Abstract: A method of manufacturing a foam insulated water heater of the type having an inner tank, a layer of insulating foam material surrounding the inner tank and an outer protective shell includes, in one embodiment, the steps of (1) forming a flexible, expandable bag in a configuration which may be placed around the bottom edge of the inner tank, (2) attaching the flexible bag around the bottom edge of the tank, (3) filling the bag with a foam material which expands to form a collar, (4) positioning the outer shell about inner tank prior to expansion of the foam collar, and (5) subsequently filling the remainder of the space between the tank and the shell with an expandable foam material which is retained, at least in part, by the foam expanded, flexible bag.