**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-KSB**


(Mark
                one)ý
            Annual
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934**For
                The Fiscal Year Ended December 31, 2006.**o
            Transition
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934For
                the transition period from____________to
                ____________.Commission
                File Number 000-29649








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





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


**(250)
      477-9969**


(Issuer’s
                Telephone Number)


**None**


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





**Common
      Stock, $0.001 par value**


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







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




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB.  ý







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




State
      issuer’s revenues for its most recent fiscal year: $8,373,597.




State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days: As of March 2, 2007, the aggregate
      market value of the Company’s common stock held by non-affiliates was
      approximately $22,390,584 based on the closing price for shares of the
      registrant’s common stock on the American Stock Exchange for that
      date.




State
      the
      number of shares outstanding of each of the issuer’s class of common equity, as
      of the latest practicable date: As of March 2, 2007, there were 13,156,427
      shares of the Company’s common stock outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




No
      documents are incorporated by reference.




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

















**FLEXIBLE
      SOLUTIONS INTERNATIONAL, INC.**







**INDEX
      TO ANNUAL REPORT ON FORM 10-KSB**


**For
      the Fiscal Year Ended December 31, 2006**




**Page****PART
                I**Item
                1.
            Description
                of Business.
            1Item
                2.
            Description
                of Property.
            11Item
                3.
            Legal
                Proceedings.
            11Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders.
            11**PART
                II**Item
                5.
            Market
                for Common Equity and Related Stockholder
                Matters.
            12Item
                6.
            Management’s
                Discussion and Analysis or Plan of
                Operation.
            13Item
                7.
            Financial
                Statements.
            16Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure.
            17Item 8A.
            Controls
                and Procedures.
            17Item 8B.
            Other
                Information.
            17**PART
                III**Item
                9.
            Directors,
                Executive Officers, Promoters and Control
                Persons; Compliance With Section 16(a) of the Exchange
                Act.
            18Item
                10.
            Executive
                Compensation.
            20Item
                11.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters.
            23Item
                12.
            Certain
                Relationships and Related
                Transactions.
            24Item
                13.
            Exhibits.
            25Item
                14.
            Principal
                Accountant Fees and Services.
            25**SIGNATURES**
            
            26










**CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





This
      Annual Report on Form 10-KSB for the year ended December 31, 2006 (“Annual
      Report”), including the Notes to Audited Consolidated Financial Statements,
      contains forward-looking statements within the meaning of the Private Securities
      Litigation Reform Act of 1995. Forward-looking statements include, without
      limitation, those statements relating to development of new products, our
      financial condition, our ability to increase distribution of our products,
      integration of businesses we acquire and disposition of any of our current
      business. Forward-looking statements can be identified by the use of
      forward-looking terminology, such as “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “continue,” “plans,” “intends,” or other similar
      terminology. These forward-looking statements are not guarantees of future
      performance and involve risks, uncertainties and assumptions that are difficult
      to predict. Therefore, actual outcomes and results may differ materially from
      what is anticipated or forecasted in these forward-looking statements due to
      numerous factors, including, but not limited to, our ability to generate or
      obtain sufficient working capital to continue our operations, changes in demand
      for our products, the timing of customer orders and deliveries and the impact
      of
      competitive products and pricing. In addition, such statements could be affected
      by general industry and market conditions and growth rates, and general domestic
      and international economic conditions.





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








**PART
      I**




**Item
              1.**
            **Description
                of
                Business.**




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





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





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





Our
      website is www.flexiblesolutions.com





**Our
      Products**





HEAT$AVR®/ECO$AVR





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





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





In
      outdoor pools, the HEAT$AVR® also provides convenience compared to pool
      blankets. Pool blankets are plastic cover, which are cut to the size and shape
      of the surface of the pool or spa. Pool blankets float on the surface and,
      like
      the HEAT$AVR®, reduce energy cost by inhibiting water evaporation. However, it
      is often inconvenient to use conventional pool blankets because a pool blanket
      must be removed and stored before the pool can be used. Pool blankets do not
      provide any energy savings when not on the pool. Conversely, HEAT$AVR®
eliminates the need to install, remove and store the blanket and works 24 hours
      a day. In addition, the use of HEAT$AVR® in an indoor pool results in even
      greater energy savings since indoor pool locations use energy not only to heat
      the pool water, but also to air condition the pool environment. By slowing
      the
      transfer of heat and water vapor




**1**


from
      the
      pool to the atmosphere of the pool enclosure, less energy is required to
      maintain a pool at the desired temperature and there is a reduced load on the
      air-conditioning system.





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





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





We
      have 7
      non-exclusive distributorships in Canada and the United States for the sale
      of
      bulk HEAT$AVR® (without the ECO$AVR® dispenser) and exclusive distributorships
      in Australia, Chile, Japan, Korea, Spain, South Africa, Switzerland and Great
      Britain. We support our distributors and seek additional market opportunities
      by
      annually attending the major pool industry trade shows in the United States.
      We
      also advertise in trade magazines, maintain a semi-annual newsletter that is
      sent to buyer associations, customers and potential customers, and maintain
      a
      website which is information about our products.





*WATER$AVR®*





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





WATER$AVR®
      is sold in granulated form is provided in shaker containers holding 3⁄4 lbs. or in
      50 lbs. weatherproof bags. WATER$AVR® can be applied by hand or by fully
      automated scheduled metering, and we also offer an automatic dispenser for
      WATER$AVR®.





Tests
      have indicated that WATER$AVR®:





·
            Reduces
                daily water evaporation as much as
                54%


·
            Reduces
                monthly water evaporation as much as
                37%


·
            Is
                odorless


·
            Has
                no effect on invertebrates or
                vertebrates


·
            Has
                no anticipated effect on any current drinking water treatment processes
                and


·
            Is
                biodegradable





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





*WATER$AVR—BTITM*





WATER$AVR—BTITM
      combines evaporation control with an environmentally friendly method of killing
      mosquito larvae during the first, second and third stages of development.
      Combined with our original WATER$AVR® product, WATER$AVR—BTITM can be quickly and
      evenly spread across large and small water surfaces and can be constrained
      to
      the water/air interface where larvae must go to obtain air. Tests conducted
      by
      the Entomology Department at the Louisiana State University Agricultural




**2**


Center
      showed that the use of WATER$AVR—BTITM resulted in a 100% kill rate of mosquito
      larvae in contact with the product.





*TPAs*





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





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





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





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





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





**Competition**





*HEAT$AVR®
      and ECO$AVRTM*





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




**3**


a
      higher
      price point and limited sales history to date, must be taken seriously because
      of the expertise Sun Solar derived from working with us between 1998 ad 2004
      as
      our exclusive North American sales channel of ECO$AVR®’s predecessor product.





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





*WATER$AVR®*





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





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





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





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





*WATER$AVR—BTITM*





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





*TPAs*





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





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





·
            Biodegradability
                compared to competing oil field
                chemicals;





**4**





·
            Cost-effectiveness
                for crop enhancement compared to increased fertilizer use;
                and


·
            Environmental
                considerations, ease of formulation and increased crop yield opportunities
                in irrigation scale markets.


·
            Biodegradability
                compared to poly-acrylic acid for
                detergents;





**Manufacturing**





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





Our
      WATER$AVR® products are manufactured under contract with Ondeo Nalco Company
      (“Ondeo”) under an agreement which expires April 2007, with a five-year
      extension available. We are not required to purchase any minimum quantity of
      this product.





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





**Government
      Regulations**





*HEAT$AVR®
      and ECO$AVR* ®





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





*WATER$AVR®*





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





*WATER$AVR—BTITM*





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





**5**


*TPAs*





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





**Proprietary
      Rights**





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





**Research
      and Development**





We
      spent
      $123,254 for the year ended December 31, 2006 and $57,806 for the year ended
      December 31, 2005 on research and development. This work relates primarily
      to
      the development of our water and energy conservation products, as well as new
      research in connection with our TPA products.





**Employees**





As
      of
      December 31, 2006 we had 26 employees, including one officer, fifteen sales
      and
      customer support personnel, and ten manufacturing personnel. None of our
      employees is represented by a labor union and we have experienced no work
      stoppages to date.





**Risk
      Factors**





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





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





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





**6**


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





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





·
            demand
                for and market acceptance of our
                products;





·
            competitive
                pressures resulting in lower selling
                prices;





·
            adverse
                changes in the level of economic activity in regions in which we
                do
                business;





·
            adverse
                changes in industries, such as swimming pool construction, on which
                we are
                particularly dependent;





·
            changes
                in the portions of our revenue represented by various products and
                customers;





·
            delays
                or problems in the introduction of new
                products;





·
            the
                announcement or introduction of new products, services or technological
                innovations by our competitors;





·
            variations
                in our product mix;





·
            the
                timing and amount of our expenditures in anticipation of future
                sales;




******·
            increased
                costs of raw materials or supplies;
                and





***·***
            changes
                in the volume or timing of product
                orders.





***Our
      operations are subject to seasonal fluctuation.***





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





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





We
      purchase certain raw materials and components from third parties pursuant to
      purchase orders placed from time to time. Because we do not have guaranteed
      long-term supply arrangements with our




**7**


suppliers,
      any material interruption in our ability to purchase necessary raw materials
      or
      components could have a material adverse effect on our business, financial
      condition and results of operations.





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





The
      marketing efforts of our WATER$AVR® product may result in continued losses. We
      introduced our WATER$AVR® product in June 2002 and, to date, we have delivered
      quantities for testing by potential customers, but only a few customers have
      ordered the product for commercial use. This product can achieve success only
      if
      it is ordered in substantial quantities by commercial customers who have
      determined that the water saving benefits of the product exceed the costs of
      purchase and deployment of the product. We can offer no assurance that we will
      receive sufficient orders of this product to achieve profits or cover the
      additional expenses incurred to manufacture and market this product. We expect
      to spend $400,000 on the marketing and production of our WATER$AVR® product in
      fiscal 2007.





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





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





·
            accurately
                anticipate customer needs;





·
            innovate
                and develop new products and
                applications;





·
            successfully
                commercialize new products in a timely
                manner;





·
            price
                our products competitively and manufacture and deliver our products
                in
                sufficient volumes and on time; and





·
            differentiate
                our products from our competitors’
products.





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





***We
      are dependent upon certain customers.***





Among
      our
      current customers, we have identified six that are sizable enough that the
      loss
      of any one would be significant. Any such loss of one or more of these customers
      could result in a substantial reduction in our revenues. For this reason, we
      concentrate on maintaining good sales relations with these customers. We also
      try and minimize this risk by seeking out new customers.





**8**


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





In
      the
      year ended December 31, 2006, revenues from shipments made outside of the
      United States accounted for approximately 79% of our revenues, 80% in the year
      ended December 31, 2005 and 65% in the year ended December 31, 2004.
      Since we sell our products worldwide, our business is subject to risks
      associated with doing business internationally. We anticipate that revenues
      from
      international operations will continue to represent a sizable portion of our
      total revenue. Accordingly, our future results could be harmed by a variety
      of
      factors, including:





·
            changes
                in foreign currency exchange rates;





·
            changes
                in a country or region’s political or economic conditions, particularly in
                developing or emerging markets;





·
            longer
                payment cycles of foreign customers and difficulty of collecting
                receivables in foreign
                jurisdictions;





·
            trade
                protection measures and import or export licensing
                requirements;





·
            differing
                tax laws and changes in those laws;





·
            difficulty
                in staffing and managing widespread
                operations;





·
            differing
                protection of intellectual property and changes in that protection;
                and





·
            differing
                regulatory requirements and changes in those
                requirements.





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





We
      currently allow our major customers between 30 and 45 days to pay for each
      shipment of product we make to them. This practice, while customary, presents
      an
      accounts receivable write-off risk in that if one or more of our significant
      customers defaulted on their payment obligations to us, such write-off, if
      substantial, would have a material adverse effect on our business and results
      of
      operations. While we have exposure to this type of risk, we are no longer
      subject to the concentrated credit risk that we were previously subject to
      because of our relationship with Sun Solar. In addition, while our exposure
      to a
      bad debts and write-offs credit risk may increase as we service a larger number
      of customers in the swimming pool and personal spa, water evaporation and TPA
      industries, the effect of any such bad debts and write-offs will be minimized
      as
      a result of the increase in the numbers of our customers and overall
      revenues.





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





Some
      of
      our products are flammable and must be stored properly to avoid fire risk.
      Additionally, some of our products may cause irritation to a person’s eyes if
      they are exposed to the concentrated product. Although we label our products
      to
      warn of such risks, our sales could be reduced if our products were to be viewed
      as being dangerous to use or if they are implicated in causing personal injury
      or




**9**


property
      damage. We are not currently aware of any circumstances in which our products
      have caused harm or property damage to consumers. Nevertheless, litigation
      regarding the handling, storage and safety of our products would have a material
      adverse effect on our business and results of operations.





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





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





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





While
      we
      own certain patents and trademarks, some aspects of our business cannot be
      protected by patents or trademarks. Accordingly, in these areas there are few
      legal barriers that prevent potential competitors from copying certain of our
      products, processes and technologies or from otherwise entering into operations
      in direct competition with us. In particular, we have been informed that our
      former exclusive agent for the sale of our products, Sun Solar, is now competing
      with us in the swimming pool and personal spa markets. As a former distributor,
      they were given access to many of our sales, marketing and manufacturing
      techniques. Accordingly, we are doing all that we can to ensure our proprietary
      products and technologies are not used by them (or others) without our
      permission.





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





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





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





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





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





Our
      business would be adversely affected if the executive services of Daniel B.
      O’Brien ceased to be available to us because we currently do not have any other
      employee with an equivalent level of




**10**


expertise
      in and knowledge of our industry. If Mr. O’Brien no longer served as our
      President and Chief Executive Officer, we would have to recruit one or more
      new
      executives, with no real assurance that we would be able to engage a replacement
      executive with the required skills on satisfactory terms. The market for skilled
      employees is highly competitive, especially for employees in the fields in
      which
      we operate. While our compensation programs are intended to attract and retain
      the employees required for it to be successful, there can be no assurance that
      we will be able to retain the services of all our key employees or a sufficient
      number to execute on our plans, nor can there be any assurances that we will
      be
      able to continue to attract new employees as required.





**Item
              2.**
            **Description
                of
                Property.**





We
      lease
      4,300 sq. ft. in Victoria, British Columbia for administration and sales and
      research at $4,368 per month. This lease is effective through June 2009. We
      lease an 11,000 sq. ft. building in Calgary, Alberta for $7,592 per month which
      we use to manufacture our swimming pool products. This lease is effective
      through September 2009. We lease 1,488 sq. ft. in Richmond, British Columbia
      for
      sales and customer support at a cost of $1,202 per month. This lease is
      effective through December 2011. We lease 7,000 sq. ft. in Bedford Park,
      Illinois for offices and laboratories at a cost of $6,548 per month. This lease
      is effective through November 2007. We also own a 56,780 sq. ft. facility in
      Peru, Illinois which is used to manufacture our TPA line of
      products.





**Item
              3.**
            **Legal
                Proceedings.**





In
      January 2007 all litigation between Patrick Grant and us was settled. As part
      of
      the settlement we permitted Mr. Grant to exercise an option to purchase 100,000
      shares of FSI’s common stock at a price of $1.50 per share and to exercise a
      second option to purchase 50,000 shares of FSI’s common stock at a price of
      $2.00 per share. Both options expire on April 15, 2007. FSI also forgave a
      loan
      to Mr. Grant in the amount of approximately $37,000. FSI, its subsidiaries
      and
      officers face no further liability in regard to the Grant lawsuit.





On
      July
      23, 2004, we filed a breach of contract suit in the Circuit Court of Cook
      County, Illinois against Tatko Biotech Inc. (“Tatko”). The action arises out of
      our joint product development agreement with Tatko in which we agreed to invest
      $10,000 toward the product development venture and granted to Tatko 100,000
      shares of our restricted common stock. In return, Tatko granted us a five-year
      option to purchase 20% of Tatko’s outstanding capital stock. Tatko has since
      refused to collaborate on the agreement and we have sought declaratory relief
      stating that Tatko is not entitled to the 100,000 shares of our restricted
      common stock. The litigation is still pending at this time. In addition, Tatko
      filed its own suit on September 24, 2004 in the Circuit Court of Cook County,
      Illinois seeking declaratory relief of its entitlement to our restricted common
      stock. On May 23, 2005, the Tatko suit was dismissed with prejudice by the
      Circuit Court. No
      amounts have been recorded as receivable in our consolidated financial
      statements and no amount has been accrued as a loss as the outcome of the claim
      against Tatko is not determinable.





In
      December 2006 all litigation between us and Sunsolar Energy Technologies was
      settled on a confidential basis.





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





Not
      applicable.








**11**


**PART
      II**





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





**Market
      for Securities**





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




**High**
              
              **Low****Year
                  Ended December 31, 2005**
              First
                  Quarter
                Second
                  Quarter
                Third
                  Quarter
                Fourth
                  Quarter
              $5.14
                4.89
                5.09
                4.05
              
              $3.52
                3.70
                3.80
                2.70**High**
              
              **Low****Year
                  Ended December 31, 2006**
              First
                  Quarter
                Second
                  Quarter
                Third
                  Quarter
                Fourth
                  Quarter
              3.55
                4.30
                3.25
                4.12
              
              2.25
                2.45
                2.50
                2.80




Prices
      represent high and low prices on the American Stock Exchange. As of December
      31,
      2006 we had approximately 1,700 shareholders.





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





**Shares
      Which May Be Issued**





As
      of
      March 15, 2007 we had 13,163,627 outstanding shares of common stock. The
      following table lists additional shares of our common stock which may be issued
      as of March 15, 2007:




Number
                Of
                  Shares
              
              Note
                ReferenceShares
                  issuable upon the exercise of warrants
                held
                  by private investors
              987,400
              
              AShares
                  issuable upon exercise of options granted
                to
                  our officers, directors, employees, consultants,
                and
                  third parites
              2,126,740
              
              B


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




**12**


Shares
                  Issuable
                Upon
                  Exercise
                Of
                  Warrant
              
              Issue
                Date
              
              Exercise
                Price
              
              Expiration
                Date900,000
                87,400
              
              4/14/05
                6/8/05
              
              $4.50
                $4.50
              
              4/14/09
                6/8/09


B.  Options
      are exercisable at prices ranging from $1.40 to $4.55 per share. See Item 10
      of
      this report for more information concerning these options.





**Dividend
      Policy**





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





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





**Results
      of Operations**





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





Year
      Ended December 31, 2006




Item
            
            Increase
                (I) or
              Decrease
                (D)
            
            ReasonSales
            
            I
            
            Sales
                growth in all divisions.Wages
            
            I
            
            In
                2005 the Company was not required to record the expense of stock
                options.
                The expense, for financial report purposes for employee stock options,
                added $131,517 to wages in 2006.Administrative
                salaries and benefits
            
            I
            
            In
                2005 the Company was not required to record the expense of stock
                options.
                The expense, for financial report purposes for employee stock options,
                added $369,992 to administrative salaries in 2006.Investor
                relations and transfer agent fee
            
            D
            
            Upon
                the closing of our private placements in 2005, some stock options
                granted
                in 2004 vested and incurred an expense of $422,500.Insurance
            
            I
            
            Increase
                is comparable to what others are experiencing in the
                industry.Consulting
            
            I
            
            The
                expense, for financial report purposes, of stock option grants granted
                in
                2006 to consultants.Research
            
            I
            
            Increased
                spending on development.








**13**


Year
      Ended December 31, 2005




Item
            
            Increase
                (I) or
              Decrease
                (D)
            
            ReasonSales
            
            I
            
            Sales
                growth in all divisions as well as a full year of sales in the polymer
                division.Investor
                relations and transfer agent fee
            
            I
            
            Upon
                the closing of our private placements in 2005, some stock options
                granted
                in 2004 vested and incurred an expense of $422,500.Insurance
            
            I
            
            The
                increase is comparable to what others are experiencing in the
                industry.Consulting
            
            D
            
            Better
                cost control in our Watersavr division.Professional
                fees
            
            I
            
            Litigation
                costs became significant in 2005 compared to 2004 as a result of
                the need
                to protect our assets from potential litigation or unwarranted
                claims.Commissions
            
            I
            
            We
                began using commission based sales representatives in
                2005.





**Capital
      Resources and Liquidity**





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




Cash
                  provided by operations
              
              $
              17,539Patent
                  development
              
              
              (29,116
              )Equipment
                  purchases
              
              
              (37,160
              )Sale
                  of common stock
              
              
              15,285Exchange
                  rate changes
              
              
              (22,151
              )Other
              
              
              33,081Cash
                  on hand at January 1, 2006
              
              
              22,523


Our
      material sources and <uses> of cash during the year ended December 31,
      2005 were:




Cash
                  used in operations
              
              
              (623,167
              )Sale
                  of investment securities
              
              
              559,440Purchase
                  of investment
              
              
              (98,000
              )Repayment
                  of loan
              
              
              3,342Sale
                  of common stock
              
              
              308,296Patent
                  development
              
              
              (143,822
              )Equipment
                  purchases
              
              
              (92,805
              )Exchange
                  rate changes
              
              
              53,075Other
              
              
              152
  **14**


We
      are
      committed to minimum rental payments for property and premises aggregating
      approximately $454,327 over the term of four leases, the last expiring on
      December 31, 2011.




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




2007
            
            $
            154,3972008
            
            
            158,9852009
            
            
            112,0882010
            
            
            14,4282011
            
            
            14,428





We
      don’t
      anticipate any capital requirements for the twelve months ending December 31,
      2007.





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





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





**Critical
      Accounting Policies And Estimates**





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





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





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





**15**


**Item
              7.**
            **Financial
                Statements.**





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


**Page**Report
                of Independent Registered Public Accounting Firm,
                Cinnamon Jang Willoughby & Company
            F-1Consolidated
                Balance Sheet as of December 31, 2006 and
                2005
            F-2Consolidated
                Statements of Operations for the Years
                Ended December 31, 2006 and 2005
            F-3Consolidated
                Statements of Operations for the Three
                Months Ended December 31, 2006 and 2005
            F-4Consolidated
                Statements of Cash Flows for the Years
                Ended December 31, 2006 and 2005
            F-5Consolidated
                Statements of Stockholders’ Equity for the
                Years Ended December 31, 2006 and 2005
            F-6Notes
                to Consolidated Financial
                Statements
            F-7









































16


**Cinnamon
      Jang Willoughby &
Company**


Chartered
      Accountants


***A
      Partnership of Incorporated Professionals***








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**






To
      the
      Board of Directors and Stockholders of






FLEXIBLE
      SOLUTIONS INTERNATIONAL, INC.:




We
      have
      audited the consolidated balance sheets of Flexible Solutions International,
      Inc. (the “Company”) as of December 31, 2006 and 2005 and the consolidated
      statements of operations, stockholders’ equity and cash flows for the years then
      ended. The consolidated financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.




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




In
      our
      opinion the consolidated financial statements present fairly, in all material
      respects, the financial position of the Company as at December 31, 2006 and
      2005
      and the consolidated results of its operations and its cash flows for the years
      then ended in conformity with generally accepted accounting principles in the
      United States of America.













Chartered
      Accountants




Burnaby,
      Canada


February
      23, 2007





**F-1**




**FLEXIBLE
                SOLUTIONS INTERNATIONAL,
                INC.****Consolidated
                Balance Sheet****December
                31, 2006 and 2005****(U.S.
                Dollars)****December
                31, 2006**
            
            **December
                31, 2005****Assets****Current**Cash and cash equivalents
            
            $
            450,759
            
            $
            473,282Accounts receivable
            
            
            1,319,575
            
            
            766,400Income tax recoverable
            
            
            -
            
            
            28,918Loan receivable (see Note 3)
            
            
            -
            
            
            35,228Inventories (see Note 4)
            
            
            1,904,315
            
            
            2,314,979Prepaid expenses
            
            
            124,360
            
            
            137,3153,799,009
            
            
            3,756,122**Property,
                equipment and leaseholds, net (see Note 5)**
            
            
            4,100,553
            
            
            4,657,383**Patents
                (see Note 6)**
            
            
            169,758
            
            
            143,822**Investment
                (see Note 7)**
            
            
            369,000
            
            
            369,000**Long
                term deposits (see Note 8)**
            
            
            47,220
            
            
            45,073**Total
                Assets**
            
            $
            8,485,540
            
            $
            8,971,400**Liabilities****Current**Accounts
                payable and accrued liabilities
            
            $
            423,030
            
            $
            691,105Deferred
                revenue
            
            
            20,559
            
            
            -443,589
            
            
            691,105**Stockholders’
                Equity****Capital
                stock**Authorized50,000,000 common shares with a par value of $0.001 each1,000,000 preferred shares with a par value of $0.01 eachIssued
                and outstanding:13,058,427 (2005: 12,981,316) common shares
            
            
            13,058
            
            
            12,981**Capital
                in excess of par value**
            
            
            12,370,418
            
            
            11,422,219**Other
                comprehensive income (see Note 9)**
            
            
            131,002
            
            
            153,254**Accumulated
                Deficit**
            
            
            (4,472,527
            )
            
            (3,308,158
            )**Total
                Stockholders’ Equity**
            
            
            8,041,951
            
            
            8,280,295**Total
                Liabilities and Stockholders’ Equity**
            
            $
            8,485,540
            
            $
            8,971,400**Commitments,
                Contingencies and Subsequent events**
            
            **(See
                Notes 16, 17 & 18****)**




See
      Notes
      to Consolidated Financial Statements.


**F-2**





**FLEXIBLE
                SOLUTIONS INTERNATIONAL,
                INC.****Consolidated
                Statements of Operations****For
                the Years Ended December 31, 2006 and 2005****(U.S.
                Dollars)****Years
                Ended December 31,****2006**
            
            **2005****Sales**
            
            $
            8,373,597
            
            $
            6,709,394**Cost
                of sales**
            
            
            5,401,350
            
            
            4,671,349**Gross
                profit**
            
            
            2,972,247
            
            
            2,038,045**Operating
                Expenses**Wages
            
            
            1,069,736
            
            
            798,569Administrative salaries and benefits
            
            
            666,542
            
            
            241,819Advertising and promotion
            
            
            45,215
            
            
            95,094Investor relations and transfer agent fee
            
            
            258,072
            
            
            558,013Office and miscellaneous
            
            
            157,755
            
            
            156,652Insurance
            
            
            209,864
            
            
            145,596Interest expense
            
            
            3,136
            
            
            64,275Rent
            
            
            232,820
            
            
            237,113Consulting
            
            
            383,965
            
            
            156,917Professional fees
            
            
            324,359
            
            
            374,140Travel
            
            
            133,049
            
            
            136,661Telecommunications
            
            
            34,041
            
            
            40,458Shipping
            
            
            41,517
            
            
            43,830Research
            
            
            123,254
            
            
            57,806Commissions
            
            
            171,380
            
            
            121,513Bad debt expense
            
            
            90,747
            
            
            -Currency exchange
            
            
            (23,417
            )
            
            (28,096
            )Utilities
            
            
            18,064
            
            
            19,0893,940,099
            
            
            3,219,449**Loss
                before other items and income tax**
            
            
            (967,852
            )
            
            (1,181,404
            )**Registration
                rights penalty**
            
            
            (326,710
            )
            
            -**Interest
                income**
            
            
            3,114
            
            
            4,653**Loss
                before income tax**
            
            
            (1,291,448
            )
            
            (1,176,751
            )**Income
                tax (recovery)**
            
            
            (127,079
            )
            
            -**Loss
                for the year**
            
            $
            (1,164,369
            )
            $
            (1,176,751
            )**Net
                loss per share (basic and diluted)**
            
            $
            (0.09
            )
            $
            (0.09
            )**Weighted
                average number of common shares (basic and
                diluted)**
            
            
            12,994,430
            
            
            12,541,084




See
      Notes
      to Consolidated Financial Statements.


**F-3**





**FLEXIBLE
                SOLUTIONS INTERNATIONAL,
                INC.****Consolidated
                Statements of Operations****For
                Three Months Ended December 31, 2006 and 2005****(U.S.
                Dollars)****Three
                Months Ended December 31,****2006**
            
            **2005**(unaudited)
            
            (unaudited)**Sales**
            
            $
            1,700,806
            
            $
            1,519,591**Cost
                of sales**
            
            
            1,155,807
            
            
            1,312,739**Gross
                profit**
            
            $
            544,999
            
            $
            206,852**Operating
                Expenses**Wages
            
            
            217,991
            
            
            158,968Administrative salaries and benefits
            
            
            190,561
            
            
            75,983Advertising and promotion
            
            
            9,381
            
            
            33,162Investor relations and transfer agent fee
            
            
            112,064
            
            
            6,528Office and miscellaneous
            
            
            30,050
            
            
            29,665Insurance
            
            
            48,814
            
            
            40,722Interest expense
            
            
            1,161
            
            
            2,087Rent
            
            
            55,841
            
            
            68,553Consulting
            
            
            93,106
            
            
            39,062Professional fees
            
            
            111,922
            
            
            140,432Travel
            
            
            54,832
            
            
            31,476Telecommunications
            
            
            9,598
            
            
            8,470Shipping
            
            
            7,682
            
            
            9,523Research
            
            
            21,195
            
            
            18,558Commissions
            
            
            41,184
            
            
            9,354Bad debt expense
            
            
            90,557
            
            
            -Currency exchange
            
            
            (28,695
            )
            
            (85,882
            )Utilities
            
            
            4,806
            
            
            4,4261,072,050
            
            
            591,086**Loss
                before other items and income tax**
            
            $
            (527,051
            )
            $
            (384,234
            )**Registration
                rights penalty**
            
            
            -
            
            
            -**Interest
                income**
            
            
            430
            
            
            508**Loss
                before income tax**
            
            $
            (526,621
            )
            $
            (383,726
            )**Income
                tax (recovery)**
            
            
            -
            
            
            -**Loss
                for the 3 months**
            
            $
            (526,621
            )
            $
            (383,726
            )**Net
                loss per share (basic and diluted)**
            
            $
            (0.04
            )
            $
            (0.03
            )**Weighted
                average number of shares (basic and diluted)**
            
            
            13,010,514
            
            
            12,896,533




See
      Notes
      to Consolidated Financial Statements.


**F-4**


**FLEXIBLE
                  SOLUTIONS INTERNATIONAL,
                  INC.****Consolidated
                  Statements of Cash Flows****For
                  Years Ended December 31, 2006 and 2005****(U.S.
                  Dollars)****Years
                  Ended December 31,****2006**
              
              **2005****Operating
                  activities**Net
                  loss
              
              $
              (1,164,369
              )
              $
              (1,176,751
              )Adjustments
                  to reconcile net loss to net cashStock
                  compensation expense
              
              
              858,585
              
              
              525,450Shares
                  issued for services
              
              
              74,306Depreciation
              
              
              597,170
              
              
              685,768365,692
              
              
              34,467Changes
                  in non-cash working capital items:(Increase)
                  Decrease in accounts receivable
              
              
              (553,174
              )
              
              (258,228
              )(Increase)
                  Decrease in inventories
              
              
              410,664
              
              
              (898,391
              )(Increase)
                  Decrease in prepaid expenses
              
              
              12,955
              
              
              (6,035
              )Increase
                  (Decrease) in accounts payable
              
              
              (268,075
              )
              
              440,975Increase
                  (Decrease) deferred revenue
              
              
              20,559
              
              
              -Increase
                  (Decrease) in income taxes
              
              
              28,918
              
              
              64,045**Cash
                  provided by (used in) operating activities**
              
              
              17,539
              
              
              (623,167
              )**Investing
                  activities**(Increase)
                  Decrease in short-term investments
              
              
              -
              
              
              559,440(Increase)
                  Decrease in investments
              
              
              -
              
              
              (98,000
              )(Increase)
                  Decrease in long term deposits
              
              
              (2,147
              )
              
              152(Increase)
                  Decrease in loan receivable
              
              
              35,228
              
              
              3,342(Increase)
                  Decrease in development of patents
              
              
              (29,116
              )
              
              (143,822
              )(Increase)
                  Decrease in acquisition of equipment
              
              
              (37,160
              )
              
              (92,805
              )**Cash
                  provided by (used in) investing activities**
              
              
              (33,195
              )
              
              228,306**Financing
                  activities**Increase
                  (Decrease) in short-term loan
              
              
              -
              
              
              (3,150,000
              )Proceeds
                  from issuance of common stock
              
              
              15,285
              
              
              3,458,286**Cash
                  provided by financing activities**
              
              
              15,285
              
              
              308,296Effect
                  of exchange rate changes on cash
              
              
              (22,152
              )
              
              53,075**Inflow
                  (outflow) of cash**
              
              
              (22,523
              )
              
              (33,489
              )Cash
                  and cash equivalents, beginning
              
              
              473,282
              
              
              506,771**Cash
                  and cash equivalents, ending**
              
              $
              450,759
              
              $
              473,282**Supplemental
                  disclosure of cash flow information:**Registration
                  rights penalty
              
              $
              (326,710
              )
              $
              -Interest
                  paid
              
              
              3,136
              
              
              64,275Income
                  taxes paid
              
              
              -
              
              
              -


See
      Notes
      to Consolidated Financial Statements.





**F-5**




**FLEXIBLE
      SOLUTIONS INTERNATIONAL, INC.** **Consolidated
      Statements of Stockholders’ Equity**


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


**(U.S.
      Dollars)**


**Capital
                in**
            
            **Accumulated**
            
            **Other**
            
            **Total****Excess
                of**
            
            **Earnings**
            
            **Comprehensive**
            
            **Stockholders’****Shares**
            
            **Par
                Value**
            
            **Par
                Value**
            
            **(Deficiency)**
            
            **Income
                (Loss)**
            
            **Equity****Balance
                December 31, 2004**
            
            
            **11,831,916**
            
            **$**
            **11,832**
            
            **$**
            **7,439,621**
            
            **$**
            **(2,131,407**
            **)**
            **$**
            **100,179**
            
            **$**
            **5,420,225**Translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            53,075
            
            
            53,075Net loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,176,751
            )
            
            —
            
            
            (1,176,751
            )Comprehensive income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,123,676
            )Shares issued:Exercise of stock options
            
            
            162,000
            
            
            162
            
            
            226,638
            
            
            —
            
            
            —
            
            
            226,800Private placement
            
            
            987,400
            
            
            987
            
            
            3,230,509
            
            
            —
            
            
            —
            
            
            3,231,496Stock option compensation
            
            
            —
            
            
            —
            
            
            525,450
            
            
            —
            
            
            —
            
            
            525,450**Balance
                December 31, 2005**
            
            
            **12,981,316**
            
            **$**
            **12,981**
            
            **$**
            **11,422,218**
            
            **$**
            **(3,308,158**
            **)**
            **$**
            **153,254**
            
            **$**
            **8,280,295**Translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (22,495
            )
            
            (22,495
            )Net loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,164,369
            )
            
            —
            
            
            (1,187,586
            )Comprehensive income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,210,081
            )Shares issued:Exercise of stock options
            
            
            46,000
            
            
            46
            
            
            64,354
            
            
            —
            
            
            —
            
            
            64,400Issue of stock for services
            
            
            31,111
            
            
            31
            
            
            74,306
            
            
            —
            
            
            —
            
            
            74,337Private placement
            
            
            —
            
            
            —
            
            
            (49,046
            )
            
            —
            
            
            —
            
            
            (49,046
            )Stock option compensation
            
            
            —
            
            
            —
            
            
            858,585
            
            
            —
            
            
            —
            
            
            882,015**Balance
                December 31, 2006**
            
            
            **13,058,427**
            
            **$**
            **13,058**
            
            **$**
            **12,370,417**
            
            **$**
            **(4,472,527**
            **)**
            **$**
            **131,002**
            
            **$**
            **8,041,950**




See
      Notes
      to Consolidated Financial Statements.


**F-6**


**FLEXIBLE
      SOLUTIONS INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**December
      31, 2006 and 2005**


**(U.S.
      Dollars)**




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




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




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




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




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




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




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




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




**F-7**


Donlar
      assets that were pledged as security were released from their mortgage. The
      remainder of the consideration given was cash.




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




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




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




**2.**  **Significant
      Accounting Policies.**




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




(a)  *Cash
      and Cash Equivalents* .




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




(b)  *Inventories
      and Cost of Sales*




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




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




**F-8**


(c)  *Allowance
      for Doubtful Accounts*




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




(d)  *Property,
      Equipment and Leaseholds* .




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




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





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




(e)  *Impairment
      of Long-Lived Assets* .




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




(f)  *Investments.*




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




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





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





**F-9**


(g)  *Foreign
      Currency* .




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




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




(h)  *Revenue
      Recognition* .




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




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




(i)  *Stock
      Issued in Exchange for Services* .




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




(j)  *Stock-based
      Compensation* .




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




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




**F-10**


(k)  *Comprehensive
      Income* .




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




(l)  *Loss
      Per Share* .




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




(m)  *Use
      of Estimates* .




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




(n)  *Financial
      Instruments* .




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





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





The
      Company is exposed to credit-related losses in the event of non-performance
      by
      counterparties to the financial instruments. Credit exposure is minimized by
      dealing with only credit worthy counterparties. Accounts receivable for the
      three primary customers totals $483,682 (37%) as at December 31, 2006 (2005
      -
      $453,059).





(o)  *Contingencies*




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





**F-11**


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





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





**3.**  **Loan
      Receivable** **.**




See
      Note
      18 - Subsequent events




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




**4.**  **Inventories**




2006
            
            2005Completed
                goods
            
            $
            970,780
            
            $
            1,082,351Works
                in progress
            
            
            397,995
            
            
            336,233Raw
                materials
            
            
            535,540
            
            
            896,395$
            1,904,315
            
            $
            2,314,979




**5.**  **Property,
      Plant and Equipment** ****





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








**F-12**





2005
            
            Accumulated
            
            2005Cost
            
            Depreciation
            
            NetBuildings
            
            $
            3,144,259
            
            $
            455,918
            
            $
            2,688,341Computer
                hardware
            
            
            54,258
            
            
            24,296
            
            
            29,962Furniture
                and fixtures
            
            
            17,258
            
            
            6,293
            
            
            10,965Office
                equipment
            
            
            29,577
            
            
            14,496
            
            
            15,081Manufacturing
                equipment
            
            
            2,180,311
            
            
            692,103
            
            
            1,488,208Trailer
            
            
            1,995
            
            
            1,164
            
            
            831Leasehold
                improvements
            
            
            39,605
            
            
            18,243
            
            
            21,362Trade
                show booth
            
            
            7,473
            
            
            3,026
            
            
            4,447Land
            
            
            398,186
            
            
            —
            
            
            398,186$
            5,872,922
            
            $
            1,215,539
            
            $
            4,657,383





**6.**  **Patents**




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





2006
              Cost
            
            Accumulated
              Amortization
            
            2006
              Net
            
            2005Patents
            
            $
            172,938
            
            $
            3,180
            
            
            169,758
            
            $
            43,822








**7.
      Investments** **.**





2006
            
            2005Tatko
                Inc.
            
            $
            271,000
            
            $
            271,000Air-Water
                Interface Delivery and Detection Inc.
            
            
            98,000
            
            
            98,000$
            369,000
            
            $
            369,000





On
      May
      31, 2003, the Company acquired an option to purchase a 20% interest in the
      outstanding shares of Tatko Inc. (“Tatko”) for consideration of the issuance of
      100,000 shares of the Company’s common stock. The option to purchase the shares
      of Tatko expires on May 31, 2008. The cost of the investment has been accounted
      for based on the fair market value of the Company’s common stock on May 31,
      2003. For further information on this option, see Contingencies (Note 18)
      below.




In
      2005,
      NanoDetect purchased 32.7 shares of equity in Air Water Interface Delivery
      and
      Detection Inc. (“AWD”) for a total cost of $98,000. This investment represents
      only 3.3% of the issued and outstanding shares of AWD and, accordingly, will
      be
      accounted for under the cost method.




**F-13**


**8.**  **Long
      Term Deposits**




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




2006
            
            2005Long
                term deposits
            
            $
            47,220
            
            $
            45,073







**9.**  **Comprehensive
      Income**







2006
            
            2005Net
                loss
            
            $
            (1,164,369
            )
            $
            (1,176,751
            )Other
                comprehensive income
            
            
            (22,495
            )
            
            53,075Comprehensive
                income
            
            $
            (1,186,864
            )
            $
            (1,123,676
            )




**10.**  **Income
      Tax** ****






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




2006
            
            2005Current
                tax, domestic
            
            
            -
            
            
            -Current
                tax, foreign
            
            $
            (127,079
            )
            
            -Current
                tax, total
            
            $
            (127,079
            )
            
            -







**F-14**


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







2006
            
            2005Income
                before taxes, domestic
            
            $
            (427,661
            )
            $
            (486,041
            )Income
                before taxes, foreign
            
            
            (863,787
            )
            
            (690,710
            )Income
                before taxes, total
            
            $
            (1,291,448
            )
            $
            (1,176,751
            )Expense
                (recovery) for income taxes at statutory rate (35%)
            
            $
            (452,007
            )
            $
            (411,863
            )Permanent
                difference - stock based compensation
            
            
            326,523
            
            
            183,908Depreciation
            
            
            104,543
            
            
            (176,297
            )Miscellaneous
            
            
            -
            
            
            4,471Tax
                refund from application of losses to prior periods
            
            
            (127,079
            )
            
            -Application
                of losses from prior periods
            
            
            (139,308
            )
            
            -Losses
                carried forward
            
            
            160,249
            
            
            399,791Income
                tax expense (recovery)
            
            $
            (127,079
            )
            
            -








Deferred
      income taxes reflect the tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. The Company’s deferred tax liability
      calculated at a 35% tax rate consists of the following:




2006
            
            2005Non-capital
                loss carry forwards
            
            
            950,037
            
            $
            1,304,321Book
                over tax value of property and equipment
            
            
            (83,416
            )
            
            (452,944
            )Change
                in valuation allowance
            
            
            (866,621
            )
            
            (851,377
            )Net
                deferred tax asset (liability)
            
            
            -
            
            
            -





The
      Company's carried losses for income tax purposes are $2,714,390 (2005 -
      $3,726,632), which may be carried forward to apply against future income tax,
      expiring between 2013 and 2025. The future tax benefit of these loss
      carry-forwards has been offset with a full valuation allowance. These losses
      expire as follows:





2013
            
            $
            93,2182014
            
            
            390,8472016
            
            
            392,8882023
            
            
            300,3522024
            
            
            1,336,0092025
            
            
            201,076







**F-15**


**11.**  **Loss
      Per Share** **.**




Net
                loss
            
            Shares
              (denominator)
            
            Per
                share
              amount2006
                Basic net loss
            
            $
            (1,164,369
            )
            
            12,994,430
            
            $
            (0.09
            )2005
                Basic net loss
            
            $
            (1,176,751
            )
            
            12,541,084
            
            $
            (0.09
            )




Options
      to purchase 2,126,410 shares of the Company’s common stock at prices ranging
      from $3.00 to $4.60 per share were outstanding during the year ended December
      31, 2006 (2005: options to purchase 1,241,740 shares of the Company’s common
      stock at prices ranging from $1.40 to $4.60 per share), but were excluded from
      the computation of diluted earnings per share because the options’ exercise
      prices were greater than the average market price of the Company’s common stock
      and were anti-dilutive. There were no preferred shares issued and outstanding
      for the years ended December 31, 2006 or 2005.




**12.**  **Stock
      Options** .




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




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




The
      following table summarizes the Company’s stock option activity for the years
      ended December 31, 2006 and 2005:




Number
                of shares
            
            Exercise
                price
              per
                share
            
            Weighted
                average exercise priceBalance,
                December 31, 2004
            
            
            1,241,740
            
            
            $1.00
                - $4.60
            
            
            $2.87Granted
            
            
            30,000
            
            
            $3.58
                - $4.40
            
            
            $4.17Exercised
            
            
            (162,000)
            
            
            $1.40
            
            
            $1.40Cancelled
                or expired
            
            
            (49,000)
            
            
            $3.00
                - $4.25
            
            
            $3.52Balance,
                December 31, 2005
            
            
            1,060,740
            
            
            $1.40
                - $4.60
            
            
            $3.44Granted
            
            
            1,191,000
            
            
            $3.25
                - $3.60
            
            
            $3.25Exercised
            
            
            (46,000)
            
            
            $1.40
            
            
            $1.40Cancelled
                or expired
            
            
            (79,000)
            
            
            $1.40
                - $4.25
            
            
            $2.46Balance,
                December 31, 2006
            
            
            2,126,740
            
            
            $1.40
                - 4.55
            
            
            $3.44








In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued revised
      FAS No. 123(R), *Share-Based
      Payment* ,
      which
      replaces FAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      which
      superseded APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* .
      FAS No.
      123(R)




**F-16**


requires
      the cost of all share-based payment transactions to be recognized in an entity’s
      financial statements, establishes fair value as the measurement objective and
      requires entities to apply a fair-value-based measurement method in accounting
      for share-based payment transactions. FAS No. 123(R) applies to all awards
      granted, modified, repurchased or cancelled after July 1, 2005, and unvested
      portions of previously issued and outstanding awards. The Company adopted this
      statement for its first quarter starting January 1, 2006 and will continue
      to
      evaluate the impact of adopting this statement.





Prior
      to
      2006, the Company applied APB Opinion No. 25 and related interpretations in
      accounting for stock options granted to its employees and, accordingly, stock
      compensation expense of nil was recognized as wages expense in 2005 and 2004.
      Had compensation expense been determined as provided in FAS No. 123 using the
      Black-Scholes option-pricing model, the pro forma effect on the Company’s loss
      and per share amounts would be as follows:




2006
            
            2005Net
                income (loss), as reported
            
            $
            (1,164,369
            )
            $
            (1,176,751
            )Net
                income (loss), pro forma
            
            
            -
            
            
            (1,414,520
            )Net
                income (loss) per share, as reported
            
            
            (0.09
            )
            
            (0.09
            )Net
                income (loss) per share, pro forma
            
            
            -
            
            
            (0.11
            )




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




2006
            
            2005Expected
                life - years
            
            
            5.0
            
            
            5.0Interest
                rate
            
            
            4.50
            %
            
            3.85
            %Volatility
            
            
            52
            %
            
            52.0
            %Dividend
                yield
            
            
            —
            %
            
            —
            %Weighted
                average fair value of options granted
            
            $
            1.49
            
            $
            1.69





During
      the year ended December 31, 2006, the Company granted 410,000 (2005 - 30,000)
      stock options to consultants and has applied FAS No. 123 using the Black-Scholes
      option-pricing model, which resulted in additional expenses of $362,005 (2005
      -
      $9,350). During the year ended December 31, 2006, employees were granted 781,000
      (2005 - nil) stock options, which resulted in additional expenses of $496,580
      (2005 - nil). During the year ended December 31, 2005, the Company recognized
      $93,600 in expenses for 90,000 options granted in the year ended December 31,
      2004, but which vested in the year ended December 31, 2005. During the year
      ended December 31, 2005, 250,000 options, which were granted in 2004, vested
      according to the fulfillment of certain milestones, which resulted in additional
      expenses of $422,500.




**13.**  **Warrants**




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




On
      June 8, 2005, the Company announced that it had raised an additional
      $327,750 pursuant to a private placement of up to 174,800 shares of its common
      stock. An investor purchased 87,400 shares of the Company’s common stock at a
      per share price of $3.75, together with a warrant to purchase up to




**F-17**


87,400
      additional shares of the Company’s common stock. The warrant has a four-year
      term and is immediately exercisable at a price of $4.50 per share.




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




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





**14.**  **Capital
      Stock** **.**




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




On
      June 8, 2005, the Company announced that it had raised an additional
      $327,750 pursuant to a private placement of up to 174,800 shares of its common
      stock. An investor purchased 87,400 shares of the Company’s common stock at a
      per share price of $3.75, together with a warrant to purchase up to 87,400
      additional shares of the Company’s common stock. The warrant has a four-year
      term and is immediately exercisable at a price of $4.50 per share.




The
      purpose of these transactions was to provide sufficient working capital for
      the
      Company to retire the debt remaining from its acquisition of certain assets
      from
      Donlar Corporation in June 2004. Costs associated with these two capital raises
      were $49,046 (2005: $471,254).




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




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




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




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







**F-18**


**15.**  **Segmented,
      Significant Customer Information and Economic Dependency** **.**




The
      Company operates in two segments:




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




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




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




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




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




EWCP
            
            BPCA
            
            TotalRevenue
            
            $
            1,410,842
            
            $
            6,963,320
            
            $
            8,374,162Interest
                revenue
            
            
            3,114
            
            
            -
            
            
            3,114Interest
                expense
            
            
            788
            
            
            2,348
            
            
            3,136Depreciation
                and
              amortization
            
            
            59,695
            
            
            537,475
            
            
            597,170Segment
                profit (loss)
            
            
            (1,998,246
            )
            
            810,660
            
            
            (1,187,586
            )Segment
                assets
            
            
            199,230
            
            
            3,901,180
            
            
            4,100,553Expenditures
                for
              segment
                assets
            
            
            9,004
            
            
            31,336
            
            
            40,340




The
      sales
      generated in the United States and Canada are as follows:




2006
            
            2005Canada
            
            $
            202,763
            
            $
            121,963United
                States and abroad
            
            
            8,171,399
            
            
            6,587,431Total
            
            $
            8,374,162
            
            $
            6,709,394




**F-19**


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




2006
            
            2005Canada
            
            $
            364,487
            
            $
            387,892United
                States
            
            
            3,905,824
            
            
            4,413,313Total
            
            $
            4,270,311
            
            $
            4,801,205





Three
      customers account for $4,727,042 (57%) of sales made in the year (2005 -
      $3,710,659).





**16.**  **Commitments** **.**




The
      Company is committed to minimum rental payments for property and premises
      aggregating approximately $454,327 over the term of four leases, the last
      expiring on December 31, 2011.




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




2007
            
            $
            154,3972008
            
            
            158,9852009
            
            
            112,0882010
            
            
            14,4282011
            
            
            14,428





**17.**  **Contingencies** **.**




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




On
      November 13, 2003, Patrick Grant, an ex-employee, filed a lawsuit in the Circuit
      Court of Cook County, Illinois against the Company, WaterSavr Global Solutions
      Inc. (“WGS”), the wholly-owned subsidiary of the Company and Daniel B. O’Brien,
      the Company’s Chief Executive Officer. The plaintiff claims damages for breach
      of contract, tortious interference with an agreement and various wrongful
      discharge claims. The plaintiff seeks monetary damages in excess of $1,020,000
      for the breach of contract and tortious interference claims and unspecified
      compensatory and punitive damages in the wrongful discharge claims. The parties
      completed mandatory mediation ordered by the Circuit Court and will next appear
      in court for case management, at which time the court will set discovery
      deadlines. The Company considers the case without merit and is vigorously
      disputing the claims. In addition, the Company intends to file counterclaims
      against the plaintiff for failure to repay financial obligations owed to the
      Company of almost $40,000, as well as unspecified damages arising out of the
      plaintiff’s disclosure of confidential information to a client during his
      employment at WGS. No amounts have been recorded as receivable and no accrual
      has been made for any loss in the Company’s consolidated financial




**F-20**


statements
      as the outcome of the claim filed by the plaintiff is not determinable. See
      Note
      17 - Subsequent Events.




On
      May
      28, 2004, Sun Solar Energy Technologies, Inc. (“Sun Solar”), filed a lawsuit in
      the Federal Court of Canada, against the Company, Flexible Ltd., and Mr.
      O’Brien. Sun Solar is seeking: (a) a declaration that the trademark “Tropical
      Fish” is available for use by Sun Solar; (b) injunctive relief against further
      use of the “Tropical Fish” trademark by the Company; and (c) monetary damages
      exceeding $7,000,000 for the alleged infringement by the Company, Flexible
      Ltd.
      and Mr. O’Brien of the “Tropical Fish” trademark, as well as any other
“confusingly similar trademarks” or proprietary trade dresses. On August 9,
      2004, the Company, Flexible Ltd. and Mr. O’Brien filed their defense and filed a
      counterclaim against Sun Solar. The counterclaim seeks: (x) injunctive relief
      against further use of the “Tropical Fish” trademark by Sun Solar; (y) a
      declaration that the “Tropical Fish” trademark is owned by the Company, or, in
      the alternative, is not distinctive and should be struck from the trademark
      registry; and (z) monetary damages exceeding $50,000. On December 28, 2006,
      all
      lawsuits between FSI and Sunsolar Energy Technologies were settled on a
      confidential basis. This settlement will have no effect on FSI's financial
      statements nor on the Company's ability to sell its swimming pool products
      under
      its current trademarks and trade-dress.




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




In
      addition, Tatko filed its own suit on September 24, 2004 in the Circuit Court
      of
      Cook County, Illinois seeking declaratory relief of its entitlement to the
      Company’s restricted common stock. On May 23, 2005, the Tatko suit was dismissed
      with prejudice by the Circuit Court.




No
      amounts have been recorded as receivable in the Company’s consolidated financial
      statements and no amount has been accrued as a loss as the outcome of the claim
      against Tatko is not determinable.




**18.**  **Subsequent
      Events.**




As
      of
      January 3, 2007 all litigation between FSI and Patrick Grant has been settled.
      As part of the settlement FSI will permit Mr. Grant to exercise an option to
      purchase 100,000 shares of FSI’s common stock at a price of $1.50 per share and
      to exercise a second option to purchase 50,000 shares of FSI’s common stock at a
      price of $2.00 per share. Both options expire on April 15, 2007. FSI also
      forgave a loan to Mr. Grant and related parties in the amount of approximately
      $46,177. This amount has been recorded as a bad debt expense in 2006. FSI,
      its
      subsidiaries and officers face no further liability in regard to the Grant
      lawsuit.





As
      a part
      of the above settlement, the Company has issued 93,000 common stock subsequent
      to year end. The Company has also issued 5,000 common stock upon exercise of
      stock options to a former employee since the end of the year.





**19.**  **Comparative
      Figures** **.**




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




**F-21**




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





None.





**Item
              8A.**
            **Controls
                and
                Procedures.**





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





As
      of the
      end of the period covered by this Annual Report on Form 10-KSB for the year
      ended December 31, 2006, we carried out an evaluation, under the
      supervision and with the participation of management, including our principal
      executive officer and principal financial officer, of the effectiveness of
      the
      design and operation of our disclosure controls and procedures (as defined
      under
      Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
      amended). Based upon that evaluation, our principal executive officer and
      principal financial officer concluded that our disclosure controls and
      procedures are effective in timely alerting them to material information
      relating to us (including our consolidated subsidiaries) that is required to
      be
      included in our periodic reports.





The
      prior
      accounting treatment of our stock-based compensation expense was done in
      consultation and in accordance with the advice of our independent accountants.
      Moreover, the restatement relative to our inventory was a clerical error.
      Accordingly, management does not believe that the restatements of our financial
      statements indicate or result from a material weakness with respect to our
      disclosure controls and procedures or our internal controls over financial
      reporting.





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





**Item
              8B.**
            **Other
                Information.**





None.


**17**


**Item
              9.**
            **Directors
                and Executive
                Officers.**




Name
            Age
            PositionDaniel
                B. O’Brien
            50
            President,
                DirectorJohn
                H. Bientjes
            53
            DirectorDr.
                Robert N. O’Brien
            85
            DirectorDale
                Friend
            50
            DirectorEric
                Hodges
            58
            Director


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




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




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




Dale
      Friend was elected a director in December 2002. Ms. Friend is currently an
      Accounting Manager of DB Perks & Associates. She served as the company
      comptroller for a Lock and Security firm in Vancouver from 2004 to 2006 and
      was
      a Senior Trust Analyst for Alderwoods Group, a company engaged in funeral and
      mortuary services, from August 2002 to February 2003. She also served as an
      Advanced Accountant for such firm from 1999 to August 2002. From 1979 to 1998,
      Ms. Friend was with Telus in various accounting, auditing and financial planning
      positions.




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





**18**


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





John
      Bientjes, Dale Friend, and Eric Hodges are independent directors as that term
      is
      defined in section 121(a) of the listing standards of the American Stock
      Exchange.





Our
      Audit
      Committee, consisting of John Bientjes, Dale Friend and Eric Hodges, all of
      whom
      are independent directors and have strong financial backgrounds, facilitates
      and
      maintains open communications among our board of directors, our Audit Committee,
      senior management and our independent auditors. Our Audit Committee also serves
      as an independent and objective party to monitor our financial reporting process
      and internal control system. In addition, our Audit Committee reviews and
      appraises the efforts of our independent auditors. Our Audit Committee meets
      periodically with management and our independent auditors. Mr. Bientjes meets
      the SEC’s definition of audit committee financial expert. Each member of the
      Audit Committee is “independent” as that term is defined in Section 121(a) of
      the listing standards of the American Stock Exchange.





Our
      Compensation Committee, consisting of Dr. Robert O’Brien and John Bientjes,
      establishes salary, incentive and other forms of compensation for our Chief
      Executive Officer and administers our Stock Option Program. None of our officers
      participated in deliberations of the compensation committee concerning executive
      officer compensation. Dr. O’Brien is not an independent member of the
      compensation committee as that term is defined in Section 121(a) of the listing
      standards of the American Stock Exchange. During the year ended December 31,
      2006, no director was also an executive officer of another entity, which had
      one
      of our executive officers serving as a director of such entity or as a member
      of
      the compensation committee of such entity.


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







**19**


**Item
              10.**
            **Executive
                Compensation.**




**Summary
      Compensation Table**




The
      following table shows in summary form the compensation received by (i) our
      Chief
      Executive Officer and (ii) by each other executive officer who received in
      excess of $100,000 during the two fiscal years ended December 31,
      2006.




Name
                  and PrincipalPosition
              FiscalYear
              Salary(1)
              Bonus(2)
              Restricted
                  Stock
                Awards(3)
              OptionsAwards(4)
              AllOtherAnnual
                Compensation(5)
              TotalDaniel
                  B. O’Brien
                President
                  and Chief
                Executive
                  Officer
              2006
                2005
              $150,109
                $98,914
              --
                --
              --
                --
              $
                  340,217
                --
              --
                --
              $
                  490,326
                98,914


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





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





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





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





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





**Stock
      Option Program**





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





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





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





**20**


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





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





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




The
      following table shows the weighted average exercise price of the outstanding
      options granted pursuant to our Stock Option Program as of December 31, 2006,
      our most recently completed fiscal year.


Plan
                Category
            
            Number
                of Securities to be Issued Upon Exercise of Outstanding
                Options,
              Warrants
                and Rights
            
            Weighted-Average
              Exercise
                Price of
              Outstanding
                Options,
              Warrants
                and Rights
            
            Number
                of Securities
              Remaining
                Available for
              Future
                Issuance Under
              Equity
                Compensation
              Plans
                (Excluding Securities Reflected
              in
                Column (a))(a)
            
            (b)
            
            (c)Stock
                Option Program
            
            2,126,740
            
            $
                3.44
            
            Not
                ApplicableTotal
            
            2,126,740
            
            $
                3.44





As
      of
      March 15, 2007 options to purchase 2,126,740 shares of our common stock were
      outstanding under our Stock Option Program. The exercise price of these options
      varies between $1.40 and $4.55 per share. The options expire at various dates
      between July 1, 2007 and December 18, 2012.





The
      following tables show, during the fiscal year ended December 31, 2006, the
      options granted to, and the options exercised and held by, the persons named
      below. All options were granted pursuant to our Stock Option
      Program.




Options
                Granted**Name**
            Grant
              Date
            OptionsGranted
                (#)
            Price
                Per
              Share
            Exercise
              Expiration
              DateDaniel O’Brien
            1/05/06
            500,000
            $3.25
            1/5/11






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




**21**




(1)
            The
                number of shares received upon exercise of options during the fiscal
                year
                ended December 31, 2006.




(2)
            With
                respect to options exercised during the fiscal year ended December
                31,
                2006, the dollar value of the difference between the option exercise
                price
                and the market value of the option shares purchased on the date of
                the
                exercise of the options.




Shares
                  underlying
                unexercised
                  options
                which
                  are:
              Exercise
              ExpirationName
              Exercisable
              Unexercisable
              Price
              DateDaniel
                  O’Brien
              50,000
                20,000
                50,000
                100,000
              400,000
              $4.25
                3.60
                3.00
                3.25
                3.25
              07/01/07
                12/31/08
                11/26/09
                01/05/11
                01/05/11


**Director
      Compensation**





We
      reimburse directors for any expenses incurred in attending board meetings.
      We
      also compensate directors $1,000 annually and grant our directors options to
      purchase shares of our common stock each year that they serve.





Our
      directors received the following compensation in 2006:




Name
              Paid
                  in Cash
              Stock
                  Awards (1)
              Option
                  Awards (2)Robert
                  N. O’Brien
              --
              --
              $
                  170,108John
                  H. Bientjes
              $1,000
              --
              16,250Dale
                  Friend
              $1,000
              --
              16,250Eric
                  Hodges
              $1,000
              --
              16,250




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





(2)
            The
                fair value of options granted computed in accordance with FAS 123R
                on the
                date of grant. The terms of the options granted to our directors
                in 2006
                are shown below.




Name
            Option
                Price
            No.
                of Options
            Expiration
                DateRobert
                N. O’Brien
            $3.25
            250,000
            January
                5, 2011John
                H. Bientjes
            $3.25
            5,000
            January
                5, 2011John
                H. Bientjes
            $3.60
            5,000
            December
                18, 2012Dale
                Friend
            $3.25
            5,000
            January
                5, 2011Dale
                Friend
            $3.60
            5,000
            December
                18, 2012Eric
                Hodges
            $3.25
            5,000
            January
                5, 2011Eric
                Hodges
            $3.60
            5,000
            December
                18, 2012


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




**22**


**Item
                11.**
            **Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder
                Matters.**




The
      following table shows the beneficial ownership of our common stock as of March
      15, 2007 by (i) each stockholder who is known by us to own beneficially more
      than five percent of our outstanding common stock, (ii) each of our officers
      and
      directors, and (iii) by all of our executive officers and directors as a group.




Shares
                (1)
            Percentage
                OwnershipDaniel
                B. O’Brien
              2614
                Queenswood Dr.
              Victoria,
                BC V8N 1X5
            4,791,900
            36.4%Dr.
                Robert N. O’Brien
              2614
                Queenswood Dr.
              Victoria,
                BC V8N 1X5
            1,920,000
            14.6%


John
                  Bientjes
                #1-230
                  West 13th Street,
                North
                  Vancouver, B.C. V7M 1N7
              40,000
              0.3%Dale
                  Friend
                3009
                  E. Kent Ave,
                Vancouver,
                  BC V5S 4P6
              -
              -Eric
                  Hodges
                #110
                  - 4252 Commerce Circle
                Victoria,
                  BC  V8Z 4M2
              -
              -All
                  officers and directors
                as
                  a group(5 persons)
              6,751,900
              51.3%




**23**


(1)  Includes
      shares which may be acquired on the exercise of the stock options listed
      below.




Name
            No.
                of Options
            Exercise
              Price
            Expiration
                DateDaniel
                O’Brien
            50,000
            $4.25
            December
                31, 200720,000
            $3.60
            December
                31, 200850,000
            $3.00
            November
                26, 2009100,000
            $3.25
            January
                5, 2011Dr.
                Robert O’Brien
            25,000
            $4.25
            December
                31, 200720,000
            $3.60
            December
                31, 200825,000
            $3.00
            November
                26, 200950,000
            $3.25
            January
                5, 2011John
                Bientjes
            5,000
            $4.25
            December
                31, 20075,000
            $3.60
            December
                31, 20085,000
            $3.00
            November
                26, 20095,000
            $3.25
            January
                5, 2011Dale
                Friend
            5,000
            $4.25
            December
                31, 20075,000
            $3.60
            December
                31, 20085,000
            $3.00
            November
                26, 20095,000
            $3.25
            January
                5, 2011Eric
                Hodges
            5,000
            $3.60
            December
                31, 20085,000
            $3.00
            November
                26, 20095,000
            $3.25
            January
                5, 2011





**Item
              12.**
            **Certain
                Relationships and Related
                Transactions.**




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




**24**


**Item
              13.**
            **Exhibits.**




Number
            Description3.1
            Articles
                of Incorporation of the Registrant. (1)3.2
            Bylaws
                of the Registrant. (1)21.1
            Subsidiaries.
                (2)23.1
            Consent
                of Independent Accountants.31.1
            Certification
                of Principal Executive Officer
                Pursuant to §302 of the Sarbanes-Oxley Act of 2002.31.2
            Certification
                of Principal Financial Officer
                Pursuant to §302 of the Sarbanes-Oxley Act of 2002.32
            Certification
                of Chief Executive and
                Principal Financial Officer Pursuant to 18 U.S.C. §1350 and §906 of the
                Sarbanes-Oxley Act of 2002.





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


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





**Item
              14.**
            **Principal
                Accountant Fees and
                Services.**





Cinnamon
      Jang Willoughby & Company, Certified Public Accountants (“CJW”), are our
      independent auditors and have examined our financial statements for each of
      the
      fiscal years ended December 31, 2006 and 2005.





**Audit
      Fees**




CJW
      was
      paid aggregate fees of $62,731 and $27,357 for the for the fiscal years ended
      December 31, 2005 and 2004, respectively, for professional services rendered
      in
      the audit of our annual financial statements and for the reviews of the
      financial statements included in our quarterly reports on Form 10-QSB during
      these fiscal years.




**Audit-Related
      Fees**




CJW
      was
      paid $10,712 and $25,305 for the fiscal year ended December 31, 2006 and 2005,
      respectively, for assurance and related services reasonably related to the
      performance of the audit or review of our financial statements.




**Tax
      Fees**




CJW
      was
      paid aggregate fees of $2,336 and $2,150 for the fiscal years ended December
      31,
      2006 and 2005, respectively, for professional services rendered for tax
      compliance, tax advice and tax planning. The nature of these services was the
      calculation and filing of our income tax returns for the fiscal years ended
      December 31, 2005 and 2004.




**All
      Other Fees**




CJW
      was
      paid no other fees for professional services during the fiscal years ended
      December 31, 2006 and 2005.




**25**


**Audit
      Committee Pre-Approval Policies**




Rules
      adopted by the SEC in order to implement requirements of the Sarbanes-Oxley
      Act
      of 2002 require public company audit committees to pre-approve audit and
      non-audit services. Effective as of December 2002, our Audit Committee has
      adopted a policy for the pre-approval of all audit, audit-related and tax
      services, and permissible non-audit services provided by our independent
      auditors. The policy provides for an annual review of an audit plan and budget
      for the upcoming annual financial statement audit, and entering into an
      engagement letter with the independent auditors covering the scope of the audit
      and the fees to be paid. Our Audit Committee may also from time-to-time review
      and approve in advance other specific audit, audit-related, tax or permissible
      non-audit services. In addition, our Audit Committee may from time-to-time
      give
      pre-approval for audit services, audit-related services, tax services or other
      non-audit services by setting forth such pre-approved services on a schedule
      containing a description of, budget for and time period for such pre-approved
      services. The policies require our Audit Committee to be informed of each
      service and the policies do not include any delegation of our Audit Committee’s
      responsibilities to management. Our Audit Committee may delegate pre-approval
      authority to one or more of its members. The member to whom such authority
      is
      delegated will report any pre-approval decisions to our Audit Committee at
      its
      next scheduled meeting.




During
      the year ended December 31, 2006 our Audit Committee approved all of the fees
      paid to CJW. Our Audit Committee has determined that the rendering of all other
      non-audit services by CJW is compatible with maintaining CJW’s independence.
      During the year ended December 31, 2006, none of the total hours expended on
      our
      financial audit by CJW were provided by persons other than CJW’s full-time
      permanent employees.









**26**


**SIGNATURES**




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




Dated:
      March 29, 2007.




**Flexible
                Solutions International, Inc.**By:/s/ DANIEL B. O'BRIENName:Daniel
                B. O’BrienTitle:President
                and Chief Executive Officer


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




Signature
            Title
            Date/s/
                DANIEL B. O'BRIEN
              Daniel
                B. O’Brien
            President,
                Chief Executive Officer, Principal Financial and Accounting Officer
                and a
                Director
            March
                29, 2007/s/
                JOHN H. BIENTJES
              John
                H. Bientjes
            Director
            March
                  29, 2007/s/
                ROBERT N. O'BRIEN
              Robert
                N. O’Brien
            Director
            March
                  29, 2007/s/
                DALE FRIEND
              Dale
                Friend
            Director
            March
                  29, 2007/s/
                ERIC G. HODGES
              Eric
                G. Hodges
            Director
            March
                  29, 2007
































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