Edgar Filing: FLEXIBLE SOLUTIONS INTERNATIONAL INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-KSB

(Mark one)

|X| Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005.

|_| Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the transition period from to .
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Commission File Number 000-29649

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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)

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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)

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

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 |X| No
|_|

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. |X|

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

State issuer's revenues for its most recent fiscal year: $6,709,394.

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, 2006, the
aggregate market value of the Company's common stock held by non-affiliates was
approximately $16,086,877 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, 2006, there
were 12,981,316 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 |_| No
|X|

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

PAGE
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PART I

Item 1. Description of Business. 1
Item 2. Description of Property. 9
Item 3. Legal Proceedings. 10
Item 4. Submission of Matters to a Vote of Security Holders. 11

PART II

Item 5. Market for Common Equity and Related Stockholder Matters. 11
Item 6. Management's Discussion and Analysis or Plan of Operation. 14
Item 7. Financial Statements. 27
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 28
Item 8A. Controls and Procedures. 28
Item 8B. Other Information. 28

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. 29
Item 10. Executive Compensation. 31
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters. 33
Item 12. Certain Relationships and Related Transactions. 34
Item 13. Exhibits. 34
Item 14. Principal Accountant Fees and Services. 34

SIGNATURES 36

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB for the year ended December 31, 2005
("Annual Report"), including the Notes to Unaudited 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.

OUR COMPANY

Flexible Solutions International, Inc.

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

We were incorporated as Flexible Solutions, Ltd. (referred to
hereinafter as "Flexible Ltd."), a British Columbia corporation, on January 26,
1991. On May 12, 1998, we merged Flexible Ltd. with and into Flexible Solutions
International, Inc., a Nevada corporation, and, in exchange for all of the
outstanding shares of Flexible Ltd., we issued 7,000,000 shares of common stock,
which represented all of our then-issued and then-outstanding shares, to the
former shareholders of Flexible Ltd. Flexible Ltd. is now our wholly-owned
subsidiary. For further information on Flexible Ltd., see "Our
Subsidiaries--Flexible Solutions, Ltd." below. At the time of our merger with
Flexible Ltd., we had no other business and were incorporated solely in order to
acquire Flexible Ltd. This merger facilitated the establishment of a public
trading market for our common stock. Trading in our common stock commenced on
October 12, 1999, through the OTC Bulletin Board under the trading symbol
"FXSO". Since November 2002, our common stock has traded on the American Stock
Exchange under the trading symbol "FSI".

OUR SUBSIDIARIES

We are the parent holding company for Flexible Ltd., WaterSavr Global
Solutions Inc. (hereinafter referred to as "WaterSavr"), NanoChem Solutions Inc.
(hereinafter referred to as "NanoChem"), Nano Detect Technologies Inc.
(hereinafter referred to as "Nano Detect"), and Seahorse Systems Inc.
(hereinafter referred to as "Seahorse").

Flexible Solutions, Ltd.

Flexible Solutions Ltd., a British Columbia corporation
inter-provincially registered in Alberta, was organized to develop and market
swimming pool chemical products designed to reduce heat loss. HEAT$AVR(R) and
ECO$AVR(R) are Flexible Ltd.'s principal products. For further information on
these products, see "Our Products--HEAT$AVR(R) and ECO$AVR(R)" below.

WaterSavr Global Solutions Inc.

In 2002, we established WaterSavr Global Solutions Inc. to concentrate
on the marketing of our WATER$AVR(R) product. Since February 7, 2005, WaterSavr
has been organized as a Nevada corporation. WATER$AVR(R) is a patented powder
that, when deployed onto a water surface of any size, will significantly reduce
evaporation. For further information on our WaterSavr products, see "Our
Products--WATER$AVR(R)" below.

NanoChem Solutions Inc.

On May 25, 2004, we formed NanoChem Solutions Inc. in order to acquire
certain of the assets of Donlar Corporation, which owned a broad portfolio of
environmentally friendly technologies and products. In June 2004, NanoChem
purchased these assets from the bankruptcy estate of Donlar Corporation
("Donlar") for $6.15 million. In exchange for the capital contribution necessary
to purchase the Donlar assets, we were issued all of the outstanding shares of
NanoChem, making it our wholly-owned subsidiary. The newly acquired assets
include 52 U.S. and 139 International patents relating to environmental products
and technologies, as well as a 56,780 sq. ft. manufacturing plant on 40 acres of
property in an area outside of Chicago, Illinois. As part of the asset
acquisition from Donlar, we also acquired leaseholds to corporate offices and a
laboratory in Bedford Park, Illinois that are now occupied by NanoChem. The
principal products that we acquired from Donlar via our wholly-owned subsidiary,
NanoChem, consist of 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. For further
information on these products, see "Our Products--Biopolymer Products (TPAs)"
below.

Nano Detect Technologies Inc.

On January 7, 2005, we formed Nano Detect Technologies Inc. to engage
in new product research based on our thin film spreading technology.

Seahorse Systems Inc.

On June 21, 2005, we formed Seahorse Systems Inc. in order to research
alternative uses for our patented ECOSAVR(R) chemical dispensing device.

OUR PRODUCTS

HEAT$AVR(R) and ECO$AVR(TM)

Our principal products consist of the HEAT$AVR(R) and ECO$AVR(R)
branded chemical solutions. HEAT$AVR(R) is a chemical product for use in
swimming pools and personal spas that forms a thin, transparent layer on the
water's surface that reduces water evaporation and heat loss. We market the
HEAT$AVR(R) product as a cost-effective and convenient way to save on the cost
of energy required to heat pools and spas. Our studies indicate that
approximately 70% of the energy lost from a swimming pool occurs through water
evaporation. By using our HEAT$AVR(R) product, we can minimize that heat loss
and save our customers money on their pool and spa energy needs. For example, we
have received reports from our commercial customers documenting energy savings
of between $2,400 to $6,000 per year when using our HEAT$AVR(R) product.

We completed the development of our HEAT$AVR(R) product and introduced
it to the commercial marketplace in 1998, achieving initial sales of $84,252
that year. Since that time, we have expanded our marketing of the HEAT$AVR(R)
product to include the residential marketplace. We found that by designing the
HEAT$AVR(R) product to be "residential-friendly," we could increase sales. As a
result, we created a patented, fish-shaped dispensing unit for the HEAT$AVR(R)
residential market and have designated the dispensing unit as the ECO$AVR(R).
Since that time, we have increased sales and market share on our HEAT$AVR(R) and
ECO$AVR(R) products.

Each ECO$AVR(R) dispenser is made of molded plastic in the form of a
ten-inch long colorful ECO$AVR(R) fish that is filled with enough HEAT$AVR(R)
solution to cover the surface of a 400 sq. ft. swimming pool for about one
month. The ECO$AVR(R) is deployed by cutting off the dorsal fin and tossing the
fish into the pool where it submerges to the bottom. Differential pressure
causes the HEAT$AVR(R) solution inside the ECO$AVR(R) to escape into the water
where it rises to the surface and forms a transparent layer on the water's
surface. Once the ECO$AVR(R) is empty, the dispenser is removed and replaced. We
also make and sell automatic metering system dispensers for automatically
dispensing HEAT$AVR(R) into a swimming pool or spa. These dispensers contain a
reservoir holding a one-gallon supply of HEAT$AVR(R). The unit is programmed to
inject the appropriate amount of HEAT$AVR(R) product into the pool at the rate
of one ounce per 400 sq. ft. of pool surface per day.

The ECO$AVR(R) product has a suggested retail price of between $11.95
and $14.95 in the United States. HEAT$AVR(R) retails for between $200 and $300
per four gallon case in the United States. In outdoor swimming pools, our
HEAT$AVR(R) product can provide savings on pool heating costs and provides
convenience of use when compared to pool blankets. Pool blankets are plastic
covers, which are cut to the size and shape of the surface of the pool or spa.
They float on the surface and perform the same function as our HEAT$AVR(R)
product: reducing energy cost by inhibiting water evaporation. Pool personnel
often find it inconvenient to use conventional pool blankets because a pool
blanket must be removed and stored prior to entering the pool and provides no
energy savings when not on the pool. Conversely, our HEAT$AVR(R) product
eliminates the necessity of installing, removing and storing the blanket and
works 24 hours a day. We believe that the ease of use provided by HEAT$AVR(R)
results in more consistent pool and spa usage. In addition, the use of
HEAT$AVR(R) in an indoor pool results in even greater energy savings. Indoor
pool locations use energy not only to heat the pool water, but also to air
condition the pool environment. By slowing the transfer of heat and water vapor
from the pool to the atmosphere of the pool enclosure, less energy is required
to maintain a pool at the desired temperature and there is a reduced load on the
air-conditioning system because less heat is transferred from the pool water to
the surrounding air and less water vapor will have to be removed from the air to
maintain the required comfort level.

We market our HEAT$AVR(R) and ECO$AVR(R) products to both residential
and commercial markets, consisting of individual homeowners with swimming pools
and personal spas and commercial consumers consisting of operators of swimming
pools and personal spas located in hotels, motels, schools, and municipal and
private recreational facilities.

Traditionally, we sold our HEAT$AVR(R) and ECO$AVR(R) products directly
to a wholesale network. However, in February 2004, we reorganized the
distribution of our HEAT$AVR(R) and ECO$AVR(R) products so that we now handle
distribution of the products from our sales and marketing office in Richmond,
British Columbia. By bringing our product distribution in-house, we believe we
can fully integrate our manufacturing and distribution processes such that we
can increase our revenue per unit by 100%. While we now maintain greater control
over our distribution process, we also still maintain non-exclusive
distributorships in Canada and the United States for the sale of bulk
HEAT$AVR(R) (without the ECO$AVR(R) 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 an
internet presence containing information about our products.

WATER$AVR(R)

We introduced our WATER$AVR(R) product in June 2002. This product
utilizes our core technology to reduce water evaporation. We market it as a
water conservation product for use where water is standing or gently flowing and
the need for water conservation can justify the cost of purchase and deployment
of the product. We believe that our WATER$AVR(R) product may find a market for
use in the following markets: reservoirs, potable water storage, aqueducts and
canals, agricultural irrigation, flood water crops, lawn and turf care, potted
and bedding plants, stock watering ponds, and mining.

WATER$AVR(R) is sold in granulated form and can be provided in shaker
containers holding 3/4 lbs. or in 50 lbs. weatherproof bags. WATER$AVR(R) can be
applied in various ways from hand dispersal to fully automated scheduled
metering, and we also offer an automatic dispenser for WATER$AVR(R) to automate
deployment of the product.

In May 2004, the Metropolitan Water District of Southern California
awarded us a $30,000 grant under that agency's Innovation Supply Program for an
evaporation control project to start in June 2004. In September and October
2004, we achieved positive results from our evaporation control testing
conducted at Owens Lake, California. The evaporation control results were as
follows:

o Evaporation reduction for 2- and 3-day application cycles over
September and October were 37% and 30%, respectively; and

o Evaporation savings were as high as 54% and as low as 22% on
individual days depending on environmental factors.

We also ordered a simultaneous toxicity study to be performed by
McGuire Environmental Consultants Inc. of Denver, Colorado to determine if any
water quality change occurred as a result of the application of WATER$AVR(R) to
a body of water. With respect to the environmental impact testing performed in
Colorado, the results were as follows:

o No effect on odor;

o No effect on invertebrates;

o No effect on vertebrates;

o No anticipated effect on any current drinking water treatment
processes; and

o Biodegradability reconfirmed independently.

We anticipate our initial market for WATER$AVR(R) will be in Spain,
Australia and the United States. We have provided quantities of the product for
testing in these countries and, if successful, we anticipate that substantial
orders may be received. We also anticipate marketing WATER$AVR(R) to both
developed and drought stricken countries to address water conservation concerns.
In this regard, we are seeking to establish strategic relationships with
companies in the water processing industry who have marketing and manufacturing
operations in countries with water conservation concerns. We have two full-time
employees and two other employees more than 50% assigned to establishing sales
channels throughout the world for WATER$AVR(R).

WATER$AVR--BTI(TM)

Over the last three years, our continued research and development has
resulted in a patent pending modification of the original WATER$AVR(R) that
combines evaporation control with control of mosquito larvae. The result is our
new WATER$AVR--BTI(TM) product. The BTI portion of the product is a recognized
and approved, environmentally friendly method of killing mosquito larvae during
the first, second and third stages of larvae development. Combined with our
original WATER$AVR(R) product, WATER$AVR--BTI(TM) can be effectively and quickly
spread across large and small water surfaces evenly and can be constrained to
the water/air interface where larvae must go to obtain air.

In November 2004, after announcing positive test results from
independent trials conducted at Louisiana State University on the efficacy of
the WATER$AVR--BTI(TM) product, we filed an application with the U.S.
Environmental Protection Agency ("EPA") to obtain product registration. Included
in our application were the results of the field tests on the performance of
WATER$AVR--BTI(TM), carried out by the Entomology Department at the Louisiana
State University Agricultural Center. The results of the field testing at
Louisiana State University were as follows: WATER$AVR--BTI(TM) has been shown to
correspond to a reduction in the density of mosquito larvae present in a body of
water. These field tests back up our internal laboratory tests, showing that the
use of WATER$AVR--BTI(TM) resulted in a 100% kill rate of mosquito larvae in
contact with the product.

In November 2005, we received approval from the EPA for the
registration of WATER$AVR--BTI(TM), which has now been approved by the EPA for
commercial sale in the United States as of November 30, 2005. We will begin
marketing the product commercially in fiscal 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.

Biopolymer Products (TPAs)
Our subsidiary, NanoChem, produces TPAs used in industrial and consumer
products. TPAs have a wide range of molecular weights. The ideal weight depends
on the application, formulation and required performance characteristics in
specific processes. This allows for customization of the products to correspond
to particular product applications.

TPAs for Oilfields. TPAs are used to reduce scale and corrosion in
various "topside" water systems. They are chosen over traditional phosphate and
other products when biodegradability is required by environmental regulation. In
this regard, we create products that can be used by our NanoChem sales force to
market to oil service company technicians on a oil well-by-oil well basis
according to the specific water conditions involved.

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 yield values
significantly beyond the cost of the TPA used. We conduct sales of these
TPA-specific products by distribution through agricultural input companies, with
a current emphasis on the Western United States. These proteins are designated
for crop nutrient management programs and should not be confused with crop
protection and pesticides or other agricultural chemical application. 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 and
reduce maintenance costs and lengthen equipment lifetimes. These TPAs can
replace and compete with acid type scale removers, but have the competitive
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 our TPAs for 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$AVR(R) and ECO$AVR(TM)

We are aware of only one other company that manufactures a chemical
evaporation reduction product that competes with our HEAT$AVR(R) product. This
other product has had limited sales to date and does not have the important
convenience factor of our ECO$AVR(R) 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
called Turbo-Tropical Fish that directly competes with our ECO$AVR(R) product.
This product, while having a higher price point and no sales history to date,
must be taken seriously because of the expertise Sun Solar derived from working
with us for six years as our exclusive North American distributor of ECO$AVR(R),
which relationship ended in February 2004. We also believe that Sun Solar is
infringing our trademark rights by using the name "Turbo Tropical Fish" and we
are actively litigating the issue.

As mentioned above, HEAT$AVR(R) also competes against plastic pool
blanket products. We compete against pool blankets on the basis of convenience
of use of HEAT$AVR(R) versus the inconvenience of deploying and storing pool
blankets. Pool owners and operators may also decide that evaporation control
products are not needed for their pools.

WATER$AVR(R)

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

o Easier Application. WATER$AVR(R) may be deployed directly to the
water surface by hand or machine. Our competition requires
premixing to dilute the product to usable strength, followed by
extensive pumping.

o Cost. In order to achieve comparable water savings levels, other
products would cost more than the WATER$AVR(R) product.

Water conservation is an important priority throughout the world, and
numerous researchers in industry and academia are seeking to develop solutions
that may compete with, or be superior to our products. Climate changes that
relieve water shortage conditions or a technological breakthrough in water
desalination could reduce the need for water conservation products.

WATER$AVR--BTI(TM)

We are not aware of any direct competition to our WATER$AVR--BTI(TM)
product; however, the business of pest control is very large and very well
funded. There are a multitude of methods and materials that can be used for
mosquito control and all of them are competition for our product. We believe
that we will be able to compete by:

o Providing an environmentally sensitive alternative;

o Increasing effectiveness per unit cost; and

o Reducing cost of application respective to similar products.

Biopolymers (TPAs)

Our TPA products have direct competition with Lanxess AG (recently spun
out of Bayer AG), a German TPA manufacture of similar quality operating pursuant
to a different patented process from that used by NanoChem. NanoChem and Lanxess
have cross-licensed each other's processes and either company can use either
process for the term of the patents involved. It is believed that Lanxess has
approximately the same production capacity as NanoChem and it must be presumed
that their cost of goods sold is competitive. 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 the
advantage of flexibility because of the relative size of our company. In
addition, we intend to continue to seek market niches that are not the primary
targets of Lanxess, such that we can attempt to avoid confusion.

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

o Biodegradability compared to poly-acrylic acid for detergents;

o Biodegradability compared to competing oil field chemicals;

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

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

MANUFACTURING

Our HEAT$AVR(R) and ECO$AVR(R) 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 our products and we do not have any long term
supply contracts for any such items. We manufacture our products in an
approximately 11,000 sq. ft. plant in Calgary, Alberta, Canada.

Our WATER$AVR(R) products are manufactured under contract with Ondeo
Nalco Company ("Ondeo") under a five-year agreement effective as of April 2002,
with a five-year extension available. We are not required to purchase any
minimum quantity of such product.

Our 56,780 sq. ft. manufacturing facility in Peru, Illinois presently
satisfies our TPA needs for our NanoChem subsidiary. Precursor chemicals 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. The precursor chemicals are, however, derived from crude oil and are
subject to price fluctuations related to world oil prices.

GOVERNMENTAL REGULATIONS

HEAT$AVR(R) and ECO$AVR(R)

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

WATER$AVR(R)

Our WATER$AVR(R) product is subject to additional regulation in most
countries, particularly for agricultural and drinking water uses. As we continue
to develop this product, and prior to its full-scale commercial roll-out, we
will address these issues on a country-by-country basis. We do not anticipate
that governmental regulations will be an impediment to marketing our
WATER$AVR(R) product because the ingredients have historically been used in
agriculture for many years for other purposes. Nevertheless, we will need to
obtain approval to sell WATER$AVR(R) in the United States for agricultural
users. To date, we have already applied for and received National Sanitation
Foundation approval for drinking water in the United States.

WATER$AVR--BTI(TM)

As a new pesticide formulation, WATER$AVR--BTI(TM) must be approved by
the EPA and equivalent bodies in countries throughout the world where we will
sell the product. An application for product approval was filed with the EPA in
November 2004 and permission was granted November 30, 2005 to begin selling the
product. Our subsidiary, WaterSavr, will proceed to apply for certification in
any country where significant markets are identified and will begin marketing
the product commercially in fiscal 2006.

Biopolymer Products (TPAs)

In the oil field and agricultural markets, NanoChem has applied for and
received government approval in all areas of current use. As new markets are
accessed, we will seek additional certification for such markets. We believe our
NanoChem employees are experienced and skilled in the successful prosecution of
these certifications.

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 the regulatory approval requirements
therefor.

PROPRIETARY RIGHTS

Our success and ability to compete 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, the duration of
which range from 5 to 17 years. 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 have spent approximately $57,806 for the year ended December 31,
2005 and $58,552 for the year ended December 31, 2004, on research and
development activities. 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, 2005, we had 23 employees, including one officer,
sixteen sales and customer support personnel, and six manufacturing personnel.
None of our employees is represented by a labor union and we have experienced no
work stoppages to date.

ITEM 2. DESCRIPTION OF PROPERTY.

Our Chief Executive Officer provides use of space in his residence to
conduct some of his administrative duties and we do not reimburse him for such
use. We lease total space of 4,300 sq. ft. in Victoria, British Columbia for
administration and sales and research at $4,684 per month. This lease is
effective through June 2009. We lease an 11,000 sq. ft. building in Calgary,
Alberta for $6,932 per month for manufacture of our swimming pool products. This
lease is effective through September 2006. We lease 1,900 sq. ft. in Richmond,
British Columbia as additional space for sales and customer support at a cost of
$2,128 per month. This lease is effective through January 2007. NanoChem leases
7,000 sq. ft. in Bedford Park, Illinois as offices and laboratories at a cost of
$6,548 per month. This lease is effective through November 2006. NanoChem also
owns 56,780 sq. ft. of offices and factory in Peru, Illinois.

ITEM 3. LEGAL PROCEEDINGS.

On May 1, 2003, we filed a lawsuit in the Supreme Court of British
Columbia, Canada, against John Wells and Equity Trust, S.A. seeking return of
100,000 shares of our common stock and repayment of a $25,000 loan, which were
provided to defendants for investment banking services consisting of securing a
$5 million loan and a $25 million stock offering. Such services were not
performed and in the proceeding, we seek return of such shares after defendant's
failure to both return the shares voluntarily and repay the note. On May 7,
2003, we obtained an injunction freezing the transfer of the shares. On 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 yet determinable.

On November 13, 2003, an ex-employee, Patrick Grant, filed a lawsuit in
the Circuit Court of Cook County, Illinois against us, WaterSavr, and our Chief
Executive Officer, Daniel B. O'Brien. The plaintiff claims damages for breach of
contract, tortious interference with an agreement and various wrongful discharge
claims. Mr. Grant 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. We consider the case to be
without merit and are vigorously disputing the claims. In addition, we intend to
file counterclaims against the plaintiff for failure to repay financial
obligations owed to us, as well as unspecified damages arising out of
plaintiff's disclosure of confidential information to a client during his
employment at WaterSavr. No amounts have been recorded as receivable and no
accrual has been made for any loss in our consolidated financial statements as
the outcome of the claim filed by Mr. Grant is not yet determinable.

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.

On May 28, 2004, Sun Solar filed a lawsuit in the Federal Court of
Canada, against us, Flexible Ltd., and our Chief Executive Officer, Daniel B.
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 our
further use of the "Tropical Fish" trademark; and (c) monetary damages exceeding
$7,000,000 for the alleged infringement by us, Flexible Ltd. and Mr. O'Brien of
the "Tropical Fish" trademark, as well as any other "confusingly similar
trademarks" or proprietary trade dresses. On August 9, 2004, we, Flexible Ltd.
and Mr. O'Brien filed our defense and 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 we own the "Tropical Fish"
trademark, or, in the alternative, the trademark is not distinctive and should
be struck from the trademark registry; and (z) monetary damages exceeding
$50,000. The parties have completed documentary discovery and examinations for
discovery of all parties. No amounts have been recorded as receivable in our
consolidated financial statements and no amounts have been accrued as potential
losses as the outcome of this claim is not determinable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to the vote of our shareholders in the
quarter ended December 31, 2005.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET FOR SECURITIES

Our common stock began trading on the American Stock Exchange under the
symbol "FSI" on November 19, 2002. Prior to that, our stock traded on the
over-the-counter market and was quoted on the NASD Electronic Bulletin Board.

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 $5.14 $3.52
---------------------------- Second Quarter 4.89 3.70
Third Quarter 5.09 3.80
Fourth Quarter 4.05 2.70

YEAR ENDED DECEMBER 31, 2004 First Quarter 5.20 3.92
---------------------------- Second Quarter 5.15 4.30
Third Quarter 5.05 3.09
Fourth Quarter 4.15 2.82
--------------------------------------------------------------------------------

Prices since November 19, 2002 represent high and low prices on the
American Stock Exchange. Prices prior to November 19, 2002 represent
inter-dealer quotations which do not include retail mark-ups, markdowns, or
commissions, and do not necessarily represent actual transactions. As of
December 31, 2005, we had 33 record holders of our common stock. Such shares are
owned by an estimated 1,590 beneficial owners.

Our common stock also trades on the Frankfurt stock market under the
symbol "FXT."

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.

EQUITY COMPENSATION PLAN INFORMATION

The following table contains certain information relating to
outstanding options to purchase our common stock granted pursuant to individual
compensation arrangements as of December 31, 2005, our most recently completed
fiscal year.

----------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
--------------------------------------- ------------------------- ------------------------ ------------------------------
(a) (b) (c)

Equity compensation plans
approved by security holders (1): -- -- --

Equity compensation plans not
approved by security holders (2): 1,060,740 $3.44 --
----------------------------------------------------------------------------------------------------------------------------
TOTAL 1,060,740 $3.44 NOT APPLICABLE
----------------------------------------------------------------------------------------------------------------------------

(1) We have not granted any shares to purchase our common stock pursuant to
equity compensation plans that have been approved by our shareholders.

(2) (a) Consists of non-qualified options to purchase our common stock that
have been granted pursuant to individual compensation arrangements and not
pursuant to any equity compensation plan. All of the grants made during our
fiscal year are submitted for shareholder approval at such fiscal year's
annual shareholder meeting and, to date, our shareholders have approved all
of the grants.

(b) If the grantee is an employee, and if he or she ceases to be employed
by us, the grantee 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 grantee
(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.

(c) 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 shall provide each grantee with
one-months' prior written notice informing the grantee that he or she may
exercise the option in full (to the extent it has not been previously
exercised) within such one-month period. Following such date, the options
shall be terminated.

(d) 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.

(e) All of the options granted have terms of between one and six years from
and 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 thereof. As set forth below, all of the
options contain vesting provisions pursuant to which the options are 100%
exercisable within a determinable number of months from and after the date
of grant:

-------------------------------- ------------------------------ ------------------------------ -----------------------------
OPTIONS 100% EXERCISABLE OPTIONS 100% EXERCISABLE OPTIONS 100% EXERCISABLE OPTIONS 100% EXERCISABLE
WITHIN 12 MONTHS FROM AND WITHIN 12 MONTHS FROM AND WITHIN 24 MONTHS FROM AND WITHIN 48 MONTHS FROM AND
AFTER THE DATE OF GRANT AFTER THE DATE OF GRANT AFTER THE DATE OF GRANT AFTER THE DATE OF GRANT
(CONT.)
-------------------------------- ------------------------------ ------------------------------ -----------------------------

A. Options: 68,000 I. Options: 12,000 A. Options: 5,000 A. Options: 21,740
Grant Date: 12.01.01 Grant Date: 4.2.04 Grant Date: 4.10.02 Grant Date: 2.1.04
Vest Date: 12.01.01 Vest Date: 12.31.04 Vest Date: 12.31.03 Vest Date: 2.1.08

B. Options: 12,000 J. Options: 20,000 B. Options: 10,000 B. Options: 10,000
Grant Date: 01.01.02 Grant Date: 5.21.04 Grant Date: 4.23.03 Grant Date: 11.26.03
Vest Date: 01.01.02 Vest Date: 12.31.04 Vest Date: 12.31.04 Vest Date: 12.31.05

C. Options: 158,000 K. Options: 25,000 C. Options: 164,000
Grant Date: 12.31.02 Grant Date: 5.24.04 Grant Date: 11.26.03
Vest Date: 12.31.03 Vest Date: 12.31.04 Vest Date: 12.31.04

D. Options: 50,000 L. Options: 10,000 D. Options: 209,000
Grant Date: 2.16.03 Grant Date: 6.14.04 Grant Date: 11.26.04
Vest Date: 12.31.03 Vest Date: 6.30.04 Vest Date: 12.31.05

E. Options: 10,000 M. Options: 250,000
Grant Date: 4.23.03 Grant Date: 09.02.04
Vest Date: 12.31.03 Vest Date: 6.30.05

F. Options: 5,000 N. Options: 5,000
Grant Date: 5.26.03 Grant Date: 9.24.04
Vest Date: 12.31.03 Vest Date: 12.31.04

G. Options: 2,000
Grant Date: 9.18.03
Vest Date: 12.31.03

H. Options: 8,000
Grant Date: 3.15.04
Vest Date: 12.31.04
-------------------------------- ------------------------------ ------------------------------ -----------------------------

WARRANTS OUTSTANDING

On April 14, 2005, we announced that we had raised $3,375,000 pursuant
to a private placement of up to 1,800,000 shares of our common stock. The
investors collectively purchased 900,000 shares of our common stock at a per
share purchase price of $3.75, together with warrants to purchase up to 900,000
additional shares of our 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, we announced that we had raised an additional $327,750
pursuant to a private placement of up to 174,800 shares of our common stock. An
investor purchased 87,400 shares of our common stock at a per share purchase
price of $3.75, together with a warrant to purchase up to 87,400 additional
shares of our common stock. The warrant has a four-year term and is immediately
exercisable at a price of $4.50 per share. Costs associated with these two
capital raises were $471,254, making the net proceeds $3,231,496.

-----------------------------------
WARRANTS 100% EXERCISABLE WITHIN
12 MONTHS FROM AND AFTER THE DATE
OF GRANT
-----------------------------------
A. Warrants: 900,000
Grant Date: 4.14.05
Vest Date: 4.14.05

B. Warrants: 87,400
Grant Date: 6.08.05
Vest Date: 6.08.05
-----------------------------------

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Our operating activities are related primarily to manufacturing and
marketing our swimming pool conservation products and manufacturing and
marketing our biopolymer products.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Securities and Exchange Commission ("SEC") has recently issued
Financial Reporting Release ("FRR") No. 60, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, suggesting companies provide
additional disclosure and commentary on those accounting policies considered
most critical. A critical accounting policy is one that is both important to the
portrayal of our financial condition and results, and requires management's most
difficult, subjective or complex judgments. Typically, the circumstances that
make these judgments difficult, subjective and/or complex have to do with the
need to make estimates about the effect of matters that are inherently
uncertain. We believe the accounting policies below represent our critical
accounting policies as contemplated by FRR No. 60 (see Note 3 of the Notes to
Consolidated Financial Statements for a detailed discussion on the application
of these and other accounting policies):

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.

RESULTS OF OPERATIONS

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

---------------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------------
% CHANGE % CHANGE
2005 2004 2003 2005-2004 2004-2003
---------------- ---------------- ----------------- -------------- --------------

Sales
Energy Segment $1,053,507 $1,015,018 $2,321,120 4% (56%)
Polymer Segment 5,655,887 2,377,919 --* 138% **
---------------- ---------------- ----------------- -------------- --------------
Consolidated 6,709,394 3,392,937 2,321,120 98%

Gross Profit Margin
Energy Segment 473,475 502,121 958,056 (6%) (48%)
Polymer Segment 2,250,338 1,559,741 --* 46% **
---------------- ---------------- ----------------- -------------- --------------
Consolidated 2,723,813 2,061,862 958,056 32%

SG&A
Energy Segment 2,166,472 2,029,340 1,664,146 7% 122%
Polymer Segment 1,738,745 1,291,825 --* 35% **
---------------- ---------------- ----------------- -------------- --------------
Consolidated 3,905,217 3,321,165 1,664,146 18%

Interest Income
Energy Segment 4,550 34,258 203,310 (87%) (83%)
Polymer Segment 103 -- --* -- **
---------------- ---------------- ----------------- -------------- --------------
Consolidated 4,653 34,258 203,310

Write-down of Investments
Energy Segment -- 32,500 -- -- --
Polymer Segment -- -- --* --* **
---------------- ---------------- ----------------- -------------- --------------
Consolidated -- 32,500 -- -- --
---------------- ---------------- ----------------- -------------- --------------
Net Income (Loss) $(1,176,751) $(1,257,545) $(476,888) (6%) 264%
---------------------------------------------------------------------------------------------------------------

---------------
* Polymer segment data is not available as indicated. Our Polymer segment was
formed after the acquisition of certain assets of Donlar in June 2004.

SEGMENT DATA

As reflected in the table set forth in our "Results of Operations"
above, we operate in two segments: (a) development and marketing of two lines of
energy and water conservation products, and (b) manufacture of biodegradable
polymers and chemical additives used primarily within the petroleum, chemical,
utility and mining industries. Our traditional operating activities related to
the production and sale of our energy conversation product line. Upon acquiring
the Donlar assets, we formed NanoChem, which was formed as our wholly-owned
subsidiary in exchange for the capital contribution necessary to purchase the
Donlar assets. The assets we 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.

YEARS ENDED DECEMBER 31, 2005 AND 2004

Sales for the year ended December 31, 2005 were $6,709,394 compared to
$3,392,937 for the 2004 period, an increase of $3,316,457, or 98 %. The sales
increase was primarily the result of the revenue provided by NanoChem, our new
subsidiary formed from the assets acquired from the Donlar bankruptcy estate.

Our Energy segment had sales of $1,053,507 for the year ended December
31, 2005, as compared to $1,015,018 for the year ended December 31, 2004, an
increase of 4%. This slight increase is primarily the result of substantial
"Tropical Fish" product still in the market, which product is being sold by our
discontinued distributor, and our brand building efforts in connection with our
ECO$AVR(R) product line. We expect revenue in this segment to increase more in
fiscal 2006 as brand recognition of our ECO$AVR(R) product line continues to
grow and our marketing efforts of the WATER$AVR(R) product line begin to produce
increased sales. Our Polymer segment achieved sales of $5,655,887 for the year
ended December 31, 2005, as compared to $2,377,919 for the year ended December
31, 2004. This increase is attributable to a full year of operation combined
with increased sales on a quarter by quarter basis.

We experienced a loss of $1,176,751, or $0.09 per share, as compared to
a loss of $1,257,545, or $0.11 per share in fiscal 2004. The three largest
contributors to the loss were:

o The brand building, marketing and extra staffing costs to market
and develop the ECO$AVR(R) product line incurred throughout the
year that were not reflected in sales because dealers that had
been sold product by our discontinued distributor still had
substantial "Tropical Fish" product. We believe that very little
old product is on the shelves and that costs and revenue for
ECO$AVR(R) will be better balanced in fiscal 2006.

o All divisions maintained or increased sales and marketing costs in
the fourth quarter in order to increase the probability of sales
increases in all of fiscal 2006. We considered the extra costs
necessary to position us for growth.

o Litigation costs became significant in fiscal 2005 compared to
fiscal 2004 as a result of the need to protect our assets from
potential litigation or unwarranted claims. The costs are
manageable, but we will make every effort to reduce these costs
going forward without adversely affecting shareholder value.

Our overall gross profit margin on product sales decreased to 40.6% in
the year ended December 31, 2005, a decrease from 60.8% in the year ended
December 31, 2004. This decrease in gross margin was primarily due to the
increased costs of all raw materials tied to the high price of oil. Our Polymer
segment, which achieved a gross profit margin of 65.6% in fiscal 2004,
experienced a substantial rise in cost of goods sold, reducing the gross margin
to 39.8% in fiscal 2005. Our Energy segment achieved a gross profit margin of
44.9%, which is a slight decrease of 4.6% over the year ended December 31, 2004.

other costs of distribution. We do not exclude any portion of distribution costs
from cost of sales. Our gross margins may not be comparable to those of other
entities because some entities include all of the costs related to their
overhead in cost of sales. However, we exclude a portion of cost of sales from
gross profit and instead include such costs as a line item in operating expenses
(such as depreciation).

We incurred operating expenses in the year ended December 31, 2005 of
$3,905,217, as compared to $3,321,165 in the year ended December 31, 2004. In
fiscal 2005, we increased sales and marketing costs in connection with our
WATER$AVR(R) product, which was reflected in increased wages, office, rent,
telecommunications and travel expenses. We incurred higher professional fees in
the year ended December 31, 2005 primarily due to increased legal and accounting
expenses and specific consultants directed at integrating the functions and
sales of NanoChem as quickly as possible. Depreciation expense was $685,768 for
the year ended December 31, 2005, as compared to $388,071 for the year ended
December 31, 2004, reflecting depreciation for additional property and equipment
added in fiscal 2004.

There was no income tax provision for the year ended December 31, 2005,
as we had no taxable income. Our Energy segment had interest income of $4,550
for the year ended December 31, 2005, as compared to $34,258 for the year ended
December 31, 2004, as we used capital to purchase assets and develop our
business. We experienced a net loss of $1,176,751 for the year ended December
31, 2005, as compared to a loss of $1,257,545 for the year ended December 31,
2004.

With the addition of the Donlar assets, we became a much larger company
with commensurate increases in most expense segments. However, we were able to
reduce certain expenses, such as consulting ($156,652 for the year ended
December 31, 2005, as compared to $166,099 for the year ended December 31, 2004)
and telecommunications ($40,458 for the year ended December 31, 2005, as
compared to $41,895 for the year ended December 31, 2004, despite adding three
new locations), as a result of more careful cost control in our WaterSavr
subsidiary. The large increase in investor relations ($558,013 versus $215,670)
has to do with the stock options that vested in relation to the capital raisings
that closed on April 14, 2005 and June 8, 2005. This resulted in non-cash
transactions of $422,500 and without this, we would have seen a large decrease
in this expense.

YEARS ENDED DECEMBER 31, 2004 AND 2003

Sales for the year ended December 31, 2004 were $3,392,937, as compared
to $2,321,120 for the comparable 2003 period, an increase of $1,071,817, or 46
%. The sales increase was primarily the result of the revenue provided by our
new subsidiary, NanoChem.

Our Energy segment had sales of $1,015,018 for the year ended December
31, 2004, as compared to $2,321,120 for the year ended December 31, 2003, a
decrease of 56%. This decrease is primarily the result of substantial "Tropical
Fish" product still in the market, which product is being sold by our
discontinued distributor, and our brand building efforts in connection with our
ECO$AVR(R) product line. We expect revenue in this segment to increase in fiscal
2005 as brand recognition of our ECO$AVR(R) product line continues to grow and
our marketing efforts of the WATER$AVR(R) product line begin to produce
increased sales. Our Polymer segment achieved sales of $2,377,919 for the year
ended December 31, 2004. There is no comparable data from the Polymer segment
for the year ended December 31, 2003 because our Polymer segment was formed
after the acquisition of certain assets of Donlar in June 2004.

We experienced a loss of $1,257,545, or $0.11 per share, as compared to
a loss of $476,888 in fiscal 2003. The three largest contributors to the loss
were:

o The brand building, marketing and extra staffing costs in
ECO$AVR(R) sales incurred throughout the year that were not
reflected in sales because dealers that had been sold product by
our discontinued distributor still had substantial "Tropical Fish"
product.

o All divisions maintained or increased sales and marketing costs in
the fourth quarter in order to increase the probability of sales
increases in all of fiscal 2005.

o Litigation costs became significant in fiscal 2004 compared to
fiscal 2003 as a result of the need to protect our assets from
suit.

Our overall gross profit margin on product sales increased to 60.8% in
the year ended December 31, 2004, an increase from 41.3% in the year ended
December 31, 2003. This increase in gross margin was primarily due to the
addition of our Polymer segment, which achieved a gross profit margin of 65.6%.
Our Energy segment achieved a gross profit margin of 49.5%, which is an increase
of 8.2% over the year ended December 31, 2003.

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

We incurred operating expenses in the year ended December 31, 2004 of
$3,321,165, as compared to $1,664,146 in the year ended December 31, 2003. In
fiscal 2004, we also increased sales and marketing costs in connection with our
WATER$AVR(R) product, which was reflected in increased wages, office, rent,
telecommunications and travel expenses. We incurred higher professional fees in
the year ended December 31, 2004 primarily due to increased legal and accounting
expenses and specific consultants directed at integrating the functions and
sales of NanoChem as quickly as possible. Depreciation expense was $388,071 for
the year ended December 31, 2004, as compared to $37,712 for the year ended
December 31, 2003, reflecting depreciation for additional property and equipment
added in fiscal 2004.

There was no income tax provision for the year ended December 31, 2004,
as no tax installment payments were made during the year while we recorded an
income tax benefit of $25,892 for the year ended December 31, 2003. Our Energy
segment had interest income of $34,258 for the year ended December 31, 2004, as
compared to $203,310 for the year ended December 31, 2003, as we used capital to
purchase assets and develop our business. We experienced a net loss of
$1,257,545 for the year ended December 31, 2004, as compared to a loss of
$476,888 for the year ended December 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

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

--------------------------------------------------------------------------------
INCREASE
2005 2004 (DECREASE)
-------------- -------------- --------------
Cash and cash equivalents $ 526,292 $ 558,795 $ (32,503)
Short-term investments -- 559,440 (559,440)
Working capital 3,110,090 (101,121) 3,211,211
Short-term loan -- 3,150,000 (3,150,000)
--------------------------------------------------------------------------------

The overall decrease in short-term investments and cash and cash
equivalents was primarily a result of the cash used to purchase the assets
comprising our NanoChem division. Cash was also used to market our WATER$AVR(R)
product line, which has not yet attained significant sales to maintain positive
cash flow. The increase in working capital is primarily due to paying off the
short-term loan that was used to purchase the assets of the above mentioned
NanoChem division.

Historically, prior to fiscal 2004, our operations have been cash flow
positive after considering the positive adjustments to net income resulting from
stock-based compensation expense and depreciation. In the year ended December
31, 2005, our operations generated a slightly positive cash flow as we continued
to acquire a large amount of inventory. In the year ended December 31, 2004, our
operations generated negative cash flow as we acquired a large amount of
inventory and we financed the purchase of our NanoChem division through the
redemption of short-term investments. In order to build our business, develop
and research our products and sustain our start-up operations, we have relied
mainly on external equity financing.

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

We have no commitments or guarantees in the next 12 months that will
materially affect our cash position or needs and we believe we have sufficient
capital to support our business and operations for at least the next 12 months.
We anticipate utilizing approximately $300,000 in the next twelve months
attempting to close sales in California, Spain and Australia, and to extend
certain core US patents to select other countries. Approximately 80% of such
expenditures are related to our WATER$AVR(R) product line.

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

RESTATED FINANCIAL STATEMENTS

Stock-based Compensation Expense

The financial statements for the periods ended September 30, 2002
through June 30, 2005 have been restated to correct stock-based compensation
expense. In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, we determined that certain
disclosures made in connection with our stock-based compensation expense
required adjustment.

In September 2002, we entered into a distribution agreement with Ondeo
Nalco Company ("Ondeo") whereby Ondeo agreed to serve as the exclusive
distributor of our WATER$AVR(R) products for so long as Ondeo maintained a
certain threshold sales level as defined in the agreement. As consideration for
signing the agreement, Ondeo was granted an option to purchase 2,000,000 shares
of our common stock. Half of the option for one million shares was exercisable
immediately at an exercise price of $4.25 for each common share. The remaining
half of the option for 1,000,000 shares was exercisable after certain threshold
sales targets were achieved at a price of $5.50 for each common share.

In determining the stock-based compensation expense for the nine months
ended September 30, 2002, we expensed the entire fair value of the stock option
believing that the option fully vested upon the signing of the agreement. In our
October 2005 review, however, we determined that: (i) first, as stated above,
half of the option to purchase 1,000,000 shares of common stock did not vest and
was not exercisable until the threshold sales target had been met, which would
not be until five years after the signing of the distribution agreement; and
(ii) second, we did not consider Emerging Issues Task Force ("EITF") No. 96-18,
Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services; EITF No. 00-18,
Accounting Recognition for Certain Transactions involving Equity Instruments
Granted to Other Than Employees; and EITF No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer.

During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and accordingly, we should have recorded a corresponding
stock-based compensation expense of $54,080. However, since the entire
stock-based compensation expense had been recorded in the financial statements
for the quarter ended September 30, 2002 and in the year ended December 31,
2002, we did not record any additional stock-based compensation expense as a
result of the attained first threshold level.

In the fourth quarter of the year ended December 31, 2003, we
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the agreement. Consequently, the agreement and corresponding stock
option was cancelled. We accounted for the cancellation of the stock option in
accordance with Statement of Financial Accounting Standard No. 123, Accounting
for Stock-based Compensation and reversed $2,480,200 of the stock-based
compensation expense previously recorded in fiscal 2002. Had we accounted for
the cancellation of the stock option correctly, we would have reversed the
amended stock-based compensation expense of $54,080 that was recorded in the
first quarter ended March 31, 2003.

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

1. $2,704,000 in stock-based compensation expense recorded in
September 2002 has been reversed;

2. $54,080 in stock-based compensation expense has been recorded in
the quarter ended March 31, 2003, as Ondeo met the first sales
threshold under the agreement;

3. $54,080 in stock-based compensation expense has been reversed in
the year ended December 31, 2003, as Ondeo failed to meet
subsequent sales thresholds under the agreement, resulting in the
cancellation of the stock option;

4. As stated above, we previously recorded a stock-based compensation
expense of $2,704,000 in December 2002. As a result of canceling
the stock option, we previously recorded a recovery of $2,480,000
of stock-based compensation expense at December 31, 2003. This
$2,480,000 recovery has been reversed, in conjunction with the
reversal of $2,704,000 in stock-based compensation expense
originally recorded; and

5. For the periods ended March 31, 2004 to June 30, 2005, the net
effect of these adjustments is to decrease capital in excess of
par value by $223,800 and increase retained earnings by $223,800.

Inventory

On January 24, 2006, in the course of generating the audited financial
statements for the quarter and year ended December 31, 2005, we discovered a
material inventory error in the financial statements filed as part of our Form
10-QSB for the quarter ended September 30, 2005. In conducting the inventory
count at our NanoChem facility for the quarter ended September 30, 2005, we
overstated our inventory by $183,398. This clerical error led to our decision to
restate our financial statements for the three months ended September 30, 2005.
Accordingly, our previously issued financial statements covering the quarter
ended September 30, 2005 should no longer be relied upon.

On January 25, 2006, management discussed the conclusion described
above with our audit committee of the board of directors ("Audit Committee") and
Cinnamon Jang Willoughby & Company ("CJW"), our independent registered public
accounting firm. CJW informed the Audit Committee that it concurs with
management's conclusion described above. As a result, we filed amended
consolidated financial statements for the quarter ended September 30, 2005 on
February 1, 2006.

The amended financial statements reflect adjustments to the financial
statements as follows:

1. Our inventory as of September 30, 2005 has been reduced by
$183,398;

2. Our net loss for the quarter ended September 30, 2005 has been
increased by $183,398;

3. Our loss per share for the quarter ended September 30, 2005 has
been increased to $0.03;

4. Our net loss for the nine months ended September 30, 2005 has been
increased by $183,398;

5. Our net loss per share for the three and nine months ended
September 30, 2005 has been increased to $0.06; and

6. Our net loss for the three and nine months ended September 30,
2005 has been increased by $183,398.

We are presently unaware of any evidence that the restatements
described above are due to any material noncompliance by us, as a result of
misconduct, with any financial reporting requirement under the federal
securities laws. Our Audit Committee is working with management and CJW to
assure that we are taking the appropriate approach to resolving the issues
related to the restatements, as well as any further issues that may be
identified during the course of its review.

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 actual future results, including, but
not limited to, our product sales, expenses, net income and earnings per share.

RISKS RELATED TO OUR BUSINESS

WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE OUR
POTENTIAL FOR FUTURE SUCCESS.

Although we were incorporated in 1991, we have been operating in our
present form only since 1998. To date, we have generated limited revenues from
the sale of our products and do not expect to generate significant revenues
until we sell a significantly larger number of our products. Accordingly, we
have only a limited operating history upon which you can base an evaluation of
our business and prospects. The likelihood of our success must be considered in
light of the risks and uncertainties frequently encountered by middle stage
companies like ours in an evolving market. If we are unsuccessful in addressing
these risks and uncertainties, our business will be materially harmed.

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
achieve profitability. Even if we achieve profitability in the future, we may
not be able to sustain it.

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:

o demand for and market acceptance of our products;

o competitive pressures resulting in lower selling prices;

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

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

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

o delays or problems in the introduction of new products;

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

o variations in our product mix;

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

o increased costs of raw materials or supplies; and

o changes in the volume or timing of product orders.

WE HAVE NOT PAID, AND DO NOT EXPECT TO PAY, DIVIDENDS ON OUR COMMON
STOCK.

We have not paid any dividends on our common stock since our inception
and do not intend to pay any dividends to our common shareholders in the
foreseeable future. We intend to reinvest any earnings in the development and
expansion of our business.

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(R) product are also seasonal,
dependent on the wet versus dry seasons in particular countries. We attempt to
sell into a variety of countries with different seasons on both sides of the
equator in order to minimize seasonality. Our TPA business is the least
seasonal, however there is a small increase in the spring related to inventory
building for the crop season in the United States and a small slowdown in
December as oilfield customers run down stock in advance of year end, but
otherwise, little seasonal variation. We believe we are able to adequately
respond to these seasonal fluctuations by reducing or increasing production as
needed.

INTERRUPTIONS IN OUR ABILITY TO PURCHASE RAW MATERIALS AND COMPONENTS
MAY ADVERSELY AFFECT OUR PROFITABILITY.

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

OUR WATER$AVR(R) 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$AVR(R) product may result in
continued losses. We introduced our WATER$AVR(R) product in June 2002 and, to
date, we have delivered quantities for testing by potential customers, but only
one customer has 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(R) product in fiscal 2006.

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:

o accurately anticipate customer needs;

o innovate and develop new products and applications;

o successfully commercialize new products in a timely manner;

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

o 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.

OUR ACQUISITION ACTIVITIES COULD DISRUPT OUR ONGOING BUSINESS.

In June 2004, our subsidiary, NanoChem, completed the acquisition of
certain assets of Donlar, which provided us with domestic and international
patents relating to environmental products and technologies, as well as a 56,780
sq. ft. manufacturing plant on 40 acres of property in an area outside of
Chicago, Illinois. Acquisitions such as these often involve risks, including:
(i) disruption of our ongoing business; and (ii) an inability to successfully
integrate the acquired technologies and operations into our business and
maintain uniform standards, controls, policies and procedures. In addition, in
order to finance future acquisitions, we may have to raise additional funds,
through either public or private financings. We may be unable to obtain such
funds or may be able to do so only on unfavorable terms.

ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES
AND OPERATIONS COULD ADVERSELY AFFECT OUR SALES.

In the year ended December 31, 2005, revenues from shipments made
outside of the United States accounted for approximately 80% of our revenues,
65% in the year ended December 31, 2004 and 10% in the year ended December 31,
2003. 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:

o changes in foreign currency exchange rates;

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

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

o trade protection measures and import or export licensing
requirements;

o differing tax laws and changes in those laws;

o difficulty in staffing and managing widespread operations;

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

o 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 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 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 7. FINANCIAL STATEMENTS.

Our consolidated financial statements and notes thereto appear on pages
F-1 to F-22 of this Annual Report on Form 10-KSB for the year ended December 31,
2005.

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

PAGE

Report of Independent Registered Public Accounting Firm, Cinnamon Jang Willoughby & Company F-1

Consolidated Balance Sheet as of December 31, 2005 and 2004 F-2

Consolidated Statements of Operations for the Years Ended December 31, 2005 and 2004 F-3

Consolidated Statements of Operations for the Three Months Ended December 31, 2005 and 2004 F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 F-5

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2005 and 2004 F-6

Notes to Consolidated Financial Statements F-7

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 sheet of Flexible Solutions
International, Inc. as at December 31, 2005 and 2004 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.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board in the United States of America. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the consolidated financial statements are free of material
misstatement. 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.

In our opinion the consolidated financial statements present fairly, in
all material respects, the financial position of the company as at December 31,
2005 and 2004 and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 2005 in conformity with generally
accepted accounting principles in the United States of America.

As described in note 3 to the consolidated financial statements, the
accompanying consolidated financial statements of Flexible Solutions
International, Inc. as of December 31, 2004 and 2003 and for the years then
ended have been restated.

On February 11, 2005 (September 30, 2005 as to the effects of the
restatements described in note 3), we reported separately to the shareholders of
Flexible Solutions International, Inc. on consolidated financial statements for
the same period, audited in accordance with auditing standards generally
accepted in the United States of America and prepared in accordance with
accounting principles generally accepted in the United States of America.

Cinnamon Jang Willoughby & Company,
Chartered Accountants

Burnaby, British Columbia
February 6, 2006

F-1

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005 AND 2004
(U.S. DOLLARS)

---------------------------------------------- ------------------- -------------------
DECEMBER 31, 2004
RESTATED
DECEMBER 31, 2005 (SEE NOTE 3)
---------------------------------------------- ------------------- -------------------

ASSETS

CURRENT
Cash and cash equivalents $ 526,292 $ 558,795
Short term investments -- 559,440
Accounts receivable 758,463 501,372
Income tax 28,918 92,963
Loan receivable 35,228 38,570
Inventory 2,314,979 1,416,588
Prepaid expenses 137,315 131,280
---------------------------------------------- ------------------- -------------------
3,801,195 3,299,008

PROPERTY, EQUIPMENT AND LEASEHOLDS 4,657,383 5,250,346
PATENTS 143,822 --
INVESTMENT 369,000 271,000
---------------------------------------------- ------------------- -------------------

$ 8,971,400 $ 8,820,354
============================================== =================== ===================

LIABILITIES

CURRENT
Accounts payable and accrued liabilities $ 691,105 $ 250,129
Short-term loan -- 3,150,000
---------------------------------------------- ------------------- -------------------
691,105 3,400,129
---------------------------------------------- ------------------- -------------------

STOCKHOLDERS' EQUITY

CAPITAL STOCK
Authorized
50,000,000 common shares with a par value of $0.001 each
1,000,000 preferred shares with a par value of $0.01 each
Issued and outstanding:
12,981,316 (2005: 11,831,916) common shares 12,981 11,832
CAPITAL IN EXCESS OF PAR VALUE 11,422,219 7,439,621
OTHER COMPREHENSIVE INCOME 153,254 100,179
DEFICIT (3,308,158) (2,131,407)
---------------------------------------------- ------------------- -------------------

TOTAL STOCKHOLDERS' EQUITY 8,280,295 5,420,225
---------------------------------------------- ------------------- -------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,971,400 $ 8,820,354
============================================== =================== ===================

COMMITMENTS AND CONTINGENCIES (SEE NOTES 17 & 18)

--See Notes to Consolidated Financial Statements.--

F-2

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(U.S. DOLLARS)

-------------------------------------------- ------------------ ------------------
YEARS ENDED DECEMBER 31,
2004
RESTATED
2005 (SEE NOTE 3)
-------------------------------------------- ------------------ ------------------

SALES $ 6,709,394 $ 3,392,937
COST OF SALES 3,985,581 1,331,075
-------------------------------------------- ------------------ ------------------

GROSS PROFIT 2,723,813 2,061,862
-------------------------------------------- ------------------ ------------------

OPERATING EXPENSES
Wages 798,569 932,283
Administrative salaries and
benefits 241,819 133,120
Advertising and promotion 95,094 97,946
Investor relations and transfer
agent fee 558,013 215,670
Office and miscellaneous 156,652 166,099
Insurance 145,596 73,375
Interest expense 64,275 68,384
Rent 237,113 177,667
Consulting 156,917 398,753
Professional fees 374,140 308,534
Travel 136,661 132,632
Telecommunications 40,458 41,895
Shipping 43,830 28,866
Research 57,806 58,552
Commissions 121,513 9,578

Bad debt expense (recovery) -- (10)
Currency exchange (28,096) 20,000
Utilities 19,089 69,750
Depreciation 685,768 388,071
-------------------------------------------- ------------------ ------------------

3,905,217 3,321,165
-------------------------------------------- ------------------ ------------------

LOSS BEFORE OTHER ITEMS AND INCOME TAX (1,181,404) (1,259,303)
INTEREST INCOME 4,653 34,258

WRITE DOWN OF INVESTMENT -- (32,500)
-------------------------------------------- ------------------ ------------------

LOSS BEFORE INCOME TAX (1,176,751) (1,257,545)

INCOME TAX (RECOVERY) -- --
-------------------------------------------- ------------------ ------------------

NET LOSS $ (1,176,751) $ (1,257,545)
DEFICIT, BEGINNING $ (2,131,407) $ (873,862)
-------------------------------------------- ------------------ ------------------
DEFICIT, ENDING $ (3,308,158) $ (2,131,407)

NET LOSS PER SHARE $ (0.09) $ (0.11)
-------------------------------------------- ------------------ ------------------

WEIGHTED AVERAGE NUMBER OF SHARES 12,541,084 11,827,734
-------------------------------------------- ------------------ ------------------

--See Notes to Consolidated Financial Statements.--

F-3

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(U.S. DOLLARS)

----------------------------------------------- ------------------------------------
THREE MONTHS ENDED DECEMBER 31,
2004
RESTATED
2005 (SEE NOTE 3)
----------------------------------------------- ---------------- ------------------

SALES $ 1,519,591 $ 981,012
COST OF SALES 1,115,698 501,761
----------------------------------------------- ---------------- ------------------

GROSS PROFIT $ 403,893 479,251
----------------------------------------------- ---------------- ------------------

OPERATING EXPENSES

Wages 158,968 325,341
Administrative salaries and
benefits 75,983 38,147

Advertising and promotion 33,162 24,688
Investor relations and transfer
agent fee 6,528 42,506

Office and miscellaneous 29,665 12,046

Insurance 40,722 39,900

Interest expense 2,087 39,020

Rent 68,553 62,956

Consulting 39,062 104,644

Professional fees 140,432 96,388

Travel 31,476 52,801

Telecommunications 8,470 13,431

Shipping 9,523 6,916

Research 18,558 37,552

Commissions 9,354 9,578

Bad debt expense (recovery) -- 787

Currency exchange (85,882) 14,334

Utilities 4,426 23,280

Depreciation 197,041 28,535
----------------------------------------------- ---------------- ------------------

788,127 972,850
----------------------------------------------- ---------------- ------------------

LOSS BEFORE OTHER ITEMS AND INCOME TAX $ (384,234) $ (493,599)

INTEREST INCOME 508 794

WRITE DOWN OF INVESTMENT -- (32,500)
----------------------------------------------- ---------------- ------------------

LOSS BEFORE INCOME TAX $ (383,726) $ (525,305)

INCOME TAX (RECOVERY) -- --
----------------------------------------------- ---------------- ------------------

NET LOSS $ (383,726) $ (525,305)
DEFICIT, BEGINNING (2,924,432) (1,606,102)
----------------------------------------------- ---------------- ------------------
DEFICIT, ENDING $ (3,308,158) $ (2,131,407)

NET LOSS PER SHARE $ (0.03) $ (0.04)
----------------------------------------------- ---------------- ------------------

WEIGHTED AVERAGE NUMBER OF SHARES 12,896,533 11,831,916
----------------------------------------------- ---------------- ------------------

--See Notes to Consolidated Financial Statements.--

F-4

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2005 AND 2004
(U.S. DOLLARS)

-------------------------------------------------------------- ---------------------------------------
YEARS ENDED DECEMBER 31,
2004
RESTATED
2005 (SEE NOTE 3)
-------------------------------------------------------------- ------------------ -------------------

OPERATING ACTIVITIES
Net income (loss) $ (1,176,751) $ (1,257,545)
Stock compensation expense 525,450 299,345
Depreciation 685,768 388,071

Write down of investments -- 32,500
-------------------------------------------------------------- ------------------ -------------------
34,467 (537,629)
Changes in non-cash working capital items:
(Increase) Decrease in accounts receivable (257,091) 438,490
(Increase) Decrease in inventory (898,391) (907,869)

(Increase) Decrease in prepaid expenses (6,035) (39,091)
Increase (Decrease) in accounts payable 440,975 92,486
Increase (Decrease) in income taxes 64,045 (6,720)

Increase (Decrease) in amounts due to shareholders -- (7,700)
--------------------------------------------------------------- ------------------ -------------------

CASH (USED IN) OPERATING ACTIVITIES (622,030) (968,033)
-------------------------------------------------------------- ------------------ -------------------

INVESTING ACTIVITIES
Short-term investments 559,440 4,474,397

Investments (98,000) --

Loan receivable 3,342 (20,985)

Acquisition of the assets of Donlar Corporation -- (3,194,412)

Development of patents (143,822) --
Acquisition of property and equipment (92,805) (123,908)
-------------------------------------------------------------- ------------------ -------------------

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 228,154 1,135,092
-------------------------------------------------------------- ------------------ -------------------

FINANCING ACTIVITIES

Short-term loan (3,150,000) --
Proceeds from issuance of common stock 3,458,286 57,500
-------------------------------------------------------------- ------------------ -------------------

CASH PROVIDED BY FINANCING ACTIVITIES 308,296 57,500
-------------------------------------------------------------- ------------------ -------------------

Effect of exchange rate changes on cash 53,075 97,156
-------------------------------------------------------------- ------------------ -------------------

INFLOW (OUTFLOW) OF CASH (32,503) 321,715
Cash and cash equivalents, beginning 558,795 237,080
-------------------------------------------------------------- ------------------ -------------------

CASH AND CASH EQUIVALENTS, ENDING $ 526,292 $ 558,795
-------------------------------------------------------------- ------------------ -------------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 64,275 $ 68,384

Interest received 508 34,258
-------------------------------------------------------------- ------------------ -------------------

--See Notes to Consolidated Financial Statements.--

F-5

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(U.S. DOLLARS)

------------------------------------ ------------ ----------- ------------- -------------- --------------- --------------

CAPITAL IN ACCUMULATED TOTAL
EXCESS OF EARNINGS STOCKHOLDERS'
PAR VALUE (DEFICIENCY) OTHER EQUITY
AS RESTATED AS RESTATED COMPREHENSIVE AS RESTATED
SHARES PAR VALUE (NOTE 3) (NOTE 3) INCOME (LOSS) (NOTE 3)
------------ ----------- ------------- -------------- --------------- --------------

BALANCE DECEMBER 31, 2003 11,794,916 $ 11,794 $ 7,082,813 $ (873,862) $ 3,023 $ 6,223,768

Translation adjustment -- -- -- -- 97,156 97,156

Net income (loss) -- -- -- (1,257,545) -- (1,257,545)
------------------------------------ ------------ ----------- ------------- -------------- --------------- --------------

Comprehensive income -- -- -- -- -- (1,160,389)

Shares issued:

Exercise of stock options 37,000 38 57,463 -- -- 57,501

Stock option compensation -- -- 299,345 -- -- 299,345

BALANCE DECEMBER 31, 2004 11,831,916 $ 11,832 $ 7,439,621 $ (2,131,407) $ 100,179 $ 5,420,225

Translation adjustment -- -- -- -- 53,075 53,075

Net income (loss) -- -- -- (1,176,751) -- (1,176,751)
------------------------------------ ------------ ----------- ------------- -------------- --------------- --------------

Comprehensive income (1,123,676)

Shares issued:

Exercise of stock options 162,000 162 226,638 -- -- 226,800

Private placement 987,400 987 3,250,509 -- -- 3,231,496

Stock option compensation -- -- 525,450 -- -- 525,450
------------------------------------ ------------ ----------- ------------- -------------- --------------- --------------

BALANCE DECEMBER 31, 2005 12,981,316 $ 12,981 $ 11,442,218 $ (3,328,158) $ 153,254 $ 8,280,295
==================================== ============ =========== ============= ============== =============== ==============

--See Notes to Consolidated Financial Statements.--

F-6

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 below.

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

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

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

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

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

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

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

The acquisition costs assigned to property and equipment are all direct
costs incurred by the Company to purchase the Donlar assets. These costs include
due diligence fees paid to outside parties

F-7

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) Inventory and Cost of Sales.

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

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

------------------------------------ ---------------------------------
Computer hardware 30% Declining balance
Furniture and fixtures 20% Declining balance
Manufacturing equipment 20% Declining balance
Office equipment 20% Declining balance
Building 10% Declining balance
Leasehold improvements Straight-line over lease term
------------------------------------ --------------------------------

Property and equipment are written down to net realizable value when
management determines there has been a change in circumstances which indicates
its carrying amount may not be recoverable. No write-downs have been necessary
to date.

(d) Impairment of Long Lived Assets.

The Company assesses the recoverability of its long lived assets by
determining whether the carrying value of the long lived assets can be recovered
over their remaining lives through undiscounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability will be impacted if estimated future operating
cash flows are not achieved. For the years ended December 31, 2005 and 2004, no
impairment charges have been recognized.

F-8

(e) Investments.

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

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

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

(f) Foreign Currency.

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

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

(g) Revenue Recognition.

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

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

(h) Stock Issued in Exchange for Services.

The valuation of the Company's common stock issued in exchange for
services is valued at an estimated fair market value as determined by officers
and directors of the Company based upon trading prices of the Company's common
stock on the dates of the stock transactions.

(i) Stock-based Compensation.

The Company applies the fair value based method of accounting
prescribed by Statement of Financial Accounting Standards ("FAS") No. 123,
Accounting for Stock-based Compensation, in accounting for stock issued in
exchange for services to consultants and non-employees.

F-9

FAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based compensation plans to employees at fair value.
The Company has chosen to account for stock-based compensation to employees and
directors using Accounting Principles Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees. Accordingly, compensation cost for stock options
for employees is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee is
required to pay for the stock.

The Company adopts the disclosure provisions of FAS No. 123 for stock
options granted to employees and directors. The Company discloses 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.

(j) Comprehensive Income.

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

(k) Income (Loss) Per Share.

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

(l) Use of Estimates.

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

(m) Financial Instruments.

The fair market value of the Company's financial instruments comprising
cash, 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 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.

(n) Recent Accounting Pronouncements.

In December 2004, the Financial Accounting Standards Board ("FASB")
issued revised FAS No. 123(R), Share-Based Payment, which replaces FAS No. 123,
Accounting for Stock-Based Compensation, which superseded APB Opinion No. 25,
Accounting for Stock Issued to Employees. FAS No. 123(R) requires the cost of
all share-based payment transactions to be recognized in an entity's financial
statements, establishes fair value as the measurement objective and requires
entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions. FAS No. 123(R) applies to all awards granted,
modified, repurchased or cancelled after July 1, 2005, and unvested portions of

F-10

previously issued and outstanding awards. The Company will adopt this statement
for its first quarter starting January 1, 2006 and will continue to evaluate the
impact of adopting this statement.

3. RESTATEMENTS AS A RESULT OF CORRECTING STOCK-BASED COMPENSATION
EXPENSE.

In October 2005, while completing a registration statement for
securities issued in the second quarter of 2005, the Company determined that
certain stock-based compensation expense required adjustment. In September 2002,
the Company entered into a distribution agreement with Ondeo Nalco Company
("Ondeo") whereby Ondeo agreed to serve as the exclusive distributor of the
Company's WATER$AVR(R) products for so long as Ondeo maintained a certain
threshold sales level as defined in the agreement. As consideration for signing
the agreement, Ondeo was granted an option to purchase 2,000,000 shares of the
Company's common stock. Half of the option for 1,000,000 shares was exercisable
immediately at an exercise price of $4.25 for each common share. The remaining
half of the option for 1,000,000 shares was exercisable after certain threshold
sales targets were achieved at a price of $5.50 for each common share.

In determining the stock-based compensation expense for the nine months
ended September 30, 2002, the Company expensed the entire fair value of the
stock option believing that the option fully vested upon the signing of the
agreement. In the Company's October 2005 review, however, the Company determined
that: (i) first, as stated above, half of the option to purchase 1,000,000
shares of common stock did not vest and was not exercisable until the threshold
sales target had been met, which would not be until five years after the signing
of the distribution agreement; and (ii) second, the Company did not consider
Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services; EITF No. 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees; and
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer.

To correctly account for the stock options granted to Ondeo, the
stock-based compensation expense included in consulting expense should have been
measured at the date the performance obligation was complete and then recognized
on a rational and systematic manner in relation to the sales achieved by Ondeo.
Had the Company correctly accounted for these stock options, stock-based
compensation expense for the year would have been nil as no sales had yet been
achieved. Instead, the Company recorded a stock-based compensation expense of
$2,704,000 for the year.

During the three months ended March 31, 2003, Ondeo achieved the first
threshold sales target, and, accordingly, the Company should have recorded a
corresponding stock-based compensation expense of $54,080. However, since the
entire stock-based compensation expense had been recorded in the financial
statements for the quarter ended September 30, 2002 and in the year ended
December 31, 2002, the Company did not record any additional stock-based
compensation expense as a result of the attained first threshold level.

In the fourth quarter of the year ended December 31, 2003, it was
determined that Ondeo was not going to attain the minimum sales targets
stipulated in the exclusive distributorship agreement. Consequently the
exclusive distributorship agreement and corresponding stock options were
cancelled. The Company accounted for the cancellation of the stock options in
accordance with FAS No. 123, Accounting for Stock-based Compensation, and
reversed $2,480,200 of the stock-based compensation expense previously recorded
in fiscal 2002. Had the Company accounted for the cancellation of the stock
options correctly, it would have reversed the stock-based compensation of
expense of $54,080 that was recorded in the first quarter ended March 31, 2003.

F-11

The following presents the effect on the Company's previously issued
financial statements for the years ended December 31, 2004 and 2003:

Balance sheet as at December 31, 2004 -

----------------------------------------------------------------------------------------------------------
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
---------------- ----------------- ---------------
Capital in excess of par value $ 7,663,421 $ (223,800) $ 7,439,621
Accumulated deficiency (2,355,207) 223,800 (2,131,407)
----------------------------------------------------------------------------------------------------------

Statement of operations for the year ended December 31, 2004 -

----------------------------------------------------------------------------------------------------------
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
---------------- ----------------- ---------------
Deficit, beginning $ (1,097,662) $ 223,800 $ (873,862)
Deficit, ending (2,355,207) 223,800 (2,131,407)
----------------------------------------------------------------------------------------------------------

Statement of operations for the three months ended December 31, 2004 -

----------------------------------------------------------------------------------------------------------
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
---------------- ----------------- ---------------
Deficit, beginning $ (1,829,903) $ 223,800 $ (1,606,103)
Deficit, ending (2,355,207) 223,800 (2,131,407)
----------------------------------------------------------------------------------------------------------

Balance sheet as at December 31, 2003 -

----------------------------------------------------------------------------------------------------------
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
---------------- ----------------- ---------------
Capital in excess of par value $ 7,306,613 $ (223,800) $ 7,082,813
Accumulated deficiency (1,097,662) 223,800 (873,862)
----------------------------------------------------------------------------------------------------------

Statement of operations for the year ended December 31, 2003 -

----------------------------------------------------------------------------------------------------------
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
---------------- ----------------- ---------------
Expenses $ (816,054) $ 2,480,200 $ 1,664,146
Income (loss) before other item and
income tax 1,774,110 (2,480,200) (706,090)
Income (loss) before income tax 1,977,420 (2,480,200) (502,780)
Net income (loss) 2,003,312 (2,480,200) (476,888)
Net income (loss) per share 0.17 (0.21) (0.04)
Deficit, beginning (3,100,974) 2,704,000 (396,974)
Deficit, ending (1,097,662) 223,800 (873,862)
----------------------------------------------------------------------------------------------------------

Statement of cash flows for the year ended December 31, 2003 -

----------------------------------------------------------------------------------------------------------
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
---------------- ----------------- ---------------
Net income (loss) $ 2,003,312 $ (2,480,200) $ (476,888)
Stock option compensation (2,357,630) 2,480,200 122,570
----------------------------------------------------------------------------------------------------------

F-12

Statement of operations for the three months ended December 31, 2003 -

----------------------------------------------------------------------------------------------------------
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
---------------- ----------------- ---------------
Expenses $ (2,162,917) $ 2,480,200 $ 317,283
Income (loss) before other item and
income tax 2,268,695 (2,480,200) (211,505)
Income (loss) before income tax 2,316,809 (2,480,200) (163,391)
Net income (loss) 2,316,809 (2,480,200) (163,391)
Net income (loss) per share 0.20 (0.21 (0.01)
Deficit, beginning (3,414,471) 2,704,000 (710,471)
Deficit, ending (1,097,662) 223,800 (873,862)
----------------------------------------------------------------------------------------------------------

4. SHORT-TERM INVESTMENT.

Short-term investment consists of a certificate of deposit bearing
interest at 4.03% and maturing September 11, 2005. The Company withdrew the
certificate of deposit prior to maturity for the purchase of the assets that
formed our NanoChem division and to provide cash flow to operations.

5. LOAN RECEIVABLE.

-----------------------------------------------------------------------
2005 2004
------------------------------
5% loan receivable due on demand $ 35,228 $ 38,570
-----------------------------------------------------------------------

6. PREPAID EXPENSES.

-----------------------------------------------------------------------
2005 2004
------------------------------
Security deposit and prepaids $ 137,315 $ 131,280
-----------------------------------------------------------------------

7. PROPERTY, PLANT AND EQUIPMENT.

-------------------------------------------------------------------------------------------------------------
Accumulated 2005 2004
Cost Amortization Net Net
-------------- ---------------- -------------- ---------------

Buildings $ 3,144,259 $ 455,918 $ 2,688,341 $ 2,987,046
Computer hardware 54,258 24,296 29,962 27,511
Furniture and fixtures 17,258 6,293 10,965 11,515
Office equipment 29,577 14,496 15,081 18,421
Manufacturing equipment 2,180,311 692,103 1,488,208 1,785,858
Trailer 1,995 1,164 831 1,146
Leasehold improvements 39,605 18,243 21,362 14,533
Trade show booth 7,473 3,026 4,447 6,130
Land 398,186 -- 398,186 398,186
-------------- ---------------- -------------- ---------------
$ 5,872,922 $ 1,215,539 $ 4,657,383 $ 5,250,346
-------------------------------------------------------------------------------------------------------------

F-13

8. PATENTS

In fiscal 2005, the Company started the patent process for additional
WATER$AVR(R) products. As the patent process is not yet completed, amortization
has not yet been recognized. Patents are amortized over their useful lives once
granted.

-------------------------------------- --------------- ---------------
2005 2004
--------------- ---------------
Patents $ 143,822 --
-------------------------------------- --------------- ---------------

9. INVESTMENTS.

-----------------------------------------------------------------------
2005 2004
----------------------
Tatko Inc. $ 271,000 $ 271,000
Air-Water Interface Delivery and Detection Inc. 98,000 --
---------- ----------
$ 369,000 $ 271,000
-----------------------------------------------------------------------

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.

10. COMPREHENSIVE INCOME (LOSS).

--------------------------------------------------------------------------------------------------------------
2005 2004 2003
As Restated
(Note 3)
--------------- ---------------- --------------

Net income (loss) (1,176,751) $ (1,257,545) $ (476,888)
Other comprehensive income 53,075 97,156 24,377
--------------- ---------------- --------------
(1,123,676) $ (1,160,389) $ (452,511)
--------------------------------------------------------------------------------------------------------------

F-14

11. INCOME TAX.

Total income tax expenses differs from the amounts computed by applying
the combined Canadian federal and provincial statutory rate of 30% to income
before income taxes and the U.S. federal statutory rate of 35% to income before
income taxes. The income to which this is applied is as follows:

---------------------------------------------------------------------------------------------------------
2003
As Restated
2005 2004 (Note 3)
---------------- --------------- ---------------

Income (loss) before income tax per entity:
Flexible Solutions International, Inc. (749,872) $ (652,196) $ (170,369)
Flexible Solutions, Ltd. (690,710) (677,894) 16,616
WaterSavr Global Solutions Inc. (247,864) (195,368) (349,027)
NanoChem Solutions Inc. 511,695 267,915 --
---------------- --------------- ---------------
Consolidated income (loss) before income tax (1,176,751) (1,257,543) (502,780)
Permanent difference - stock option benefit 525,450 299,345 (122,570)

Depreciation (503,705) -- --
Miscellaneous 12,774 7,874 --
---------------- --------------- ---------------
Taxable income (loss) for tax purposes (1,142,232) $ (950,324) $ (380,210)
---------------------------------------------------------------------------------------------------------

Application of the federal and provincial statutory rates results in
the following:

--------------------------------------------------------------------------------------------------------
2005 2004 2003
---------------- --------------- --------------

Expected tax expense (recovery) at statutory rates:
From Canadian operations -- -- $ (25,892)
From U.S. operations -- -- (110,987)
---------------- --------------- --------------
Income tax expense (recovery) -- -- $ (136,876)
--------------------------------------------------------------------------------------------------------

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:

--------------------------------------------------------------------------------------------------------
2005 2004
--------------- --------------

Non-capital loss carry forwards 1,304,321 $ 559,545
Book over tax value of property and equipment (452,944) (234,817)
Valuation allowance (851,377) (324,728)
--------------------------------------------------------------------------------------------------------

F-15

The Company's losses for income tax purposes were $3,726,632 (2004 -
$1,598,701), which may be carried forward to apply against future income tax,
expiring between 2010 and 2025. The future tax benefit of these loss
carry-forwards has been offset with a full valuation allowance. These losses
expire as follows:

--------------------------
2010 $ 93,649
2014 392,655
2015 679,350
2018 16,858
2019 13,414
2022 268,007
2023 403,187
2024 1,336,940
2025 522,572
--------------------------

12. NET INCOME (LOSS) PER SHARE.

-------------------------------------------------------------------------------------------------------
Net income (loss) Per share
(numerator) amount
As Restated Shares As Restated
(Note 3) (denominator) (Note 3)
-------------------- ------------------ ---------------

2005 Basic net income $ (1,176,751) 12,541,084 $ (0.09)

2004 Basic net income $ (1,257,545) 11,827,734 $ (0.11)

2003 Basic net income $ (476,888) 11,734,880 $ (0.04)
-------------------------------------------------------------------------------------------------------

Options to purchase 1,060,740 shares of the Company's common stock at
prices ranging from $1.40 to $4.55 per share were outstanding during the year
ended December 31, 2005 (2004: options to purchase 1,241,740 shares of the
Company's common stock at prices ranging from $1.00 to $4.60 per share; and
2003: options to purchase 1,711,000 shares of the Company's common stock at
prices ranging from $1.00 to $4.25 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. There
were no preferred shares issued and outstanding for the years ended December 31,
2005, 2004 or 2003.

13. STOCK OPTIONS.

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.

F-16

The following table summarizes the Company's stock option activity for
the years ended December 31, 2005 and 2004:

----------------------------------------------------------------------------------------------------------------
Exercise price Weighted average
Number of shares per share exercise price
--------------------- ------------------ ---------------------

Balance, December 31, 2003 1,711,000 $1.00 - $4.25 $2.84
Granted 572,740 $3.00 - $4.60 $3.46
Exercised (37,000) $1.00 - $2.50 $1.55
Expired (5,000) $4.25 $4.25
Cancelled (1,000,000) $1.50 - $3.50 $2.50
--------------------- ------------------ ---------------------
Balance, December 31, 2004 1,241,740 $1.00 - $4.60 $2.87
Granted 30,000 $3.58 - $4.40 $4.17
Exercised (162,000) $1.40 $1.40
Cancelled (49,000) $3.00 - $4.25 $3.52
--------------------- ------------------ ---------------------
Balance, December 31, 2005 1,060,740 $1.40 - 4.55 $3.44
----------------------------------------------------------------------------------------------------------------

The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options granted to its employees and, accordingly,
compensation expense of nil (2004 - nil) was recognized as wages expense. 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 net
income (loss) and per share amounts would be as follows:

---------------------------------------------------------------------------------------------------------
2003
As Restated
2005 2004 (Note 3)
---------------- --------------- ---------------

Net income (loss), as reported $ (1,176,751) $ (1,257,545) $ (476,888)
Net income (loss), pro forma (1,414,520) (1,647,491) (557,767)
Net income (loss) per share, as reported (0.09) (0.11) (0.04)
Net income (loss) per share, pro forma (0.11) (0.14) (0.05)
---------------------------------------------------------------------------------------------------------

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

---------------------------------------------------------------------------------------------------------
2005 2004 2003
---------------- --------------- ---------------

Expected life - years 5.0 5.0 5.0
Interest rate 3.85% 3.5% 2.87%
Volatility 52% 49.0% 49%
Dividend yield --% --% --%
---------------------------------------------------------------------------------------------------------

During the year ended December 31, 2005, the Company granted 30,000
(2004 - 275,400) stock options to consultants and has applied FAS No. 123 using
the Black-Scholes option-pricing model, which resulted in additional expenses of
$9,350 (2004 - $299,345). During the year ended December 31, 2005, the Company
recognized $93,600 in expenses for 90,000 options granted in the year ended
December 31, 2004, but which vested in the year ended December 31, 2005. During
the year ended December 31, 2005, 250,000 options, which were granted in 2004,
vested according to the fulfillment of certain milestones, which resulted in
additional expenses of $422,500.

F-17

14. 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 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 activity):

----------------------------------------------------------------------------------------------------------------
Number of shares Exercise price Weighted average
per share exercise price
--------------------- ------------------ ---------------------

Balance, December 31, 2004 -- -- --
Granted 987,400 $4.50 $4.50
Exercised -- -- --
Cancelled -- -- --
--------------------- ------------------ ---------------------
Balance, December 31, 2005 987,400 $4.50 $4.50
----------------------------------------------------------------------------------------------------------------

15. CAPITAL STOCK.

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 $471,254, making the net proceeds $3,231,496.

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

During the year ended December 31, 2004, the Company issued 37,000
shares of common stock at prices ranging from $1.00 to $2.50 per share upon
exercise of stock options.

F-18

16. SEGMENTED, SIGNIFICANT CUSTOMER INFORMATION AND ECONOMIC DEPENDENCY.

The Company operates in two segments:

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

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

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 Total
--------------- ---------------- -----------------

Revenue $ 1,053,507 $ 5,655,877 $ 6,709,394
Interest revenue 4,550 103 4,653
Interest expense 6,610 57,665 64,275
Depreciation and
amortization 58,084 627,684 685,768
Segment profit (loss) (1,688,446) 511,695 (1,176,751)
Segment assets 394,122 4,407,083 4,801,205
Expenditures for
segment assets 216,421 20,206 236,627
-------------------------------------------------------------------------------------------------

There is no segment data for fiscal 2003 as our additional segment was
added in June 2004.

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

--------------------------------------------------------------------------
2005 2004
---------------- ---------------
Canada $ 121,963 $ 712,517
United States and abroad 6,587,431 2,680,420
---------------- ---------------
Total $ 6,709,394 $ 3,392,937
--------------------------------------------------------------------------

F-19

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

--------------------------------------------------------------------------
2005 2004
---------------- ---------------
Canada $ 387,892 $ 238,807
United States 4,413,313 5,011,539
---------------- ---------------
Total $ 4,801,205 $ 5,250,346
--------------------------------------------------------------------------

17. COMMITMENTS.

The Company is committed to minimum rental payments for property and
premises aggregating approximately $358,808 over the term of four leases, the
last expiring on June 30, 2009.

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

----------------------------
2006 216,160
2007 58,336
2008 56,208
2009 28,104
----------------------------

18. CONTINGENCIES.

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

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

F-20

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. The parties
have completed documentary discovery and examinations for discovery of all
parties. No amounts have been recorded as receivable in the Company's
consolidated financial statements and no amounts have been accrued as potential
losses as the outcome of this claim is not determinable.

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

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

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

19. SUBSEQUENT EVENTS.

On January 24, 2006, in the course of generating the audited financial
statements for the quarter and year ended December 31, 2005, the Company
discovered a material inventory error in the financial statements filed as part
of its Form 10-QSB for the quarter ended September 30, 2005. In conducting the
inventory count at its NanoChem facility for the quarter ended September 30,
2005, the Company overstated its inventory by $183,398. This clerical error led
to the Company's decision to restate the financial statements for the three
months ended September 30, 2005. Accordingly, the Company's previously issued
financial statements covering the quarter ended September 30, 2005 should no
longer be relied upon.

On January 25, 2006, management discussed the conclusion described
above with the Company's audit committee of the board of directors ("Audit
Committee") and Cinnamon Jang Willoughby & Company ("CJW"), the Company's
independent registered public accounting firm. CJW informed the Audit Committee
that it concurs with management's conclusion described above. As a result, on
February 1, 2006, the Company filed amended consolidated financial statements
for the quarter ended September 30, 2005.

F-21

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

PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
--------------------- --------------------- ---------------------

Cost of goods sold $ 2,686,485 $ 183,398 $ 2,869,883
Gross margin 2,503,318 (183,398) 2,319,920
Net income (loss) (609,627) (183,398) (793,170)
Earnings per share (0.05) (0.01) (0.06)
Deficit, beginning $ (2,131,407) -- $ (2,131,407)
Deficit, ending (2,741,034) (183,398) (2,924,432)

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

PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
--------------------- --------------------- ---------------------

Cost of goods sold $ 554,540 $ 183,398 $ (737,938)
Gross margin 747,547 (183,398) 564,151
Net income (loss) (185,508) (183,398) (369,906)
Earnings per share (0.01) (0.02) (0.03)
Deficit, beginning $ (2,555,526) $ -- $ (2,555,526)
Deficit, ending (2,741,034) (183,398) (2,924,432)

Balance sheet as at September 30, 2005 -

PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
--------------------- --------------------- ---------------------

Inventory $ 2,355,729 $ (183,398) $ 2,172,331
Deficit, beginning $ (2,131,407) -- $ (2,131,407)
Deficit, ending (2,741,034) (183,398) (2,924,432)

20. COMPARATIVE FIGURES.

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

F-22

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.

None.

ITEM 8A. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic reports to the
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, 2005, 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.

Changes in Internal Control 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.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth our directors and officers and their
respective ages and positions:

------------------------------- ------------------ ---------------------------
Name Age Position
---- --- --------
Daniel B. O'Brien 49 President, Director
John H. Bientjes 52 Director
Dr. Robert N. O'Brien 84 Director
Dale Friend 49 Director
Eric Hodges 57 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 has
served as the company comptroller for a Lock and Security firm in Vancouver
since August 2004. She 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.

Directors are elected annually and hold office until the next annual
meeting of our stockholders and until their successors are elected and
qualified. We reimburse directors for any expenses incurred in attending board
of directors meetings. We also compensate directors $1,000 annually and grant
the three independent directors an option to purchase 5,000 common shares each
year that they serve. 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.

BOARD COMMITTEES

Our board of directors has established an Audit Committee and a
Compensation Committee.

Audit Committee

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. The Audit Committee held [FOUR] meetings in fiscal 2005 and all
members participated. Our board of directors has determined that Mr. Bientjes
meets the SEC's definition of audit committee financial expert. Each of the
members of the Audit Committee are "independent," as such term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended.

Compensation Committee

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 programs. Our
Compensation Committee meets periodically with management and our independent
auditors. The Compensation Committee held one meeting in fiscal 2005 and both of
the members participated.

CODE OF ETHICS

Between the year ended December 31, 2003 and July 2005, we had not
adopted a written Code of Ethics applicable to our senior management and senior
financial staff. However, effective as of August 2005, our board of directors
has adopted a Code of Ethics that applies to our Chief Executive Officer, our
Chief Financial Officer and our Principal Accounting Officer, as well as to the
other senior management and senior financial staff of our company. Our Code of
Ethics complies with the requirements imposed by the Sarbanes-Oxley Act of 2002
and the rules and regulations issued thereunder for codes of ethics applicable
to such officers. Our board of directors has reviewed and will continue to
evaluate its role and responsibilities with respect to the new legislative and
other requirements of the SEC. Interested persons can obtain a copy of our Code
of Ethics, without charge and upon request, by writing to: Investor Relations,
c/o Flexible Solutions International, Inc. 615 Discovery St., Victoria, British
Columbia, V8T

5G4, CANADA. Interested persons may also obtain a copy of our Code of Ethics by
printing it from the "Investor Info--Insider Trading Reports" page of our
website, at http://www.flexiblesolutions.com.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely upon a review of our records, we are not aware of any of
our officers, directors or beneficial owners of more than 10% of our securities
that failed to timely file one or more reports disclosing beneficial ownership
of our securities as required under Section 16(a) of the Securities Exchange Act
of 1934, as amended, during the fiscal year ended December 31, 2005.

ITEM 10. EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information about the
compensation paid or accrued to the person who was our Chief Executive Officer
(the "named executive officer") during the fiscal year ended December 31, 2005.

--------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- --------------------------------------------------------
Awards Payouts
------------------------------ -------------------------
Other Securities
Annual Restricted Underlying LTIP All Other
Year Salary Bonus Compensation Stock Awards Options/SARs Payouts Compensation
------------------------------- ------------- ------------- --------------- ----------- -------------

($) ($) ($) ($) (#) ($) ($)
Daniel B. O'Brien 2005 98,914 -- -- -- -- -- --
President, Chief 2004 40,000 -- -- -- 20,000 -- --
Executive Officer 2003 40,000 -- -- -- 50,000 -- --
--------------------------------------------------------------------------------------------------------------------------

OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)

The following table provides certain information about the stock
options granted to the named executive officer in the year ended December 31,
2004. There were no stock options granted to the named executive officer in the
year ended December 31, 2005.

----------------------- --------------------- ------------------------------ ---------------------- ----------------------
No. of Securities
Underlying Percent of Total
Options/SARs Options/SARS Granted to Exercise or Base
Name Granted (#) Employees in Fiscal Year Price ($/share) Expiration Date
----------------------- --------------------- ------------------------------ ---------------------- ----------------------

Daniel B. O'Brien 50,000 shares 15.3% $3.00 December 31, 2009
----------------------- --------------------- ------------------------------ ---------------------- ----------------------

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

The following table sets forth certain information about stock options
exercised in fiscal 2005 and the value of unexercised stock option held as of
December 31, 2005 by the named executive officer.

------------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money
at FY-End (#) Options/SARs at FY-End ($)
-------------------------------- ------------------------------------
Shares Value
Acquired on Realized
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
----------------------------------- ------------ -------------- ----------------- ----------------- ------------------

Daniel B. O'Brien 100,000 $140,000 120,000 0 $434,500 0
------------------------------------------------------------------------------------------------------------------------

DIRECTOR COMPENSATION

We have agreed to issue to our non-employee directors options to
purchase 5,000 shares of our common stock annually for serving as a director.
However, Dr. Robert N. O'Brien will not receive director options in any year in
which he receives options for other services. We currently pay Dr. O'Brien
additional options for assisting in research and development and patent
prosecution. The amount of such options are determined annually by the board of
directors with Dr. O'Brien abstaining from the vote on such matter. No options
were granted in fiscal 2005. In fiscal 2004, Dr. O'Brien received the following
options for such services and he did not receive director options:

---------------------------------------- -------------------------------------- --------------------------------------
Option Price No. of Options Expiration Date
------------ -------------- ---------------

$3.00 25,000 December 31, 2009
---------------------------------------- -------------------------------------- --------------------------------------

Our outside directors received the following options in 2004:

------------------------------- ---------------------------- ---------------------------- ----------------------------
Name Option Price No. of Options Expiration Date
---- ------------ -------------- ---------------

John H. Bientjes $3.00 5,000 December 31, 2009
Dale Friend $3.00 5,000 December 31, 2009
Eric Hodges $3.00 5,000 December 31, 2009
------------------------------- ---------------------------- ---------------------------- ----------------------------

EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS

We have not entered into any employment agreements or change in control
agreements with the named executive officer.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information regarding the
beneficial ownership of our common stock as of March 2, 2006 by (i) each
stockholder who is known by us to own beneficially more than five percent of our
outstanding common stock, (ii) each member of our board of directors, (iii) the
named executive officer, and (iv) by all of our executive officers and directors
as a group. The information as to each person or entity has been furnished by
such person or group.

------------------------------------- -----------------------------------------------------------------------
Shares Beneficially Owned (1)
Common Stock Percentage
----------------------------------- -----------------------------------

Daniel B. O'Brien (2)(3) 4,746,900 36.6%
Dr. Robert N. O'Brien (2)(3) 1,875,000 14.4%
John Bientjes 25,000 0.2%
Dale Friend - -
Eric Hodges - -
----------------------------------- -----------------------------------

As a group (5 persons) 6,646,900 51.2%
------------------------------------- ----------------------------------- -----------------------------------

(1) Applicable percentage of ownership at March 2, 2006, is based upon
12,981,316 shares of Common Stock outstanding. Beneficial ownership is
determined in accordance with the rules of the SEC and includes voting
and investment power with respect to shares shown as beneficially
owned. Shares of common stock subject to options or warrants currently
exercisable or exercisable within 60 days of March 2, 2006, are deemed
outstanding for computing the shares and percentage ownership of the
person holding such options or warrants, but are not deemed outstanding
for computing the percentage ownership of any other person or entity.

(2) Address for this shareholder is 2614 Queenswood Dr., Victoria, British
Columbia, V8N 1X5, CANADA.

(3) Includes shares which may be acquired on the exercise of stock options
as follows.

---------------------------------- --------------------- ----------------------- ----------------------------
Exercise
Name No. of Options Price Expiration Date
---- -------------- ------------- ---------------

Daniel O'Brien 50,000 $4.25 December 31, 2007
20,000 $3.60 December 31, 2008
50,000 $3.00 November 26, 2009
Dr. Robert O'Brien 25,000 $4.25 December 31, 2007
25,000 $3.60 December 31, 2008
25,000 $3.00 November 26, 2009
John Bientjes 5,000 $4.25 December 31, 2007
5,000 $3.60 December 31, 2008
5,000 $3.00 November 26, 2009
Dale Friend 5,000 $4.25 December 31, 2007
5,000 $3.60 December 31, 2008
5,000 $3.00 November 26, 2009
Eric Hodges 5,000 $3.60 December 31, 2008
5,000 $3.00 November 26, 2009
---------------------------------- --------------------- ----------------------- ----------------------------

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

For a tabular description of securities authorized for issuance under
equity compensation plans, please refer to Item 5 hereof.

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.

ITEM 13. EXHIBITS.

Number Description

3.1 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 ss.302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
ss.1350 and ss.906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
ss.1350 and ss.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, 2005 and 2004.

AUDIT FEES

CJW was paid aggregate fees of $27,357 and $23,240 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 $25,305 for the fiscal year ended December 31, 2005 for
assurance and related services reasonably related to the performance of the
audit or review of our financial statements. No such fees were paid for the
fiscal year ended December 31, 2004.

TAX FEES

CJW was paid aggregate fees of $2,150 and $2,075 for the fiscal years
ended December 31, 2005 and 2004, 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, 2005 and 2004.

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, 2005, our Audit Committee approved
100% of the total fees that were 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, 2005, none of
the total hours expended on our financial audit by CJW were provided by persons
other than CJW's full-time permanent employees.

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 6, 2006.

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

By: /s/ DANIEL B. O'BRIEN
------------------------------------------
Name: Daniel B. O'Brien
Title: 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 President and Chief Executive March 6, 2006
------------------------- Officer (principal executive
Daniel B. O'Brien officer), Chief Financial Officer
(principal accounting officer) and
Director

/s/ JOHN H. BIENTJES Director March 7, 2006
-------------------------
John H. Bientjes

/s/ ROBERT N. O'BRIEN Director March 7, 2006
-------------------------
Robert N. O'Brien

/s/ DALE FRIEND Director March 7, 2006
-------------------------
Dale Friend

/s/ ERIC G. HODGES Director March 7, 2006
-------------------------
Eric G. Hodges