lumber products in a continuous flow manner, cutting them to length at the
      end
      of the initial cooling process.  The final shape of the lumber depends
      on the die being used.  At Everwood the pieces that were produced were
      five inch diameter round posts, while at the California plant they are four
      inch
      square pieces that have rounded edges.





The
      recycled plastic lumber lines are comprised of standard pieces of equipment
      set
      up to mix the ingredients, heat, extrude, cool, cut to length and bundle the
      pieces for shipping.  The technology created and represented in these
      extrusion lines were evolved through eight years of research, development,
      testing and process refining to create plastic lumber best suited to
      agricultural needs and uses.  Each production line can process up to 4
      million pounds of recycled plastic per year.





The
      recycled plastic lumber line in California is currently operating at about
      5% of
      its 4 million pounds per year capacity, because of down time for equipment
      refinements, and because market promotion for its products has only commenced
      recently.  The capacity of the Everwood plant is 3.5 million pounds
      per year because of the age of the extrusion equipment.  This plant
      operates at about 100% of capacity because it is serving well established
      markets.





**Raw
      Materials Supply**





Active
      programs are operated to collect and granulate plastic containers across Canada
      and the USA.  There are many more firms collecting other plastic
      materials from a large variety of recycling facilities, including municipal
      recycling programs, as well as plastics discarded in various industrial and
      manufacturing processes throughout North America.  Our plants in
      Canada and California obtain raw materials from all of these sources, as well
      as
      from the spent blasting media that Poly-Pacific takes back in respect of its
      lease and recycle media sales.





In
      2006,
      as the Company was not able to obtain an adequate supply of raw material from
      the sources described above and also from California operations due to decreased
      sales, the Company decided to close its operations and to cease production
      of
      plastic lumber.





19




**Governmental
      Regulations**




***General
      Applicability***




Although
      the recycled plastic and composite lumber operations did not generate
      significant quantities of waste materials or hazardous substances, our
      operations were and will be  in the future be subject to numerous
      existing and proposed laws and regulations designed to protect the environment
      from waste materials and particularly hazardous wastes emissions.





Our
      businesses are subject to extensive laws and regulations designed to protect
      the
      environment from toxic wastes and hazardous substances or emissions and to
      provide a safe workplace for employees. Under current federal regulations,
      the
      Resource Conservation & Recovery Act, and Comprehensive Environmental
      Responsibility, Compensation, and Liability Act, the generator of toxic or
      hazardous waste is financially and legally responsible for that waste forever,
      and strictly liable for the clean up and disposal costs. We believe we are
      either in material compliance with all currently applicable laws and regulations
      or that we are operating in accordance with appropriate variances or similar
      arrangements, but we cannot be sure that we will always be deemed in compliance,
      nor can we be sure that compliance with future laws and regulations will not
      require significant capital expenditures.





The
      primary regulations affecting the plastic lumber divisions are air quality
      emissions from our manufacturing plants, disposal of solid and liquid wastes,
      wastewater, and storm water discharge. We do not believe that our waste disposal
      practices and manufacturing processes are in violation of any existing or
      presently proposed laws or regulations or require special handling permits
      or
      procedures or other factors that could result in significant capital
      expenditures.





Additionally,
      as with manufacturing practices in general, if we release any hazardous
      substance, such a release could have a material adverse effect whether we (i)
      directly or indirectly cause the release; or (ii) the release comes from any
      of
      our owned or leased properties; or (iii) the release comes from any associated
      offsite disposal of our wastes; or (iv) the release comes from prior activities
      on our owned or leased property.  These laws and regulations are
      subject to change and could become more stringent in the future.





Although
      state and federal legislation currently provides for procurement preferences
      for
      recycled materials, the preferences for materials containing waste plastics
      are
      dependent upon the eventual promulgation of product or performance standard
      guidelines by state or federal regulatory agencies. The guidelines for recycled
      plastic building materials may not be released or, if released, the product
      performance standards required by those guidelines may be incompatible with
      our
      manufacturing capabilities. It may be necessary to expend considerable time,
      effort and money to keep our existing or acquired facilities in compliance
      with
      applicable environmental, zoning, health, and safety regulations as to which
      there may not be adequate insurance coverage. In addition, due to the
      possibility of unanticipated factual or regulatory developments, the amounts
      and
      timing of future environmental expenditures and compliance could vary
      substantially from those currently anticipated.




***Our
      Operations***




Our
      material handling, supplies and products are subject to environmental laws
      and
      regulations.  The United States Environmental Protection Agency (EPA)
      administers these laws and regulations through 10 regional offices and the
      environmental departments or agencies of the states.  In Canada, the
      federal department, Environment Canada, and the provinces ministries or
      departments of environment, administer equivalent laws and regulations. In
      order
      to operate a recycling program in a given locale, a company must be able to
      provide assurances that it meets the legal requirements.





20




The
      original operations for Everwood in Canada were approved by the Ontario Ministry
      of the Environment prior to 1996 as being in compliance the clean air, fresh
      water and pollution emission controls requirements of the
      province.  In addition, CropLife Canada had similar approvals
      throughout all provinces in Canada for the processes used to collect and
      transport the plastic from the agricultural herbicide and pesticide
      containers.  And CropLife Canada had assisted Everwood in ensuring
      that the products met environmental requirements for sale in the agriculture
      industry.





However,
      spent plastic blasting media is a material that could potentially be classed
      as
      hazardous waste due to components such as cadmium in the paint
      particles.  In order to collect this material from customers in the
      USA, Poly-Pacific had to obtain approvals from the EPA for the methods that
      would be used to collect, handle, transport, store and use the spent plastic
      blasting media to ensure that there could be no damage to the environment
      arising from this process.  The scope for EPA monitoring and control
      extends to the record keeping for tracking the material from its source, or
      the
      generator of the potentially hazardous material, to its inclusion in batches
      of
      product produced.  In addition, Poly-Pacific has to be able to prove
      to the EPA authorities that the spent media and/or the products being produced
      are not being stockpiled; there has to be an existing, proven market for the
      products.  Because of the processes used by Poly-Pacific, and because
      of the agricultural demand for recycled plastic lumber, providing this proof
      has
      never been a problem, but the EPA authority in each jurisdiction where spent
      media may be collected must first provide approval for the program.





The
      first
      EPA approvals for handling spent media as an ingredient for recycled plastic
      lumber rather than as a solid or hazardous waste were obtained in
      1997.  Poly-Pacific began its program by contracting a company called
      Everwood Agricultural Products Inc. in Aylmer, Ontario, to use spent MultiCut
      media in producing fence posts for the agricultural
      industry.  Poly-Pacific took complete control of the process by
      purchasing the recycled plastic lumber equipment from the prior Everwood company
      in 1998 and setting the operations up as a wholly owned subsidiary, Everwood
      Agricultural Products International Inc.





The
      Poly-Pacific recycling program has now been approved by 8 EPA Regions including:
      in 1997 USEPA Regions 4, 6 and 10; in 1998 Regions 3, 7 and 9; in 2000 Region
      5;
      and in 2002 Region 2.  The recycling program has also been approved by
      37 states including: in 1997 Alabama, Alaska (part of USEPA Region 10), Arizona,
      Florida, Georgia, Idaho, Kentucky, Minnesota, Mississippi, North Carolina,
      Oklahoma, Texas and Washington; in 1998 California, Iowa (part of USEPA Region
      7), Kansas, Maryland, Nebraska, Nevada, New Jersey, Pennsylvania and Utah;
      in
      1999 Illinois, Indiana, North Dakota, South Carolina, South Dakota, Virginia
      and
      Wyoming; in 2000 Arkansas, Colorado, Louisiana, Montana, New Mexico, Oregon
      and
      West Virginia; and in 2001 Tennessee.





In
      Canada, prior to discontinuing our operations in plastic lumber in Ontario,
      the
      Everwood processes and plant had been approved by the Ontario Ministry of the
      Environment; and CropLife Canada has approval from all 10 provinces for the
      processes to collect and transport the cleaned and ground up agricultural
      containers.





21




**GENERAL
      COMPANY INFORMATION**




**Warranties**





Although
      the Company provided limited warranty that the products will be free from
      defects in material and workmanship and, when subject to normal use, they are
      further warranted against manufacturing defects that result in peeling, flaking,
      blistering, cracking, breaking, corroding, abnormal weathering and abnormal
      discoloration of surfaces.  The warranty provided for repair,
      replacement or refund to the purchaser for lumber determined to be defective.
      The Company’s maximum liability to refund is reduced by five (5) percent for
      each year after the date of original purchase.  The warranty does not
      apply to the cost of installation or removal of any defective
      material.  Since inception we had not received any warranty claims and
      we had sold well over 600,000 posts, prior our closure of the Plastic Lumber
      (Everwood) operations.





No
      warranty is provided for plastic blasting media because it is manufactured
      in
      accordance with each particular customer’s specifications.





**Customer
      Dependence**





We
      are
      not dependent upon any individual customers for 10% or more of the revenues
      for
      either the media or the recycled plastic lumber product.  The plastic
      blasting media is sold to over 40 different end-user customers.  The
      recycled plastic lumber products are sold to an indeterminant number of
      agricultural end users.





**Seasonality**





As
      shown
      in the table below for results averaged over four years, although there are
      some
      minor variations, our sales exhibit virtually no seasonality.  Plastic
      media is used primarily for blasting operations in enclosed buildings and can
      therefore be done any time of the year.  Recycled plastic lumber
      products are sold throughout Canada and the USA, so there are climatic effects
      on sales in particular regions in accordance with outdoor repair
      activities.  In colder climate areas sales are heaviest in the spring
      and summer, and in warmer climate areas sales are heaviest in the fall and
      winter months.





**Poly-Pacific
                Average 2000 to 2005 Seasonality of Sales****Quarter
                1**
            
            
            **Quarter
                2**
            
            
            **Quarter
                3**
            
            
            **Quarter
                4**Plastic
                Media Sales Percentage
            
            
            31.1
            %
            
            
            17.8
            %
            
            
            20.4
            %
            
            
            26.7
            %Plastic
                Lumber Sales Percentage
            
            
            4.1
            %
            
            
            ---
            
            
            
            ---
            
            
            
            ---Total
                Sales Percentage by Quarter
            
            
            35.2
            %
            
            
            17.8
            %
            
            
            20.4
            %
            
            
            26.7
            %




22




**Property,
      Plants and Equipment**




The
      extent and nature of the Company's properties are summarized in the table
      below:




***Facility
                and location***
            ***Use
                and Size of Property***
            ***Owned/Leased
                & Term***Everwood
                plant at
              233
                Edward St
              St
                Thomas, Ontario
              N5P
                1Z4
            Manufacturing
                recycled plastic lumber.
              15,000
                square foot building on 6 acres of land. Fenced property for open
                storage.
            Leased
                with the term that extended to 2008 but was mutually cancelled with
                the
                Landlord in 2007.Poly-Pacific
                Technologies plant at
              4755
                Zinfandel Court, Unit A
              Ontario,
                CA  91761
            Manufacturing
                plastic blasting media and recycled plastic lumber.
              38,000
                square foot building.
            Leased
                with term that extends to July
                2007.





**NEW
      OPPORTUNITIES/DIRECTION FOR THE COMPANY:**





As
      a
      result of decreasing margins in plastic media and decision to close to Everwood
      as described earlier, the management began to explore new opportunities for
      the
      Company, such as reclamation of land fill sites, to increase shareholder
      value.





On
      March
      1, 2007, the Company announced that City Council of Kingston has approved an
      agreement, subject to certain conditions being fulfilled, will allow
      Poly-Pacific to gain access for the assessment of fibre resource located at
      the
      Kingston West (McAdoo) landfill site.





The
      City
      of Kingston wished to investigate the potential for removal and recycling
      polymer fibres (nylons and polyesters) that are believed to be present in the
      former Kingston West Landfill Site (also know as the McAdoo Lane Landfill).
      The
      McAdoo Lane Landfill Site was operated as a licensed landfill from 1970 through
      to its closure in 1987. Although no formal records of landfilling were kept,
      it
      is estimated that approximately 180,000 tonnes (360 million pounds) of
      industrial waste were landfilled between 1970 and 1987 and that the overall
      volume of the present landfill is in the order of 1 million cubic
      metres.





Upon
      meeting the conditions as outlined in the access agreement, the City of Kingston
      will grant Poly-Pacific a license to access the site for the sole purpose of
      assessing the feasibility of extracting fibre resource from the site. The term
      of this agreement continues until November 1, 2007, subject to an extension
      by
      the mutual agreement of the parties.





Poly-Pacific
      retained the engineering services of Kleinfeldt Consultants Ltd. of Toronto,
      Ontario to undertake the assessment and feasibility of this
      project.





On
      that
      news release Mr. Randy Hayward, President, stated: “The McAdoo Lane Landfill
      site presents Poly-Pacific with a unique opportunity to use our expertise to
      reclaim significant quantities of a valuable fibre resource. Subject to proving
      the commercial viability of this project, we are enthusiastic regarding the
      economic benefits that will accrue to the City of Kingston and the shareholders
      of Poly-Pacific.”





The
      Company also announced on the same day that it is expecting receipt of the
      final
      access approval from the City of Kingston in the near future.




23





**Background
      of Polyran Reclamation Inc.**





Polyran
      Reclamation Inc. (“Polyran”) was incorporated under the laws of Alberta on
      September 11, 2006.  Polyran was founded with an intention to
      participate in a joint venture with Poly-Pacific which was pursuing a nylon
      reclamation project near Kingston, Ontario.  At the time of
      incorporation, the sole officer and director of Polyran was Mr. Randy Hayward
      who became the President of Poly-Pacific on October 10, 2006 and subsequently
      became a director of Poly-Pacific on February 16, 2007.  Due to a
      potential conflict of interest Mr. Hayward resigned as officer and director
      of
      Polyran on January 10, 2007, at which time, Mr. John Primose assumed the duties
      of President and sole director; and Ms. Angela Cole assumed duties as
      Secretary-Treasurer.





On
      June
      20, 2007 purchased all of the issued and outstanding shares of Polyran
      Reclamation Inc. (“Polyran”) pursuant to an exempt take over bid.  In
      consideration for the shares of Polyran, the Company has issued an aggregate
      of
      7,999,996 of its common shares at a deemed price of $0.23 per share *pro
      rata* to the shareholders of Polyran.  The acquisition of the
      Polyran shares was completed as an Expedited Acquisition under the policies
      of
      the TSX Venture Exchange and is subject to the Exchange’s final
      approval.





**Joint
      Venture Agreement**





Further
      to the Company’s press release of May 1, 2007 whereby the Company signed an
      access agreement with the city of Kingston, Ontario the Company had a 100%
      interest in the “McAdoo Project”.     Polyran had
      raised $600,000 through share subscriptions proceeds which was advanced by
      Polyran to the Company in tranches from September 11, 2006 through April 30,
      2007.   These funds were used for the purposes of evaluation and
      due diligence with respect to the nylon deposit joint venture.  This
      was recorded in the Company’s balance sheet as a non-controlling interest of a
      variable interest entity.





To
      assist
      in the joint venture evaluation, management of Polyran sourced and retained
      experts in polymer reclamation, specialized cleaning and processing equipment,
      engineering expertise, and individuals with in-depth knowledge of the North
      American and Asian markets.  Polyran has earned a 30% financial
      interest in the McAdoo Project by providing financial and technical
      contributions to the Company.  As a result, a joint venture agreement
      was formalized on May 15, 2007 between the Company and Polyran.





With
      the
      acquisition of Polyran, Poly-Pacific will now have a 100% interest in the McAdoo
      Project.





The
      Company is also actively pursuing a number of additional polymer landfill
      opportunities in North America.





24




**ITEM
      5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS**





**Nature
      of Business**





Poly-Pacific
      International Inc. was incorporated under the Alberta Business Corporations
      Act
      on October 25, 1995.  The Company is in the business of manufacturing
      plastic blasting media and manufacturing plastic lumber using recycled plastic
      materials.





**Going
      Concern**





These
      consolidated financial statements have been prepared in accordance with U.S.
      generally accepted accounting principles on a going concern basis, which
      presumes that the Company will be able to realize its assets and discharge
      its
      liabilities in the normal course of business for the foreseeable
      future.





The
      Company incurred a net loss for the year ended December 31, 2006 of $1,970,479
      with a total accumulated deficit of $4,031,534.  There is substantial
      doubt about the Company’s ability to continue as a going concern.  The
      Company’s continuation as a “going concern” is dependent upon its ability to
      achieve profitable operations, upon the continued financial support of its
      shareholders and upon its ability to obtain additional financing or
      equity.  Management is implementing a plan to obtain additional equity
      financing in amounts sufficient to sustain operations.  The outcome of
      this matter cannot be determined at this time.





These
      consolidated financial statements do not include any adjustments to the amounts
      and classification of assets and liabilities that may be necessary should the
      Company be unable to continue as a going concern.





**Significant
      Accounting Policies**





**Basis
      of Presentation**





These
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States (U.S.
      GAAP).  All amounts herein are expressed in Canadian dollars unless
      otherwise noted.  These consolidated financial statements conform in
      all material respects with Canadian generally accepted accounting principles
      (“Canadian GAAP”), except as discussed in Note 20.





25




**Principles
      of Consolidation**





The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries, Everwood Agricultural Products International Inc.
      (“Everwood”), Poly-Pacific Technologies Inc. (“PPT”), and PolyRan Reclamation
      Inc (“Poly-Ran”) a variable interest entity in which the Company is the primary
      beneficiary.  As discussed in Note 16, at December 31, 2006, Everwood
      has been classified as a discontinued operation.  All inter-company
      transactions have been eliminated on consolidation.





**Revenue
      Recognition**





Revenue
      is recorded when significant risks and rewards of ownership have been
      transferred to the customer.  This occurs at the time of shipment (FOB
      shipping point) of the products from the Company’s warehouse and an invoice is
      prepared.  Revenues are recognized only when the Company has
      transferred to the customer the significant risk and rewards of ownership of
      the
      goods, title to the products transfers, the amount is fixed and determinable,
      evidence of an agreement exists, there is reasonable assurance of collection
      of
      the sales proceeds, the Company has no future obligations and the customer
      bears
      the risk of loss.





**Property
      and Equipment**





Property
      and equipment is recorded at cost.  Amortization is calculated at the
      following annual rates:




Automotive
                  equipment
              -
              30%
                  declining balanceComputer
                  equipment
              -
              30%
                  declining balanceLeasehold
                  improvements
              -
              20%
                  straight-lineOffice
                  equipment
              -
              20%
                  declining balancePlant
                  equipment
              -
              20%
                  declining balance





**Impairment
      of Long-Lived Assets**





The
      Company reviews the carrying values of long-lived assets for existence of facts
      or changes in circumstances that might indicate a condition of
      impairment.  If estimates of undiscounted cash flows expected to
      result from the use of an asset and its eventual disposition are less than
      the
      carrying amount then the carrying amount of the asset is written down to its
      fair value.





**Translation
      of Foreign Currency**





The
      functional currency of the Company and all of its subsidiaries is the Canadian
      dollar.  Monetary assets and liabilities of the company are translated
      into Canadian dollars at the rate of exchange in effect at the balance sheet
      date.  Revenue and expense items are translated at average rates of
      exchange in effect at the respective transaction months.  The
      resulting exchange gains or losses are included in
      earnings.  Non-monetary assets and liabilities, arising from
      transactions denominated in foreign currencies, are translated at rates of
      exchange in effect at the date of the transaction.





26




Monetary
      assets and liabilities of the integrated foreign subsidiary are translated
      into
      Canadian dollars at a rate of exchange in effect at the balance sheet
      date.  Non-monetary assets and liabilities are translated at
      historical exchange rates.  Revenue and expense items other than
      amortization are translated at the average rate of exchange for the
      year.  Amortization of assets translated at historical exchange rates
      are translated at the same exchange rates as the assets to which they
      relate.





**Inventories**





Inventories
      are recorded at the lower of cost or net realizable value.  Cost of
      inventories is determined on an average cost basis.





**Deferred
      Taxes**





The
      Company accounts for and measures deferred tax assets and liabilities in
      accordance with the asset and liability method.  Under this method,
      deferred tax assets and liabilities are recognized for future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax
      bases.  Deferred tax assets and liabilities are measured using enacted
      tax rates expected to apply to taxable income in the years in which those
      temporary differences are expected to be reversed or settled.  The
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in income in the period that includes the date of enactment of the
      change.  When the future realization of income tax assets does not
      meet the test of being more likely than not to occur, a valuation allowance
      in
      the amount of the potential future benefit is taken and no net asset is
      recognized.





**Stock-Based
      Compensation Plan**





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      Board (“SFAS”) No. 123(R) “Share-Based Payment”, a revision to SFAS 123
“Accounting for Stock-Based Compensation”.  SFAS 123(R) requires the
      Company to recognize in the income statement the grant date fair value of
      share-based compensation awards granted to employees over the requisite service
      period.  Compensation expense recognized reflects estimates of award
      forfeitures and any change in estimates thereof are reflected in the period
      of
      change.  The risk-free interest rate assumption is based upon observed
      interest rates appropriate for the expected term of the Company’s employee stock
      options.  The Company used its historical volatility as a basis to
      estimate the expected volatility assumption used in the Black-Scholes model
      consistent with  SFAS 123(R).  The Company has not paid any
      dividends on common stock since its inception and does not anticipate paying
      dividends on its common stock in the foreseeable future.  The expected
      life of employee stock options is based on historic forfeiture
      rates.





**Direct
      Costs**





Direct
      costs consist primarily of purchasing costs, freight, direct labour and other
      specific costs.





27




**General
      and Administrative**





General
      and administrative costs consist primarily of office expenses, management
      salaries, stock-based compensation, administrative salaries and other
      expenses.





**Project
      Development Costs**





Project
      development costs incurred in completing the ISO 9002 project, in developing
      a
      project which will recycle used plastic blasting media, in setting up an
      additional processing plant for plastic blasting media, in researching
      certification of military grade materials for export and researching and
      developing a new manufacturing process for plastic blasting media are expensed
      in the year incurred.





**Occupancy
      Costs**





Occupancy
      costs consist primarily of rent, utilities and telephone expenses.





**Selling
      and Marketing**





Selling
      and marketing consist primarily of advertising, sales and marketing salaries,
      travel expenses and other promotional expenses.





**Net
      Income (Loss) Per Common Share**





Net
      income (loss) per common share is calculated using the weighted average number
      of common shares outstanding during the period.  Diluted net income
      (loss) per common share is calculated using the treasury stock method which
      uses
      the weighted average number of common shares outstanding during the period
      and
      also includes the dilutive effect of potentially issuable common
      shares.





**Allowance
      for Doubtful Accounts**





The
      allowance for doubtful accounts is the Company’s best estimate of the amount of
      probable credit issues in the existing accounts receivable.  The
      Company reviews its allowance for doubtful accounts on a continual
      basis.  Account balances are charged off against the allowance after
      all means of collection have been exhausted and the potential for recovery
      is
      considered remote.





**Advertising**





The
      Company expenses advertising costs as incurred.





**Deposit**





Deposit
      consists of refundable amounts held by vendors.





28




**Use
      of Estimates**





The
      preparation of financial statements in conformity with U.S. GAAP requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period.  Actual results could differ
      from those estimates.





**Recent
      Pronouncements**





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments – an amendment of FASB Statements No. 133 and
      140”.  This Statement amends FASB Statements No. 133, Accounting for
      Derivative Instruments and Hedging Activities, and No. 140, Accounting for
      Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities.  This Statement resolves issues addressed in Statement
      133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial
      Interest in Securitized Financial Assets.” This Statement permits fair value
      remeasurement for any hybrid financial instrument that contains an embedded
      derivative, clarifies which interest-only strips and principal-only strips are
      not subject to the requirements of Statement 133, establishes a requirement
      to
      evaluate interest in securitized financial assets to identify interest that
      are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation, clarifies that
      concentrations  of credit risk in the form of subordination are not
      embedded derivatives and amends Statement 140 to eliminate the prohibition
      on a
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument.  This Statement is effective for all financial instruments
      acquired or issued after the beginning on an entity’s first fiscal year that
      begins after September 15, 2006.  This standard will be applicable to
      the Company during the period ending 2007.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets an amendment of FASB Statement No. 140”.  This Statement amends
      FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
      Assets and Extinguishments of Liabilities, with respect to the accounting for
      separately recognized servicing assets and servicing
      liabilities.  This Statement requires an entity to recognize a
      servicing asset or servicing liability each time it undertakes an obligation
      to
      service a financial asset by entering into a servicing contract.  An
      entity should adopt this Statement as of the beginning of its first fiscal
      year
      that begins after September 15, 2006.  This standard will be
      applicable to the Company during the period ending 2007.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”).  SFAS 157 defines fair value, establishes a framework for
      measuring fair value and expands disclosures regarding fair value
      measurements.  SFAS 157 does not require any new fair value
      measurements but rather eliminates inconsistencies in guidance found in various
      prior accounting pronouncements.  SFAS 157 is effective for fiscal
      years beginning after November 15, 2007.   This standard will be
      applicable to the Company during the period ending 2007.





29




In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements”.  This pronouncement addresses how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement.   Management does not
      expect the adoption of this Bulletin to have a material effect on the Company’s
      financial position and results of operations.




In
      July
      2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes”.
      This standard prescribes a recognition and measurement model for tax positions
      taken or expected to be taken in a tax return, and provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. Management does not expect the adoption
      of
      this Bulletin to have a material effect on the Company’s financial position and
      results of operations.





**Change
      in Accounting Policy**





*Stock-based
      compensation*





Effective
      January 1, 2006, the Company adopted SFAS No. 123(R) Share-Based Payments,
      a
      revision to SFAS 123 “Accounting for Stock-Based Compensation”.  SFAS
      123(R) requires the Company to recognize in the income statement the grant
      date
      fair value of share-based compensation awards granted to employees over the
      requisite service period.  Compensation expense recognized reflects
      estimates of award forfeitures and any change in estimates thereof are reflected
      in the period of change.





Pursuant
      to the provisions of SFAS 123(R), the Company applied the modified-prospective
      transition method.  Under this method, the fair value provisions of
      SFAS 123(R) are applied to new employee share-based payment awards granted
      or
      awards modified, repurchased, or cancelled after January 1,
      2006.  Measurement and attribution of compensation costs for unvested
      awards at January 1, 2006, granted prior to the adoption of SFAS 123(R) are
      recognized based upon the provisions of SFAS 123(R).  The adoption of
      this policy did not have a material effect on the Company’s financial position
      and results of operations.




30




**A.
      Operating Results**




The
      Company's activities in the last five years can be divided into two different
      product lines: (1) blasting media, (2) plastic lumber. The expenditures for
      operations and capital incurred for these product lines are itemized in the
      Tables 5.1 and 5.2.




**Table
      5.1—Summary of Operations for the Blasting Media**




The
      summary of operations for the blasting media products (in Canadian $), as
      reported pursuant to U.S. GAAP, are presented in this table.




**Poly-Pacific
                International Inc.****Summary
                of Financial Information in Canadian Dollars****Product
                -**
              **Blasting
                Media**
            **Year
                ended**
              **31/12/2006**
            **Year
                ended**
              **31/12/2005**
            **Year
                ended**
              **31/12/2004**Blasting
                Media Sales in Canada
            ---
            65,086
            167,700Blasting
                Media Sales outside Canada
            1,462,113
            2,436,932
            2,968,006Total
                Blasting Media Sales Revenues
            1,462,113
            2,502,018
            3,135,706Income
                Tax Expense (Recovery)
            ---
            174,750
            19,316Blasting
                Media Net Income (Loss)
            (1,561,652)
            (1,108,299)
            (132,850)Capital
                Expenditures
            ---
            2,704
            32,430





**Table
      5.2—Summary of Operations for the Plastic Lumber**




The
      summary of operations for plastic lumber products (in Canadian $), as reported
      pursuant to U.S. GAAP, are presented in this table.




**Poly-Pacific
                International Inc.****Summary
                of Financial Information in Canadian Dollars****Product
                -**
              **Plastic
                Lumber**
            **Year
                ended**
              **31/12/2006**
            **Year
                ended**
              **31/12/2005**
            **Year
                ended**
              **31/12/2004**Plastic
                Lumber Sales in Canada
            ---
            93,295
            281,875Plastic
                Lumber Sales outside Canada
            8,244
            457,403
            401,012Total
                Plastic Lumber Sales Revenues
            8.244
            550,698
            682,887Income
                Tax Expense (Recovery)
            ---
            ---
            76Plastic
                Lumber Net Income (Loss)
            (408,827)
            (53,363)
            (108,899)Capital
                Expenditures
            ---
            ---
            18,264




31




**Summary
      of Unaudited Quarterly Results**





The
      following table presents the unaudited selected financial data for each of
      the
      last eight quarters ended December 31, 2006:





**Year
                ended December 31, 2006**
            
            
            **Year
                ended December 31, 2005****Q4**
            
            
            **Q3**
            
            
            **Q2**
            
            
            **Q1**
            
            
            **Q4**
            
            
            **Q3**
            
            
            **Q2**
            
            
            **Q1**Revenues
                from continuing operations  ($)
            
            
            260,037
            
            
            
            297,831
            
            
            
            389,667
            
            
            
            514,578
            
            
            
            353,316
            
            
            
            447,938
            
            
            
            788,915
            
            
            
            912,933Loss
                from continuing operations – ($)
            
            
            (631,261
            )
            
            
            (736,368
            )
            
            
            (168,563
            )
            
            
            (25,460
            )
            
            
            (717,385
            )
            
            
            (174,772
            )
            
            
            (155,802
            )
            
            
            (56,950
            )Income
                (loss) from discontinuing operations –  ($)
            
            
            (204,896
            )
            
            
            (53,046
            )
            
            
            (101,115
            )
            
            
            (49,770
            )
            
            
            (40,519
            )
            
            
            3,344
            
            
            
            (21,408
            )
            
            
            1,830Basic
                and diluted earnings (loss) per share from continuing
                operations  - ($)
            
            
            (0.028
            )
            
            
            (0.032
            )
            
            
            (0.007
            )
            
            
            (0.001
            )
            
            
            (0.057
            )
            
            
            (0.014
            )
            
            
            (0.013
            )
            
            
            (0.004
            )Basic
                and diluted earnings (loss) per share – ($)
            
            
            (0.036
            )
            
            
            (0.034
            )
            
            
            (0.012
            )
            
            
            (0.004
            )
            
            
            (0.060
            )
            
            
            (0.014
            )
            
            
            (0.015
            )
            
            
            (0.004
            )




**Results
      of Continuing Operations**





Overall,
      the Company recorded a consolidated net loss of $1,561,652 ($0.068 per common
      share) for the year ended December 31, 2006 as compared with a consolidated
      net
      loss of $930,159 ($0.088 per common share) for the year ended December 31,
      2005.  The large increase in the consolidated loss for 2006 as
      compared to 2005 was primarily attributable to the write-off of significant
      amount of slow-moving inventory (see Revenue and Direct cost section below)
      and
      an accrual for the unpaid consulting and other fees which were settled through
      the issuance of shares subsequent to year-end.   There has been a
      significant decrease in sales of plastic media due to declining US economy,
      increased competitive forces and decrease in sales of agricultural products
      in
      2006 as compared to 2005.   Everwood has also not been producing
      and selling agricultural lumber products since October 2005 and thus incurred
      $400,583 of expenses.  As a result of these continuing losses and in
      an effort to conserve costs, at December 31, 2006, the Company decided to close
      the  St. Thomas, Ontario plant.




**Revenues
      and Direct Costs of continuing operations**




Revenues
      for year ending December 31, 2006 were $1,462,113 as compared to $2,503,302
      for
      the year ending December 31, 2005.    As described above,
      the decrease in revenue for year ended December 31, 2006 by $1,041,189 was
      primarily attributable to the decrease in sales of plastic media due to
      declining US economy and declining gross margins due to competitive pressures
      within plastic media industry and decrease in sales of agricultural products
      since October 2005.   In addition, due to decreased working
      capital and due to some legal disputes with certain transport and freight
      companies, the Company was not able to service some clients properly and thus
      losing  potential revenues from these and other clients.





Gross
      margins for the year December 31, 2006 was 21.9% as compared to 28.2% for year
      ended December 31, 2005 and 50.1% for the year ended December 31,
      2004.  The large decrease in gross margin is because a significant
      amount of Company’s inventory was written-off resulting in a large increase in
      the direct costs balance, thus decreasing gross profit.  In the past,
      this inventory had been carried on the books at the cost of production and
      it
      was believed that there was an active market for this slow-moving or obsolete
      inventory; however, after a detailed re-evaluation of this inventory by the
      new
      management team and its potential sales market for such inventory, it was
      written down to a its net realizable value.    Management
      intends to assess the value of inventory on quarterly basis and May write-off
      additional inventory to its net realizable value, as warranted in the
      future.





32




**Operating
      Expenses of the continued operations:**





Overall,
      operating expenses were $1,793,725 for the year December 31, 2006 compared
      to
      $1,564,971 for the year period ended December 31, 2005.  The changes
      in operating expenses for the year ending December 31, 2006 are attributed
      to
      the following:





General
      and administrative (G&A) expenses increased by $399,057 from
      $465,127  to $864,184  for the year ended December 31,
      2006.   The large increase was primarily due to the accrual of
      unpaid consulting fees to officers and consultants of the Company of $190,218
      which were  charged to this account thus contributing majority of this
      increase in G&A expenses.   During the year, the Company
      issued stock options to an officer and directors of the corporation, which
      resulted in a stock based compensation expense of $47,626 included in this
      account.   In addition, the company also had redundant assets on
      the balance, which were also written-off at year-end thus further contributing
      to the overall increase in the G&A expenses.





Occupancy
      costs decreased by $7,392 from $326,909 to $334,301 as the landlord for the
      Burnaby, Canada premises had waived the rent for the second quarter of 2006
      to
      compensate the Company for any inconvenience caused by building
      renovations.





Professional
      fees were comparable to prior year as they increased slightly by $2,444 to
      $274,232 from $271,788.





Amortization
      of property, plant and equipment decreased by $45,656 from $194,542 to
      $148,886.  There were  no additions or disposals of any
      capital assets during the year.





Management
      fees, paid to a corporation controlled by a former director, decreased by
      $39,805 to $48,300 for the year ended December 31, 2006 from $88,105 in the
      prior year.  The former director resigned from the Company in August
      2006 and no management fees were paid to him as result of his
      resignation.





Foreign
      exchange loss for year ended December 31, 2006 was $1,469 as compared to $20,358
      in the prior year. The change is due to timing differences (difference in the
      amount recorded as compared to the amount paid and when the funds were
      transferred from one company to another) in the foreign exchange rate between
      the Canadian dollar and the US dollar.





Interest
      expense increased $16,223 to $87,688 for the year ended December 31,
      2006.  This increase is due to the Company increasing its borrowing on
      the Bank loan during the year to assist with general working capital and also
      because the prime rate had increased in 2006 as compared to the same period
      in
      2005, resulting in an overall increase in borrowing cost.





33




**Income
      taxes:**





The
      Company had a $nil balance for current taxes due to losses for year ended
      December 31, 2006.  The Company recognized a deferred income taxes
      expense of $nil for the year ended December 31, 2006 as compared to $174,750
      for
      the year ended December 31, 2005 when it wrote-off the deferred income tax
      asset, as management determined that due to continuing losses of Poly-Pacific
      International Inc. and its subsidiary, Poly-Pacific Technologies Ltd., it is
      unable to meet the criteria for recognition of deferred income taxes as an
      asset
      (i.e., it is not “more likely than not” that these losses will be utilized in
      the foreseeable future).





**Fourth
      Quarter - Results of Continuing Operations**





Revenues
      for the fourth quarter ending December 31, 2006 decreased to $260,037 as
      compared to revenues of $297,831 for the third quarter ended September 30,
      2006
      and $353,316 for the fourth quarter ended December 31, 2006.





The
      loss
      for the fourth quarter ended December 31, 2006 amounted to $264,187 compared
      to
      a loss of $757,904 for the fourth quarter ended December 31, 2005.





As
      described above, the decrease in revenue for year and the fourth quarter ended
      December 31, 2006 was primarily attributable to the decrease in sales of plastic
      media due to declining US economy and declining gross margins due to competitive
      pressures within plastic media industry and decrease in sales of agricultural
      products since October 2005.   In addition, particularly, in the
      fourth quarter ended December 31, 2006, due to decreased working capital and
      due
      to some legal disputes with certain transport and freight companies, the Company
      was not able to service some clients properly and thus  losing
      potential revenues from these and other clients.





**Discontinued
      Operations:**





At
      December 31, 2006, as a result of continued losses and Everwood’s inability to
      obtain an adequate supply of raw materials to make posts and to attain
      cost-efficient production, the Company decided to permanently cease its
      operations in St. Thomas, Ontario, in order to reduce costs and to focus its
      efforts in developing McAdoo Nylon Reclamation Project in Kingston,
      Ontario.





Results
      of discontinued operations:





Revenues
      of the discontinued operation significantly decreased by $541,170 to $8,244
      for
      the year ended December 31, 2006 from $549,414 for the year ended December
      31,
      2005.





The
      net
      loss for the discontinued operation increased by $352,074 to a loss of $408,827
      for the year ended December 31, 2006 from a loss of $56,753 for the year-ended
      December 31, 2005.    As described above, the large increase
      in the net loss was due to Everwood’s inability to obtain adequate supply of raw
      materials and thus decreasing the revenue as compared to prior
      year.





34




**Non-controlling
      interest of variable interest entity:**





During
      the year, the Company’s President incorporated a new company, PolyRan
      Reclamation Inc. (“Poly-Ran”), which is controlled by him and other shareholders
      to raise funds to develop McAdoo Nylon Reclamation Project in Kingston, Ontario
      (“Kingston project”) with the Company.   At December 31, 2006,
      the Poly-Ran was determined to be a variable interest entity as the Company
      is
      deemed to be the beneficiary.  Poly-Ran had a total share subscription
      (capital) of $280,589, which was accounted as a non-controlling
      interest.   During the year, $264,000 was transferred to the
      Company to fund general working capital of the Company and to finance the
      testing the Kingston project to various engineering consultants.





Although
      the full terms of the Poly-Ran relationship with the Company and the existing
      shareholders of the Company have  not been finalized, the shareholders
      of both the Companies will share equally or in other agreed amounts in the
      Kingston project development costs and eventual any profits and
      losses.




**B.
      Liquidity and Capital Resources**




The
      following table presents major Company financial data in summary form, as
      reported pursuant to U.S. GAAP, as at the years ended December 31, 2006, 2005
      and 2004:




**Year**
            **Current
                assets**
            **Total
                assets**
            **Current
                liabilities**2006
            409,486
            1,313,837
            1,765,1892005
            994,796
            2,111,503
            1,389,6552004
            1,733,114
            3,628,977
            2,774,297





Working
      capital deficiency as at December 31, 2006 was $1,355,703 as compared to working
      capital deficiency of $365,443 as at December 31, 2005.   This
      large increase in the working capital deficiency is due to write-down of
      inventory (described in the Revenue and direct cost section), decrease in the
      accounts receivable and increase in the accounts payable.





The
      Company’s cash position decreased to a bank indebtedness of $2,144 as compared
      to a cash balance of $61,346 as at December 31, 2005.    The
      Company used $532,112 to fund continuing operations and used $307,423 to fund
      discontinued operation, and received cash of $778,189 from financing activities
      for the year ended December 31, 2006.  During the year, the Company
      did not use or receive any funds from investing activities.





In
      addition, the loan agreement for the bank loan and equipment loan specifies
      the
      Company must maintain an effective tangible net worth ratio, debt to effective
      tangible net worth ratio, current ratio and debt coverage ratio at certain
      levels.  As at December 31, 2006, the Company was not in compliance
      with these requirements.  Consequently, the equipment loan could be
      repayable on demand and has been classified as current liability




35




The
      following table delineates the sources and uses of cash by the Company during
      the most recent three years covered by the financial statements.




**2006**
              
              
              2005
              
              
              2004**Operating
                  Activities**Net
                  loss for the year from continuingoperations
              
              $
              **(1,561,652**
              **)**
              
              $
              (1,104,909
              )
              
              $
              (132,851
              )Items
                  not involving cash:Amortization
                  of property and equipment
              
              ****
              **148,886**
              
              
              
              194,542
              
              
              
              255,476Deferred
                  income taxes expense
              
              ****
              **---**
              
              
              
              174,750
              
              
              
              19,392Stock-based
                  compensation
              
              ****
              **47,626**
              
              
              
              33,696
              
              
              
              25,272Foreign
                  exchange gain on debenture
              
              ****
              **---**
              
              
              
              (133,678
              )
              
              
              (125,672
              )Net
                  change in non-cash operating assets andliabilities
                  (Note 14)
              
              ****
              **833,028**
              
              
              
              642,571
              
              
              
              191,544Funds
                  provided by (used in) continuingoperations
              
              ****
              **(532,112**
              **)**
              
              
              (193,028
              )
              
              
              233,161Funds
                  provided by (used in) discontinuedoperations
                  (Note 16)
              
              ****
              **(307,423**
              **)**
              
              
              56,118
              
              
              
              18,018Cash
                  provided by (used in) operatingactivities
              
              ****
              **(839,535**
              **)**
              
              
              (136,910
              )
              
              
              251,179**Financing
                  Activities**Bank
                  overdraft advances
              
              ****
              **2,144**
              
              
              
              ---
              
              
              
              ---Repayment
                  of long-term debt
              
              ****
              **(48,179**
              **)**
              
              
              (65,431
              )
              
              
              (75,020
              )Bank
                  loan advances
              
              ****
              **66,071**
              
              
              
              175,502
              
              
              
              343,368Non-controlling
                  interest
              
              ****
              **280,589**
              
              
              
              ---
              
              
              
              ---Issuance
                  of share capital, net ofshare
                  issue costs
              
              ****
              **469,064**
              
              
              
              ---
              
              
              
              ---Debenture
                  payableadvances
                  (repayment)
              
              ****
              **8,500**
              
              
              
              (284,856
              )
              
              
              (361,440
              )Funds
                  used in discontinuedoperations
                  (Note 16)
              
              ****
              **---**
              
              
              
              (162,540
              )
              
              
              (24,720
              )Cash
                  provided by (used in)financing
                  activities
              
              ****
              **778,189**
              
              
              
              (337,325
              )
              
              
              (117,812
              )**Investing
                  Activities**Purchase
                  of property and equipment
              
              ****
              **---**
              
              
              
              (2,678
              )
              
              
              (47,088
              )Funds
                  provided by (used in)discontinued
                  operations (Note 16)
              
              ****
              **---**
              
              
              
              404,974
              
              
              
              (3,607
              )Cash
                  provided by (used in) investingactivities
              
              ****
              **---**
              
              
              
              402,296
              
              
              
              (50,695
              )**Increase
                  (decrease) in cash**
              
              ****
              **(61,346**
              **)**
              
              
              (71,939
              )
              
              
              82,672**Cash,
                  beginning of year**
              
              ****
              **61,346**
              
              
              
              133,285
              
              
              
              50,613**Cash,
                  end of year**
              
              **$**
              **---**
              
              
              $
              61,346
              
              
              $
              133,285


36





**Supplemental
      Cash Flow Information**





a)       Changes
      in non-cash operating assets and liabilities:


**2006**
              
              
              2005
              
              
              2004Accounts
                  receivable
              
              **$**
              **58,360**
              
              
              $
              183,866
              
              
              $
              194,245Prepaid
                  expenses
              
              ****
              **18,965**
              
              
              
              (13,584
              )
              
              
              33,638Inventories
              
              ****
              **415,977**
              
              
              
              307,081
              
              
              
              (83,968
              )Accounts
                  payable andaccrued
                  liabilities
              
              ****
              **339,726**
              
              
              
              165,208
              
              
              
              47,629**$**
              **833,028**
              
              
              $
              642,571
              
              
              $
              191,544
  b)
                Interest:
  **2006**
              
              
              2005
              
              
              2004Interest
                  paid
              
              **$**
              **64,583**
              
              
              $
              71,465
              
              
              $
              48,394




**Capital
      commitments:**





The
      Company has no significant commitments for property and equipment expenditures
      for 2006.  The Company has forecasted that any property and equipment
      expenditures incurred in 2007, based on future needs, will be funded from
      working capital and/or from operating or capital leases.




**C.
      Research and Development, Patents and Licenses**





The
      Company policies for research and development are directed toward finding and
      implementing technology to enhance the manufacturing processes for both plastic
      blasting media and recycled plastic lumber.  For the plastic blasting
      media, the culmination of much of the development was realized with the
      installation of the new processing line in California in 2002.  The
      continuation of research and development in 2003 resulted in further refinements
      to the processing which improved the quality of product as well as increasing
      available capacity.  For the recycled plastic lumber the research and
      development has resulted in improvements to the process output of the extrusion
      machines, the refinement of designs for molding systems that will enable
      production of better dimensional lumber pieces, and completion of refinements
      that make it possible to recycle all types of post consumer plastics into good
      lumber products.  Costs incurred for these activities during the most
      recent three years are included in this table:





**Poly-Pacific
                International Inc.****2006**
            
            
            **2005**
            
            
            **2004**Research
                and Development Projects Costs
            
            $
            ---
            
            
            $
            ---
            
            
            $
            115,340





There
      have not been any costs incurred by the Company for patents or for special
      product processing licenses during the fiscal year ending December 31,
      2006.




37




**D.
      Trend Information**




No
      trends
      that will impact upon the Company’s results this year are known at this
      time.




**E.
      Off Balance Sheet Arrangements**




There
      are
      no off balance sheet arrangements.




**F.
      Tabular Disclosure of Contractual Obligations**





**Contractual
                Obligations**
              **As
                at December 31, 2006**
            **Principal/Lease
                Amounts Remaining to be Paid in**
            **Total
                Contractual Obligations****Less
                than**
              **1
                Year**
            **1-3
                Years**
            **3-5
                Years**
            **More
                than**
              **5
                Years**Equipment
                Long-Term Loan
            154,281
            
            
            
            154,28110%
                Convertible Debenture
            102,000
            
            
            
            102,000Building
                Lease Obligation in California (Poly Pacific Technologies) and in
                St.
                Thomas, Ontario (Everwood)
            192,677
            112,394
            
            
            305,071






**ITEM
      6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**




**A.
      Directors and Senior Management**




**Randy
      Hayward, B.Comm, LLB. – President, Chief Executive Officer & Acting Chief
      Financial officer, and Director**




Randy
      Hayward maintained a successful law practice in Edmonton, Alberta for 20
      years.   During the latter phase of his law practice, he founded and
      managed Canadian Dispute Resolution (Alberta) Ltd and marketed the service
      of
      mediation to the legal community and the insurance industry. Mr. Hayward also
      earned his Diploma in Counseling at P.D. Seminars from the Haven Institute
      on
      Gabriola Island, B.C. After relocating to the west coast from Edmonton, he
      has
      worked with numerous private and public companies for 15 years. Recently, Mr.
      Hayward  has been a consultant to 4 successful public companies trading on
      the TSX –Venture, raising investment capital and working in corporate
      communications, business development and investor relations. In March of
      this year, Mr. Hayward became involved with Poly-Pacific as a major shareholder
      and consultant and has worked with the company in a variety of capacities since
      then until assuming the office of President on August 22nd,
      2006.




**Mr.
      Mike Duff**, Director




Mr.
      Duff
      of Edmonton, Alberta is the President and Chief Executive Officer of Design
      Group Staffing Inc., a supplier of temporary and contract staff primarily in
      the
      engineering, construction and resource industries. Mr. Duff founded Design
      Group
      in Edmonton in 1976. Since that time, the company has grown to be a leading
      national staffing firm with 11 branch offices across the country. The company
      has a temporary workforce of over 1500 people and revenues in 2001 of over
      $100
      million dollars. Mr. Duff is also President of Devonian Hyundai and Subaru
      City,
      an Edmonton automotive dealership as well as having other business
      interests.




38




**Mr.
      David Tam**, Director and Secretary




Mr.
      Tam
      is a partner at the law firm Parlee McLaws in Edmonton, Alberta. His practice
      focuses on securities and corporate transactions and he has represented both
      issuers and agents for a number of public offerings, private placements and
      regulatory compliance matters for issuers listed on the Canadian Venture
      Exchange. David has worked with a number of technology companies involved in
      high technology, biotechnology and advanced materials, guiding them from the
      formative stages through various private placements and eventually to initial
      public offerings.




**Dr.
      Edward J. Chambers**, Director




Dr.
      Chambers of Victoria, B.C. is a Professor of Economic Analysis at the University
      of Alberta’s Faculty of Business, Director of the Western Centre for Economic
      Research and Director of the Centre for International Business Studies at the
      University of Alberta. Dr. Chambers has written and lectured extensively in
      the
      areas of business and economics for several decades. He is the former Dean
      of
      the Faculty of Business at the University of Alberta




**Richard
      Oravec**, Director




Mr.
      Richard Oravec, a resident of New York, holds an MBA from
      Fordham University and a BA from Boston University. Mr. Oravec is a
      seasoned financial engineer of emerging technology companies, having
      successfully structured corporate finance syndications and private placements
      in
      small and medium sized public and private companies. Through his diverse network
      in the public and private sectors, Mr. Oravec brings to Poly-Pacific his
      experience and resources in the raising of capital, creating investment
      structures, strategic planning, marketing and development, and developing
      strategic business alliances for accelerated growth




The
      Company's directors are elected by shareholders at each annual meeting to serve
      until the next annual meeting or, in the event of a vacancy, appointed by the
      Board of Directors then in office to serve until the next annual meeting or
      until their successors are elected and qualified. The Company's executive
      officers are appointed by the Board of Directors and serve at the discretion
      of
      the Board of Directors. There are no family relationships among the directors
      or
      executive officers of the Company.




**Rick
      Gliege – V.P of Production & Sales**




Rick
      Gliege comes to Poly-Pacific International Inc. with over 15 years experience
      as
      a senior manager in the public and private sectors. As a provincial manager
      with
      one of the largest automotive insurance company’s in North America, Mr. Gliege
      was instrumental in the design, implementation and management of two new
      divisions, Dispute Resolution and Road Improvement Strategies. Mr. Gliege,
      a
      graduate from the University of Victoria and a certified commercial
      mediator.  Mr. Gliege will now assume the position of Vice President
      of Production and Sales for all of Poly-Pacific International’s subsidiary
      companies in Canada and the United States.





39




**B.
      Executive Compensation**




**Summary
      Compensation Table**




During
      the last completed financial year ended December 31, 2006, the Corporation
      had
      two (2) Named Executive Officers, D. Randy Hayward, President and Thomas Lam,
      former President.  The following table sets forth all annual and
      long-term compensation paid by the Corporation for each of the last three (3)
      completed financial years to all of the Named Executive Officers during that
      time period:




**Annual
                Compensation**
            **Long-Term
                Compensation****Awards**
            **Payouts****Name
                and Principal Position**
            **Year**
            **Gross**
              **Salary**
              **($)**
            **Bonus**
              **($)**
            **Other
                Annual Compen-**
              **sation**
              **($)**
            **Securities
                Under Options/ SARs Granted**
              **(#)**
            **Restricted
                Shares**
              **or**
              **Restricted
                Share Units**
              **($)**
            **LTIP**
              **Payouts**
              **($)**
            **All
                Other Compen-**
              **sation**
              **($)**D.
                Randy Hayward
              President(1)
            2006
            62,000
            Nil
            Nil
            200,000
            Nil
            Nil
            NilThomas
                Lam
              Former
                President
            2006
              2005
              2004
            $52,770
              120,000
              120,000
            Nil
              Nil
              Nil
            5,600
              9,600
              9,600
            Nil
              Nil
              351,000
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              NilTerry
                Hawes
              Former
                Chief Financial Officer
            2005
              2004
            10,000
              10,000
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              NilPeter
                Inman
              Former
                Chief Financial Officer
            2005
              2004
            25,000
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              NilAnthony
                Corso
              Former
                Chief Financial Officer
            2005
              2004
            17,000
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil
            Nil
              Nil





40




**Long-Term
      Incentive Plans - Awards in Most Recently Completed Fiscal
      Year**




As
      of the
      date hereof, the Corporation does not have any long-term incentive plans and
      no
      long-term incentive plan awards were granted to the Named Executive Officers
      during the Corporation’s most recently completed financial year ended December
      31, 2006.  A “Long-Term Incentive Plan” is a plan under which awards
      are made based on performance over a period longer than one fiscal year, other
      than a plan for options, SARs or restricted share compensation.




**Options/SARs
      Granted During the Most Recently Completed Fiscal Year**




As
      of the
      date hereof, the Corporation does not have any long-term incentive plans and
      no
      long-term incentive plan awards were granted to the Named Executive Officers
      during the Corporation’s most recently completed financial year ended December
      31, 2006. A “Long-Term Incentive Plan” is a plan under which awards are made
      based on performance over a period longer than one fiscal year, other than
      a
      plan for options, SARs or restricted share compensation.





**Name**
            **Securities,
                Under Options/SARs Granted**
              **(#)**
            **%
                of Total Options/SAR Granted in Financial Year**
            **Exercise**
              **or**
              **Base
                Price**
              **($/Security)**
            **Market
                Value of Securities Underlying Options/SARs on the Date of
                Grant**
              **($/Security)**
            **Expiration
                Date**D.
                Randy Hayward
              President
                (1)
            200,000
                (1)
            0.01%
            $0.10
            $0.075
            April
                12, 2007Thomas
                Lam
              Former
                President
            Nil
            N/A
            N/A
            N/A
            N/A





**Notes:**


(1)
      These
      Options were granted to Mr. Hayward as a consultant of the Corporation and
      prior
      to his appointment as President of the Corporation on November 4,
      2006.






41




**Aggregated
      Option/SARs Exercised During the Most Recently Completed Fiscal Year and Fiscal
      Year End Option/SAR Values**




No
      Options or SARs were exercised by the Named Executive Officers during the
      Corporation's most recently completed financial year ended December 31,
      2006.  The following table sets out the value of Options held by the
      Named Executive Officers as at December 31, 2006.  During fiscal 2006,
      no SARs were held by the Named Executive Officers.




**Name**
            **Securities,**
              **Acquired
                on**
              **Exercise**
              **(#)**
            **Aggregate**
              **Value**
              **Realized
                ($)**
            **Unexercised
                Options at**
              **Fiscal
                Year-End**
              **Exercisable/Unexercisable**
              **(#)**
            **Value
                of Unexercised In-the-Money Options at Fiscal Year-End ($) Exercisable
                /
                Unexercisable**D.
                Randy Hayward
              President
            Nil
            Nil
            175,000
                /
                125,000
            N/AThomas
                Lam
              Former
                President
            Nil
            Nil
            351,000
                / Nil
            N/A






**Option/SAR
      Repricing During the Most Recently Completed Fiscal Year**




No
      Options/Sars were repriced during the fiscal year ended December 31,
      2006.





**Termination
      of Employment, Change in Responsibilities and Employment
      Contracts**




Effective
      November 3, 2006, the Corporation entered into an employment contract with
      Mr.
      Hayward as President for a term
      of three (3) months which will renew upon mutual agreement by both
      parties.  Pursuant to the employment contract, Mr. Hayward is
      entitled to receive a monthly salary of eight thousand (CDN$8,000) Canadian
      dollars per month.  The employment contract also grants an option to
      purchase 250,000 Shares in accordance with the Corporation’s stock option
      plan.  All such options will vest fully over eighteen (18)
      months.  In addition, the Corporation will reimburse Mr. Hayward for
      all reasonable expenses and in the case of unusual expense items prior written
      approval is required.




The
      Corporation entered into an employment contract with Thomas Lam, as President,
      dated effective January 1, 2002, for a term of two (2) years which automatically
      renews on each anniversary subject to six (6) months notice from either
      party




At
      the
      end of the Corporation’s most recently completed financial year, there were no
      compensatory plans, contracts or arrangements in place with respect to any
      Named
      Executive Officer in the event of the resignation, retirement or other
      termination of employment, a change of control of the Corporation or any of
      its
      subsidiaries or a change in the Named Executive Officer’s responsibilities
      following a change in control except as stipulated above.




42




**Compensation
      of Directors**




Directors
      of the Corporation receive no compensation for services rendered in such
      capacity (including salaries, director’s fees, commissions, bonuses paid for
      services rendered, bonuses paid for services rendered in a previous year, and
      any compensation other than bonuses earned by the directors for services
      rendered), but are eligible to receive stock options pursuant to the
      Corporation’s stock option plan.




The
      following table sets forth information in respect of compensation paid to the
      Directors for their services as Directors and the securities underlying the
      Options as at the Corporation’s most recently completed financial year ended
      December 31, 2006.




**Director**
            **Total
                Compensation**
            **Options
                Granted / Total Held**Thomas
                Lam
            Nil
            Nil
                / 351,000 (1)Don
                Quon
            Nil
            Nil
                / 117,000 (2)Edward
                Chambers
            Nil
            750,000
                / 867,000 (3)Mike
                Duff
            Nil
            750,000
                / 867,000 (3)David
                S. Tam
            Nil
            750,000
                / 250,000 (3)(4)





**Notes:**




(1)
            These
                Options expired on January 31, 2007, being 90 days from November
                2, 2007,
                the date that Mr. Lam resigned as a director of the
                Corporation.


(2)
            These
                Options expired on  4, 2007, being 90 days from November 6,
                2007, the date that Mr. Quon resigned as a director of the
                Corporation.


(3)
            Subsequent
                to the year ended December 31, 2007, 500,000 Options were exercised
                on
                February 27, 2007.


(4)
            Mr.
                Tam exercised an additional 117,000 Options on February 7,
                2007.




**SECURITIES
      AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**




The
      following table sets forth information in respect of compensation plans under
      which equity securities of the Corporation are authorized for issuance for
      the
      Corporation’s financial year ended December 31, 2006.




**Plan
                Category**
            **Number
                of securities, to be issued**
              **upon
                exercise of outstanding warrants**
              **and
                rights**
              **(a)**
            **Weighted-average
                exercise price of**
              **outstanding
                options, warrants and rights**
              **(b)**
            **Number
                of securities remaining available**
              **for
                future issuance under equity**
              **compensation
                plans (excluding securities**
              **reflected
                in column (a))**
              **(c)****Equity
                compensation plans approved by security holders**
            4,563,600
                (1)(2)
            $0.14
            181,248
                (1)(3)
                (4)**Equity
                compensation plans not approved by security
                holders**
            N/A
            N/A
            N/A**TOTAL:**
            4,563,600
            N/A
            181,248





**Notes:**


(1)
            A
                total of 923,100 Options have been returned for issuance pursuant
                to the
                stock option plan as a result of the resignation and termination
                of
                various directors and employees
                respectively.


(2)
            800,000
                of these Options require Shareholder approval.  See “Particular
                Matters to Be Acted Upon – Grant of Stock
                Options”.


(3)
            Subsequent
                to the year ended December 31, 2006, an aggregate of 3,500,000 Options
                were granted such that the number of securities remaining available
                for
                further issuance under its equity compensation plans was 181,248
                as at the
                date hereof.


(4)
            The
                Corporation can grant no more than 4,744,748 Options under the
                Corporation’s current stock option
                plan.





43




**INTEREST
      OF INFORMED PERSONS IN MATERIAL TRANSACTIONS**




Other
      than as disclosed herein, there are no material interests, direct or indirect,
      of directors and executive officers of the Corporation, nominees for director,
      any shareholder who beneficially owns more than 10% of the Shares of the
      Corporation, or any known associate or affiliate of such persons, in any
      transaction since the commencement of the Corporation’s last completed fiscal
      year or in any proposed transaction which has materially affected or would
      materially affect the Corporation or any or its subsidiaries.




**MANAGEMENT
      CONTRACTS**




Other
      than as disclosed herein, management functions of the Corporation and its
      subsidiaries are performed solely by directors or executive officers of the
      Corporation and not, to any substantial degree, by any other
      person.




**C.
      Board Practices**




In
      accordance with the Articles of the Company the number of directors shall be
      such number not less than one as the Company by ordinary resolution may from
      time to time determine and each director shall hold office until the next annual
      general meeting following his or her election or until his or her successor
      is
      elected. The Company has five directors.




The
      officers of the Company are elected by the Board of Directors as soon as
      possible following each annual general meeting and shall hold office for such
      period and on such terms as the board may determine.




The
      members of the Company Audit Committee are appointed by the Board of Directors
      as soon as possible following each annual general meeting.   The
      current audit committee members are Dr. Edward Chambers, Mr. Mike Duff and
      Richard Oravec who are all independent Directors, in accordance with the
      criteria set down pursuant to Exchange Act Rule 10A-3. The Board of Directors
      does not have a formally appointed compensation committee, but performs this
      function as a whole in respect of compensation of officers of the corporation,
      with any officer who is also a director being excluded from the deliberations
      of
      the other directors in respect of that officer’s compensation.




**D.
      Employees**




As
      at
      December 31, 2006, the Company had the following full-time employees (or under
      contract providing management, accounting and administrative):




Poly-Pacific
      International Inc.— 2 management, 1 accounting and 1 administration


Everwood,
      Ontario—1 manager and 2 operators


Everwood,
      Edmonton—1 sales and marketing manager (laid off on December 31,
      2006)


Poly-Pacific
      Technologies—2 sales and marketing, 1 plant manager, 1
      accounting/administration, 1 maintenance technician, 1 operators full time,
      and
      1 operators part time




44




**E.
      Share Ownership**





The
      authorized capital of the Company consists of an unlimited number of common
      shares without nominal or par value and an unlimited number of preferred
      shares.





Common
      Shares and Warrants:


As
      at
      December 31, 2006, the numbers of issued common shares are 25,237,740 as
      compared to 18,885,456 as at December 31, 2005.  No preferred shares
      have been issued.




As
      of
      December 31, 2006, all directors, officers and key employees of the Company
      as a
      group own and control approximately 11.8% of the Company's common shares
      outstanding and could own and control approximately 20.0% of the Company's
      common shares if all outstanding options and warrants were to be
      exercised.






45




**ITEM
      7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**




**A.
      Major Shareholders**




The
      Company is not owned or controlled, either directly or indirectly, by any other
      corporation or by any government. There are no arrangements, known to the
      Company, the operation of which may at a future date result in a change of
      control of the Company.  The people identified in the table below are
      the only registered owners of more than 10% of the Company’s voting securities,
      as of December 31, 2006.




***Identity
                of Owner***
            ***Amount
                Owned and***
              ***Controlled***
            ***Percent
                of Class******Now
                Outstanding***
            ***Fully
                Diluted*****(3)**Mike
                Duff
            1,818,181
            1,818,181
            2,685,181




**B.
      Related Party Transactions**




During
      the reporting years, the Company had the following related party transactions
      with corporations under significant influence of the Company's
      directors:




**Year
                Ended December 31**
            **2006**
            **2005**
            **2004**Management
                Fees
            48,300
            88,105
            98,061.





Prior
      to
      Mr. Thomas Lam’s resignation in August 2006 as a CEO and President and
      resignation as Director and Chairman of the Board in November 2006, these fees
      are incurred pursuant to a Management Agreement between the Company and
      Poly-Pacific Inc. and Mr. Thomas Lam, which is for two years effective January
      1, 2002 and is subject to annual renewals at the end of the initial
      term.  Poly-Pacific Inc., a private corporation, is the predecessor
      company from which the plastic blasting media equipment and technology was
      acquired by the Company in 1996.  Although Mr. Lam is only one of the
      shareholders in the said private company, he is the only person who receives
      any
      remuneration through Poly-Pacific Inc.





The
      agreement includes a two-year non-compete in respect of the plastic media
      business, and a two-year moratorium to further protect the interests of the
      Company and its affiliates through non-solicitation of any customers, employees
      or agents of the Company, or any of its affiliates.   The
      employment agreement, as described in Item 6 B in this report, between the
      Company and Mr. Thomas Lam complements the management agreement in respect
      of
      his compensation as President and the other terms of his
      employment.





As
      disclosed in the notes to the financial statements, these transactions are
      in
      the normal course of operations and are measured at the exchange amount, which
      is the amount of consideration established and agreed to by the related
      parties.




**C.
      Interests of Experts and Counsel**




Not
      applicable.




46




**ITEM
      8. FINANCIAL INFORMATION**




**A.
      Consolidated Financial Statements and Other Financial
      Information**




The
      following financial statements of Poly-Pacific International Inc. for the years
      ended December 31, 2006, 2005 and 2004 are incorporated with this Item 8 to
      this
      report:




·
            Management
                Responsibility for Financial
                Reporting.


·
            Auditors'
                Report.


·
            Consolidated
                Balance Sheet at period end date.


·
            Consolidated
                Statement of Operations.


·
            Statement
                of Retained Earnings and Deficit.


·
            Consolidated
                Statement of Cash Flows.


·
            Notes
                to Consolidated Financial
                Statements.




The
      Company has neither declared nor paid any dividends to date on its outstanding
      shares. The Company intends to retain any future earnings to finance the
      development of its properties, and accordingly, does not anticipate paying
      any
      dividends in the foreseeable future.




The
      financial statements are presented on the immediately following
      pages.




47








**POLY-PACIFIC
      INTERNATIONAL INC.**


(Expressed
      in Canadian Dollars)





**Consolidated
      Financial Statements**





**December
      31, 2006, 2005**










48




**MANAGEMENT'S
      RESPONSIBILITY FOR THE FINANCIAL STATEMENTS**





The
      accompanying consolidated financial statements of Poly-Pacific International
      Inc. for the years ended December 31, 2006 and 2005 have been prepared by
      management in accordance with U.S. generally accepted accounting
      principles.





Management
      maintains systems of internal control designed to provide reasonable assurance
      that the assets are safeguarded, all transactions are authorized and duly
      recorded, and financial records are properly maintained to facilitate the
      preparation of the consolidated financial statements in a timely
      manner.  The Board of Directors is responsible for ensuring that
      management fulfils its responsibilities for financial reporting and is
      ultimately responsible for reviewing and approving the consolidated financial
      statements.  The Board carries out this responsibility principally
      through its Audit Committee.





The
      Audit
      Committee of the Board of Directors has reviewed the consolidated financial
      statements with management and the external auditors.  Collins Barrow
      Edmonton LLP, an independent firm of chartered accountants, appointed as
      external auditors by the shareholders, have audited the consolidated financial
      statements and their report is included herein.








*“Randy
      Hayward”*


Signed


Randy
      Hayward


President,
      Acting Chief Executive Officer and


Acting
      Chief Financial Officer








April
      19,
      2007




49




**Report
          of Independent Registered Public Accounting Firm**
 
 
 To
          the
          Shareholders of
 Poly-Pacific
          International Inc.
 
 We
          have
          audited the accompanying consolidated balance sheets of Poly-Pacific
          International Inc. (the “Company”) as at December 31, 2006 and 2005 and the
          related consolidated statements of operations, shareholders’ equity and cash
          flows for each of the years in the three year period ended December 31,
          2006.  These consolidated financial statements are the responsibility
          of the Company’s management.  Our responsibility is to express an
          opinion on these consolidated financial statements based on our
          audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States).  Those standards require
          that we plan and perform the audits to obtain reasonable assurance about
          whether
          the consolidated financial statements are free of material
          misstatement.  The Company is not required to have, nor were we
          engaged to perform, an audit of its internal control over financial
          reporting.  Our audits included consideration of internal control over
          financial reporting as a basis for designing audit procedures that are
          appropriate in the circumstances, but not for the purpose of expressing
          an
          opinion on the effectiveness of the Company’s internal control over financial
          reporting.  Accordingly, we express no such opinion.  An
          audit also includes assessing the accounting principles used and significant
          estimates made by management, as well as evaluating the overall financial
          statement presentation.  We believe that our audits provide a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of the Company as at December
          31, 2006 and December 31, 2005 and the results of its operations and its
          cash
          flows for each of the years in the three year period ended December 31,
          2006 in
          accordance with U.S. generally accepted accounting principles.
 
 The
          accompanying consolidated financial statements have been prepared assuming
          that
          the Company will continue as a going concern.  As discussed in Note 1
          to the financial statements, the Company has suffered recurring losses
          from
          operations and has a net working capital deficiency that raise substantial
          doubt
          about its ability to continue as a going concern.  Management’s plans
          in regard to these matters are also described in Note 1.  The
          consolidated financial statements do not include any adjustments that might
          result from the outcome of this uncertainty.
 
 
 “Collins
          Barrow Edmonton LLP”
 Signed
 Collins
          Barrow Edmonton LLP, Chartered Accountants
 Independent
          Registered Chartered Accountants
 
 Edmonton,
          Canada
 April
          19,
          2007
 
 50
 
 **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Consolidated
          Balance Sheets
 As
            at
            December 31, 2006 and 2005
 
 **2006**
                
                
                2005ASSETS**Current
                    Assets**Cash
                
                **$**
                **---**
                
                
                $
                61,346Accounts
                    receivable net of allowance [$229,260 (2005 - $204,719)]
                
                ****
                **98,425**
                
                
                
                160,217Other
                    receivable
                
                ****
                **24,084**
                
                
                
                20,652Prepaid
                    expenses
                
                ****
                **---**
                
                
                
                18,949Inventories
                    (Note 4)
                
                ****
                **276,639**
                
                
                
                692,616Current
                    assets of discontinued operations (Note 16)
                
                ****
                **10,338**
                
                
                
                41,016****
                **409,486**
                
                
                
                994,796**Deposit**
                
                ****
                **29,400**
                
                
                
                29,416**Property
                    and equipment**(Note 5)
                
                ****
                **874,951**
                
                
                
                1,023,882**Equipment
                    of discontinued operations**(Note 16)
                
                ****
                **---**
                
                
                
                63,409**$**
                **1,313,837**
                
                
                $
                2,111,503LIABILITIES
                    AND SHAREHOLDERS’ EQUITY**Current
                    Liabilities**Bank
                    indebtedness
                
                **$**
                **2,144**
                
                
                $
                ---Accounts
                    payable
                
                ****
                **561,290**
                
                
                
                387,314Accrued
                    liabilities
                
                ****
                **230,711**
                
                
                
                64,961Bank
                    loan (Note 6)
                
                ****
                **584,941**
                
                
                
                518,870Current
                    portion of long-term debt (Note 7)
                
                ****
                **154,281**
                
                
                
                202,460Debentures
                    payable (Note 8)
                
                ****
                **102,000**
                
                
                
                93,500Current
                    liabilities of discontinued operations (Note 16)
                
                ****
                **129,822**
                
                
                
                122,550****
                **1,765,189**
                
                
                
                1,389,655Non-controlling
                    interest of variableinterest
                    entity
                
                ****
                **280,589**
                
                
                
                ---****
                **2,045,778**
                
                
                
                1,389,655**Commitments,
                    Contingencies and****Subsequent
                    Events**(Notes 10, 11 and 17)SHAREHOLDERS'
                    EQUITYShare
                    capital (Note 9)
                
                ****
                **2,467,602**
                
                
                
                1,998,538Authorized:Unlimited
                    common and preferred sharesCommon
                    shares issued and outstanding:December
                    31, 2006 - 25,237,740December
                    31, 2005 - 18,885,456December
                    31, 2004 - 9,361,624Additional
                    paid in capital
                
                ****
                **778,796**
                
                
                
                731,170Accumulated
                    deficit
                
                ****
                **(4,031,534**
                **)**
                
                
                (2,061,055
                )Accumulated
                    other comprehensive income
                
                ****
                **53,195**
                
                
                
                53,195****
                **(731,941**
                **)**
                
                
                721,848**$**
                **1,313,837**
                
                
                $
                2,111,503
  *The
          accompanying notes to the consolidated financial statements are an integral
          part
          of the statements.*
 
 Approved
                    on behalf of the Board“Mike
                    Duff”
                
                “Edward
                    Chambers”Signed
                
                SignedDirector
                
                Director
 
 51
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Consolidated
          Statement of Operations
 For
            the
            Years Ended December 31, 2006, 2005 and 2004
 
 **2006**
                
                
                2005
                
                
                2004**Sales**
                
                **$**
                **1,462,113**
                
                
                $
                2,503,302
                
                
                $
                3,135,706Direct
                    costs
                
                ****
                **1,142,352**
                
                
                
                1,797,061
                
                
                
                1,566,073Gross
                    profit
                
                ****
                **319,761**
                
                
                
                706,241
                
                
                
                1,569,633**Expenses**General
                    and administrative
                
                ****
                **864,184**
                
                
                
                465,127
                
                
                
                338,639Occupancy
                    costs
                
                ****
                **334,301**
                
                
                
                326,909
                
                
                
                342,364Professional
                    fees
                
                ****
                **274,232**
                
                
                
                271,788
                
                
                
                166,279Amortization
                    of property and equipment
                
                ****
                **148,886**
                
                
                
                194,542
                
                
                
                255,476Selling
                    and marketing
                
                ****
                **96,105**
                
                
                
                180,968
                
                
                
                284,748Management
                    fees
                
                ****
                **48,300**
                
                
                
                88,105
                
                
                
                98,090Foreign
                    exchange loss (gain)
                
                ****
                **1,469**
                
                
                
                20,358
                
                
                
                (3,866
                )Regulatory
                    costs
                
                ****
                **26,248**
                
                
                
                17,174
                
                
                
                39,726Project
                    development
                
                ****
                **---**
                
                
                
                ---
                
                
                
                113,782****
                **1,793,725**
                
                
                
                1,564,971
                
                
                
                1,635,238**Operating
                    Loss from continuing operations**
                
                ****
                **(1,473,964**
                **)**
                
                
                (858,730
                )
                
                
                (65,605Interest
                    income
                
                ****
                **---**
                
                
                
                (36
                )
                
                
                (464
                )Interest
                    expense
                
                ****
                **87,688**
                
                
                
                71,465
                
                
                
                48,394**Operating
                      Loss from continuing operations**before income
                      taxes
                
                ****
                **(1,561,652**
                **)**
                
                
                (930,159
                )
                
                
                (113,535
                )**Income
                    taxes - deferred**(Note 12)
                
                ****
                **---**
                
                
                
                174,750
                
                
                
                19,392**Loss
                    from continuing operations**
                
                ****
                **(1,561,652**
                **)**
                
                
                (1,104,909
                )
                
                
                (132,927
                )**Loss
                    from discontinued operations**(Note 16)
                
                ****
                **(408,827**
                **)**
                
                
                (56,753
                )
                
                
                (108,822
                )**Net
                    Loss for the year**
                
                **$**
                **(1,970,479**
                **)**
                
                $
                (1,161,662
                )
                
                $
                (241,749
                )**Loss
                      per share from continuing operations**(Note
                      13)
                
                **$**
                **(0.068**
                **)**
                
                $
                (0.088
                )
                
                $
                (0.014
                )**Net
                    loss per share**(Note 13)
                
                **$**
                **(0.086**
                **)**
                
                $
                (0.093
                )
                
                $
                (0.026
                )**Loss
                      per share from discontinued o**perations (Note
                      13)
                
                **$**
                **(0.018**
                **)**
                
                $
                (0.005
                )
                
                $
                (0.012
                )
  *The
          accompanying notes to the consolidated financial statements are an integral
          part
          of the statements.*
  52
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Consolidated
          Statement of Shareholders’ Equity
 For
            the
            Years Ended December 31, 2006, 2005 and 2004
 
 **Share
                    Capital****Accumulated****Additional**
                
                
                
                
                
                **Other**
                
                
                
                
                
                **Shareholders’****Number**
                
                
                
                
                
                **Number
                    of**
                
                
                
                
                
                **Paid
                    in**
                
                
                **Accumulated**
                
                
                **Comprehensive**
                
                
                **Comprehensive**
                
                
                **Equity****of
                    Shares**
                
                
                **Amount**
                
                
                **Warrants**
                
                
                **Amount**
                
                
                **Capital**
                
                
                **Deficit**
                
                
                **Income**
                
                
                **Loss**
                
                
                **(Deficit)**Balance
                    atDecember
                    31, 2003
                
                
                9,361,624
                
                
                $
                865,584
                
                
                
                -
                
                
                $
                
                
                
                $
                672,202
                
                
                $
                (657,644
                )
                
                $
                53,195
                
                
                $
                -
                
                
                $
                933,337Stock
                         based compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25,272
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25,272Loss
                    for the period
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (241,749
                )
                
                
                -
                
                
                
                -
                
                
                
                (241,749
                )Comprehensive
                    loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (241,749
                )
                
                
                -Balance
                    atDecember
                    31, 2004
                
                
                9,361,624
                
                
                
                865,584
                
                
                
                -
                
                
                
                -
                
                
                
                697,474
                
                
                
                (899,393
                )
                
                
                53,195
                
                
                
                -
                
                
                
                716,860Conversion
                    of debenture
                
                
                9,523,832
                
                
                
                1,132,954
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,132,954Stock
                    based compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                33,696
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                33,696Loss
                    for the period
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,161,662
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,161,662
                )Comprehensive
                    loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,161,662
                )
                
                
                -Balance
                    atDecember
                    31, 2005
                
                
                18,885,456
                
                
                
                1,998,538
                
                
                
                -
                
                
                
                -
                
                
                
                731,170
                
                
                
                (2,061,055
                )
                
                
                53,195
                
                
                
                -
                
                
                
                721,848**Issuance
                    of common **shares****
                
                ****
                **6,352,284**
                
                
                ****
                **294,884**
                
                
                ****
                **5,595,284**
                
                
                ****
                **174,180**
                
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **469,064****Stock-based****Compensation**
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **47,626**
                
                
                
                -
                
                
                
                -
                
                
                ****
                **-**
                
                
                ****
                **47,626****Loss
                    for the period**
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **-**
                
                
                ****
                **(1,970,479**
                **)**
                
                
                -
                
                
                
                -
                
                
                ****
                **(1,970,479**
                **)****Comprehensive
                    loss**
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                ****
                **(1,970,479**
                **)**
                
                
                -**Balance
                    at****December
                    31, 2006**
                
                ****
                **25,237,740**
                
                
                **$**
                **2,293,422**
                
                
                ****
                **5,595,284**
                
                
                **$**
                **174,180**
                
                
                **$**
                **778,796**
                
                
                **$**
                **(4,031,534**
                **)**
                
                **$**
                **53,195**
                
                
                $
                -
                
                
                **$**
                **(731,941**
                **)**
  *The
          accompanying notes to the consolidated financial statements are an integral
          part
          of the statements.*
  53
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Consolidated
          Statement of Cash Flows
 For
            the
            Years Ended December 31, 2006, 2005 and 2004
 
 **2006**
                
                
                2005
                
                
                2004**Operating
                    Activities**Net
                    loss for the year from continuing operations
                
                **$**
                **(1,561,652**
                **)**
                
                $
                (1,104,909
                )
                
                $
                (132,851
                )Items
                    not involving cash:Amortization
                    of property and equipment
                
                ****
                **148,886**
                
                
                
                194,542
                
                
                
                255,476Deferred
                    income taxes expense
                
                ****
                **---**
                
                
                
                174,750
                
                
                
                19,392Stock-based
                    compensation
                
                ****
                **47,626**
                
                
                
                33,696
                
                
                
                25,272Foreign
                    exchange gain on debenture
                
                ****
                **---**
                
                
                
                (133,678
                )
                
                
                (125,672
                )Net
                    change in non-cash operating assets andliabilities
                    (Note 14)
                
                ****
                **833,028**
                
                
                
                642,571
                
                
                
                191,544Funds
                    provided by (used in) continuingoperations
                
                ****
                **(532,112**
                **)**
                
                
                (193,028
                )
                
                
                233,161Funds
                    provided by (used in) discontinuedoperations
                    (Note 16)
                
                ****
                **(307,423**
                **)**
                
                
                56,118
                
                
                
                18,018Cash
                    provided by (used in) operating activities
                
                ****
                **(839,535**
                **)**
                
                
                (136,910
                )
                
                
                251,179**Financing
                    Activities**Bank
                    overdraft advances
                
                ****
                **2,144**
                
                
                
                ---
                
                
                
                ---Repayment
                    of long-term debt
                
                ****
                **(48,179**
                **)**
                
                
                (65,431
                )
                
                
                (75,020
                )Bank
                    loan advances
                
                ****
                **66,071**
                
                
                
                175,502
                
                
                
                343,368Non-controlling
                    interest
                
                ****
                **280,589**
                
                
                
                ---
                
                
                
                ---Issuance
                    of share capital, net of share issue costs
                
                ****
                **469,064**
                
                
                
                ---
                
                
                
                ---Debenture
                    payable advances (repayment)
                
                ****
                **8,500**
                
                
                
                (284,856
                )
                
                
                (361,440
                )Funds
                    used in discontinued operations (Note 16)
                
                ****
                **---**
                
                
                
                (162,540
                )
                
                
                (24,720
                )Cash
                    provided by (used in) financing activities
                
                ****
                **778,189**
                
                
                
                (337,325
                )
                
                
                (117,812
                )**Investing
                    Activities**Purchase
                    of property and equipment
                
                ****
                **---**
                
                
                
                (2,678
                )
                
                
                (47,088
                )Funds
                    provided by (used in)discontinued
                    operations (Note 16)
                
                ****
                **---**
                
                
                
                404,974
                
                
                
                (3,607
                )Cash
                    provided by (used in) investing activities
                
                ****
                **---**
                
                
                
                402,296
                
                
                
                (50,695
                )**Increase
                    (decrease) in cash**
                
                ****
                **(61,346**
                **)**
                
                
                (71,939
                )
                
                
                82,672**Cash,
                    beginning of year**
                
                ****
                **61,346**
                
                
                
                133,285
                
                
                
                50,613**Cash,
                    end of year**
                
                **$**
                **---**
                
                
                $
                61,346
                
                
                $
                133,285**Supplemental
                    cash flow information** (Note 14)
 
 *The
          accompanying notes to the consolidated financial statements are an integral
          part
          of the statements.*
  54
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 1.
                **Nature
                    of Business and Going
                    Concern**
 
 **Nature
          of
          Business**
 
 Poly-Pacific
          International Inc. was incorporated under the Alberta Business Corporations
          Act
          on October 25, 1995.  The Company is in the business of manufacturing
          plastic blasting media and manufacturing plastic lumber using recycled
          plastic
          materials.
 
 **Going
          Concern**
 
 These
          consolidated financial statements have been prepared in accordance with
          U.S.
          generally accepted accounting principles on a going concern basis, which
          presumes that the Company will be able to realize its assets and discharge
          its
          liabilities in the normal course of business for the foreseeable
          future.
 
 The
          Company incurred a net loss for the year ended December 31, 2006 of $1,970,479
          with a total accumulated deficit of $4,031,534.  There is substantial
          doubt about the Company’s ability to continue as a going concern.  The
          Company’s continuation as a “going concern” is dependent upon its ability to
          achieve profitable operations, upon the continued financial support of
          its
          shareholders and upon its ability to obtain additional financing or
          equity.  Management is implementing a plan to obtain additional equity
          financing in amounts sufficient to sustain operations.  The outcome of
          this matter cannot be determined at this time.
 
 These
          consolidated financial statements do not include any adjustments to the
          amounts
          and classification of assets and liabilities that may be necessary should
          the
          Company be unable to continue as a going concern.
  2.
                **Significant
                    Accounting Policies**
 
 **Basis
          of Presentation**
 
 These
          consolidated financial statements have been prepared in accordance with
          accounting principles generally accepted in the United States (U.S.
          GAAP).  All amounts herein are expressed in Canadian dollars unless
          otherwise noted.  These consolidated financial statements conform in
          all material respects with Canadian generally accepted accounting principles
          (“Canadian GAAP”), except as discussed in Note 20.
 
 **Principles
          of Consolidation**
 
 The
          consolidated financial statements include the accounts of the Company and
          its
          wholly owned subsidiaries, Everwood Agricultural Products International
          Inc.
          (“Everwood”), Poly-Pacific Technologies Inc. (“PPT”), and PolyRan Reclamation
          Inc (“Poly-Ran”) a variable interest entity in which the Company is the primary
          beneficiary.  As discussed in Note 16, at December 31, 2006, Everwood
          has been classified as a discontinued operation.  All inter-company
          transactions have been eliminated on consolidation.
 
 55
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 2.
                **Summary
                    of Significant Accounting Policies**
                    (Continued)
 
 **Revenue
          Recognition**
 
 Revenue
          is recorded when significant risks and rewards of ownership have been
          transferred to the customer.  This occurs at the time of shipment (FOB
          shipping point) of the products from the Company’s warehouse and an invoice is
          prepared.  Revenues are recognized only when the Company has
          transferred to the customer the significant risk and rewards of ownership
          of the
          goods, title to the products transfers, the amount is fixed and determinable,
          evidence of an agreement exists, there is reasonable assurance of collection
          of
          the sales proceeds, the Company has no future obligations and the customer
          bears
          the risk of loss.
 
 **Property
          and Equipment**
 
 Property
          and equipment is recorded at cost.  Amortization is calculated at the
          following annual rates:
  Automotive
                      equipment
                  -
                  30%
                      declining balanceComputer
                      equipment
                  -
                  30%
                      declining balanceLeasehold
                      improvements
                  -
                  20%
                      straight-lineOffice
                      equipment
                  -
                  20%
                      declining balancePlant
                      equipment
                  -
                  20%
                      declining balance
  **Impairment
          of Long-Lived
          Assets**
 
 The
          Company reviews the carrying values of long-lived assets for existence
          of facts
          or changes in circumstances that might indicate a condition of
          impairment.  If estimates of undiscounted cash flows expected to
          result from the use of an asset and its eventual disposition are less than
          the
          carrying amount then the carrying amount of the asset is written down to
          its
          fair value.
 
 **Translation
          of Foreign Currency**
 
 The
          functional currency of the Company and all of its subsidiaries is the Canadian
          dollar.  Monetary assets and liabilities of the company are translated
          into Canadian dollars at the rate of exchange in effect at the balance
          sheet
          date.  Revenue and expense items are translated at average rates of
          exchange in effect at the respective transaction months.  The
          resulting exchange gains or losses are included in
          earnings.  Non-monetary assets and liabilities, arising from
          transactions denominated in foreign currencies, are translated at rates
          of
          exchange in effect at the date of the transaction.
 
 Monetary
          assets and liabilities of the integrated foreign subsidiary are translated
          into
          Canadian dollars at a rate of exchange in effect at the balance sheet
          date.  Non-monetary assets and liabilities are translated at
          historical exchange rates.  Revenue and expense items other than
          amortization are translated at the average rate of exchange for the
          year.  Amortization of assets translated at historical exchange rates
          are translated at the same exchange rates as the assets to which they
          relate.
 
 **Inventories**
 
 Inventories
          are recorded at the lower of cost or net realizable value.  Cost of
          inventories is determined on an average cost basis.
 
 56
 
 **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 2.
                **Summary
                    of Significant Accounting Policies**
                    (Continued)
 
 **Deferred
          Taxes**
 
 The
          Company accounts for and measures deferred tax assets and liabilities in
          accordance with the asset and liability method.  Under this method,
          deferred tax assets and liabilities are recognized for future tax consequences
          attributable to differences between the financial statement carrying amounts
          of
          existing assets and liabilities and their respective tax
          bases.  Deferred tax assets and liabilities are measured using enacted
          tax rates expected to apply to taxable income in the years in which those
          temporary differences are expected to be reversed or settled.  The
          effect on deferred tax assets and liabilities of a change in tax rates
          is
          recognized in income in the period that includes the date of enactment
          of the
          change.  When the future realization of income tax assets does not
          meet the test of being more likely than not to occur, a valuation allowance
          in
          the amount of the potential future benefit is taken and no net asset is
          recognized.
 
 **Stock-Based
          Compensation Plan**
 
 Effective
          January 1, 2006, the Company adopted Statement of Financial Accounting
          Standards
          Board (“SFAS”) No. 123(R) “Share-Based Payment”, a revision to SFAS 123
“Accounting for Stock-Based Compensation”.  SFAS 123(R) requires the
          Company to recognize in the income statement the grant date fair value
          of
          share-based compensation awards granted to employees over the requisite
          service
          period.  Compensation expense recognized reflects estimates of award
          forfeitures and any change in estimates thereof are reflected in the period
          of
          change.  The risk-free interest rate assumption is based upon observed
          interest rates appropriate for the expected term of the Company’s employee stock
          options.  The Company used its historical volatility as a basis to
          estimate the expected volatility assumption used in the Black-Scholes model
          consistent with  SFAS 123(R).  The Company has not paid any
          dividends on common stock since its inception and does not anticipate paying
          dividends on its common stock in the foreseeable future.  The expected
          life of employee stock options is based on historic forfeiture
          rates.
 
 **Direct
          Costs**
 
 Direct
          costs consist primarily of purchasing costs, freight, direct labour and
          other
          specific costs.
 
 **General
          and Administrative**
 
 General
          and administrative costs consist primarily of office expenses, management
          salaries, stock-based compensation, administrative salaries and other
          expenses.
 
 **Project
          Development Costs**
 
 Project
          development costs incurred in completing the ISO 9002 project, in developing
          a
          project which will recycle used plastic blasting media, in setting up an
          additional processing plant for plastic blasting media, in researching
          certification of military grade materials for export and researching and
          developing a new manufacturing process for plastic blasting media are expensed
          in the year incurred.
 
 **Occupancy
          Costs**
 
 Occupancy
          costs consist primarily of rent, utilities and telephone expenses
 
 57
 
 **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 2.
                **Summary
                    of Significant Accounting Policies**
                    (Continued)
 
 **Selling
          and Marketing**
 
 Selling
          and marketing consist primarily of advertising, sales and marketing salaries,
          travel expenses and other promotional expenses.
 
 **Net
          Income (Loss) Per Common Share**
 
 Net
          income (loss) per common share is calculated using the weighted average
          number
          of common shares outstanding during the period.  Diluted net income
          (loss) per common share is calculated using the treasury stock method which
          uses
          the weighted average number of common shares outstanding during the period
          and
          also includes the dilutive effect of potentially issuable common
          shares.
 
 **Allowance
          for Doubtful
          Accounts**
 
 The
          allowance for doubtful accounts is the Company’s best estimate of the amount of
          probable credit issues in the existing accounts receivable.  The
          Company reviews its allowance for doubtful accounts on a continual
          basis.  Account balances are charged off against the allowance after
          all means of collection have been exhausted and the potential for recovery
          is
          considered remote.
 
 **Advertising**
 
 The
          Company expenses advertising
          costs as incurred.
 
 **Deposit**
 
 Deposit
          consists of refundable
          amounts held by vendors.
 
 **Use
          of Estimates**
 
 The
          preparation of financial statements in conformity with U.S. GAAP requires
          management to make estimates and assumptions that affect the reported amounts
          of
          assets and liabilities and disclosure of contingent assets and liabilities
          at
          the date of the financial statements and the reported amounts of revenues
          and
          expenses during the reporting period.  Actual results could differ
          from those estimates.
 
 **Recent
          Pronouncements**
 
 In
          February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
          Financial Instruments – an amendment of FASB Statements No. 133 and
          140”.  This Statement amends FASB Statements No. 133, Accounting for
          Derivative Instruments and Hedging Activities, and No. 140, Accounting
          for
          Transfers and Servicing of Financial Assets and Extinguishments of
          Liabilities.  This Statement resolves issues addressed in Statement
          133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial
          Interest in Securitized Financial Assets.” This Statement permits fair value
          remeasurement for any hybrid financial instrument that contains an embedded
          derivative, clarifies which interest-only strips and principal-only strips
          are
          not subject to the requirements of Statement 133, establishes a requirement
          to
          evaluate interest in securitized financial assets to identify interest
          that are
          freestanding derivatives or that are hybrid financial instruments that
          contain
          an embedded derivative requiring bifurcation, clarifies that
          concentrations
 
 58
 
 **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 2.
                **Summary
                    of Significant Accounting Policies**
                    (Continued)
 
 **Recent
          Pronouncements** (Continued)
 
 of
          credit
          risk in the form of subordination are not embedded derivatives and amends
          Statement 140 to eliminate the prohibition on a qualifying special-purpose
          entity from holding a derivative financial instrument that pertains to
          a
          beneficial interest other than another derivative financial
          instrument.  This Statement is effective for all financial instruments
          acquired or issued after the beginning on an entity’s first fiscal year that
          begins after September 15, 2006.  This standard will be applicable to
          the Company during the period ending 2007.
 
 In
          March
          2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
          Assets an amendment of FASB Statement No. 140”.  This Statement amends
          FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
          Assets and Extinguishments of Liabilities, with respect to the accounting
          for
          separately recognized servicing assets and servicing
          liabilities.  This Statement requires an entity to recognize a
          servicing asset or servicing liability each time it undertakes an obligation
          to
          service a financial asset by entering into a servicing contract.  An
          entity should adopt this Statement as of the beginning of its first fiscal
          year
          that begins after September 15, 2006.  This standard will be
          applicable to the Company during the period ending 2007.
 
 In
          September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
          157”).  SFAS 157 defines fair value, establishes a framework for
          measuring fair value and expands disclosures regarding fair value
          measurements.  SFAS 157 does not require any new fair value
          measurements but rather eliminates inconsistencies in guidance found in
          various
          prior accounting pronouncements.  SFAS 157 is effective for fiscal
          years beginning after November 15, 2007.   This standard will be
          applicable to the Company during the period ending 2007.
 
 In
          September 2006, the Securities and Exchange Commission (SEC) issued Staff
          Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year
          Misstatements when Quantifying Misstatements in Current Year Financial
          Statements”.  This pronouncement addresses how the effects of the
          carryover or reversal of prior year misstatements should be considered
          in
          quantifying a current year misstatement.   Management does not
          expect the adoption of this Bulletin to have a material effect on the Company’s
          financial position and results of operations.
 
 In
          July
          2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes”.
          This standard prescribes a recognition and measurement model for tax positions
          taken or expected to be taken in a tax return, and provides guidance on
          de-recognition, classification, interest and penalties, accounting in interim
          periods, disclosure and transition. Management does not expect the adoption
          of
          this Bulletin to have a material effect on the Company’s financial position and
          results of operations.
 
 3.
                **Change
                    in Accounting Policy**
 
 *Stock-based
          compensation*
 
 Effective
          January 1, 2006, the Company adopted SFAS No. 123(R) Share-Based Payments,
          a
          revision to SFAS 123 “Accounting for Stock-Based Compensation”.  SFAS
          123(R) requires the Company to recognize in the income statement the grant
          date
          fair value of share-based compensation awards granted to employees over
          the
          requisite service period.  Compensation expense recognized reflects
          estimates of award forfeitures and any change in estimates thereof are
          reflected
          in the period of change.
 
 59
 
 **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 3.
                **Change
                    in Accounting Policy**
                    (Continued)
 
 Pursuant
          to the provisions of SFAS 123(R), the Company applied the modified-prospective
          transition method.  Under this method, the fair value provisions of
          SFAS 123(R) are applied to new employee share-based payment awards granted
          or
          awards modified, repurchased, or cancelled after January 1,
          2006.  Measurement and attribution of compensation costs for unvested
          awards at January 1, 2006, granted prior to the adoption of SFAS 123(R)
          are
          recognized based upon the provisions of SFAS 123(R).  The adoption of
          this policy did not have a material effect on the Company’s financial position
          and results of operations.
 
 4.
                
                **Inventories**
 
 **2006**
                
                
                2005Raw
                    materials
                
                **$**
                **63,119**
                
                
                $
                54,820Work
                    in progress
                
                ****
                **176,342**
                
                
                
                509,664Finished
                    goods
                
                ****
                **26,554**
                
                
                
                113,274Supplies
                
                ****
                **10,624**
                
                
                
                14,858**$**
                **276,639**
                
                
                $
                692,616
 
 5
                .
                **Property
                    and Equipment**
 
 **2006****Accumulated****Cost**
                
                
                **Amortization**
                
                
                **Net**Automotive
                    equipment
                
                **$**
                **29,508**
                
                
                **$**
                **18,210**
                
                
                **$**
                **11,298**Computer
                    equipment
                
                ****
                **83,404**
                
                
                ****
                **66,164**
                
                
                ****
                **17,240**Leasehold
                    improvements
                
                ****
                **17,086**
                
                
                ****
                **4,405**
                
                
                ****
                **12,681**Office
                    equipment
                
                ****
                **105,879**
                
                
                ****
                **61,763**
                
                
                ****
                **44,116**Plant
                    equipment
                
                ****
                **1,615,828**
                
                
                ****
                **826,212**
                
                
                ****
                **789,616****$**
                **1,851,705**
                
                
                **$**
                **976,754**
                
                
                **$**
                **874,951**
 
 **2005****Accumulated****Cost**
                
                
                **Amortization**
                
                
                **Net**Automotive
                    equipment
                
                $
                29,509
                
                
                $
                16,046
                
                
                $
                13,463Computer
                    equipment
                
                
                83,404
                
                
                
                60,265
                
                
                
                23,139Leasehold
                    improvements
                
                
                17,086
                
                
                
                3,988
                
                
                
                13,098Office
                    equipment
                
                
                105,879
                
                
                
                54,941
                
                
                
                50,938Plant
                    equipment
                
                
                1,615,828
                
                
                
                692,584
                
                
                
                923,244$
                1,851,706
                
                
                $
                827,824
                
                
                $
                1,023,882
  60
 
 **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
  6.
                
                **Bank
                    Loan**
 
 **2006**
                
                
                2005Bank
                    loan bears interest at a rate of U.S. primeplus
                    1%, interest only payments, matured onNovember
                    25, 2006.  The bank has currentlyextended
                    this loan until May 26, 2007.The
                    bank loan is secured by a general
                  security
                    agreement.  The approved creditis
                    to a maximum of $500,000 USD
                
                **$**
                **584,941**
                
                
                $
                518,870
 
 7.
                
                **Long-Term
                    Debt**
 
 **2006**
                
                
                2005Equipment
                    loan, repayable in monthlyInstalments
                    of $5,461, including principaland
                    interest at prime plus 1%, maturesJune
                    24, 2009 and is secured by equipmentwith
                    a carrying amount of $789,616
                
                **$**
                **154,281**
                
                
                $
                202,460Less
                    current portion
                
                ****
                **154,281**
                
                
                
                202,460**$**
                **---**
                
                
                $
                ---Principal
                    instalments required to be paid over the remaining three years
                    are as
                    follows:2007
                
                $
                56,1332008
                
                
                59,5962009
                
                
                38,552$
                154,281
  The
          loan
          agreement for the bank loan (Note 6) and equipment loan specifies the Company
          must maintain an effective tangible net worth ratio, debt to effective
          tangible
          net worth ratio, current ratio and debt coverage ratio at certain
          levels.  As at December 31, 2006, the Company was not in compliance
          with these requirements.  Consequently, the equipment loan and bank
          loan could be repayable on demand and has been classified as current
          liabilities.
 
 8.
                **Debentures
                    Payable**
 
 A
          $275,000 unsecured convertible debenture was issued during 2003.  The
          convertible debenture bears interest at 10% per annum and was due on December
          15, 2004.  The debenture is convertible at the option of the debenture
          holder into fully paid, non-assessable common shares without par value
          in the
          capital of the Company at a conversion price in the range
          of   $0.15 to $0.20 per common share.  The convertible
          debentures held by the public were settled with the debenture holders during
          2005 for cash consideration of $161,856.  During 2005, a convertible
          debenture holder exercised his option to convert his $10,000 convertible
          debenture to 161,332 common shares of the Company at a negotiated price
          of
          $0.075 per share.  The remaining convertible debentures of $102,000
          held by directors and former directors of the Company have been
          postponed.
 
 61
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 9.
                **Share
                    Capital**
 
 **Authorized**
 
 Unlimited
          number of common voting shares and unlimited number of preferred non-voting
          shares
 
 Pursuant
          to the First private placement Agreement dated April 12, 2006, the Company
          issued 4,838,284 units at a price of $0.07 per unit by way of a non-brokered
          private placement for total proceeds of $326,393 (net of share issuance
          costs of
          $12,288). Each unit comprises one common share and one share purchase warrant
          of
          the Company.  Each share warrant entitles the holder to purchase one
          common share at $0.10 until March 30, 2008. The net proceeds from the sale
          of
          these units has been allocated between share capital $188,298 in respect
          of the
          shares and $138,095 in respect of the warrants, based on the relative fair
          value
          of each of the components.
 
 Pursuant
          to the Second private placement Agreement dated August 30, 2006, the Company
          issued 1,514,000 units at a price of $0.10 per unit by way of a non-brokered
          private placement for total proceeds of $142,671 (net of share issuance
          costs of
          $8,729).  Each unit comprises one common share and one half share
          purchase warrant of the Company.  Each share warrant entitles the
          holder to purchase one common share at $0.25 until August 30,
          2008.  The net proceeds from the sale of these units has been
          allocated between share capital $106,586 in respect of the shares and $36,085
          in
          respect of the warrants, based on the relative fair value of each of the
          components.
 
 A
          summary of the private placements
          are as follows:
 
 **Number
                    of**
                  **Common**
                  **Shares**
                
                
                **Amount**
                
                
                **Number
                    of Warrants**
                
                
                **Amount**
                
                
                **Total****Shares
                    issued in first private placement**
                
                ****
                **4,838,284**
                
                
                ****
                **188,298**
                
                
                ****
                **4,838,284**
                
                
                ****
                **138,095**
                
                
                ****
                **326,393****Shares
                    issued in second private placement**
                
                ****
                **1,514,000**
                
                
                ****
                **106,586**
                
                
                ****
                **757,000**
                
                
                ****
                **36,085**
                
                
                ****
                **142,671**
 
 For
          the
          share purchase warrants issued pursuant to the two private placements above,
          the
          Company determined the fair value consistent with the method prescribed
          under
          FAS No. 148 and allocated the proceeds from the private placements to common
          shares and warrants issued.  The fair value of each warrant was
          estimated using the Black-Scholes fair value option pricing model with
          the
          following weighted average assumptions:
 
 Annualized
                    volatility
                165%Risk-free
                    interest rate
                4.24%Expected
                    life of warrants in years
                2.0
                    yearsDividend
                    rate
                0.0%
 
 62
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 9.
                **Share
                    Capital** (Continued)
 
 **Stock-Based
          Compensation Plan**
 
 a)
                Summary
                    of the stock option transactions are as
                    follows:
  Number
                    of
                
                
                Weighted
                    AverageOptions
                
                
                Exercise
                    PriceOutstanding
                    at December 31, 2003
                
                
                ---
                
                
                $
                ---Granted
                
                
                1,872,000
                
                
                
                0.10Cancelled
                
                
                (235,000
                )
                
                
                0.10Outstanding
                    at December 31, 2004
                
                
                1,637,000
                
                
                
                0.10Cancelled
                
                
                (550,400
                )
                
                
                0.10Balance
                    at December 31, 2005
                
                
                1,086,600
                
                
                
                0.10**Granted**
                
                ****
                **1,700,000**
                
                
                ****
                **0.10****Cancelled**
                
                ****
                **(205,900**
                **)**
                
                ****
                **0.10****Balance
                    at December 31, 2006**
                
                ****
                **2,580,700**
                
                
                **$**
                **0.10**
  During
          the year, the Company granted 200,000 stock options to an officer of the
          Company
          on April 12, 2006, which expire on April 12, 2007, exercisable at
          $0.10.   The options vest on the basis of 25% immediately upon
          grant, 25% in three months, 25% in six months, and the remaining 25% in
          nine
          months.
 
 In
          addition to the above, during the year, the Company granted 1,500,000 stock
          options to the directors of the Company, which expire December 21, 2011,
          exercisable at $0.10.   These options vest in 30
          days.
 
 During
          2004, the Company has issued stock options to acquire common stock through
          its
          stock option plan.  The options granted to directors and employees
          totalled 1,872,000 of which 1,872,000 have fully vested.  235,000,
          550,400 and 205,900 stock options have been subsequently cancelled in 2004,
          2005
          and 2006, respectively.  The stock options can be exercised at $0.10
          per common share and expire on April 15, 2009.  Terms and conditions
          of options granted are set out in the Company’s stock option plan.
 
 63
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 9.         **Share
          Capital** (Continued)
 
 b)  The
                    following table summarizes information about stock options outstanding
                    at
                    December 31, 2006, 2005 and 2004:
  **2006****Options
                    Outstanding**
                
                
                **Options
                    Exercisable****Weighted****Weighted**
                
                
                **Average**
                
                
                
                
                
                **Weighted****Number**
                
                
                **Average**
                
                
                **Remaining**
                
                
                **Number**
                
                
                **Average****of**
                
                
                **Exercise**
                
                
                **Contractual**
                
                
                **of**
                
                
                **Exercise****Options**
                
                
                **Price**
                
                
                **Life
                    (Years)**
                
                
                **Options**
                
                
                **Price******
                **880,700**
                
                
                **$**
                **0.10**
                
                
                ****
                **2.29**
                
                
                ****
                **880,700**
                
                
                **$**
                **0.10******
                **200,000**
                
                
                ****
                **0.10**
                
                
                ****
                **0.30**
                
                
                ****
                **150,000**
                
                
                ****
                **0.10******
                **1,500,000**
                
                
                ****
                **0.10**
                
                
                ****
                **4.90**
                
                
                ****
                **---**
                
                
                ****
                **0.10**
 
 2005Options
                    Outstanding
                Options
                    ExercisableWeightedWeighted
                Average
                
                WeightedNumber
                Average
                Remaining
                Number
                Averageof
                Exercise
                Contractual
                of
                ExerciseOptions
                Price
                Life
                    (Years)
                Options
                Price1,086,600
                $0.10
                3.29
                1,086,600
                $0.10
 
 2004Options
                    Outstanding
                Options
                    ExercisableWeightedWeighted
                Average
                
                WeightedNumber
                Average
                Remaining
                Number
                Averageof
                Exercise
                Contractual
                of
                ExerciseOptions
                Price
                Life
                    (Years)
                Options
                Price1,637,000
                $0.10
                4.54
                803,000
                $0.10
  The
          Black-Scholes option valuation model was developed for use in estimating
          the
          fair value of traded options which have no vesting restrictions and is
          fully
          transferable.  In addition, the valuation model calculates the
          expected stock price volatility based on highly subjective
          assumptions.  Because the Company’s employee stock options have
          characteristics significantly different from those of traded options, and
          because changes in the subjective input assumptions can materially affect
          the
          fair value estimates, in management opinion, the existing model does not
          necessarily provide a reliable single measure of the fair value of its
          employee
          stock options.
 
 64
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 9.
                **Share
                    Capital** (Continued)
 
 As
          at December 31, 2006, there was
          $67,487 of unrecognized compensation cost related to non-vested
          stock options.
 
 During
          the year ended December 31, 2006, the Company recognized $ 47,626 (2005
          -
          $33,696; 2004 - $25,272) in stock-based compensation expense.
 
 The
          fair
          value for stock options expensed was estimated using the Black-Scholes
          option
          pricing model assuming no expected dividends and the following weighted
          average
          assumptions:
 
 **2006**
                
                
                2005
                
                
                2004Interest
                    rate
                
                ****
                **4.15**
                **%**
                
                
                2.58
                %
                
                
                2.58
                %Expected
                    volatility
                
                ****
                **224**
                **%**
                
                
                870
                %
                
                
                870
                %Expected
                    life options (in years)
                
                ****
                **4.53**
                
                
                
                5.0
                
                
                
                5.0Fair
                    value
                
                **$**
                **0.069**
                
                
                $
                0.032
                
                
                $
                0.032
  10.
                **Commitments**
 
 a)
                The
                    Company has entered into a lease agreement for its current premises
                    located in Ontario, California.  Lease concessions and
                    escalations are amortized over the lease term and included in
                    the
                    calculation of minimum annual lease payments.  The minimum
                    annual lease payments which will become owing are as
                    follows:
 
 2007
                
                
                192,6772008
                
                
                112,394$
                305,071
 
 11.
                **Contingencies**
 
 Through
          the ordinary course of business, a number of claims are pending in which
          the
          Company or its subsidiaries may be the plaintiff or defendant.  In the
          opinion of management, the ultimate resolution of any current lawsuits
          would not
          have a material effect on the financial position or results of operations
          of the
          Company.  As at the date of these consolidated financial statements,
          outstanding claims against the Company amount to $228,871, however, the
          likelihood of payment of these claims cannot be determined at this time
          and have
          not been accrued in the consolidated financial statements.
 
 In
          addition, a subsidiary of the Company has a claim against it and a consent
          judgement has been entered into in the amount of $53,554.  This amount
          has been included in accounts payable.
 
 65
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 12.
                **Income
                    Taxes**
 
 The
          difference between the computed expected income tax provision based on
          a
          statutory tax rate of 32.49% (2005 - 33.62%; 2004 - 33.87%) and the actual
          income tax provision are summarized as follows:
 
 **2006**
                
                
                2005
                
                
                2004Computed
                      expected incometaxes (recovery)
                
                **$**
                **(640,209**
                **)**
                
                $
                (449,302
                )
                
                $
                (88,423
                )**Increase
                    (decrease) in tax resulting from:**Non-deductible
                    costs
                
                ****
                **23,829**
                
                
                
                71,033
                
                
                
                10,747Amortization
                      in excess of capital costallowance for tax
                
                ****
                **45,847**
                
                
                
                67,932
                
                
                
                21,166Foreign
                    exchange gain on translation
                
                ****
                **(9,734**
                **)**
                
                
                (13,704
                )
                
                
                53,045Underaccrual
                    (overaccrual) of prior yeartax
                    recovery
                
                ****
                **---**
                
                
                
                ---
                
                
                
                410Losses
                      not recognized as afuture tax asset
                
                ****
                **580,267**
                
                
                
                324,041
                
                
                
                274,752Change
                    in valuation allowance
                
                ****
                **---**
                
                
                
                174,750
                
                
                
                ---Deductible
                      research and developmentcosts
                
                ****
                **---**
                
                
                
                ---
                
                
                
                (153,186
                )Utilization
                    of loss carry forwards
                
                ****
                **---**
                
                
                
                ---
                
                
                
                (99,119
                )Total
                    income taxes
                
                **$**
                **---**
                
                
                $
                174,750
                
                
                $
                19,392
 
 The
          following summarizes the components included in deferred income taxes as
          at
          December 31:
 
 **2006**
                
                
                2005
                
                
                2004**Assets:**Tax
                    benefits of loss carry forward
                
                **$**
                **1,432,240**
                
                
                $
                881,605
                
                
                $
                557,565Difference
                    between tax value andbook
                    value of cumulative eligiblecapital
                
                ****
                **15,388**
                
                
                
                37,344
                
                
                
                39,147Valuation
                    allowance
                
                ****
                **(1,447,628**
                **)**
                
                
                (918,949
                )
                
                
                (421,962
                )Net
                    future tax assets
                
                **$**
                **---**
                
                
                $
                ---
                
                
                $
                174,750
 
 As
          at
          December 31, 2006, the Company has $4,408,249 non-capital losses which
          may be
          used to reduce future Canadian income taxes otherwise payable. The non-capital
          losses expire as follows:
 
 2009
                
                $
                241,1002010
                
                $
                650,0682014
                
                $
                767,2662015
                
                $
                963,8302026
                
                $
                1,785,985
 
 66
 
 **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 13.
                **Net
                    Loss per Common Share**
 
 Loss
          per share was calculated as
          follows:
 
 **2006**
                
                
                2005
                
                
                2004**Numerator:**Net
                    loss from continuing operations
                
                **$**
                **(1,561,652**
                **)**
                
                $
                (1,104,909
                )
                
                $
                (132,927
                )Net
                    loss from discontinued operations
                
                ****
                **(408,827**
                **)**
                
                
                (56,753
                )
                
                
                (108,822
                )Net
                    loss
                
                **$**
                **(1,970,479**
                **)**
                
                $
                (1,161,662
                )
                
                $
                (241,749
                )**Denominator:**Basic
                    and diluted weighted averagecommon
                    shares outstanding
                
                ****
                **22,817,241**
                
                
                
                12,536,235
                
                
                
                9,366,624**Loss
                    per common share:****2006**
                
                
                2005
                
                
                2004Continuing
                    operations
                
                **$**
                **(0.068**
                **)**
                
                $
                (0088
                )
                
                $
                (0014
                )Discontinued
                    operations
                
                ****
                **(0.018**
                **)**
                
                
                (0.005
                )
                
                
                (0.012
                )Total
                
                **$**
                **(0.086**
                **)**
                
                $
                (0.093
                )
                
                $
                (0.026
                )
 
 Diluted
          net loss per common share is calculated using the treasury stock
          method.  The effects of the potential exercise of options and
          conversion of the convertible debentures are anti-dilutive for the year
          ended
          December 31, 2006, 2005 and 2004 and were excluded from the calculation
          of
          diluted net loss per common share.
 
 The
          following securities were
          excluded from the diluted loss per share calculations:
 
 **2006**
                
                
                2005
                
                
                2004Convertible
                    debentures
                
                ****
                **425,000**
                
                
                
                425,000
                
                
                
                1,650,000Warrants
                
                ****
                **5,595,284**
                
                
                
                ---
                
                
                
                ---Options
                
                ****
                **2,580,700**
                
                
                
                1,086,600
                
                
                
                1,637,000****
                **8,600,984**
                
                
                
                1,511,600
                
                
                
                3,287,000
 
 
 67
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 14.
                **Supplemental
                    Cash Flow Information**
 
 a)       Changes
          in non-cash operating assets and liabilities:
 
 **2006**
                
                
                2005
                
                
                2004Accounts
                    receivable
                
                **$**
                **58,360**
                
                
                $
                183,866
                
                
                $
                194,245Prepaid
                    expenses
                
                ****
                **18,965**
                
                
                
                (13,584
                )
                
                
                33,638Inventories
                
                ****
                **415,977**
                
                
                
                307,081
                
                
                
                (83,968
                )Accounts
                    payable andaccrued
                    liabilities
                
                ****
                **339,726**
                
                
                
                165,208
                
                
                
                47,629**$**
                **833,028**
                
                
                $
                642,571
                
                
                $
                191,544
  b)       Interest:
 
 **2006**
                
                
                2005
                
                
                2004Interest
                    paid
                
                **$**
                **64,583**
                
                
                $
                71,465
                
                
                $
                48,394
  15.
                **Related
                    Party Transactions**
 
 During
          the year, the Company had the following related party transactions with
          corporations under significant influence of one of the Company's former
          directors:
 
 **2006**
                
                
                2005
                
                
                2004Management
                    fees
                
                **$**
                **48,300**
                
                
                $
                88,105
                
                
                $
                98,061
 
 These
          transactions are in the normal course of operations and are measured at
          the
          exchange amount, which is the amount of consideration established and agreed
          to
          by the related parties.
 
 16.
                **Discontinued
                    Operations**
 
 At
          December 31, 2006, as a result of continued losses and Everwood’s inability to
          obtain an adequate supply of raw materials to make posts and attain
          cost-efficient production, the Company decided to permanently cease its
          operations in St. Thomas, Ontario, in order to mange costs and to focus
          its
          efforts in developing the McAdoo Nylon Reclamation Project in Kingston,
          Ontario.
 
 Summary
          of Discontinued Operations are as follow:
 
 **December
                    31,**
                  **2006**
                
                
                December
                    31,
                  2005
                
                
                December
                    31,
                  2004Revenues
                
                ****
                **8,244**
                
                
                
                549,414
                
                
                
                682,887Cost
                    of Sales
                
                ****
                **127,088**
                
                
                
                279,538
                
                
                
                284,330Expenses
                
                ****
                **289,983**
                
                
                
                326,629
                
                
                
                289,735Net
                    loss
                
                ****
                **(408,827**
                **)**
                
                
                (56,753
                )
                
                
                (108,822
                )
  68
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 16.
                **Discontinued
                    Operations**(continued)
 
 Summarized
          Balance Sheets of the Discontinued Operation are as follow:
 
 **December
                    31,**
                  **2006**
                
                
                December
                    31,
                  2005Current
                    Assets
                
                ****
                **10,338**
                
                
                
                41,016Equipment
                
                ****
                **---**
                
                
                
                63,409Current
                    Liabilities
                
                ****
                **129,822**
                
                
                
                122,550
 
 Summarized
          Statement of Cash
          flows:
 
 **2006**
                
                
                2005
                
                
                2004Operating
                    ActivitiesNet
                    income (loss)
                
                **$**
                **(408,827**
                **)**
                
                $
                (56,753
                )
                
                $
                (108,822
                )Add
                    back for items not involving cash
                
                ****
                **63,454**
                
                
                
                39,269
                
                
                
                30,904Net
                    change in non-cash working capital
                
                ****
                **37,950**
                
                
                
                73,602
                
                
                
                95,936Cash
                    provided by (used in) operating activities
                
                ****
                **(307,423**
                **)**
                
                
                56,118
                
                
                
                18,018Financing
                    ActivitiesRepayment
                    of long-term debt
                
                ****
                **---**
                
                
                
                (162,540
                )
                
                
                (24,720
                )Cash
                    used in financing activities
                
                ****
                **---**
                
                
                
                (162,540
                )
                
                
                (24,720
                )Investing
                    ActivitiesPurchase
                    of property, plant and equipment
                
                ****
                **---**
                
                
                
                (26
                )
                
                
                (3,607
                )Proceeds
                    on disposal of capital assets
                
                ****
                **---**
                
                
                
                405,000
                
                
                
                ---Cash
                    provided by (used in) investing activities
                
                ****
                **---**
                
                
                
                404,974
                
                
                
                (3,607
                )Cash
                      provided by (used in)discontinued operations
                
                **$**
                **(307,423**
                **)**
                
                $
                298,552
                
                
                $
                (10,309
                )
  17.
                **Subsequent
                    Events**
 
 On
                    January 4, 2007, the Company announced that it proposes to settle
                    certain
                    of its debt with various creditors in the aggregate amount of
                    approximately $190,218, subject to regulatory approval.  The
                    Company will settle the debt by the payment of cash and by the
                    issuance of
                    common shares of the Company.   The Company will issue up
                    to 2,797,008 Common Shares ranging in price from $0.05 to $0.10
                    per Common
                    Share.  The Common Shares will have a four-month hold
                    period.
 
 On
                    February 6, 2007, the Company received final acceptance for a
                    private
                    placement of an aggregate of 6,000,000 units at a price of $0.05
                    per Unit
                    for gross proceeds of $300,000. Each Unit is comprised of one
                    common share
                    and one Common Share purchase warrant.   Each Warrant
                    entitles the holder to purchase one additional Common Share at
                    a price of
                    $0.25 per Common Share for a period of two (2) years following
                    the date of
                    closing.   All Common Shares issued under the Private
                    Placement and Common Shares issued upon exercise of the Warrants
                    are
                    subject to a restricted period and may not be traded for a four
                    month
                    period expiring on June 1, 2007.
 
 69
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 17.
                **Subsequent
                    Events** (Continued)
 
 On
                    February 14, 2007, the Company announced that, subject to regulatory
                    approval, it intends to complete a non-brokered offering of a
                    minimum of
                    750,000 units and a maximum of 1,250,000 Units at a price of
                    $0.40 per
                    Unit for gross proceeds of a minimum of $300,000 to a maximum
                    of $500,000
                    by way of a private placement.  Each Unit is comprised of one
                    common share and one Common Share purchase warrant.  Each whole
                    warrant entitles the holder to purchase one  additional Common
                    Share at a price of $0.60 per Common Share during the first year
                    following
                    the date of closing and at $0.75 per Common Share during the
                    subsequent
                    year up to a period of two years following the date of
                    closing.   The Company intends to use the proceeds from the
                    Private Placement for general working capital
                    purposes.   On March 13, 2007, the Company announced that
                    it will not be proceeding with this private
                    placement.
 
 18.
                **Financial
                    Instruments**
 
 **Foreign
          Currency Risk**
 
 A
          substantial portion of the Company's revenues are derived in currencies
          other
          than Canadian dollars.  This results in financial risk due to
          fluctuations in the value of the Canadian dollar relative to those foreign
          currencies.  For the most part, this exposure is reduced to the extent
          that the company incurs operating expenses in currencies other than Canadian
          dollars.  The company also provides funding to its foreign subsidiary
          in the local currency of the subsidiary.  Fluctuations in payments
          made for the company's products and in repayments of advances to the subsidiary
          could cause unanticipated fluctuations in the Company's operating
          results.
 
 The
          accounts receivable, accounts payable and long-term debt balances to be
          received
          and paid in foreign currency are subject to foreign exchange risk
 
 **Credit
          Risk**
 
 Concentration
          of credit risk with respect to accounts receivable is limited due to the
          Company's credit evaluation process, the large number of customers comprising
          the Company's customer base and their dispersion among many different industries
          in North America.
 
 In
          the
          normal course of business, the company evaluates the financial condition
          of its
          customers on a continuing basis and reviews the credit worthiness of all
          new
          customers.  The company has its Canadian customers insured through
          Export Development Canada and its U.S. customers insured through CNA Insurance
          Companies and as a result this reduces the specific customer risks.
 
 **Fair
          Value**
 
 Fair
          value estimates are made as of a specific point in time using available
          information about the financial instrument.  These estimates are
          subjective in nature and often cannot be determined with precision.
 
 Financial
          instruments of the company consist mainly of cash, accounts receivable,
          other
          receivable, bank indebtedness, accounts payable, accrued liabilities, bank
          loan,
          debentures and long-term debt.  As at December 31, 2006 and 2005,
          there were no significant differences between the carrying amounts of these
          items and their estimated fair values.
 
 **Interest
          Rate
          Risk**
 
 The
          Company’s debentures payable are subject to interest rate price risk and the
          Company’s bank loan and long-term debt is subject to interest rate cash flow
          risk.
 
 70
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 19.
                **Segmented
                    Information**
 
 Poly-Pacific
          International Inc. has two reportable segments, plastic media and plastic
          lumber.  These segments are business units that offer different
          products and operate in different geographic areas.  The plastic media
          segment manufactures plastic blasting media for industrial use and operates
          in
          California, U.S.A.  The discontinued segment in Ontario, Canada,
          obtains recycled plastic material and uses this material to produce plastic
          lumber for agricultural use.  The accounting policies of the segments
          are as those described in Note 2.
  Plastic
                    Media
                
                Agricultural
                  Plastic
                    Lumber
                
                Total**2006**
                
                
                2005
                
                
                2004
                
                
                **2006**
                
                
                2005
                
                
                2004
                
                
                **2006**
                
                
                2005
                
                
                2004Assets
                **$**
                **1,303,499**
                
                $
                1,992,552
                
                $
                2,903,515
                
                **$**
                **10,338**
                
                $
                118,951
                
                $
                725,462
                
                **$**
                **1,313,837**
                
                $
                2,111,503
                
                $
                3,628,977Long-livedassets
                    inCanada
                
                **---**
                
                
                20,432
                
                
                24,589
                
                
                **---**
                
                
                63,409
                
                
                507,652
                
                
                **---**
                
                
                83,841
                
                
                532,241Long-livedassets
                    inthe
                    U.S.
                
                **874,951**
                
                
                1,003,450
                
                
                1,188,872
                
                
                **---**
                
                
                ---
                
                
                ---
                
                
                **874,951**
                
                
                1,003,450
                
                
                1,188,872Sales
                    inCanada
                
                **---**
                
                
                65,086
                
                
                167,700
                
                
                **---**
                
                
                93,295
                
                
                281,875
                
                
                **---**
                
                
                158,381
                
                
                449,575Sales
                    inthe
                    U.S.
                
                **1,462,113**
                
                
                2,436,932
                
                
                2,968,006
                
                
                **8,244**
                
                
                457,403
                
                
                401,012
                
                
                **1,470,357**
                
                
                2,894,335
                
                
                3,369,018Total
                    sales
                **1,462,113**
                
                
                2,502,018
                
                
                3,135,706
                
                
                **8,244**
                
                
                550,698
                
                
                682,887
                
                
                **1,470,357**
                
                
                3,052,716
                
                
                3,818,593Segment
                    profit(loss)
                **(1,561,652)**
                
                
                (1,108,299)
                
                
                (132,850)
                
                
                **(408,827)**
                
                
                (53,363)
                
                
                (108,899)
                
                
                **(1,970,479)**
                
                
                (1,161,662)
                
                
                (241,749)Amortization:Property,
                    plantand
                    equipment
                **148,886**
                
                
                194,542
                
                
                253,287
                
                
                **---**
                
                
                15,877
                
                
                34,228
                
                
                **148,886**
                
                
                210,419
                
                
                287,515Interest
                    expense
                **87,688**
                
                
                68,068
                
                
                46,409
                
                
                **---**
                
                
                3,397
                
                
                12,100
                
                
                **87,688**
                
                
                71,465
                
                
                58,509Income
                    taxes(recovery)
                **---**
                
                
                174,750
                
                
                19,316
                
                
                **---**
                
                
                **---**
                
                
                76
                
                
                **---**
                
                
                174,750
                
                
                19,392Capitalexpenditures
                **---**
                
                
                2,704
                
                
                32,430
                
                
                **---**
                
                
                ---
                
                
                18,264
                
                
                **---**
                
                
                2,704
                
                
                50,694
  71
  **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 20.
                **Differences
                    Between United States and Canadian Generally Accepted Accounting
                    Principles**
 
 The
          financial statements of the Company have been prepared in accordance with
          U.S.
          generally accepted accounting principles which, as they apply to the Company,
          differ in certain material respects from those applicable in
          Canada.  Significant differences between U.S. GAAP and Canadian GAAP
          are set forth below:
 
 **2006**
                
                
                2005
                
                
                2004Balance
                    Sheet Adjustments:Additional
                    Paid In CapitalBalance
                    under U.S. GAAP
                
                **$**
                **778,796**
                
                
                $
                731,170
                
                
                $
                697,474Adjustment
                    for stock compensationfor
                    employees (b)
                
                ****
                **(58,396**
                **)**
                
                
                (58,396
                )
                
                
                (58,396
                )Balance
                    under Canadian GAAP
                
                **$**
                **720,400**
                
                
                $
                672,774
                
                
                $
                639,078Accumulated
                    Comprehensive IncomeBalance
                    under U.S. GAAP
                
                **$**
                **53,195**
                
                
                $
                53,195
                
                
                $
                53,195Translation
                    adjustments (c)
                
                ****
                **(53,195**
                **)**
                
                
                (53,195
                )
                
                
                (53,195
                )Balance
                    under Canadian GAAP
                
                **$**
                **---**
                
                
                $
                ---
                
                
                $
                —Retained
                    earnings (deficit)Balance
                    under U.S. GAAP
                
                **$**
                **(4,031,534**
                **)**
                
                $
                (2,061,055
                )
                
                $
                (899,393
                )Additions
                    to deferred charges (a)
                
                
                
                
                
                
                ---
                
                
                
                115,340Translation
                    adjustment (c)
                
                ****
                **53,195**
                
                
                
                53,195
                
                
                
                53,195Write-down
                    of deferred charges (a)
                
                ****
                **---**
                
                
                
                ---
                
                
                
                (567,615
                )Cumulative
                    adjustment of prioryear’s
                    differences
                
                ****
                **58,396**
                
                
                
                58,396
                
                
                
                510,672Balance
                    under Canadian GAAP
                
                **$**
                **(3,919,943**
                **)**
                
                $
                (1,949,464
                )
                
                $
                (787,801
                )Effect
                    on consolidated statement of operationsNet
                    loss under U.S. GAAP
                
                **$**
                **1,970,479**
                
                
                $
                1,161,662
                
                
                $
                241,749Additions
                    to deferred charges (a)
                
                ****
                **---**
                
                
                
                ---
                
                
                
                (115,340
                )Amortization
                    of deferred charges (a)
                
                ****
                **---**
                
                
                
                ---
                
                
                
                —Write-down
                    of deferred charges (a)
                
                ****
                **---**
                
                
                
                ---
                
                
                
                567,615Net
                    loss under Canadian GAAP
                
                **$**
                **1,970,479**
                
                
                $
                1,161,662
                
                
                $
                694,024Basic
                    loss per share - Canadian GAAP
                
                **$**
                **0.09**
                
                
                $
                0.09
                
                
                $
                0.07
  There
          are
          no other differences between U.S. GAAP and Canadian GAAP in amounts reported
          as
          cash flows provided by (used in) operating, financing or investing
          activities.
 
 72
 
 **POLY-PACIFIC
          INTERNATIONAL INC.**
 (Expressed
          in Canadian Dollars)
 Notes
            to
            the Consolidated Financial Statements
 
 20.
                **Differences
                    Between United States and Canadian Generally Accepted Accounting
                    Principles** (Continued)
 
 a)
                Deferred
                    Charges
 
 Under
          Canadian GAAP, when a development cost meets Canadian GAAP criteria for
          deferral
          and amortization amounts incurred for project development are capitalized
          and
          amortized over the expected useful life.  Development costs incurred
          in 2006, 2005 and 2004 have been expensed as incurred.
 
 b)
                Stock
                    Based Compensation
 
 Under
          Canadian GAAP, the Company did not adopt the policy of expensing stock
          options
          until January 1, 2002.  Prior to this, no stock based compensation
          expense was required to be recorded.
 
 c)
                Translation
                    Adjustment
 
 Under
          Canadian GAAP, the foreign currency translation adjustment would be recorded
          as
          a cumulative translation adjustment rather than as accumulated other
          comprehensive income.
 
 21.
                **Comparative
                    figures**
 
 Comparative
          figures have been restated to conform with the statement presentation adopted
          for the current year.




73




**B.
      Significant Changes**





**Discontinued
      Operations:**





At
      December 31, 2006, as a result of continued losses and Everwood’s inability to
      obtain an adequate supply of raw materials to make posts and to attain
      cost-efficient production, the Company decided to permanently cease its
      operations in St. Thomas, Ontario, in order to reduce costs and to focus its
      efforts in developing McAdoo Nylon Reclamation Project in Kingston,
      Ontario.





Results
      of discontinued operations:





Revenues
      of the discontinued operation significantly decreased by $541,170 to $8,244
      for
      the year ended December 31, 2006 from $549,414 for the year ended December
      31,
      2005.





The
      net
      loss for the discontinued operation increased by $352,074 to a loss of $408,827
      for the year ended December 31, 2006 from a loss of $56,753 for the year-ended
      December 31, 2005.    As described above, the large increase
      in the net loss was due to Everwood’s inability to obtain adequate supply of raw
      materials and thus decreasing the revenue as compared to prior
      year.







74




**ITEM
      9. THE OFFER AND LISTING**




**Not
      applicable except for Item 9.A.4. and Item 9.C.**




The
      principal trading market for the Company's Common Shares is the TSX Venture
      Exchange (TSX-V) under the symbol "PMB". The following table sets forth, for
      the
      periods indicated, the high and low sales prices per share of the Company's
      Common Shares on the TSX-V.




**Table
      9.1—History on TSX Venture Exchange (in Canadian Dollars)**





***Year***
            ***Period***
            ***High***
            ***Low***2000
            1
                Year
            0.40
            0.152001
            1
                Year
            0.35
            0.142002
            1
                Year
            0.29
            0.112003
            1
                Year
            0.24
            0.112004
            Quarter
                1
              Quarter
                2
              Quarter
                3
              Quarter
                4
              Annual
            0.160
              0.175
              0.175
              0.105
              0.175
            0.100
              0.100
              0.105
              0.075
              0.0752005
            Quarter
                1
              Quarter
                2
              Quarter
                3
              Quarter
                4
              Annual
            0.0550
              0.0500
              0.0675
              0.1300
              0.1050
            0.0525
              0.0450
              0.0630
              0.1000
              0.06002006
            Quarter
                1
              Quarter
                2
              Quarter
                3
              Quarter
                4
              Annual
            0.12
              0.13
              0.12
              0.08
              0..13
            0.05
              0.06
              0.07
              0.05
              0.05Latest
                Six Months
            January
                2007
              February
                2007
              March
                2007
              April
                2007
              May
                2007
              June
                2007
            0.25
              0.65
              0.26
              0.34
              0.29
              0.37
            0.06
              0.17
              0.09
              0.10
              0.16
              0.18




75




**ITEM
      10. ADDITIONAL INFORMATION**




**A.
      Share Capital**





The
      following description is a summary of the material terms of the provisions
      of
      our Articles of Incorporation.  The Articles of Incorporation have
      been filed as exhibits to the registration statement.





**Common
      Shares**





The
      Company is authorized to issue an unlimited number of common shares with no
      par
      value. As of December 31, 2006, there were 25,237,740 common shares issued
      and outstanding that were held by approximately 66 shareholders of
      record.





Each
      share of common stock entitles the holder to one vote, either in person or
      by
      proxy, at meetings of shareholders. The holders are not permitted to vote their
      shares cumulatively. Accordingly, the shareholders of our common shares who
      hold, in the aggregate, more than fifty percent of the total voting rights
      can
      elect all of our directors and, in such event, the holders of the remaining
      minority shares will not be able to elect any of the such directors. The vote
      of
      the holders of a majority of the issued and outstanding common shares entitled
      to vote thereon is sufficient to authorize, affirm, ratify or consent to such
      act or action, except as otherwise provided by law.





Holders
      of common shares are entitled to receive ratably such dividends, if any, as
      may
      be declared by the Board of Directors out of funds legally available. We have
      not paid any dividends since our inception, and we presently anticipate that
      all
      earnings, if any, will be retained for development of our business. Any future
      disposition of dividends will be at the discretion of our Board of Directors
      and
      will depend upon, among other things, our future earnings, operating and
      financial condition, capital requirements, and other factors.





Holders
      of our common shares have no preemptive rights or other subscription rights,
      conversion rights, redemption or sinking fund provisions. Upon our liquidation,
      dissolution or winding up, the holders of our common shares will be entitled
      to
      share ratably in the net assets legally available for distribution to
      shareholders after the payment of all of our debts and other liabilities. There
      are not any provisions in our Articles of Incorporation that would prevent
      or
      delay change in our control.





The
      authorized capital of the Company consists of an unlimited number of common
      shares without nominal or par value and an unlimited number of preferred
      shares.





Common
      Shares and Warrants:


As
      at
      December 31, 2006, the numbers of issued common shares are 25,237,740 as
      compared to 18,885,456 as at December 31, 2005.  No preferred shares
      have been issued.





During
      the Company had the following private placements:





76




Pursuant
      to the First private placement Agreement dated April 12, 2006, the Company
      issued 4,838,284 units at a price of $0.07 per unit by way of a non-brokered
      private placement for total proceeds of $326,393 (net of share issuance costs
      of
      $12,288). Each unit comprises one common share and one share purchase warrant
      of
      the Company.  Each share warrant entitles the holder to purchase one
      common share at $0.10 until March 30, 2008. The net proceeds from the sale
      of
      these units has been allocated between share capital $188,298 in respect of
      the
      shares and $138,095 in respect of the warrants, based on the relative fair
      value
      of each of the components.





Pursuant
      to the Second private placement Agreement dated August 30, 2006, the Company
      issued 1,514,000 units at a price of $0.10 per unit by way of a non-brokered
      private placement for total proceeds of $142,671 (net of share issuance costs
      of
      $8,729).  Each unit comprises one common share and one half share
      purchase warrant of the Company.  Each share warrant entitles the
      holder to purchase one common share at $0.25 until August 30,
      2008.  The net proceeds from the sale of these units has been
      allocated between share capital $106,586 in respect of the shares and $36,085
      in
      respect of the warrants, based on the relative fair value of each of the
      components.





The
      net
      proceeds of these two private placements were used for general working
      purposes.





**Common
      share issued Subsequent to year-end**





On
      January 4, 2007, the Company announced that it proposes to settle certain of
      its
      debt with various creditors in the aggregate amount of approximately $190,218,
      subject to regulatory approval.  The Company will settle the debt by
      the payment of cash and by the issuance of common shares of the
      Company.   The Company will issue up to 2,797,008 Common Shares
      ranging in price from $0.05 to $0.10 per Common Share, which Common Shares
      will
      have a four-month hold period.





On
      February 6, 2007, the Company received final acceptance for a private placement
      of an aggregate of 6,000,000 units at a price of $0.05 per Unit for gross
      proceeds of $300,000. Each Unit is comprised of one common share and one Common
      Share purchase warrant.   Each Warrant entitles the holder to
      purchase one additional Common Share at a price of $0.25 per Common Share for
      a
      period of two (2) years following the date of closing.   All
      Common Shares issued under the Private Placement and Common Shares issued upon
      exercise of the Warrants are subject to a restricted period and may not be
      traded for a four month period expiring on June 1, 2007.





On
      June
      8, 2007, the Company received final acceptance for a private placement of an
      aggregate of 3,000,000 units at a price of $0.10 per Unit for gross proceeds
      of
      $300,000.  Each Unit is comprised of one common share (“Common Share”)
      and one Common Share purchase warrant.  Each Warrant entitles the
      holder to purchase one additional Common Share at a price of $0.40 per Common
      Share for a period of two years following the date of
      closing.   All Common Shares issued under the Private Placement
      and Common Shares issued upon exercise of the Warrants are subject to a
      restricted period and may not be traded for a four month period expiring on
      September 26, 2007.   The Company intends to use the proceeds
      from the Private Placement for general working capital purposes and to assist
      the Company in obtaining a letter of credit for $300,000 in order to fulfill
      one
      of the conditions imposed by the City of Kingston, Ontario to obtain approval
      to
      access the McAdoo landfill site before July 1, 2007.





77




As
      described earlier, on June 20, 2007, the Company purchased all of the issued
      and
      outstanding shares owned by the shareholders of Polyran Reclamation
      Inc.   In consideration for the shares of Poly Ran, the Company
      has issued an aggregate of 7,999,996 of its common shares pro rata to the
      shareholders of Poly Ran. The acquisition of the Poly Ran shares was completed
      as an Expedited Acquisition.





**Preferred
      Shares**





The
      Company is authorized to issue an unlimited number of preferred shares in series
      as fixed by the Directors without par value. As of the date of this registration
      statement, there are no preferred shares outstanding.





Preferred
      shares may be issued in series with preferences and designations as the Board
      of
      Directors may from time to time determine. The board may, without shareholders
      approval, issue preferred shares with voting, dividend, liquidation and
      conversion rights that could dilute the voting strength of our common
      shareholders and may assist management in impeding an unfriendly takeover or
      attempted changes in control.  There are no restrictions on our
      ability to repurchase or reclaim our preferred shares while there is any
      arrearage in the payment of dividends on our preferred shares.





During
      2003, a total of 3,030,200 preferred shares were redeemed at a value of
      $2,353,230 in exchange for an unsecured, non-interest bearing debenture in
      the
      amount of $1,586,250 USD.  There have been no preferred shares
      issuances or redemptions by the Company since December 31, 2003.  The
      authorization for preferred shares remains unlimited.





There
      is
      a convertible debenture remaining as at the date of this report, for a total
      principal value of $102,000, held by 2 subscribers, who are all directors of
      the
      Company, which is convertible to common shares of the Corporation at the rate
      of
      $0.15 to $0.20 per share.





78




**Stock
      Options**





As
      at
      December 31, 2006, there were 2,580,700 stock options outstanding with a
      weighted average exercise price of $0.10 as compared to 1,086,600 stock options
      outstanding with a weighted average exercise price of $0.10, at December 31,
      2005.





During
      the year, the Company granted 200,000 stock options to an officer of the Company
      on April 12, 2006, which expires on April 12, 2007, exercisable at
      $0.10.   The options vested on the basis of 25% immediately upon
      grant, 25% in three months, 25% in six months, and the remaining 25% in nine
      months.





In
      addition to the above, during the year, the Company granted 1,500,000 stock
      options to the directors of the Company, which expire December 21, 2011,
      exercisable at $0.10.   These options vest in 30
      days.





**Share
      Capital Changes**





Pursuant
      to the First private placement Agreement dated April 12, 2006, the Company
      issued 4,838,284 units at a price of $0.07 per unit by way of a non-brokered
      private placement for total proceeds of $326,393 (net of share issuance costs
      of
      $12,288). Each unit comprises one common share and one share purchase warrant
      of
      the Company.  Each share warrant entitles the holder to purchase one
      common share at $0.10 until March 30, 2008. The net proceeds from the sale
      of
      these units has been allocated between share capital $188,298 in respect of
      the
      shares and $138,095 in respect of the warrants, based on the relative fair
      value
      of each of the components.





Pursuant
      to the Second private placement Agreement dated August 30, 2006, the Company
      issued 1,514,000 units at a price of $0.10 per unit by way of a non-brokered
      private placement for total proceeds of $142,671 (net of share issuance costs
      of
      $8,729).  Each unit comprises one common share and one half share
      purchase warrant of the Company.  Each share warrant entitles the
      holder to purchase one common share at $0.25 until August 30,
      2008.  The net proceeds from the sale of these units has been
      allocated between share capital $106,586 in respect of the shares and $36,085
      in
      respect of the warrants, based on the relative fair value of each of the
      components.





**A
      summary of the private placements are as follows:**





**Number
                of**
              **Common**
              **Shares**
            
            
            **Amount**
            
            
            **Number
                of Warrants**
            
            
            **Amount**
            
            
            **Total****Shares
                issued in first private****placement**
            
            ****
            **4,838,284**
            
            
            ****
            **188,298**
            
            
            ****
            **4,838,284**
            
            
            ****
            **138,095**
            
            
            ****
            **326,393****Shares
                issued in second private placement**
            
            ****
            **1,514,000**
            
            
            ****
            **106,586**
            
            
            ****
            **757,000**
            
            
            ****
            **36,085**
            
            
            ****
            **142,671**





79




For
      the
      share purchase warrants issued pursuant to the two private placements above,
      the
      Company determined the fair value consistent with the method prescribed under
      FAS No. 148 and allocated the proceeds from the private placements to common
      shares and warrants issued.  The fair value of each warrant was
      estimated using the Black-Scholes fair value option pricing model with the
      following weighted average assumptions:





Annualized
                volatility
            165%Risk-free
                interest rate
            4.24%Expected
                life of warrants in years
            2.0
                yearsDividend
                rate
            0.0%


**Consolidated
        Statement of Shareholders’ Equity**


**For
        the Years Ended December 31, 2006, 2005 and 2004**




**Share
                  Capital****Accumulated****Additional**
              
              
              
              
              
              **Other**
              
              
              
              
              
              **Shareholders’****Number**
              
              
              
              
              
              **Number
                  of**
              
              
              
              
              
              **Paid
                  in**
              
              
              **Accumulated**
              
              
              **Comprehensive**
              
              
              **Comprehensive**
              
              
              **Equity****of
                  Shares**
              
              
              **Amount**
              
              
              **Warrants**
              
              
              **Amount**
              
              
              **Capital**
              
              
              **Deficit**
              
              
              **Income**
              
              
              **Loss**
              
              
              **(Deficit)**Balance
                  atDecember
                  31, 2003
              
              
              9,361,624
              
              
              $
              865,584
              
              
              
              -
              
              
              $
              -
              
              
              $
              672,202
              
              
              $
              (657,644
              )
              
              $
              53,195
              
              
              $
              -
              
              
              $
              933,337Stock
                  based compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              25,272
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              25,272Loss
                  for the period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (241,749
              )
              
              
              -
              
              
              
              -
              
              
              
              (241,749
              )Comprehensive
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (241,749
              )
              
              
              -Balance
                  atDecember
                  31, 2004
              
              
              9,361,624
              
              
              
              865,584
              
              
              
              -
              
              
              
              -
              
              
              
              697,474
              
              
              
              (899,393
              )
              
              
              53,195
              
              
              
              -
              
              
              
              716,860Conversion
                  of debenture
              
              
              9,523,832
              
              
              
              1,132,954
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,132,954Stock
                  based compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,696
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,696Loss
                  for the period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,161,662
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,161,662
              )Comprehensive
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,161,662
              )
              
              
              -Balance
                  atDecember
                  31, 2005
              
              
              18,885,456
              
              
              
              1,998,538
              
              
              
              -
              
              
              
              -
              
              
              
              731,170
              
              
              
              (2,061,055
              )
              
              
              53,195
              
              
              
              -
              
              
              
              721,848**Issuance
                  of common **shares****
              
              ****
              **6,352,284**
              
              
              ****
              **294,884**
              
              
              ****
              **5,595,284**
              
              
              ****
              **174,180**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **469,064****Stock-based****Compensation**
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **47,626**
              
              
              
              -
              
              
              
              -
              
              
              ****
              **-**
              
              
              ****
              **47,626****Loss
                  for the period**
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **-**
              
              
              ****
              **(1,970,479**
              **)**
              
              
              -
              
              
              
              -
              
              
              ****
              **(1,970,479**
              **)****Comprehensive
                  loss**
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              ****
              **(1,970,479**
              **)**
              
              
              -**Balance
                  at****December
                  31, 2006**
              
              ****
              **25,237,740**
              
              
              **$**
              **2,293,422**
              
              
              ****
              **5,595,284**
              
              
              **$**
              **174,180**
              
              
              **$**
              **778,796**
              
              
              **$**
              **(4,031,534**
              **)**
              
              **$**
              **53,195**
              
              
              $
              -
              
              
              **$**
              **(731,941**
              **)**




80




**B.
      Memorandum and Articles of Association**




The
      Articles of Association of the Company, as amended to date, has been filed
      as
      Exhibit 1.0 to the Company's Registration Statement on Form 20-F, filed with
      the
      Securities and Exchange Commission. The Articles of Association were approved
      by
      shareholders on October 25, 1995.  Amendments were registered on April
      23, 1999 and on June 12, 2003.




The
      Company is incorporated pursuant to the *Companies Act, Chapter 21, Revised
      Statutes of Alberta 2000* (Companies Act), which provides for the powers,
      rights and responsibilities of all corporations registered within the
      jurisdiction of the Province of Alberta.




The
      primary requirements and provisions of the Company’s articles of association are
      included in the Companies Act and apply to the Company, subject only to changes
      that have been made through Directors’ Resolutions that have been filed as
      certificates and amendment and registration of restated articles, as included
      in
      Exhibit 1.0.  Pursuant to the Companies Act, (a) a director may not
      vote on a proposal, arrangement or contract in which the director has a material
      interest; (b) the directors may not, in the absence of an independent quorum,
      vote compensation to themselves or any members of their body; (c) the directors
      may only exercise borrowing powers, or vary those powers, through the approval
      of a majority of their number attendant at a duly convoked meeting of directors,
      with the vote results being recorded in the minutes of the meeting; (d) there
      is
      no age limit requirement in respect of retirement or non-retirement of
      directors; and (e) ownership of shares is not required for director’s
      qualification.




Any
      change in the rights of holders of the stock, however proposed, must be approved
      by at least a two-thirds majority vote of the common
      shareholders.  Pursuant to the Companies Act and the regulations of
      the Alberta Securities Commission, the vote may be conducted through a formal
      polling of shareholders, or it may be taken at a duly convoked general or
      special meeting of shareholders.   The law requires that at least
      one general meeting of shareholders must be convoked each year.  The
      notice for a general or extraordinary meeting must be promulgated at least
      45
      days in advance of the meeting date through delivery to all shareholders of
      record as at a date, prior to the date of issuance of the notice, which must
      be
      published with the notice.




81




**C.   Disclosure
      Controls and Procedures Update**





Disclosure
      controls and procedures have been designed to ensure that information required
      to be disclosed by the Company is accumulated and communicated to its management
      as appropriate to allow timely decisions regarding disclosure. The Company’s
      Acting Chief Executive Officer and Acting Chief Financial Officer have
      concluded, based on their evaluation as of the date of this Management’s
      Discussion and Analysis that disclosure controls and procedures provide
      reasonable assurance that material information is made known to them by others
      within the Company.   It should be noted
      that while the Company’s Acting Chief Executive Officer and Acting Chief
      Financial Officer believe that disclosure controls and procedures provide a
      reasonable level of assurance and that they are effective, they do not expect
      that the disclosure controls and procedures would prevent all errors and
      fraud.  A control system, no matter how well conceived or operated,
      can only provide reasonable assurance that the objectives of the control system
      are met.




**Internal
      Controls over Financial Reporting**





The
      Acting Chief Executive Officer and Acting Chief Financial Officer of the Company
      are responsible for designing internal controls over financial reporting or
      causing them to be designed under their supervision in order to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      Canadian generally accepted accounting principles.





Further,
      because the Company is a registrant under US securities legislation, the Acting
      Chief Executive Officer and Acting Chief Financial Officer of the Company are
      responsible for assessing the effectiveness of the internal controls over
      financial reporting or causing them to be assessed under their supervision
      in
      order to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      in
      accordance with Canadian and United States generally accepted accounting
      principles.





The
      Company has assessed the design of its internal controls over financial
      reporting and during this process management identified the following material
      weaknesses:





a)
            Due
                to limited staff, the Company is not able to achieve complete segregation
                ofincompatible
                duties and achieve a formal authorization and approval process for
                transactions and payments.  In order to compensate for this
                weakness, the Acting Chief Executive Officer and Acting Chief Financial
                Officer along with senior management oversee all material transactions
                and
                related accounting records. In addition, the Audit Committee reviews
                on a
                quarterly basis the financial
                statements.





82


b)
            Bank
                reconciliations currently are not performed or reviewed on monthly
                basis.  Management intends to implement policies and procedure
                requiring bank reconciliations be prepared, reviewed and approved
                on a
                monthly basis.





c)
            Inventory
                count tags were not used in the year-end inventory count and there
                were
                inconsistencies in the method used to weigh
                inventory.   Management intends to implement policies and
                procedures to use count tags during inventory counts to ensure inventory
                is not double counted and that there is a consistent weighting method
                to
                be used to ensure inventory is accurately
                measured.





d)
            Due
                to limited staff, the Company’s finance staff does not have sufficient
                technical accounting knowledge to address all complex and non-routine
                accounting transactions that may arise.    In
                addition, certain government filings are often filed
                late.   Management intends to implement policy and
                procedures to ensure government filings are filed on
                time.





e)
            There
                is a lack of control over the retention of some supporting
                documents.   Management intends to centralize accounting
                function in one office and implement policies and procedures to ensure
                proper retention of supporting
                documentation.





f)
            During
                period and year-end, certain transactions are not recorded in the
                proper
                time frame resulting in “cut-off” errors.   Management
                intends to implement policy and procedures to ensure that transactions
                are
                recorded in the proper period that they relate
                to.





It
      should
      be noted that while the Company’s Acting Chief Executive Officer and Acting
      Chief Financial Officer believe that internal control over financial reporting
      provides a reasonable level of assurance, they do not expect that the internal
      controls over financial reporting would prevent all errors and
      fraud.  A control system, no matter how well conceived or operated,
      can only provide reasonable assurance that the objectives of the control system
      are met.




**D.
      Material Contracts**





Material
      contracts, other than contracts entered into during the ordinary course of
      business, entered into during the two years immediately preceding the date
      of
      this submission are:





None.





83




**D.
      Exchange Controls**




There
      are
      no government laws,****decrees or regulations in Canada
      relating to restrictions on the import/export of capital, or affecting the
      remittance of interest, dividends or other payments to non-residential holders
      of the Company's shares. Any such remittances to United States residents,
      however, may be subject to a 15% tax pursuant to Article X of the reciprocal
      tax
      treaty between Canada and the United States. The applicable rate is dependent
      on
      the type of entity receiving the dividends. See Item 10 E - Taxation,
      below.




Except
      as
      provided in the *Investment Canada Act* (the "Act"), there are no
      limitations under the laws of Canada, the Province of Alberta or in the charter
      or any other constituent documents of the Corporation on the right of foreigners
      to hold and/or vote the shares of the Company.





The
      purpose of the Act is to provide for the review of significant
      investments in Canada by non-Canadians in order to ensure benefit to Canada.
      The
      legislation describing the "review function" and associated rules are complex
      and any non-Canadian considering an investment to which the Act might apply
      can
      obtain information about the Act and regulations from the Government of Canada
      athttp://strategis.ic.gc.ca/epic/internet/inica-lic.nsf/en/Home.




The
      provisions of the Act apply to any person who is not a Canadian citizen or
      a
      permanent resident, within the meaning of the *Immigration Act* (ie. a
      person who has been ordinarily resident in Canada for not more than one year
      after the time at which he/she first became eligible to apply for Canadian
      citizenship).  For the purposes of the Act, a non-Canadian includes
      any entity that is not controlled or beneficially owned by
      Canadians.




Non-Canadians
      must either file a Notification or an Application for Review of an investment
      unless a specific exemption applies pursuant to section 10 of the
      Act.  The determination of which action is required is dependent upon
      the following conditions:




1.
            A
                Notification must be filed by a non-Canadian when commencing a new
                business activity in Canada and when acquiring control of an existing
                Canadian business where the establishment or acquisition of control
                is not
                a reviewable transaction.  Pursuant to the Act, a Notification
                must be filed no later than thirty days after the implementation
                of the
                investment.




2.
            An
                Application for Review of the investment must be submitted when it
                is for
                an acquisition of a Canadian business and the asset value of the
                Canadian
                business being acquired equals or exceeds any of the following
                thresholds:




(a)
            For
                an investor who is not from a World Trade Organization country, the
                threshold is $5 million for a direct acquisition and $50 million
                for an
                indirect acquisition; the $5 million threshold will apply, however,
                for an
                indirect acquisition if the asset value of the Canadian business
                being
                acquired exceeds 50% of the total assets of the
                business.




(b)
            Except
                as specified in paragraph (c) below, a threshold is calculated annually
                for reviewable direct acquisitions by investors who are from a World
                Trade
                Organization country, such as the United States of America. The threshold
                that was set for 2004 was $237 million. Pursuant to Canada's international
                commitments, indirect acquisitions by investors who are from World
                Trade
                Organization countries are not
                reviewable.




84


(c)
            The
                limits set out in paragraph (a) apply to all non-Canadian investors
                for
                acquisitions of a Canadian business
                that:




(i)
            engages
                in the production of uranium and owns an interest in a producing
                uranium
                property in Canada;




(ii)
            provides
                any financial service;




(iii)
            provides
                any transportation service; or




(iv)
            is
                a cultural business.




3.
            Notwithstanding
                the above, any investment for which only a Notification is usually
                required, including the establishment of a new Canadian business,
                and
                which falls within a specific business activity listed in Schedule
                IV of
                the *Regulations Respecting Investment in Canada*, may be reviewed
                if an Order-in-Council from the Government of Canada directing a
                review is
                made and a notice is sent to the non-Canadian investor within 21
                days
                following the receipt of a certified complete notification.  The
                types of businesses included in Schedule IV are those involved
                in:




(a)
            The
                publication, distribution or sale of books, magazines, periodicals
                or
                newspapers in print or machine readable
                form.




(b)
            The
                production, distribution, sale or exhibition of film or video
                products.




(c)
            The
                production, distribution, sale or exhibition of audio or video music
                recordings.




(d)
            The
                publication, distribution or sale of music in print or machine readable
                form.




**E.
      Taxation**




The
      discussion under this heading summarizes the material Canadian federal income
      tax consequences of acquiring, holding and disposing of common shares of the
      Registrant for a shareholder of the Registrant who is not resident in Canada
      and
      who is resident in the United States. It is based on the current provisions
      of
      the *Income Tax Act (Canada)* (the "Tax Act") and the regulations
      thereunder. The provisions of the Tax Act are subject to income tax treaties
      to
      which Canada is a party, including the Canada-United States Income Tax
      Convention (1980) (the Convention). Generally, dividends paid by Canadian
      corporations to non-resident shareholders are subject to a withholding tax
      of
      25% of the gross amount of such dividends. However, Article X of the reciprocal
      tax treaty between Canada and the United States reduced to 15% the withholding
      tax on the gross amount of dividends paid to residents of the United States.
      A
      further 9% reduction, in 1996, and a 10% reduction in 1997 and thereafter,
      in
      the withholding tax rate on the gross amount of dividends is applicable when
      a
      US corporation owns at least 10% of the voting  sharesof the Canadian
      corporation paying the dividends.




85




A
      non-resident who holds shares of the Company as capital property will not be
      subject to tax on capital gains realized on the disposition of such shares
      unless such shares are "taxable Canadian Property" within the meaning of the
      *Income Tax Act (Canada)*("Tax Act'), and no relief is afforded under
      any applicable tax treaty. The shares of the Company would be taxable Canadian
      property of a non-resident if****at any time during the five
      year period immediately preceding a disposition
      by the
      non-resident of such shares (a) not less than 25% of the issued shares of any
      class of the Company belonged to the non-resident (b) the person with whom
      the
      nonresident dealt did not deal at arm's length, or (c) to the non-resident
      and
      any person with whom the non-resident did not deal at arm's
      length.




As
      a
      foreign corporation with US shareholders, the Company could be treated as a
      passive foreign investment Corporation ("PFIC"), as
      defined****in Section 1296 of the Internal Revenue Code. This
      determination is dependent upon the percentage of the Company's passive income,
      or the percentage of the Company's assets, which are producing passive income.
      US shareholders owning shares of a PFIC may defer the U.S. tax with respect
      to
      that investment until the US holder disposes of the PFIC shares or receives
      certain distributions. At that time, the U.S. holder is subject to US tax,
      plus
      interest, based on the value of the tax deferral for the period during which
      the
      shares of the PFIC are owned, in addition to treatment of any gain realized
      on
      the disposition of the shares of the PFIC as ordinary income rather than as
      a
      capital gain.




Gain
      from
      a disposition of PFIC shares or certain distributions are treated as income
      earned ratably over the period during which the shareholder has held the shares.
      That portion allocable to the current year and to years when the corporation
      was
      not a PFIC is included in the shareholder's gross income in the year of
      distribution as ordinary income, rather than as a capital gain. That portion
      of
      the distribution or disposition which is not allocable to the current year
      is
      subject to deferred U.S. tax (the amount of tax that
      would****have been owed if the allocated amount had been
      included in income in the earlier year), plus interest.




However,
      if the U.S. shareholder makes a timely election to treat a PFIC as a qualified
      electing fund ("QEF") with respect to such shareholder's interest therein,
      the
      above-described rules generally will not apply. Instead, the electing U.S.
      shareholder would include annually in his gross income his pro-rata share of
      the
      PFIC's earnings and profits and any net capital gain, regardless of whether
      such
      income or gain was actually distributed. A U.S. Holder of a QEF can, however,
      elect to defer the payment of United States Federal Income tax on such income
      inclusions income not currently received. Special rules apply to U.S.
      shareholders who own their interests in a PFIC through intermediate entities
      or
      persons.




86





This
      section describes the material United States federal income tax consequences
      of
      owning shares. The United States Taxation subsection applies to you only if
      you
      hold your shares as capital assets for tax purposes. The United States Taxation
      subsection does not apply to you if you are a member of a special class of
      holders subject to special rules, including:





●
            a
                dealer in securities;





●
            a
                trader in securities that elects to use a mark-to-market method of
                accounting for your securities
                holdings;





●
            a
                tax-exempt organization;





●
            a
                life insurance company;





●
            a
                person liable for alternative minimum
                tax;





●
            a
                person that actually or constructively owns 10% or more of our voting
                stock;





●
            a
                person that holds shares as part of a straddle or a hedging or conversion
                transaction; or,





●
            a
                US holder (as defined below) whose functional currency is not the
                US
                dollar.





This
      section is based on the Internal Revenue Code of 1986, as amended, its
      legislative history, existing and proposed regulations, published rulings and
      court decisions These laws are subject to change, possibly on a retroactive
      basis.





You
      are a
      "U.S. holder" if you are a beneficial owner of shares and you are:





●
            a
                citizen or resident of the United
                States;





●
            a
                domestic corporation;





●
            an
                estate whose income is subject to United States federal income tax
                regardless of its source; or,





●
            a
                trust, if a United States court can exercise primary supervision
                over the
                trust's administration and one or more United States persons are
                authorized to control all substantial decisions of the
                trust.





87




Taxation
      of dividends





Under
      the
      United States federal income tax laws, and subject to the passive foreign
      investment company, or PFIC, rules discussed below, if you are a United States
      holder, you must include in your gross income the gross amount of any dividend
      paid by us out of our current or accumulated earnings and profits (as determined
      for United States federal income tax purposes). This includes any supplementary
      dividend or any additional dividends that we may elect to distribute to
      shareholders not tax resident in Canada, as explained in the Canada Taxation
      subsection. Dividends paid by us will not constitute qualified dividend income
      that would be eligible for the special tax rate applicable to qualified dividend
      income. Withholding tax is deducted from the ordinary dividend, any
      supplementary dividend and any additional dividend. You should include any
      supplementary dividend and any additional dividends and Canada tax withheld
      from
      the dividend payments in this gross amount even though you do not in fact
      receive the withholding tax. Any dividend is taxable to you when you receive
      the
      dividend, actually or constructively. Any such dividend will not be eligible
      for
      the dividends-received deduction generally allowed to United States corporations
      in respect of dividends received from other United States corporations. The
      amount of the dividend distribution that you must include in your income as
      a
      United States holder will be the US dollar value of the Canada dollar payments
      made, determined at the spot Canada dollar/US dollar rate on the date the
      dividend distribution is includible in your income, regardless of whether the
      payment is in fact converted into US dollars. Generally, any gain or loss
      resulting from currency exchange fluctuations during the period from the date
      you include the dividend payment in income to the date you convert the payment
      into US dollars will be treated as ordinary income or loss. The gain or loss
      generally will be income or loss from sources within the United States for
      foreign tax credit limitation purposes. Distributions in excess of current
      and
      accumulated earnings and profits, as determined for United States federal income
      tax purposes, will be treated as a non-taxable return of capital to the extent
      of your basis in the shares and thereafter as capital gain.





Subject
      to certain limitations, the Canada tax withheld and paid over to Canada should
      be creditable against your United States federal income tax liability However,
      it is not certain that withholding tax deemed paid from a supplementary dividend
      will be creditable, because that tax may not be considered withheld or may
      be
      considered a non-creditable subsidy.





Dividends
      will be income from sources outside the United States. Dividends paid in taxable
      years beginning before January 1, 2007 generally will be "passive" or "financial
      services" income, and dividends paid in taxable years beginning after December
      31, 2006 will, depending on your circumstances, be "passive" or "general" income
      which, in either case, is treated separately from other types of income for
      purposes of computing the foreign tax credit allowable to you.





Taxation
      of capital gains





Subject
      to the PFIC rules discussed above, if you are a United States holder and you
      sell or otherwise dispose of your shares, you will recognize capital gain or
      loss for United States federal income tax purposes equal to the difference
      between the US dollar value of the amount that you realize and your tax basis,
      determined in US dollars, in your shares. Capital gain of a non-corporate United
      States holder that is recognized on or after May 6, 2003 and before January
      1,
      2009 is generally taxed at a maximum rate of 15% where the holder has a holding
      period greater than one year.





The
      gain
      or loss will generally be income or loss from sources within the United States
      for foreign tax credit limitation purposes.




88




**F.
      Dividend and Paying Agents**




The
      Company has not declared any dividends in any of its years of operations, and
      has therefore not appointed a dividend paying agent.  The Company’s
      articles of association do not contain any provision to prohibit the payment
      of
      dividends to its shareholders.  However, the Companies Act stipulates
      that no dividend shall be declared if a company is insolvent, if the dividend
      would render the company insolvent, or if the dividend would impair the capital
      of the company.  Further, if a dividend was to be declared and paid by
      a company under the preceding stated conditions, the directors of the company
      would be jointly and severally liable to the company and its creditors for
      the
      debts that would exist after the declaration and payment of such a
      dividend.




**G.
      Statement by Experts**




Included
      as Exhibit 10.1 in respect of the audited financial statements of the Company
      for the years ending December 31, 2006, 2005 and 2004.




**H.
      Documents on Display**




It
      is
      possible to read and copy documents referred to in this annual report on Form
      20-F that have been filed with the SEC at the SEC's public reference room
      located at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC
      at
      1-800-SEC-0330 for further information on the public reference rooms and their
      copy charges.




Other
      documents concerning the Company, which are referred to in this report, or
      which
      are otherwise deemed to be public information, may be inspected during normal
      business hours at the Principal Executive Offices of the Company located at
      4287B Dawson Street; Burnaby, BC; V5C 4B3.  Requests for documents
      from the Company may be made at (604) 263-8885, by fax to (604) 293-8234, or
      by
      e-mail to tking@poly-pacific.com.




**I.
      Subsidiary Information**





Not
      applicable, since it is included in the financial statements pursuant to
      generally accepted accounting principles.




**ITEM
      11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




Not
      applicable.




89




**ITEM
      12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**




Not
      applicable.







**PART
      II**




**ITEM
      13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES**




Not
      applicable.




**ITEM
      14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS**




Not
      applicable.




**ITEM
      15. CONTROL AND PROCEDURES**




Not
      applicable.




**ITEM
      16. RESERVED**




**A.
      Audit Committee Financial Expert**




Not
      applicable.




**B.
      Code Of Ethics**




Not
      applicable.




**C.
      Principal Accountant Fees And Services**




Not
      applicable.




**D.
      Exemption From Listing Standards For Audit Committees**




Not
      applicable.




**E.
      Purchases Of Equity Securities By The Issuer And Affiliated
      Persons**




Not
      applicable.




90




**PART
      III**




**ITEM
      17. FINANCIAL STATEMENTS**




Incorporated
      by Reference to Item 8.




**ITEM
      18. FINANCIAL STATEMENTS**




Not
      applicable.




**ITEM
      19. EXHIBITS**





**Number**
            **Description
                of Exhibit**10.1
            Consent
                of accountants pursuant to Item
                10.G




91




**SIGNATURE**




The
      registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to sign
      this annual report on its behalf.




**Poly-Pacific
                International Inc.**
              (Registrant)
              Pursuant
                to the requirements of the Securities Act of 1933, this Form 20-F
                Filing
                has
              been
                signed by the following person in the capacity and on the date
                indicated.**Date**
            **Name
                and Signature**
            **Title**July
                  23, 2007
            /s/
                Randy Hayward
            PresidentRandy
                Hayward









92