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

                                   FORM 10-KSB

[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

                       Commission File Number: 333-126378

                                 CEREPLAST, INC.
                          (A development stage company)
                 (Name of small business issuer in its charter)

              Nevada                                      91-2154289
   State or other jurisdiction             I.R.S. Employer Identification Number
of incorporation or organization

                       3421-3433 West El Segundo Boulevard
                           Hawthorne, California 90250
                     (Address of principal executive office)

                    Issuer's telephone number: (310) 676-5000

       Securities registered under Section 12(b) of the Exchange Act: None

       Securities registered under Section 12(g) of the Exchange Act: None

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 is not contained in this form, and no disclosure will be
contained, to the best of the 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. [ ]

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

The Issuer's revenues for the year ending December 31, 2005 were $542,699.

As of March 20, 2006 the number of shares outstanding of the Issuer's common
stock was 199,483,262.

As of March 20, 2006 the aggregate number of shares held by non-affiliates was
approximately 71,870,637.

As of March 20, 2006 the aggregate market value of the Issuer's common stock
held by non-affiliates was $56,059,096.86, based on the average bid and asked
price of $0.78 per share as of March 20, 2006.

Documents incorporated by reference None


                                       1
<PAGE>
                                   FORM 10-KSB

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

                                      INDEX

                                                                       Page
                                                                       ----
PART I
   ITEM 1. DESCRIPTION OF BUSINESS                                        5
   ITEM 2. DESCRIPTION OF PROPERTY                                        9
   ITEM 3. LEGAL PROCEEDINGS                                              9
   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.            9

PART II                                                                  10
   ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
           STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
           PURCHASES OF EQUITY SECURITIES.                               10
   ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
           OF OPERATION                                                  12
   ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                   17
   ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
           ON ACCOUNTING AND FINANCIAL DISCLOSURE                        17
   ITEM 8A. CONTROLS AND PROCEDURES                                      17
   ITEM 8B. OTHER INFORMATION                                            17

PART III                                                                 18
   ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
           CONTROL PERSONS; COMPLIANCE  WITH SECTION 16(a)
           OF THE EXCHANGE ACT.                                          18
   ITEM 10. EXECUTIVE COMPENSATION                                       18
   ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
            OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS        20
   ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS               20
   ITEM 13. EXHIBITS                                                     22
   ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                       23


                                       2
<PAGE>


                 STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In this annual report,  references to "Cereplast",  "CERP". "the Company," "we,"
"us," and "our" refer to Cereplast,  Inc. Except for the historical  information
contained herein, some of the statements in this Report contain  forward-looking
statements that involve risks and  uncertainties.  These statements are found in
the sections entitled "Business,"  "Management's Discussion and Analysis or Plan
of Operation,"  and "Risk  Factors."  They include  statements  concerning:  our
business strategy;  expectations of market and customer response;  liquidity and
capital  expenditures;  future  sources of  revenues;  expansion of our proposed
product line; and trends in industry activity generally.  In some cases, you can
identify  forward-looking  statements by words such as "may," "will,"  "should,"
"expect,"  "plan,"  "could,"  "anticipate,"   "intend,"  "believe,"  "estimate,"
"predict,"  "potential,"  "goal," or  "continue" or similar  terminology.  These
statements   are  only   predictions   and  involve  known  and  unknown  risks,
uncertainties  and other  factors,  including,  but not  limited  to,  the risks
outlined  under  "Risk  Factors,"  that may cause our or our  industry's  actual
results,  levels of  activity,  performance  or  achievements  to be  materially
different  from  any  future  results,   levels  of  activity,   performance  or
achievements  expressed  or  implied  by such  forward-looking  statements.  For
example,  assumptions  that could cause actual results to vary  materially  from
future  results  include,  but are not  limited to our  ability to  successfully
develop and market our products to customers;  our ability to generate  customer
demand for our products in our target  markets;  the  development  of our target
markets and market  opportunities;  our ability to manufacture suitable products
at competitive cost; market pricing for our products and for competing products;
the extent of increasing competition;  technological  developments in our target
markets and the  development of alternate,  competing  technologies in them; and
sales  of  shares  by  existing  shareholders.  Although  we  believe  that  the
expectations  reflected in the forward  looking  statements are  reasonable,  we
cannot   guarantee   future   results,   levels  of  activity,   performance  or
achievements.  Unless we are required to do so under US federal  securities laws
or  other   applicable   laws,  we  do  not  intend  to  update  or  revise  any
forward-looking statements


                                       3
<PAGE>
                                     PART I


ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

History

      We were  incorporated  on September  29, 2001 in the State of Nevada under
the name of Biocorp  North America Inc. On March 18, 2005, we filed an amendment
to our certificate of incorporation to change our name to Cereplast, Inc.

Overview

      We were  initially  engaged  in the  sale of  finished  products,  such as
utensils and drinking straws,  that were manufactured by third parties using our
resins.  However, we elected to shift our focus to the development,  manufacture
and sale of bio-based  resins and in August 2005,  we commenced the limited sale
of resins.  Prior to August  2005,  primarily  all of our revenue was  generated
through the sale of finished products.

      Each of our  finished  products  have been  approved by the  Biodegradable
Products Institute (BPI),  which is a certification  program founded by Frederic
Scheer,  our CEO and President,  who currently serves as Chairman Emeritus and a
board member of BPI. In 2005 some of our resins were  approved by the BPI and we
are  applying to have other  approved.  In order to have our products and resins
approved by BPI, we are required to pay an  evaluation  fee as well as an annual
licensing  fee for the use of the BPI logo.  The  significance  of obtaining the
logo  is  to  illustrate  to  consumers   that  the  product  will   biodegrade,
disintegrate and compost. The State of California requires the affixation of the
BPI logo in order to market a product  as  compostable  and local  agencies  and
cities are requiring the logo for products to be used in composting programs.

      As we increase our resin based  business we have been slowly  winding down
our finished products business. We expect to cease the sale of finished products
and to be solely producing resins by the middle of 2007.

      We are  engaged  in the  development,  manufacture  and sale of  bio-based
resins which are used as substitutes for conventional,  petroleum based plastics
in a variety of  applications,  including the  manufacture of food service items
such as utensils,  plates,  cups and straws.  Our bio-based resins are made from
renewable   resources  such  as  corn,  wheat  and  potato  starch,   which  are
bio-degradable,  bio-based  and  compostable.  Our  resins  incorporate  several
natural ingredients  including starch derived from corn starch,  wheat starch or
potato starch, poly lactic acid and other biodegradable components to insure the
physical properties of the end product.

      We manufacture each of our resins at our facility to create various grades
of our  resins.  We then sell our resins to plastic  manufacturers.  Each of our
resins are  thermoplastic  and can be processed on  conventional  equipment  for
various applications  including injection molding,  thermoforming,  blow molding
and extrusions.  As a result,  plastic manufacturers do not need to change their
equipment  in order to  accommodate  our resins.  We believe our resins  provide
plastic  manufacturers  with an  environmentally  safe and  economically  viable
alternative to conventional,  petroleum-based  plastics. Our web site address is
www.cereplast.com.

Finished Products

      We currently sell finished products  including various types of dinnerware
such as bowls,  plates and utensils that are manufactured by third parties using
our resins.  During the first  quarter of 2005,  we commenced  the  marketing of
NAT-UR (R) straws and higher heat resistant  utensils.  From inception to August
2005, all of our revenues were generated through the sales of finished products.
We are  currently  undergoing  a switch  in our  business  plan from the sale of
finished  products to the  manufacture  and sale of resins.  As we increase  our
resin based  business we have been slowly  winding  down our  finished  products
business.  We  expect to cease the sale of  finished  products  and to be solely
producing resins by the middle of 2007.


                                       4
<PAGE>
Resins

      Traditional foodservice  disposables,  wraps, and paperboard are currently
manufactured  from a variety  of  materials,  including  paper and  plastic.  We
believe that none of these  materials  fully  addresses  three of the  principal
challenges  facing the foodservice  industry;  namely  performance,  price,  and
environmental  impact. We believe plastics that are manufactured with our resins
address  the   combination   of  these   challenges   better  than   traditional
alternatives.

      To  date,  our  resins  have  been  used  to  produce  limited  commercial
quantities of  foodservice  ware  including  utensils,  plates,  cups and straws
intended for use by all segments of the foodservice disposable packaging market,
including quick-service  restaurants,  food and facilities management companies,
the  U.S.  government,  universities/colleges,   and  retail  operations.  These
products were manufactured using our resins which minimize the harmful impact on
the environment without sacrificing competitive price or performance.

      Our resins  are  primarily  made from  abundantly  available  and low cost
natural raw materials such as starch from annually renewable crops such as corn,
wheat and potatoes.  We believe that foodservice  disposables made of our resins
will offer certain significant  environmental  benefits, will have comparable or
superior performance characteristics, such as greater strength and rigidity, and
can be  commercially  produced  and sold at  prices  that are  competitive  with
comparable conventional paper and plastic foodservice disposables.

      Our resins can be used in the following conventional processes:

            o     Injection molding to manufacture utensils, plates and cups.

            o     Thermoforming to manufacture cups and hard plates.

            o     Blow film to manufacture film for compostable bags.

            o     Blow molding to manufacture bottles and other containers

            o     Extrusion for paper lamination or for straws.

Industry Overview

      The end market  for our resins  encompass  the  entire  plastic  industry.
However, we have elected to focus on the food service packaging industry,  which
we  believe is more  environmentally  sensitive  and in need of  environmentally
friendly packaging.

      Our objective is to establish our resins as the preferred  resin  supplier
for  plastics  manufacturers  producing  disposable  packaging  material for the
foodservice  industry  throughout  the world  based on  comparable  performance,
environmental  superiority and competitive  pricing.  Our approach for achieving
this objective has been to:

            o     manufacture  our resins at our  facility  and to  license  our
                  resin   producing   technology   to   strategically   selected
                  manufacturing  or operating  partners to manufacture,  market,
                  distribute and sell our resins;

            o     demonstrate  customer  acceptance  and  demand  for our resins
                  through key market leaders and environmental groups; and

            o     demonstrate the  manufacturability and improved economics with
                  initial strategic partners.

      We have  commenced  manufacturing  of our resins and intend to license our
patented technology to other manufacturers on a world wide basis. Our goal is to
establish  our resins as the  preferred  choice of large  plastic  manufacturers
supplying the food service industry.  Waste collection bags and foodservice ware
made from our resins are  currently  sold  through  retail  outlets such as Wild
Oats,  Whole Food Market and Walgreens  primarily in areas where  bio-degradable
waste bags are mandated for the handling of compostable  organic wastes or where
food waste composting has been introduced.


                                       5
<PAGE>
      In addition to the United States,  we believe the market  opportunity  for
plastics made with our  bio-degradable  resins is particularly  strong in Europe
and  parts of Asia  due to  heightened  environmental  concerns  and  government
regulations. In Europe, environmental legislation,  such as the so-called "Green
Dot" laws have created an opportunity for environmentally  preferable  products.
Meanwhile,  new regulations in many Asian countries have mandated a reduction in
polystyrene production stimulating an increased demand for foodservice packaging
manufactured  from acceptable  alternative  materials.  Furthermore,  we believe
improvements in the Asian and European  composting and recycling  infrastructure
are expected to facilitate the use of environmentally preferable products.

Marketing

      In order to  achieve  our  objective  of  establishing  our  resins as the
preferred resin for plastic manufacturers  producing disposable packaging in the
foodservice industry, we intend to engage in the following marketing strategies:

            o     develop resins for use in products which deliver comparable or
                  greater  performance,   are  competitively  priced  and  offer
                  environmental  advantages as compared to traditional packaging
                  alternatives

            o     demonstrate customer demand as well as product performance and
                  positioning

            o     educate the market and build awareness for the Nat-UR(R) brand

            o     prove manufacturability and economics of foodservice packaging
                  produced utilizing our resins

            o     license  our  resin  technology  to  strategic   manufacturing
                  partners to manufacture,  market, distribute and sell plastics
                  manufactured with our resin technology.

Manufacturing

      We manufacture  our bio-based  resins in our facility at 3421-3433 West El
Segundo  Boulevard,  Hawthorne,  California  90250. Our facility  consists of an
approximately 25,000 square foot manufacturing area, equipped with machine tools
and other  industrial  equipment,  plus storage for materials.  This facility is
adequate for our present manufacturing needs.

      Our  manufacturing  process for creating  resins  consists of blending the
component  ingredients  of a  proprietary  composite  material in an  industrial
mixer, then processing such ingredients through heat and extrusion with a custom
designed  extruder  installed at our facility.  The resins are subject to drying
and  packaged at the  facility.  We use Poly Lactic  Acid (PLA)  purchased  from
NatureWorks  , LLC.  (formerly  Cargill  Dow LLC)  ("NatureWorks")  and  readily
available  natural  raw  materials,  such as potato or corn  starch,  as well as
natural  organic  compound and blend.  All the ingredients are processed in very
specific percentages according to proprietary formulations.

      Since our resins engineered from readily  available,  low-cost natural raw
materials  such as poly lactic acid and starch,  we believe our  products can be
manufactured  cost-effectively at commercial  production levels. We have entered
into an agreement with NatureWorks for the provision of poly lactic acid resins.
In the  event  that we are  unable  to  obtain  poly  lactic  acid  resins  from
NatureWorks  our operations  may be negatively  impacted.  All other  materials,
including starches are readily available.  There are no exclusive  suppliers for
our other raw  materials  including  the  starches,  which  are  available  from
numerous suppliers

      Over the past several years, we have devoted resources to develop finished
products and to demonstrate the commercial  viability of our resins. To date, we
have  produced  limited  amounts  of  resins  on  production  lines  but we have
demonstrated  that our  proprietary  resins  can be  processed  on  conventional
equipment.


                                       6
<PAGE>
Intellectual Property

      We regard our copyrights,  service marks,  trademarks,  trade dress, trade
secrets  and similar  intellectual  property  as  critical  to our  success.  In
addition,  we have filed for patent and trademark protection for our proprietary
technology.  We were granted  registration  of our  trademark,  Nat-Ur(R) in the
United  States.  We have filed for patent  protection  of our  technology in the
United States and in Europe. Our patent  applications are pending and the patent
application numbers are 10/788,542 and 10//789,549 in the United States. In late
2005 and early 2006, we filed two additional  patents  applications  with the US
Patent Office under number:  11/293,517 on December 1, 2005 and 11/365,579 filed
on February  28,  2006.  We can give no  assurance  that any such patent will be
granted for our resin technology.

      We rely on  trademark  and  copyright  law,  trade secret  protection  and
confidentiality  or license agreements with our employees,  customers,  partners
and others to protect our proprietary rights.

Competition

      Competition  among  resin  providers  for  food  and  beverage   container
manufacturers  in the foodservice  industry and in the finished product industry
is  intense.  Historically,  we  have  been  engaged  in the  sale  of  finished
biodegradable  products but we are  presently in the process of winding down the
sale of finished  products  and shifting our core focus to the sale of resins to
food and beverage container manufacturers. For our finished products, we compete
on the  basis  of  price  and we  have a large  market  presence.  Based  on our
research, we believe that the finished products that we offer are of equal to or
superior  quality at less cost. Our primary  competitors in the finished product
market include Polargruppen, BiogroupUSA and Wei Mon Industries.

      In the resin industry, we compete with BASF, Cargill-Dow,  DuPont, Eastman
Chemical-Novamont  and Dow  Chemical.  Virtually all of these  competitors  have
greater  financial and marketing  resources at their  disposal than our company,
and many have established supply, production and distribution  relationships and
channels.  Companies producing  competitive  products may reduce their prices or
engage  in  advertising  or  marketing   campaigns  designed  to  protect  their
respective market shares and impede market acceptance of our resin. In addition,
we also compete with  companies  that provide  petroleum  based raw materials to
plastic  manufacturers.  As we have only recently switched our focus to the sale
of resins, our market presence is limited. We intend to compete with our larger,
better  financed  competitors by  highlighting  our resins'  higher  temperature
resistance and easy process ability for certain applications.

      Several  paper  and  plastic   disposable   packaging   manufacturers  and
converters  and others have made  efforts to  increase  the  recycling  of these
products.  Increased  recycling of paper and plastic products could lessen their
harmful environmental impact, one major basis upon which we intend to compete. A
number of companies have introduced, or are attempting to develop, biodegradable
starch-based  materials,  plastics, or other materials that may be positioned as
potential  environmentally superior packaging alternatives.  It is expected that
many existing packaging  manufacturers may actively seek to develop  competitive
alternatives  to products  and  processes  utilizing  their own resins or resins
developed by our competitors.

Government Regulation

      The  manufacture,  sale and use of our resins are subject to regulation by
the U.S. Food and Drug  Administration  (the "FDA").  The FDA's  regulations are
concerned with  substances  used in food  packaging  materials.  Thus,  food and
beverage  containers  are in compliance  with FDA  regulations if the components
used in the food and beverage containers:

            o     are approved by the FDA as indirect  food  additives for their
                  intended uses and comply with the applicable FDA indirect food
                  additive regulations; or

            o     are generally  recognized as safe for their  intended uses and
                  are of suitable purity for those intended uses.

      We believe that our resins are in compliance with all  requirements of the
FDA and do not require FDA approval prior to the sale of our products. We cannot
be certain, however, that the FDA will agree with these conclusions.


                                       7
<PAGE>
Research and Development

      We are  currently  researching  new  applications  in  various  industries
including   agriculture,   medical  and  electronics.   Our  research   includes
researching new methods of improving  processing on  conventional  equipment and
developing new material with higher heat  resistance.  In the medical field,  we
are  researching  the  possibility  of  improving  the  strength of material and
control  the  speed  of  biodegradation.  For  applications  in the  agriculture
industry,  we are studying the use of biodegradable  resin to substitute certain
part of equipment  currently made of conventional  petroleum based plastics.  We
are also studying tear  resistance  and overall  strength of materials  produced
with our resins.

Employees

         We have twelve full time employees and one part time employee. None of
our employees are represented by a labor organization.

ITEM 2. DESCRIPTION OF PROPERTY

      We currently  maintain our executive  offices and research and development
facilities at 3421-3433 West El Segundo Boulevard,  Hawthorne, California 90250,
and our telephone  number is (310)  676-5000.  This  facility  consists of about
25,000 square foot manufacturing facility and approximately 2,000 square feet of
office space.  Our lease for these  facilities  requires that we pay $11,700 per
month in rent.  This  facility is in good working  condition  and we expect this
facility to satisfy our needs for the next 12 months.  In February 2006 we added
space consisting of 3,000 square feet adjacent to our building for an additional
monthly rent of $2,250 expiring in January 2010.

ITEM 3. LEGAL PROCEEDINGS

      From time to time,  we may become  involved in various  lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent  uncertainties,  and an adverse  result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal  proceedings  or claims  that we believe  will have,
individually  or in the  aggregate,  a material  adverse affect on our business,
financial condition or operating results.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

         None



                                       8
<PAGE>
                                     PART II

ITEM  5. MARKET FOR REGISTRANT'S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
      SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common  stock has been  quoted on the OTC  Bulletin  Board  under the symbol
"CERP.OB."  The  following  table  shows the  reported  high and low closing bid
quotations per share for our common stock based on  information  provided by the
OTC Bulletin Board.  Particularly since our common stock is traded infrequently,
such  over-the-counter  market quotations reflect inter-dealer  prices,  without
markup,  markdown  or  commissions  and may  not  necessarily  represent  actual
transactions or a liquid trading market.

        Year Ended December 31, 2006                  High       Low
                                                     -----     -----

        First Quarter ended March 31, 2006*          $0.78     $0.30

        Year Ended December 31, 2005                  High       Low
                                                     -----     -----

        Fourth Quarter ended December 31, 2005**     $0.93     $0.30

* Through March 20, 2006
** Commencing November 4, 2006

Holders

         As of March 20, 2006, there were 165 holders of record of our common
stock.

Dividend Policy

Historically,  we have not paid any dividends to the holders of our common stock
and we do not expect to pay any such dividends in the  foreseeable  future as we
expect to retain our future  earnings for use in the  operation and expansion of
our business.

We have appointed US Stock Transfer Corporation,  1745 Gardena Avenue,  Glendale
CA 91204-2991, as transfer agent for our shares of common stock.

Equity Compensation Plan Information

         As of December 31, 2005:

<TABLE>
<CAPTION>
Plan Category                       Number   of  shares  to  be      Weighted-average   exercise      Number of shares  remaining
                                    issued  upon   exercise  of      price    of     outstanding      available     for    future
                                    outstanding   options   and      options and warrants             issuance    under    equity
                                    warrants                                                          compensation plans
                                    ---------------------------      ---------------------------      ---------------------------

<S>                                               <C>                           <C>                          <C>
Approved by security holders                      -0-                            --                                  -0-
Not approved by security holders                  -0-                            --                           25,000,000
Total                                             -0-                            --                           25,000,000

</TABLE>


                                       9
<PAGE>

2004 STOCK OPTION PLAN

GENERAL

      The 2004 Stock  Option  Plan was  adopted by the Board of  Directors.  The
Board of Directors has initially reserved  25,000,000 shares of Common Stock for
issuance under the 2004 Stock Plan. Under the Plan, options may be granted which
are intended to qualify as Incentive Stock Options ("ISOs") under Section 422 of
the Internal  Revenue  Code of 1986 (the  "Code") or which are not  ("Non-ISOs")
intended to qualify as Incentive Stock Options thereunder.

      The 2004 Stock Option Plan and the right of participants to make purchases
thereunder  are intended to qualify as an "employee  stock  purchase plan" under
Section 423 of the Internal  Revenue Code of 1986, as amended (the "Code").  The
2004 Stock  Option  Plan is not a  qualified  deferred  compensation  plan under
Section 401(a) of the Internal Revenue Code and is not subject to the provisions
of the Employee Retirement Income Security Act of 1974 ("ERISA").

PURPOSE

      The primary purpose of the 2004 Stock Option Plan is to attract and retain
the best available  personnel for the Company in order to promote the success of
the Company's business and to facilitate the ownership of the Company's stock by
employees.

ADMINISTRATION

      The 2004 Stock  Option  Plan is  administered  by the  Company's  Board of
Directors,  as the Board of  Directors  may be composed  from time to time.  All
questions of  interpretation of the 2004 Stock Option Plan are determined by the
Board,  and its  decisions  are final and  binding  upon all  participants.  Any
determination  by a majority  of the  members of the Board of  Directors  at any
meeting,  or by written  consent  in lieu of a meeting,  shall be deemed to have
been made by the whole Board of Directors.

      Notwithstanding the foregoing,  the Board of Directors may at any time, or
from time to time, appoint a committee (the "Committee") of at least two members
of the Board of  Directors,  and delegate to the  Committee the authority of the
Board of Directors to administer the Plan. Upon such appointment and delegation,
the Committee  shall have all the powers,  privileges and duties of the Board of
Directors,  and  shall  be  substituted  for  the  Board  of  Directors,  in the
administration of the Plan, subject to certain limitations.

      Members of the Board of Directors who are eligible employees are permitted
to  participate  in the 2004 Stock Option Plan,  provided that any such eligible
member may not vote on any matter affecting the administration of the 2004 Stock
Option  Plan or the grant of any option  pursuant to it, or serve on a committee
appointed to administer the 2004 Stock Option Plan. In the event that any member
of the  Board  of  Directors  is at any time not a  "disinterested  person",  as
defined in Rule 16b-3(c)(3)(i)  promulgated  pursuant to the Securities Exchange
Act of 1934, the Plan shall not be administered  by the Board of Directors,  and
may  only  by  administered  by a  Committee,  all  the  members  of  which  are
disinterested persons, as so defined.

ELIGIBILITY

      Under the 2004 Stock Option Plan, options may be granted to key employees,
officers, directors or consultants of the Company, as provided in the 2004 Stock
Option Plan.

TERMS OF OPTIONS

      The term of each Option  granted  under the Plan shall be  contained  in a
stock option agreement between the Optionee and the Company and such terms shall
be determined by the Board of Directors  consistent  with the  provisions of the
Plan, including the following:


                                       10
<PAGE>

(a) PURCHASE PRICE. The purchase price of the Common Shares subject to each ISO
shall not be less than the fair market value (as set forth in the 2004 Stock
Option Plan), or in the case of the grant of an ISO to a Principal Stockholder,
not less that 110% of fair market value of such Common Shares at the time such
Option is granted. The purchase price of the Common Shares subject to each
Non-ISO shall be determined at the time such Option is granted, but in no case
less than 85% of the fair market value of such Common Shares at the time such
Option is granted.

(b) VESTING. The dates on which each Option (or portion thereof) shall be
exercisable and the conditions precedent to such exercise, if any, shall be
fixed by the Board of Directors, in its discretion, at the time such Option is
granted.

(c) EXPIRATION. The expiration of each Option shall be fixed by the Board of
Directors, in its discretion, at the time such Option is granted; however,
unless otherwise determined by the Board of Directors at the time such Option is
granted, an Option shall be exercisable for ten(10) years after the date on
which it was granted (the "Grant Date"). Each Option shall be subject to earlier
termination as expressly provided in the 2004 Stock Option Plan or as determined
by the Board of Directors, in its discretion, at the time such Option is
granted.

(d) TRANSFERABILITY. No Option shall be transferable, except by will or the laws
of descent and distribution, and any Option may be exercised during the lifetime
of the Optionee only by him. No Option granted under the Plan shall be subject
to execution, attachment or other process.

(e) OPTION ADJUSTMENTS. The aggregate number and class of shares as to which
Options may be granted under the Plan, the number and class shares covered by
each outstanding Option and the exercise price per share thereof (but not the
total price), and all such Options, shall each be proportionately adjusted for
any increase decrease in the number of issued Common Shares resulting from
split-up spin-off or consolidation of shares or any like Capital adjustment or
the payment of any stock dividend.

Except as otherwise provided in the 2004 Stock Option Plan, any Option granted
hereunder shall terminate in the event of a merger, consolidation, acquisition
of property or stock, separation, reorganization or liquidation of the Company.
However, the Optionee shall have the right immediately prior to any such
transaction to exercise his Option in whole or in part notwithstanding any
otherwise applicable vesting requirements.

(f) TERMINATION, MODIFICATION AND AMENDMENT. The 2004 Stock Option Plan (but not
Options previously granted under the Plan) shall terminate ten (10) years from
the earlier of the date of its adoption by the Board of Directors or the date on
which the Plan is approved by the affirmative vote of the holders of a majority
of the outstanding shares of capital stock of the Company entitled to vote
thereon, and no Option shall be granted after termination of the Plan. Subject
to certain restrictions, the Plan may at any time be terminated and from time to
time be modified or amended by the affirmative vote of the holders of a majority
of the outstanding shares of the capital stock of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance with the
applicable laws of the State of Nevada.

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

CAUTIONARY STATEMENTS

      This Form 10-KSB may contain "forward-looking statements," as that term is
used in federal  securities laws, about Cereplast,  Inc.'s financial  condition,
results of operations and business. These statements include, among others:

            o     statements  concerning  the  potential  benefits  that  we may
                  experience   from  its   business   activities   and   certain
                  transactions it contemplates or has completed; and

            o     statements  of our  expectations,  beliefs,  future  plans and
                  strategies,  anticipated  developments  and other matters that
                  are  not  historical  facts.  These  statements  may  be  made
                  expressly  in this  Form  10-KSB.  You can find  many of these
                  statements by looking for words such as "believes," "expects,"
                  "anticipates,"  "estimates,"  "opines," or similar expressions
                  used in this Form 10-KSB. These forward-looking statements are
                  subject to numerous assumptions,  risks and uncertainties that
                  may cause our actual  results to be materially  different from
                  any  future  results  expressed  or  implied  by us  in  those
                  statements.  The most  important  facts that could prevent our
                  company from achieving its stated goals  include,  but are not
                  limited to, the following:


                                       11
<PAGE>

            o     volatility or decline of our stock price;

            o     potential fluctuation in quarterly results;

            o     our failure to earn revenues or profits;

            o     inadequate   capital  to  continue  or  expand  its  business,
                  inability  to  raise   additional   capital  or  financing  to
                  implement its business plans;

            o     failure to commercialize our technology or to make sales;

            o     changes in demand for our products and services;

            o     rapid and significant changes in markets;

            o     litigation  with or legal  claims and  allegations  by outside
                  parties;

            o     insufficient revenues to cover operating costs.

         There is no assurance that we will be profitable. We may not be able to
successfully  develop,  manage or market our products and  services,  attract or
retain qualified executives and technology personnel or obtain customers for our
products or services. Our products and services may become obsolete,  government
regulation may hinder our business,  additional  dilution in  outstanding  stock
ownership may be incurred due to the issuance of more shares, warrants and stock
options,  or the exercise of outstanding  warrants and stock options,  and other
risks inherent in our businesses.

         Because the statements are subject to risks and  uncertainties,  actual
results  may  differ   materially   from  those  expressed  or  implied  by  the
forward-looking  statements.  We caution you not to place undue  reliance on the
statements,  which speak only as of the date of this Form 10-KSB. The cautionary
statements  contained or referred to in this  section  should be  considered  in
connection with any subsequent written or oral  forward-looking  statements that
our company or persons  acting on our behalf may issue.  We do not undertake any
obligation  to review or  confirm  analysts'  expectations  or  estimates  or to
release  publicly any  revisions to any  forward-looking  statements  to reflect
events or  circumstances  after the date of this Form 10-KSB,  or to reflect the
occurrence of unanticipated events.

CURRENT OVERVIEW

         We were organized in September  2001. We were initially  engaged in the
sale of finished  products,  such as utensils  and  drinking  straws,  that were
manufactured  by third  parties  using our resins that serve as a substitute  to
fossil  fuel  based  plastics.  However,  we  elected  to shift our focus to the
development,  manufacture  and sale of bio-based  resins and in August 2005,  we
commenced the limited sale of resins. Prior to August 2005, primarily all of our
revenue was generated through the sale of finished products.

         Each of our finished  products  and  plastics  made with our resins are
biodegradable,  biobased  and  compostable.  The ideal  situation,  although not
required to attain the environmental impact of our products, is for our products
to be used in a composting  program  where the  products are  discarded on sites
that allow a direct return to nature.

         Although  the market for our  products is  worldwide,  we have  focused
sales  efforts  within the United  States  with a  concentration  in the western
United  States.  Our revenues have been  generated from the sales of bags (50%),
utensils and straws (30%) and cups, plates and other items (20%). As we increase
our resin based business, we have been slowly winding down our finished products
business.  We  expect to cease the sale of  finished  products  and to be solely
generating revenues based on producing resins by the middle of 2007.


                                       12
<PAGE>
         We intend to market our  resins to  distinguish  them from our  larger,
more established companies by highlighting the higher temperature resistance and
easy process ability for certain applications.

         We were  successful  in creating  this new resin that can be applied to
conventional  converting  equipment,  at a price  competitive  with  traditional
plastic.  We  started  to  test-market  commercialization  of our  biodegradable
proprietary materials through the manufacturing of disposable food service ware.
Our "plastic" can be used in all major  converting  processes  such as injection
molding, thermoforming, blow molding, extrusions, etc. We spent several years on
testing  not only the  physical  properties  of resins,  but also their  process
ability on conventional equipment.  Management believes that it is a key element
for the resin to be useable on conventional equipment, and believes that it will
be easier for traditional  converters to substitute  petroleum based resins with
our resins.

         Our  proprietary  substrate is made from annually  renewable  resources
such as corn and potato  starch.  All of our resins are biobased,  biodegradable
and  compostable,  and  finished  products  made of our resin  are  commercially
produced and sold at prices that are competitive with conventional plastic.

         Products  made of our resins have been tested for their  compostability
with specific  reference to US standards set by the American Society for Testing
and  Materials  ("ASTM")  such as ASTM  6400 D99 or ASTM  6868.  Several  of our
resins,  including our resins for injection  molding,  thermoforming,  extrusion
coating and blow molding,  have passed successfully such standards  requirements
allowing our company to introduce on the market  products,  which were the first
of their class. For instance, in 2004, we announced that our utensils sold under
the brand name NAT-UR(R) were granted the first Biodegradable Products Institute
Logo.  The ASTM  standards are  significant  in so far as they identify  plastic
products  that will  compost  satisfactorily  in a wide  array of  municipal  or
commercial composting facilities. Further, the ASTM standards allow consumers to
educate  themselves  on the  appropriate  uses  and  recovery  avenues  for  the
compostable plastic products..

         In addition,  we had several resins tested for their biobased  content.
This is an important aspect of the resins, especially now that several State and
Federal  initiatives  are pushing  energy  independence  and use of  alternative
energy  and  products.  All tests on our  products  our  performed  by  Advanced
Materials Testing Laboratory.

         Although  we  developed  the  resins  focusing  on the  properties  and
environmental  aspects of the products, in recent months the drastic increase in
petroleum based plastics is creating a momentum for bio-based products.

         Our company so far has concentrated on applications in the food service
industry  due to an existing  and  growing  demand for  "compostable"  products.
However,  we are also  exploring  the  possibility  of extending  the use of our
resins to other fields, such as agriculture, where we are currently working on a
research project with potentially large applications in agriculture. The medical
field is also of interest to our company,  and several  conversations  have been
entertained with professionals from the medical field for specific applications.

         We started to implement a shift into our business  model to manufacture
resin  directly  instead of using our resin to make and sell finished  products.
During the second quarter of 2005, we proceeded with the installation of a large
extrusion  facility  in our  plant  facility,  which we  increased  by adding an
additional  8,000 square feet of space.  In doing so, we started to decrease our
focus on the sale of finished products towards setting up a resin  manufacturing
facility.

         Management  anticipates that the shift to resin manufacturing will take
several months with added equipment  investment and management  anticipates that
the complete shift to resin  manufacturing  may last for another 18 months.  The
fist shipment of resin occurred in August 2005.  During this period we continued
to sell finished products directly and through distributorship  arrangements. We
purchased  additional  raw  material,  compared to the previous  year.  Such raw
material  was  necessary  for the  manufacturing  of resin.  The raw material is
accounted for in  inventory.  Some of the raw material was also used in research
and development activity.

         Historically,  Yanosan,  New Belgium  Brewery,  City of Portland,  Area
Distributors  and  Pollack  Paper have each  accounted  for more than 10% of our
revenues each or our prior periods.


                                       13
<PAGE>
CRITICAL ACCOUNTING POLICIES

         Our discussion  and analysis of our financial  condition and results of
operations are based upon our financial statements,  which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The  preparation  of these  financial  statements  requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues  and  expenses,   and  related  disclosure  of  contingent  assets  and
liabilities.  We monitor our estimates on an on-going basis for changes in facts
and  circumstances,  and material  changes in these estimates could occur in the
future.  Changes in  estimates  are  recorded in the period in which they become
known. We base our estimates on historical experience and other assumptions that
we believe to be reasonable under the  circumstances.  Actual results may differ
from our estimates if past experience or other assumptions do not turn out to be
substantially accurate.

         We have  identified  the  policies  below as critical  to our  business
operations and the understanding of our results of operations.

         Revenue Recognition.  Our revenue recognition polices are in compliance
with Staff  accounting  bulletin  (SAB) 104.  Sales revenue is recognized at the
date of shipment to customers  when a formal  arrangement  exists,  the price is
fixed  or  determinable,   the  delivery  is  completed,  no  other  significant
obligations  by us exist and  collectibility  is  reasonably  assured.  Payments
received  before  all of the  relevant  criteria  for  revenue  recognition  are
satisfied are recorded as unearned revenue.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE THREE
AND YEAR ENDED DECEMBER 31, 2004.

           Revenues  decreased by $73,809,  or 11.97%,  to $542,699 for the year
ended  December  31, 2005  compared to the year ended  December  31,  2004.  The
decrease  in  revenue  was a result of  setting up new  equipment  and  training
technicians.

Cost of Sales

         Cost of sales Cost of sales decreased by $81,784 or 14.16%, to $495,654
for the year ended  December  31, 2005  compared to the year ended  December 31,
2004.  As a  percentage  of sales,  cost of sales was  91.33% for the year ended
December  31, 2005  compared  to 93.66% for the year ended  December  31,  2004,
indicating a 2.33% decrease. Management attributes the decrease in cost of sales
to a decrease of products being sold. The slight  decrease in cost of sales as a
percentage of total sales in 2005 also reflects increased efficiency.

Gross Profit

           Gross profit  increased  $7,975,  or 20.41%,  to $47,045 for the year
ended  December 31, 2005 compared to the year ended December 31, 2004. The gross
profit margin also  increased  136.75% to 8.67% for the year ended  December 31,
2005  compared to 6.34% for the year ended  December 31, 2004,  primarily due to
the product mix sold.

General and Administrative Expenses

         General and  administrative  ("G&A")  expenses  expenses  increased  by
$766,387,  or  314.51%,  to  $1,010,061  for the year ended  December  31,  2005
compared to the year ended December 31, 2004.  This increase in G&A expenses was
a result of an increase in staff  salaries of  $165,976,  and  professional  and
consulting fees of $307,407.

Research and Development

         Research and development ("R&D") costs increased by $47,161, or 77.43%,
to $108,069  for the year ended  December  31,  2005  compared to the year ended
December  31,  2004.  This  increase  in R&D  costs  was a result  of  Cereplast
manufacturing its own resin in-house.


                                       14
<PAGE>
Net Loss

         Net loss increased by $832,208,  or 290.27%, to $1,118,906 for the year
ended  December 31, 2005  compared to the year ended  December  31,  2004.  This
increase in net loss was a result of  increased  G&A  expenses and R&D costs for
our growth.  Currently  operating costs exceed revenue because sales are not yet
significant. We cannot assure when or if revenue will exceed operating costs.

Liquidity and Capital Resources

         We had net cash of $506,487 at December  31, 2005 as compared to $4,705
at December 31, 2004.

         We had working capital (i.e. the difference  between current assets and
current  liabilities) of $484,062 at December 31, 2005, as compared to a working
capital deficit of $95,749 at December 31, 2004. The increase in working capital
was due to  funds  provided  by  investors  in our  stock,  and an  increase  in
purchasing  inventory  for the  growth  of our  company  during  the year  ended
December 31, 2005.

         On February 13, 2006,  we entered  into an Periodic  Equity  Investment
Agreement with Cumorah. Pursuant to the Periodic Equity Investment Agreement, we
may, at our discretion,  periodically sell to Cumorah shares of common stock for
a total  purchase  price of up to  $10,000,000.  For each share of common  stock
purchased under the Periodic Equity  Investment  Agreement,  Cumorah will pay us
90% of the  lowest  closing  bid  price  of the  common  stock  during  the five
consecutive  trading days  immediately  following the notice date.  For example,
assuming that 90% of the lowest closing bid price of our common stock during the
five consecutive trading days immediately following a notice date is $.52, if we
request an  advance  in the amount of  $250,000,  Cumorah  will be  entitled  to
534,188 shares of our common stock,  which is calculated by dividing $250,000 by
$.468.

         Cumorah is restricted  from owing in excess of 4.9% of our  outstanding
common stock. In the event that Cumorah is unable to sell shares of common stock
that  it  acquires  under  the  Periodic  Equity  Investment  Agreement  and its
ownership equals 4.9% of the our  outstanding,  then we will not be able to draw
down money under the  Standby  Distribution  Agreement.  Cumorah  also  received
5,000,000  shares of our common  stock upon  execution  of the  Periodic  Equity
Investment  Agreement.  We are registering in this offering 20,000,000 shares of
common stock to be issued under the Periodic Equity Investment Agreement.

         During the year ended December 31, 2005, we used $1,171,998 of cash for
operating activities, as compared to $103,491 during the year ended December 31,
2004.  The increase in the use of cash for operating  activities was a result of
hiring  staff,  legal fees incurred to go public,  and research and  development
costs incurred to produce the resin in-house.

         Cash used in investing activities to purchase equipment during the year
ended  December 31, 2005 was $113,627  compared to $2,170  during the year ended
December 31, 2004.

         Cash  provided by  financing  activities  relating  to the  issuance of
shares of common stock during the year ended  December 31, 2005 was  $1,583,423,
as compared to $0 during the year ended  December  31,  2004.  In  addition,  we
received  $200,000 and $50,000 in funds for the operation of our company,  at an
interest  rate  of  9%,  due  and  payable  in  December  2005,  and  June  2006
respectively.  The note payable for $200,000 due in December  2005 was converted
into common stock.

         We will continue to market our products through sales leads, referrals,
and  marketing to increase its customer  base,  and will raise  further  capital
through the issuance of common stock.


                                       15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by Item 7 appears at Page F-1, which appears
after the signature page to this report.


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

         On or about December 22, 2005, we engaged HJ Associates & Consultants,
LLP, Certified Public Accountants ("New Accountant") to audit and review our
financial statements for the fiscal year ending December 31, 2005. The New
Accountant has been engaged for general audit and review services and not
because of any particular transaction or accounting principle, or because of any
disagreement with our former accountant, Rose, Snyder & Jacobs, a corporation of
certified public accountants (the "Former Accountant").

      The Former  Accountant  was  dismissed  effective  December 22, 2005.  The
Former  Accountant's  reports on our  financial  statements  during its past two
fiscal years did not contain an adverse  opinion or disclaimer  of opinion,  nor
was it modified as to uncertainty,  audit scope or accounting principles, except
for the qualification  reflected in its going concern  disclosure  regarding our
company  contained  in its audit  report for the fiscal year ended  December 31,
2004,  included with the Company's Form SB-2  registration  statement filed with
the Securities  and Exchange  Commission on July 5, 2005. The decision to change
accountants was  recommended and approved by our Board of Directors.  During the
fiscal years ended  December 31, 2003 and December 31, 2004 and through the date
hereof,  we did not have any  disagreements  with the Former  Accountant  on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure  which,  if not resolved to the Former  Accountant's
satisfaction,  would have caused it to make  reference to the subject  matter of
the disagreement in connection with its report.

      The New  Accountant  was engaged  effective  December  22,  2005.  The New
Accountant was engaged for general audit and review  services and not because of
any  particular   transaction  or  accounting  principle,   or  because  of  any
disagreement  with the Former  Accountant.  A letter from the Former  Accountant
addressed to the Securities and Exchange Commission was requested by the Company
and was filed as an exhibit to a Form 8-K Current Report.

ITEM 8A. CONTROLS AND PROCEDURES

      As of the end of the  period  covered  by this  report,  we  conducted  an
evaluation,  under  the  supervision  and with the  participation  of our  chief
executive officer and principal financial officer of our disclosure controls and
procedures  (as defined in Rule  13a-15(e)  and Rule  15d-15(e)  of the Exchange
Act).  Based upon this  evaluation,  our chief  executive  officer and principal
financial  officer  concluded  that our  disclosure  controls and procedures are
effective  to ensure  that  information  required to be  disclosed  by us in the
reports that we file or submit  under the  Exchange Act is recorded,  processed,
summarized and reported,  within the time periods  specified in the Commission's
rules  and  forms.  There was no change  in our  internal  controls  or in other
factors that could affect  these  controls  during our last fiscal year that has
materially affected,  or is reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 8B. OTHER INFORMATION

         None.


                                       16
<PAGE>
                                    PART III

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

         Our directors and executive officers are as follows:

NAME AND ADDRESS          AGE        POSITION
----------------          ---        -------------------------------------

Frederic Scheer           51         President, CEO and a Director

Raylan Jensen             65         Director

Brian Altounian           42         Director

William Kelly             58         Senior Vice President - Technology

Robert L. Dobbs           38         Vice President -Sales

Russell Wegner            44         Vice President - Marketing and
                                     Regional Planning

FREDERIC  SCHEER,  our  President,  CEO and a director,  became  involved in the
biodegradable plastics industry in 1994 when, serving as a financial consultant,
he organized  the buyout of Novamont,  SpA,  then a division of  Montedison,  an
Italian  resin  manufacturer  and research  company.  Subsequently,  Mr.  Scheer
secured the exclusive  distribution rights in North America for Mater-Bi(TM),  a
100%  biodegradable  resin  patented  and  produced  by  Novamont,  and  started
distribution of Mater-Bi in North America.  This platform  allowed Mr. Scheer to
access  the  emerging  industry  at that  time.  Mr.  Scheer  then  created  the
Biodegradable   Products  Institute  (BPI).  Prior  to  his  engagement  in  the
biodegradable  industry in 1994,  Mr.  Scheer worked at ING and Credit Suisse in
Europe.  Mr.  Scheer  holds a Doctor of Laws  from the  University  of Paris,  a
Masters  Degree in  Finance  and a Masters  Degree in  Political  Sciences  from
Institut d'Etudes Politiques,  Paris, France. Mr. Scheer, a US citizen is fluent
in French, Spanish, Italian and English.

RAYLAN  JENSEN,  director,  has served since June 1994 as the  President of Sunn
Classic  Pictures,  a wholly owned  subsidiary of Sunn Classic  Pictures,  Inc.,
where he is engaged in the financing,  business planning and product acquisition
in connection  with film  distribution.  From 1990 to 1996, Mr. Jensen served as
the President and Chief Operating Officer of Cofitras Entertainment, a video and
motion pictures company.

BRIAN  ALTOUNIAN,  director,  has  served  since June 2003 as the  Chairman  and
Interim CEO of XsunX, Inc. (OTCBB:  XSNX) which is developing a solar technology
that allows glass windows to produce electricity from the power of the sun. From
January 2000 to June 2003, Mr. Altounian served as the Executive Vice President,
CFO  and  COO  of  Main  Course  Technologies/Plyent,  technology  startup.  Mr.
Altounian  received a BA in Psychology  from the  University of California - Los
Angeles and an MBA from Pepperdine University.

WILLIAM KELLY,  Senior Vice President of Technology,  has worked as a specialist
in  polymer  product  development  for the  last 26  years  in which he has been
involved in the development of thermoplastic  materials.  From 1999 to 2002, Mr.
Kelly served as the Technical Service and Development  manager for Hycail BV and
from 1995 to 1998 as the Technical  Service Manager for Chronopol Inc. Mr. Kelly
graduated in 1976 from SUNY-Albany with a BS in Chemistry.

ROBERT  DOBBS,  Vice  President - Sales,  has over 12 years of experience in the
restaurant industry and casual dining in packaging  development.  Among his past
experience,  Mr. Dobbs worked at Perseco in Chicago as Product manager from 1996
to 1997 and worked at Yum Brands Restaurants,  the parent company for Pizza Hut,
Taco Bell,  KFC,  Long John Silvers and A&W from 1997 to 2002.  From 2002 to the
present, Mr. Dobbs managed his own package consulting and national sales account
agency. Mr. Dobbs hold a BS in Packaging from Michigan State University.


                                       17
<PAGE>

RUSSELL  WEGNER,  Vice President - Marketing and Regional  Planning,  has served
since 2003 as the Vice  President,  Marketing  and Regional  Planning in our San
Francisco office.  From 1992 to present,  Mr. Wegner has served as the President
of Work of Art  Catering,  Inc.,  a company  which he founded that is engaged in
catering  and  event  planning.  Mr.  Wegner  has a  Finance  Degree  and MBA in
Management  of  Science,  Technology,  and  Innovation  from  George  Washington
University.

      The above listed directors will serve until the next annual meeting of the
stockholders  or  until  their  death,  resignation,   retirement,  removal,  or
disqualification,  and  until  their  successors  have  been  duly  elected  and
qualified.  Vacancies in the existing  Board of Directors are filled by majority
vote of the remaining Directors.  Our officers serve at the will of the Board of
Directors. There are no agreements or understandings for any officer or director
to resign at the request of another  person and no officer or director is acting
on  behalf of or will act at the  direction  of any  other  person.  There is no
family relationship between any of our executive officers or directors.

BOARD COMMITTEES

AUDIT COMMITTEE

      The  audit  committee  of the  board of  directors  reviews  the  internal
accounting  procedures of our company and consults with and reviews the services
provided by our independent accountants. The audit committee consists of Messrs.
Jensen and Altounian,  both of whom are considered to be independent.  The audit
committee held no meetings in 2004. Mr. Altounian serves as the financial expert
on the Audit Committee.

COMPENSATION COMMITTEE

         The compensation committee of the board of directors:

            o     reviews  and  recommends  to the  board the  compensation  and
                  benefits of our executive  officers;  o administers  our stock
                  option  plans  and  employee   stock   purchase  plan;  and  o
                  establishes   and  reviews   general   policies   relating  to
                  compensation and employee benefits.

      The  compensation   committee  consists  of  Messrs  Scheer,   Jensen  and
Altounian. No interlocking relationships exist between the board of directors or
compensation  committee and the board of directors or compensation  committee of
any other company. During the past fiscal year the compensation committee had no
meetings.

DIRECTOR  COMPENSATION.   Our  directors  do  not  receive  any  cash  or  other
compensation  for their service as members of the Board of  Directors,  although
they  are  reimbursed  for  travel  and  lodging  expenses  in  connection  with
attendance at Board meetings.

CODE OF ETHICS

      We have  adopted a Code of  Ethics  and  Business  Conduct  for  Officers,
Directors  and  Employees  that applies to all of our  officers,  directors  and
employees.


ITEM 10. EXECUTIVE COMPENSATION

      The  following  table sets forth all  compensation  paid in respect of our
Chief  Executive  Officer and those  individuals  who received  compensation  in
excess of $100,000 per year (collectively,  the "Named Executive  Officers") for
our last three completed fiscal years.


                                       18
<PAGE>

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                            ANNUAL COMPENSATION                LONG TERM COMPENSATION
                                   -----------------------------------     ------------------------------

                                                                            SECURITIES          ALL OTHER
                                                                            UNDERLYING        COMPENSATION
NAME AND PRINCIPAL POSITION        YEAR       SALARY ($)     BONUS ($)     OPTIONS (#S)             ($)
---------------------------        ----       ----------     ---------     ------------       ------------

<S>                                <C>         <C>            <C>               <C>              <C>
Frederic Scheer, President         2005        $66,250        $     0           0                $     0



                                   2004        $     0        $     0           0                $     0
</TABLE>

      We did not pay to our Chief Executive Officer or any executive officer any
compensation  intended to serve as  incentive  for  performance  to occur over a
period longer than one year pursuant to a long-term  incentive plan in the years
ended December 31, 2004 and December 31, 2005.

      We do not have any defined  benefit or actuarial  plan with respect to our
Chief  Executive  Officer or any  executive  officer  under which  benefits  are
determined primarily by final compensation and years of service.

STOCK OPTION GRANTS IN LAST FISCAL YEAR

      We did not grant stock options during the year ended December 31, 2005.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR

      None of the named  executive  officers  exercised  options during the year
ended December 31, 2005.

EMPLOYMENT AGREEMENTS

      We presently do not have any employment  agreements.  We have entered into
the following agreements with our executive officers:

            o     We entered into a  Memorandum  of  Understanding  with William
                  Kelly on September 16, 2002. Mr. Kelly is an executive officer
                  of our company.  The  Memorandum of  Understanding  outlines a
                  collaboration  between Mr.  Kelly and our company  whereby Mr.
                  Kelly  has  agreed  to  provide  our  company  with  technical
                  assistance in the development of our products. The term of the
                  Memorandum  is for a period of ten years and  provides  that a
                  final, definitive agreement will be entered.

            o     On February 11, 2003, we entered into an agency agreement with
                  Work of Art  Catering,  a company owed by Russell  Wegner,  an
                  executive  officer and a shareholder of our company.  Pursuant
                  to  such  agreement,   Mr.  Wegner  agreed  to  provide  sales
                  assistance for our products in the San Francisco  area. We are
                  required  to pay  Mr.  Wegner  a  minimum  of 5% on all  sales
                  generated through Mr. Wegner.

            o     On August 22, 2003, we entered into an Agency  Agreement  with
                  Robert L. Dobbs,  an executive  officer and shareholder of our
                  company.  Pursuant  to the  Agency  Agreement,  Mr.  Dobbs has
                  agreed to represent  our company in the food service  industry
                  and will receive a commission on all sales  resulting from his
                  efforts.

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

      The  following  table  sets forth  information  regarding  the  beneficial
ownership  of our common  stock as of March 20, 2006.  The  information  in this
table provides the ownership information for:


                                       19
<PAGE>

            o     each  person  known by us to be the  beneficial  owner of more
                  than 5% of our Common Stock;

            o     each of our directors;

            o     each of our executive officers; and

            o     our executive officers and directors as a group.

      Beneficial  ownership has been determined in accordance with the rules and
regulations of the SEC and includes  voting or investment  power with respect to
the shares.  Unless  otherwise  indicated,  the persons named in the table below
have sole  voting  and  investment  power  with  respect to the number of shares
indicated as beneficially  owned by them.  Common stock  beneficially  owned and
percentage  ownership is based on  199,483,262  shares  outstanding on March 20,
2006,  and assuming the exercise of any options or warrants or conversion of any
convertible  securities held by such person, which are presently  exercisable or
will become exercisable within 60 days after March 20, 2006.

                                    NUMBER OF SHARES
NAME AND ADDRESS                   BENEFICIALLY OWNED        PERCENT OF CLASS
----------------                   ------------------        ----------------

Frederic Scheer(1)(2)                  113,585,000                 56.93%

Raylan Jensen(1)                         1,000,000                     *

Brian Altounian(1)                       1,159,000                     *

William Kelly(1)                         1,000,000                     *

Robert L. Dobbs(1)                         495,000                     *

Russell Wegner(1)                        6,158,625                  3.09%

Wings Fund, Inc. (3)                     4,081,320                  2.04%

Julie-Anne O'Rear                       11,250,000                  5.64%

All officers and directors as a        123,397,625                 61.86%
Group (6 people)

*Less than one percent

**  Address  is c/o  Cereplast,  Inc.,  3421-3433  West  El  Segundo  Boulevard,
Hawthorne, California 90250

(1)   Officer and/or director of our company.
(2)   Mr. Scheer  beneficially owns such shares jointly with his wife,  Jocelyne
      Scheer.
(3)   Karen M.  Graham is the sole  owner of Wings  Fund,  Inc.  Ms.  Graham has
      voting and dispositive control over such shares held by Wings Fund, Inc.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      During 2002 and 2003,  we issued an  aggregate  of  118,800,000  shares of
common stock to Frederic Scheer in consideration  for services in organizing our
company.


                                       20
<PAGE>

      We entered  into a  Memorandum  of  Understanding  with  William  Kelly on
September  16,  2002.  Mr. Kelly is an  executive  officer of our  company.  The
Memorandum of Understanding  outlines a collaboration  between Mr. Kelly and our
company  whereby  Mr.  Kelly has agreed to provide our  company  with  technical
assistance in the development of our products.  The Memorandum of  Understanding
does not  specifically  address the compensation to be received by Mr. Kelly for
his services to our company. Accordingly, we pay Mr. Kelly for his services on a
case by case basis.  As of August 1, 2005, Mr. Kelly has received  approximately
$71,000 in compensation from our company and has been issued 1,000,000 shares of
common stock for  services.  The term of the  Memorandum  is for a period of ten
years and provides that the Memorandum shall govern the relationship between our
company and Mr.  Kelly  until such time that a final,  definitive  agreement  is
entered.

      On February 11, 2003, we entered into an agency agreement with Work of Art
Catering,  a  company  owed  by  Russell  Wegner,  an  executive  officer  and a
shareholder  of our company.  Pursuant to such  agreement,  Mr. Wegner agreed to
provide  sales  assistance  for our products in the San  Francisco  area. We are
required to pay Mr.  Wegner a minimum of 5% on all sales  generated  through Mr.
Wegner.  To date,  Mr.  Wegner has  received  fees in the amount of $21,142  and
6,158,625 shares of common stock.

      On August 22,  2003,  we entered into an Agency  Agreement  with Robert L.
Dobbs,  an executive  officer and  shareholder  of our company.  Pursuant to the
Agency  Agreement,  Mr.  Dobbs has agreed to  represent  our company in the food
service  industry and will receive a commission on all sales  resulting from his
efforts. Mr. Dobbs received 495,000 shares of common stock for his services.

      Jocelyne  Scheer,  a  shareholder  of our company and the wife of Frederic
Scheer, the President,  CEO and a director of our company,  has extended various
loans to our company in the aggregate  amount of approximately  $340,000.  These
loans  were  consolidated  into  one loan on March 5,  2005.  These  loans  bear
interest  at 6% and will be repaid  not before  June 2006.  In the event that we
default on this loan,  we are  required to pay the loan plus all  interest and a
penalty of $1,000 per day.

ITEM 13. EXHIBITS

Exhibit
Number      Description
-------     -----------

3.1         Articles of Incorporation. (1)

3.2         Certificate  of  Amendment to the  Articles of  Incorporation  dated
            February 26, 2003 (1)

3.3         Certificate of Amendment to the Articles of Incorporation dated July
            19, 1004 (1)

3.4         Certificate  of  Amendment to the  Articles of  Incorporation  dated
            March 18, 2005 (1)

3.5         Bylaws (1)

4.1         Form of  Subscription  Agreement  used in  connection  with  private
            offering dated April 2005 (2)

4.2         Stock Option Plan(2)

4.3         Form of  Subscription  Agreement  used in  connection  with  private
            offering of 872,000 shares of common stock(2)

4.4         Periodic Equity Investment  Agreement dated February 13, 2006 by and
            between the Company and Cumorah Capital, Inc. (5)

4.5         Registration Rights Agreement dated February 13, 2006 by and between
            the Company and Cumorah Capital, Inc. (5)

10.1        Sale and Purchase  Agreement entered between the Company and Cargill
            Dow LLC(2)

10.2        Memorandum of Understanding Entered with William Kelly(2)


                                       21
<PAGE>

10.3        Agency Agreement entered with Russell Wegner(2)

10.4        Agency Agreement entered with Robert Dobbs(2)

10.5        Lease entered with El Segundo/Yukon Partners LLC (3)

10.6        Promissory  Note in the amount of $100,000 in the name of Wings Fund
            Inc. (3)

10.7        Promissory  Note in the  amount of  $50,000  in the name of  Yanosan
            Group (3)

14.1        Code of Ethics(1)

16.1        Letter from Rose, Snyder & Jacobs, a corporation of certified public
            accountants, dated January 5, 2006. (4)

31.1        Certification  of the  Chief  Executive  Officer  and the  Principal
            Accounting/Financial   Officer   pursuant  to  Section  302  of  the
            Sarbanes-Oxley Act of 2002.

32.1        Certification  of the  Chief  Executive  Officer  and the  Principal
            Accounting/Financial  Officer pursuant to 18 U.S.C. Section 1350, As
            Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

(1)   Incorporated  by reference to the Form SB-2  Registration  Statement filed
      with the Securities and Exchange Commission dated July 5, 2005

(2)   Incorporated  by reference to the Form SB-2  Registration  Statement filed
      with the Securities and Exchange Commission dated August 26, 2005

(3)   Incorporated  by reference to the Form SB-2  Registration  Statement filed
      with the Securities and Exchange Commission dated September 21, 2005

(4)   Incorporated  by reference to the Form 8-K/A Current Report filed with the
      Securities and Exchange Commission dated January 6, 2006

(5)   Incorporated  by reference to the Form SB-2  Registration  Statement filed
      with the Securities and Exchange Commission dated February 14, 2006


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      Audit Fees.  The aggregate fees billed by our auditors,  for  professional
services rendered for the audit of our annual financial statements for the years
ended  December  31,  2005  and  2004,  and for  the  reviews  of the  financial
statements  included in our Quarterly  Reports on Form 10-QSB during that fiscal
year were $54,830  and $39,060,  respectively.

      Audit Related Fees. We incurred fees to auditors of $41,830 and
$20,000, respectively, for audit related fees during the fiscal years ended
December 31, 2005 and 2004.

      Tax  Fees.   We  incurred   fees  to  auditors  of  $500  and   $500,
respectively,  for tax compliance, tax advice and tax compliance services during
the fiscal years ended December 31, 2005 and 2004.

      The Audit  Committee  has  considered  whether the  provision of non-audit
services is compatible with maintaining the principal accountant's independence.


                                       22
<PAGE>
                                   SIGNATURES


         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned on
March 29, 2006, thereunto duly authorized.

                                CEREPLAST, INC.

                                By:  /s/  Frederic Scheer
                                     -----------------------------------------
                                     Frederic Scheer
                                     Chief Executive Officer, Principal
                                     Financial/Accounting Officer and Director

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.

                                By:  /s/Frederic Scheer
                                     -----------------------------------------
                                     Frederic  Scheer,
                                     President,  Chief Executive Officer,
                                     Principal Financial/Accounting Officer
                                     and Director

                                By:  /s/Raylan Jensen
                                     -----------------------------------------
                                     Raylen Jensen, Director

                                By:  /s/Brian Altounian
                                     -----------------------------------------
                                     Brian Altounian, Director


                                       23
<PAGE>
                                 CEREPLAST, INC.
                              FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004



                                       24
<PAGE>

             Report of Independent Registered Public Accounting Firm

To the Board of Directors
Cereplast, Inc.
Hawthorne, CA

We have audited the balance  sheet of  Cereplast,  Inc. as of December 31, 2005,
and the related statement of operations,  stockholders'  equity,  and cash flows
for the year  ended  December  31,  2005.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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.   We  believe  that  our  audit  provided  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Cereplast,  Inc. as of December
31,  2005,  and the  results of its  operations  and its cash flows for the year
ended December 31, 2005, in conformity with U.S. generally  accepted  accounting
principles.


HJ Associates & Consultants, LLP
Salt Lake City, UT
March 18, 2006

                                       25
<PAGE>


             Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders
Cereplast, Inc.

We have audited the accompanying statement of operations,  shareholders' deficit
and cash flows of Cereplast,  Inc. (the  "Company")  for the year ended December
31, 2004.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the results of operations  and cash flows of Cereplast,
Inc.  for the year ended  December  31,  2004,  in  conformity  with  accounting
principles generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going  concern.  The Company has sustained  operating
losses since its inception and has negative  working capital and a shareholders'
deficit  during  the year  ended  December  31,  2004.  These  conditions  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The financial  statements do not include any adjustments  that might result from
the outcome of this uncertainty.


Rose, Snyder & Jacobs
A Corporation of Public Accountants

Encino, California
June 21, 2005

                                       26
<PAGE>

                                 CEREPLAST, INC.
                            CONDENSED BALANCE SHEETS
                                DECEMBER 31, 2005


Current Assets
   Cash                                                            $   506,487
   Accounts Receivable, Net                                             46,963
   Inventory                                                           290,105
   Employee Advances                                                     1,300
   Prepaid Expenses                                                    172,686
                                                                   -----------
                        Total Current Assets                         1,017,541
                                                                   -----------

Property and Equipment
   Property and Equipment                                              456,537
    Accumulated Depreciation and Amortization                          (83,098)
                                                                   -----------
                       Net Property and Equipment                      373,439
                                                                   -----------

Other Assets
   Intangibles, Net                                                      1,965
   Deposits                                                             22,437
                                                                   -----------
                        Total Other Assets                              24,402
                                                                   -----------

                       Total Assets                                $ 1,415,382
                                                                   ===========

                  LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
   Accounts Payable                                                $   229,402
   Other Payable                                                         6,819
   Accrued Expenses                                                    107,640
   Credit Lines                                                         67,629
   Note Payable, Customer                                               50,000
   Shareholder's Loan                                                  126,125
   Capital Leases, Current Portion                                      41,128
   Loan Payable, Current Portion                                         9,736
                                                                   -----------
                      Total Current Liabilities                        638,479
                                                                   -----------

Long-Term Liabilities
   Captial Leases                                                      125,283
   Loan Payable                                                         25,426
                                                                   -----------
                       Total Long-Term Liabilities                     150,709
                                                                   -----------

                       Total Liabilities                               789,188

Shareholders' Equity
      Preferred Stock, $0.001 par value;
      5,000,0000 authorized preferred shares
      Common Stock, $0.001 par value;
      495,000,000 authorized shares;
      183,913,262 shares issued and outstanding                        183,914
      Subscription receivable                                         (105,000)
     Additional Paid in Capital                                      2,108,611
     Accumulated Deficit S-Corporation                                (442,425)
     Accumulated Deficit                                            (1,118,906)
                                                                   -----------
                      Total Shareholders' Equity                       626,194
                                                                   -----------

                      Total Liabilities and Shareholders' Equity   $ 1,415,382
                                                                   ===========


                                       27
<PAGE>

                                 CEREPLAST, INC.
                            STATEMENTS OF OPERATIONS
                           DECEMBER 31, 2005 AND 2004


                                                           Year Ended
                                                -------------------------------
                                                December 31,     December 31,
                                                    2005             2004
                                                -------------    --------------


REVENUES                                        $     542,699    $     616,508

COST OF SALES                                         495,654          577,438
                                                -------------    -------------

             GROSS PROFIT                              47,045           39,070

OPERATING EXPENSES
  Administrative Expenses                           1,010,061          243,674
  Research and Development                            108,069           60,908
                                                -------------    -------------
                                                    1,118,130          304,582
                                                -------------    -------------

LOSS FROM OPERATIONS BEFORE OTHER EXPENSES         (1,071,085)        (265,512)

OTHER EXPENSES
  Interest                                            (47,821)         (21,186)
                                                -------------    -------------

                  NET LOSS                      $  (1,118,906)   $    (286,698)
                                                =============    =============

BASIC AND DILUTED LOSS PER SHARE                $       (0.01)   $       (0.00)
                                                =============    =============

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING        154,259,837      128,546,583
                                                =============    =============

                                       28
<PAGE>


                                CEREPLAST, INC.
                       STATEMENT OF SHAREHOLDERS' DEFICIT
                           DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                             Common stock                    Preferred stock
                                                                      ---------------------------     ----------------------------
                                                                         Shares          Amount          Shares           Amount
                                                                      -----------     -----------     -----------      -----------
<S>                                                                   <C>             <C>             <C>              <C>
Balance, December 31, 2003                                            123,172,500     $   123,173              --      $        --

Issuance of preferred stock in February 2004 for cash
(75,000 preferred shares issued at $1.00 per share)                            --              --          75,000               75

Issuance of common stock in March 2004 for services
(6,406,125 common shares issued at fair value)                          6,406,125           6,406              --               --

Issuance of common stock in December 2004 for services
(247,500 common shares issued at fair value)                              247,500             248              --               --

Net Loss for the Year Ended December 31, 2004                                  --              --              --               --
                                                                      -----------     -----------     -----------      -----------
Balance, December 31, 2004                                            129,826,125     $   129,827          75,000      $        75

Issuance of common stock in March 2005 for cash
(2,000,031 common shares issued at $0.02 per share )                    2,000,031           2,000              --               --

Issuance of common stock in March 2005 for cash
(660,000 common shares issued at $0.03 per share )                        660,000             660              --               --

Converted preferred shares to common shares                             2,475,000           2,475         (75,000)             (75)

Issuance of common stock in April 2005 for cash
(25,000,000 common shares issued at $0.02 per share)                   25,000,000          25,000              --               --

Issuance of common stock in April 2005 for services
(660,000 common shares issued at $0.02 per share)                         660,000             660              --               --

Issuance of common stock in April 2005 for services
(678,106 common shares issued at fair value)                              678,106             678              --               --

Issuance of common stock in April 2005 for cash
(415,000 common shares issued at $0.10 per share)                         415,000             415              --               --

Issuance of common stock in May 2005 for cash
(212,000 common shares issued at $0.10 per share)                         212,000             212              --               --


Issuance of common stock in June 2005 for cash
(215,000 common shares issued at $0.10 per share)                         215,000             215              --               --

Issuance of common stock in July 2005 for cash
(30,000 common shares issued at $0.10 per share)                           30,000              30              --               --

Issuance of common stock in October 2005 for cash
(3,010,000 common stock issued at $0.05 per share)                      3,010,000           3,010         147,490          150,500

Issuance of common stock in November 2005 for cash
(7,85,000 common stock issued at $0.10 per share)                       7,850,000           7,850         777,150          785,000

Issuance of common stock in December 2005 for services
(673,000 common stock issued at fair value)                               673,000             673          66,627           67,300

Issurance of common stock in December 2005 for services
(159,000 common stock issued at fair value)                               159,000             159          15,741           15,900

Issuance of common stock in December 2005 for debt
(8,000,000 common stock issued for conversion of debt)                  8,000,000           8,000         192,000          200,000

Issuance of common stock in December 2005 for director services
(1,000,0000 common stock issued for services)                           1,000,000           1,000          24,000           25,000

Common stock subscribed                                                 1,050,000           1,050         103,950               --

Net Loss for the Year Ended December 31, 2005                                  --              --              --               --
                                                                      -----------     -----------     -----------      -----------

Balance, December 31, 2005                                            183,913,262     $   183,914              --      $        --
                                                                      ===========     ===========     ===========      ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                      Additional
                                                                        Paid-in         Accumulated
                                                                        Capital           Deficit          Total
                                                                      -----------      -------------    -----------
<S>                                                                   <C>              <C>              <C>
Balance, December 31, 2003                                            $     1,827      $    (155,727)   $   (30,727)

Issuance of preferred stock in February 2004 for cash
(75,000 preferred shares issued at $1.00 per share)                        74,925                 --         75,000

Issuance of common stock in March 2004 for services
(6,406,125 common shares issued at fair value)                             58,296                 --         64,702

Issuance of common stock in December 2004 for services
(247,500 common shares issued at fair value)                                2,252                 --          2,500

Net Loss for the Year Ended December 31, 2004                                  --           (286,698)      (286,698)
                                                                      -----------      -------------    -----------
Balance, December 31, 2004                                            $   137,300      $    (442,425)   $  (175,223)

Issuance of common stock in March 2005 for cash
(2,000,031 common shares issued at $0.02 per share )                       37,975                 --         39,975

Issuance of common stock in March 2005 for cash
(660,000 common shares issued at $0.03 per share )                         20,588                 --         21,248

Converted preferred shares to common shares                                (2,400)                --             --

Issuance of common stock in April 2005 for cash
(25,000,000 common shares issued at $0.02 per share)                      475,000                 --        500,000

Issuance of common stock in April 2005 for services
(660,000 common shares issued at $0.02 per share)                          12,540                 --         13,200

Issuance of common stock in April 2005 for services
(678,106 common shares issued at fair value)                               14,322                 --         15,000

Issuance of common stock in April 2005 for cash
(415,000 common shares issued at $0.10 per share)                          41,085                 --         41,500

Issuance of common stock in May 2005 for cash
(212,000 common shares issued at $0.10 per share)                          20,988                 --         21,200

Issuance of common stock in June 2005 for cash
(215,000 common shares issued at $0.10 per share)                          21,285                 --         21,500

Issuance of common stock in July 2005 for cash
(30,000 common shares issued at $0.10 per share)                            2,970                 --          3,000

Issuance of common stock in October 2005 for cash
(3,010,000 common stock issued at $0.05 per share)                        147,490                           150,500

Issuance of common stock in November 2005 for cash
(7,85,000 common stock issued at $0.10 per share)                         777,150                           785,000

Issuance of common stock in December 2005 for services
(673,000 common stock issued at fair value)                                66,627                            67,300

Issurance of common stock in December 2005 for services
(159,000 common stock issued at fair value)                                15,741                            15,900

Issuance of common stock in December 2005 for debt
(8,000,000 common stock issued for conversion of debt)                    192,000                           200,000

Issuance of common stock in December 2005 for director services
(1,000,0000 common stock issued for services)                              24,000                            25,000

Common stock subscribed                                                   103,950                                --

Net Loss for the Year Ended December 31, 2005                                  --         (1,118,906)    (1,118,906)
                                                                      -----------      -------------    -----------
Balance, December 31, 2005                                            $ 2,108,611      $  (1,118,906)   $   626,194
                                                                      -----------      -------------    -----------
</TABLE>


                                       29
<PAGE>

                                 CEREPLAST, INC.
                             STATEMENT OF CASH FLOWS
                           DECEMBER 31, 2005 AND 2004


<TABLE>
<CAPTION>
                                                                    Year End
                                                          ---------------------------
                                                          December 31,   December 31,
                                                              2005           2004
                                                          ------------   ------------
<S>                                                       <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net loss                                           $(1,118,906)   $  (286,698)
       Adjustment to reconcile net loss to net cash
         used in operating activities
       Depreciation and amortization                           48,731         24,347
       Common stock issued for services                       136,400         67,202
           (Increase) Decrease in:
          Accounts Receivable                                 (11,381)       (15,492)
          Inventory                                           (95,932)        21,613
          Employee advances                                    (1,300)            --
          Deposits                                            (20,753)        (1,684)
          Prepaid Expenses                                   (172,686)            --
          Increase (Decrease) in:
           Accounts Payable                                     8,960         89,822
           Other Payables                                       6,819             --
           Accrued Expenses                                    48,050         (2,601)
                                                          -----------    -----------
              NET CASH USED IN OPERATING ACTIVITIES        (1,171,998)      (103,491)
                                                          -----------    -----------

NET CASH USED IN INVESTING ACTIVITIES:
    Purchase of property and equipment, and intangibles      (113,627)        (2,170)
                                                          -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Advances from shareholders                                 37,860         38,749
    Payments on advances from shareholders                    (69,904)      (133,313)
    Advances on  Credit Lines                                  35,417         22,087
    Payments on Capital Leases                                (40,787)        (4,211)
    Payments on Term Loan Payable                              (9,102)        (5,736)
    Funds received from Term Loan Payable                          --         50,000
    Proceeds from Notes Payable                               250,000             --
    Proceeds from issuance of preferred stock                      --         75,000
    Proceeds from issuance of common stock                  1,583,923             --
                                                          -----------    -----------
              NET CASH PROVIDED BY FINANCING ACTIVITIES     1,787,407         42,576
                                                          -----------    -----------

                 NET INCREASE (DECREASE) IN CASH              501,782        (63,085)

CASH, BEGINNING OF PERIOD                                       4,705         67,790
                                                          -----------    -----------
CASH, END OF PERIOD                                       $   506,487    $     4,705
                                                          ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Interest paid                                          $    15,981    $     8,574
                                                          ===========    ===========
   Taxes paid                                             $        --    $        --
                                                          ===========    ===========
</TABLE>


SUPPLEMENTAL  SCHEDULE OF NON-CASH  TRANSACTIONS  During the year ended December
31, 2005, the Company issued  3,170,106 shares valued at $136,400 fair value for
services;  the Company  purchased  $183,700 of molds and equipment under capital
leases;  In addition the Company  issued  8,000,000  shares in  conversion  of a
promissory note valued at $200,000. During the year ended December 31, 2004, the
Company issued 6,653,625 shares valued at $67,202 for services;  In addition the
Company purchased $27,709 of molds and equipment under capital leases.

                                       30
<PAGE>

                                 CEREPLAST, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


1.    ORGANIZATION AND LINE OF BUSINESS

      Organization

      Cereplast, Inc. (the "Company") was incorporated in the state of Nevada on
      September  29, 2001.  The Company,  based in Hawthorne  California,  began
      commercial operations January 1, 2002 to provide products and services for
      biodegradable  packaging and organic waste systems in the food service and
      beverage  industries.  In 2005,  the  Company  started  to  re-direct  its
      operations  toward resin  manufacturing  and expanded  its  operations  in
      renting an industrial  facility with a warehouse  space. In addition,  the
      company enjoyed the use a warehouse space in Mexico.

      Line of Business

      The Company has developed a breakthrough technology to produce proprietary
      bio-based   resins,   which  are  used  as  substitutes  for  conventional
      petroleum-based  plastics  in a variety  of  applications,  including  the
      manufacture  of food service  items such as utensils,  plates,  cups,  and
      straws as well as  agricultural  applications.  The company was validating
      its technology in selling finished products but since mid-2005 the Company
      started its transition to become only a resin manufacturer.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      This summary of significant  accounting policies of Cereplast is presented
      to  assist  in  understanding  the  Company's  financial  statements.  The
      financial  statements  and  notes  are  representations  of the  Company's
      management,  which is  responsible  for their  integrity and  objectivity.
      These  accounting  policies  conform to  accounting  principles  generally
      accepted  in the  United  States of  America  and have  been  consistently
      applied in the preparation of the financial statements.

      Revenue Recognition

      The Company  recognizes  revenue when services are  performed,  and at the
      time of shipment of products,  provided  that  evidence of an  arrangement
      exists, title and risk of loss have passed to the customer, fees are fixed
      or  determinable,  and collection of the related  receivable is reasonably
      assured.

      Use of Estimates

      The  preparation  of financial  statements  in conformity  with  generally
      accepted  accounting  principles requires management to make estimates and
      assumptions that affect the amounts reported in the accompanying financial
      statements.  Significant  estimates  made  in  preparing  these  financial
      statements include the estimate of useful lives of property and equipment,
      the deferred tax valuation allowance, and the fair value of stock options.
      Actual results could differ from those estimates.

      Cash and Cash Equivalent

      The  Company  considers  all highly  liquid  investments  with an original
      maturity of three months or less to be cash equivalents.

      Accounts Receivable

      The Company  maintains an allowance  for doubtful  accounts for  estimated
      losses that may arise if any of its  customers are unable to make required
      payments.  Management  performs a review of the receivables  past due from
      the customers on a monthly basis and reserves against  uncollectible items
      for each  customer  after all  reasonable  means of  collection  have been
      exhausted,  and the  potential  for  recovery is  considered  remote.  The
      allowance for doubtful accounts was $3,002 as of December 31, 2005.

                                       31
<PAGE>

                                 CEREPLAST, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Inventories

      Inventories are stated at the lower of cost (first-in, first-out basis) or
      market,   and   consists   of   finished   goods,   raw   materials,   and
      work-in-process. As of December 31, 2005, the inventories are as follows:

                     Finished Goods                $162,799
                     Raw Materials                   97,626
                     Work-In-Process                 29,680
                                                   --------
                                                   $290,105
                                                   ========


      Property and Equipment

      Property and equipment are stated at cost, and depreciation is computed on
      the  straight-line  method over the estimated  useful lives of the assets.
      The  estimated  useful lives of the assets are between 5-7 years.  Repairs
      and maintenance expenditures are charged to expense as incurred.  Property
      and Equipment consist of:

                                                                          2005
                                                                        --------
      Molds                                                             $126,000
      Dryers                                                              11,800
      Equipment                                                          290,468
      Furniture & Fixtures                                                 5,456
      Computer Equipment                                                  22,813
                                                                        --------
                                                                         456,537
      Less Accumulated Depreciation                                       83,098
                                                                        --------
      Net Property and Equipment                                        $373,439
                                                                        ========

      Fair Value of Financial Instruments

      SFAS No. 107,  "Disclosures  About Fair Value of  Financial  Instruments",
      requires  disclosure  of  the  fair  value  information,  whether  or  not
      recognized in the balance sheet,  where it is practicable to estimate that
      value.  The  amounts  reported  for cash,  accounts  receivable,  accounts
      payable, accrued interest and other expenses, approximate their fair value
      because of their short maturities.

      Advertising

      The Company expenses advertising costs as incurred.  Advertising costs for
      the year  ended  December  31,  2005  and 2004  were  $6,440  and  $6,937,
      respectively.

      Research and Development Costs

      Research and development  costs are charged to expense as incurred.  These
      cost consist primarily to produce resin and testing of product.  The costs
      for the years ended  December 31, 2005 and 2004 were  $108,069 and $60,908
      respectively.

      Income Taxes

      As of January 2005 the status of the corporation changed from a Subchapter
      S Corporation to a C Corporation. The Company uses the liability method of
      accounting  for income  taxes.  Deferred  tax assets and  liabilities  are
      recognized  for the  future tax  consequences  attributable  to  financial
      statements  carrying  amounts of existing assets and liabilities and their
      respective tax bases and operating loss and tax credit carryforwards.  The
      measurement of deferred tax assets and  liabilities is based on provisions
      of applicable tax law. The  measurement of deferred tax assets is reduced,
      if necessary, by a valuation allowance based on the amount of tax benefits
      that, based on available evidence, is not expected to be realized.

                                       32
<PAGE>

                                 CEREPLAST, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Common Shares

      All common  shares  amounts  give effect to a  thirty-three  for one stock
      split that occurred in the first quarter of 2005.

      Loss per Share Calculations

      The Company adopted Statement of Financial  Standards ("SFAS") No. 128 for
      the calculation of "Loss per Share". SFAS No. 128 dictates the calculation
      of basic earnings per share and diluted earnings per share. Basic earnings
      per share is computed by dividing income available to common  shareholders
      by  the  weighted-average  number  of  common  shares  available.  Diluted
      earnings per share is computed  similar to basic earnings per share except
      that the  denominator  is  increased  to include the number of  additional
      common shares that would have been  outstanding  if the  potential  common
      shares had been issued and if the additional  common shares were dilutive.
      The  Company's  diluted  loss per share is the same as the basic  loss per
      share for the year ended  December  31, 2005 and 2004 as the  inclusion of
      any  potential  shares would have had an  anti-dilutive  effect due to the
      Company generating a loss.

      Recently Issued Accounting Pronouncements

      In  November  2004,  the FASB  issued SFAS No. 151  "Inventory  Costs,  an
      amendment of ARB No. 43, Chapter 4. The  amendments  made by Statement 151
      clarify that abnormal amounts of idle facility expense,  freight, handling
      costs,   and  wasted   materials   (spoilage)   should  be  recognized  as
      current-period  charges  and require the  allocation  of fixed  production
      overheads  to  inventory  based on the normal  capacity of the  production
      facilities.  The guidance is effective for inventory costs incurred during
      fiscal  years  beginning  after  June 15,  2005.  Earlier  application  is
      permitted for inventory costs incurred during fiscal years beginning after
      November 23, 2004. The Company has evaluated the impact of the adoption of
      SFAS 151,  and does not  believe  the impact  will be  significant  to the
      Company's overall results of operations or financial position.

      In  December  2004,  the FASB issued  Statement  of  Financial  Accounting
      Standards No. 123R,  Share-based  Payment.  SFAS 123R revises SFAS 123 and
      supersedes  APB 25.  SFAS  123R  will be  effective  for the  year  ending
      December  31,  2006,  and  applies  to  transactions  in which  an  entity
      exchanges its equity instruments for goods or services and also applies to
      liabilities an entity may incur for goods or services that are to follow a
      fair  value of those  equity  instruments.  Under  SFAS  123R,  we will be
      required to follow a fair value  approach using an  option-pricing  model,
      such as the  Black-Scholes  option valuation model, at the date of a stock
      option grant.  The deferred  compensation  calculated under the fair value
      method would then be amortized over the  respective  vesting period of the
      stock option. The adoption of SFAS 123R is not expected to have a material
      impact on our results of operations.

      In December 2004, the Financial Accounting Standards Board issued two FASB
      Staff  Positions  - FSP  FAS  109-1,  Application  of FASB  Statement  109
      "Accounting for Income Taxes" to the Tax Deduction on Qualified Production
      Activities Provided by the American Jobs Creation Act of 2004, and FSP FAS
      109-2  Accounting  and  Disclosure   Guidance  for  the  Foreign  Earnings
      Repatriation  Provision  within the  American  Jobs  Creation Act of 2004.
      Neither of these  affected the Company as it does not  participate  in the
      related activities.

      In March  2005,  the SEC  released  Staff  Accounting  Bulletin  No.  107,
      "Share-Based  Payment" ("SAB 107"), which provides  interpretive  guidance
      related to the  interaction  between SFAS 123(R) and certain SEC rules and
      regulations. It also provides the SEC staff's views regarding valuation of
      share-based  payment  arrangements.  In April  2005,  the SEC  amended the
      compliance  dates for SFAS 123(R),  to allow  companies  to implement  the
      standard at the  beginning of their next fiscal year,  instead of the next
      reporting  period  beginning after June 15, 2005.  Management is currently
      evaluating the impact SAB 107 will have on our financial statements.

                                       33
<PAGE>

                                 CEREPLAST, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


      Recently Issued Accounting Pronouncements (continued)

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
      Conditional  Asset  Retirement  Obligations"  ("FIN 47").  FIN 47 provides
      guidance  relating to the  identification  of and financial  reporting for
      legal   obligations  to  perform  an  asset   retirement   activity.   The
      Interpretation requires recognition of a liability for the fair value of a
      conditional  asset retirement  obligation when incurred if the liability's
      fair value can be reasonably estimated. FIN 47 also defines when an entity
      would have sufficient information to reasonably estimate the fair value of
      an asset retirement  obligation.  The provision is effective no later than
      the end of fiscal years ending after  December 15, 2005.  The Company will
      adopt FIN 47 beginning  the first quarter of fiscal year 2006 and does not
      believe the adoption will have a material impact on its financial position
      or results of operations or cash flows.

      In May 2005, the FASB issued FASB Statement No. 154,  "Accounting  Changes
      and Error  Corrections."  This new  standard  replaces APB Opinion No. 20,
      "Accounting  Changes,  and FASB  Statement  No.  3,  Reporting  Accounting
      Changes in Interim Financial  Statements," and represents  another step in
      the FASB's goal to converge its  standards  with those issued by the IASB.
      Among other  changes,  Statement 154 requires  that a voluntary  change in
      accounting  principle  be applied  retrospectively  with all prior  period
      financial statements presented on the new accounting principle,  unless it
      is  impracticable  to do so. Statement 154 also provides that (1) a change
      in method of depreciating or amortizing a long-lived  non-financial  asset
      be accounted for as a change in estimate (prospectively) that was effected
      by a change  in  accounting  principle,  and (2)  correction  of errors in
      previously  issued financial  statements should be termed a "restatement."
      The new standard is effective  for  accounting  changes and  correction of
      errors made in fiscal years  beginning  after  December  15,  2005.  Early
      adoption  of  this  standard  is  permitted  for  accounting  changes  and
      correction of errors made in fiscal years  beginning  after June 1, 2005 .
      The Company has  evaluated the impact of the adoption of Statement 154 and
      does not believe the impact will be significant  to the Company's  overall
      results of operations or financial position.

3.    CAPITAL STOCK

      During the years  ended  December  31,  2005 and 2004 the  Company  issued
      28,532,031  shares of common stock for cash of $648,423;  1,338,106 shares
      were issued for services with a fair value of 28,200;  2,475,000 shares of
      common stock issued for conversion of 75,000 preferred  shares;  Through a
      private  placement,  which was made in  reliance  upon an  exemption  from
      registration under rule 506 of Regulation D promulgated under Section 4(2)
      of the  Securities  Act of 1933,  10,820,000  restricted  shares of common
      stock were issued for cash of $935,500;  In addition 1,832,000  restricted
      shares of common  stock  were  issued  for  services  with a fair value of
      $108,200;  8,000,000  restricted  shares of common  stock were  issued for
      conversion of debt for $200,000;  1,050,000  restricted  subscribed shares
      for  cash of  $105,000;  75,000  shares  of  preferred  stock  for cash of
      $75,000;  and  201,625  shares of  common  stock  for  services  valued at
      $67,202;  At December  31,  2005,  2,085,000  shares of common  stock were
      transferred from the stockholder to various Transferees,  and certificates
      were reissued with restrictive transfer legend to the Transferees pursuant
      to Section  4(1) of the Act ;  subsequent  to the year ended  December 31,
      2004, the Company  increased its  authorized  shares to  500,000,000,  and
      effected a thirty-three for one stock split.

4.    REVOLVING LINES OF CREDIT

      The Company has a revolving line of credit of $25,000.The borrowings under
      the credit  line as of  December  31,  2005 was  $24,125.  The credit line
      expires on  November  7, 2006.  The rate of  interest is tied to the prime
      index. As of December 31, 2005 and 2004,  interest  expense was $2,733 and
      $2,153 respectively.

      The  Company  has  another  revolving  line  of  credit  of  $20,000.  The
      borrowings under this credit line as of December 31, 2005was $20,095.  The
      interest rate is prime plus 8.75%, with an annual fee of $150 and a credit
      protection fee of $0.35 per $100 average daily balance. As of December 31,
      2005 and 2004, interest expense was $2,907 and $0 respectively.

                                       34
<PAGE>

                                 CEREPLAST, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


4.    REVOLVING LINES OF CREDIT (Continued)

      Also,  the Company had a cash  reserve line of credit for $1,000 tied to a
      credit  card with an interest  rate of 16.80%.  The balance as of December
      31, 2005 and 2004 were $0 and $882.

      The Company has  another  revolving  credit line in the amount of $25,000.
      The borrowings under this credit line as of December 31, 2005 was $23,409.
      The rate of interest is prime plus 5.75%.  The monthly payments vary based
      on the amount  outstanding on the line of credit.  As of December 31, 2005
      and 2004, interest expense was $2,451 and $0 respectively.

5.    RENTAL LEASE

      In January 2005, the Company  entered into a sublease and lease  agreement
      for office,  industrial  and warehouse  space.  The sublease  commenced in
      February 2005 with monthly rents of $3,200, and expires in July 2006. Upon
      expiration of the sublease,  the Company will lease the same space,  which
      will commence in August 2006 with monthly rents of $4,550,  and expires in
      January 2010.

      In May 2005,  the Company  entered into a lease  agreement  for office and
      warehouse  space.  The lease  commenced June 1, 2005 with monthly rents of
      $5,920, and expires in January 2010.

6.    LOAN PAYABLE

      During the year ended December 31, 2004, the Company  obtained a term loan
      payable in the amount of  $50,000,  which  bears  interest  at the rate of
      6.75% per annum,  and matures in 2009. The monthly  payments are $984 with
      principal  and  interest.  The future  payments on the loan  payable is as
      follows:

                  Years ending
                  December 31,
      -------------------------------------
                      2006                                     9,736
                      2007                                    10,413
                      2008                                    11,139
                      2009                                     3,874
                                                            --------
                                                              35,162
      Less Current Portion of Loan Payable                     9,736
                                                            --------
      Long Term Portion of Loan Payable                     $ 25,426
                                                            ========

                                       35
<PAGE>

                                 CEREPLAST, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

7.    DEFERRED TAX BENEFIT

      At  December  31,  2005,  the  Company  has  available  federal  and state
      cumulative net operating loss  carryforwards of approximately  $1,118,906,
      which expires at dates that have not been determined.

      The  difference  between the Company's  effective  income tax rate and the
      statutory  federal  rate for the years  ended  December  31, 2005 and 2004
      relates  primarily  to  losses  incurred  for  which  no tax  benefit  was
      recognized, due to the uncertainty of realization. The valuation allowance
      was $163,000 and $0 at December  31, 2005 and 2004,  respectively.  Due to
      the change in  ownership  provisions  of the Tax  Reform Act of 1986,  net
      operating loss carryforwards for Federal income tax reporting purposes are
      subject to significant  annual  limitations.  Should a change in ownership
      occur, net operating loss carryforwards may be limited as to use in future
      years.

      A reconciliation of income tax expense that would result from applying the
      U.S.  Federal  and State rate of 40% to  pre-tax  income  from  continuing
      operations  for the years ended  December 31, 2005 and 2004,  with federal
      income tax expense presented in the financial statements is as follows.

                                                             2005         2004
                                                          ---------    ---------
      Income tax benefit computed at U.S. Federal
        statutory rate (34%)                              $(380,428)   $      --
      State income taxes, net of benefit federal taxes      (67,134)
      Meals & Entertainment                                   2,929           --
      Accrued Compensation                                    7,000           --
      Less Valuation Allowance                              437,633           --
                                                          ---------    ---------
      Income tax expense                                  $      --    $      --
                                                          =========    =========


      The deferred income tax benefit at December 31, 2005 and 2004 reflects the
      impact  of  temporary  differences  between  the  amounts  of  assets  and
      liabilities  recorded for financial reporting purposes and such amounts as
      measured  in  accordance  with tax  laws.  The  items,  which  comprise  a
      significant   portion  of  deferred   tax  assets  and   liabilities   are
      approximately as follows:

                                                            2005          2004
                                                         ---------     ---------
      Deferred tax assets:
            NOL Carryover                                $ 437,633     $      --
      Deferred tax liabilities:                                 --            --
      Less valuation allowance                            (437,633)           --
                                                         ---------     ---------
      Deferred income tax asset                          $      --     $      --
                                                         =========     =========


      The change in the valuation  allowance  during the year ended December 31,
      2005 is $438,000.

                                       36
<PAGE>

                                 CEREPLAST, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

8.    CAPTIAL LEASE OBLIGATIONS

      At December 31, 2005, capital lease obligations are as follows:

<TABLE>
<S>                                                                                            <C>
Capital lease at 20% interest, with monthly principal and interest payments of
  $674 due December 2008, secured by mold equipment.
  The purchase option at the end of the lease  is $1.00.                                       $ 18,394

Capital lease at 32% interest, with monthly principal and interest
  payments of $47 due February 2008, secured by a computer. The
  purchase option at the end of the lease is $1.00.                                                 863

Capital lease at 32% interest, with monthly principal and interest payments of
  $18 due February 2008, secured by computer equipment.
  The purchase option at the end of the lease is $1.00.                                             325

Capital lease at 15% interest, with monthly principal and interest payments of
  $513 due January 2010, secured by mold equipment.
  The purchase option at the end of the lease is $1.00                                           18,756

Capital lease at 22% interest, with monthly principal and interest payments of
  $820 due January 2007, secured by mold equipment.
  The purchase option at the end of the lease is $1.00                                           16,767

Capital lease at 12% interest, with monthly principal and interest payments of
  $214 due January 2007, secured by equipment.
  The purchase option at the end of the lease is $1.00                                            4,567

Capital lease at 22% interest, with monthly principal and interest payments of
  $214 due January 2007, secured by equipment.
  The purchase option at the end of the lease is $1.00                                            3,162

Capital lease at 13% interest, with monthly principal and interest payments of
  $1,128 due January 2009, secured by equipment.
  The purchase option at the end of the lease is $1.00                                           36,269

Capital lease at 29% interest, with monthly principal and interest payments of
  $1,369 due January 2010, secured by equipment.
  The purchase option at the end of the lease is $1.00                                           40,860

Capital lease at 21% interest, with monthly principal and interest payments of
  $1,028 due January 2008, secured by equipment.
  The purchase option at the end of the lease is $1.00                                           26,448
                                                                                              ---------
                                                                                              $ 166,411
Less current portion                                                                             41,128
                                                                                              ---------
                                                                                              $ 125,283
                                                                                              =========
</TABLE>

                                       37
<PAGE>

                                 CEREPLAST, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


8.    CAPTIAL LEASE OBLIGATIONS (Continued)

      Future payments on capital lease obligations are as follows:

                   Years ending
                   December 31,
      -------------------------------------
                       2006                                   72,345
                       2007                                   71,520
                       2008                                   57,588
                       2009                                   27,098
                       2010                                    8,728
                                                           ---------
                  Total Payments                             237,279
               Less Interest portion                          70,868
                                                           ---------
         Present value of future payments                  $ 166,411
                                                           =========

      Leased assets under capital obligations, comprised of warehouse equipment,
      and computer equipment is as follows at December 31, 2005:

      Assets under capitalized leases                      $ 211,409
      Accumulated amortization                                28,680
                                                           ---------
                                                           $ 182,729
                                                           =========


      The assets have been recorded under property and equipment,  and are being
      amortized over the estimated  lives of the assets leased.  Amortization of
      assets leased is included in depreciation and amortization expense.

9.    RELATED PARTY

      At  December  31, 2005 and 2004,  the loans in the amount of $126,125  and
      $158,170,  respectively,  are from  the  shareholders,  and bear  interest
      payable at the rate of 6% per year. The principal is due in June 2006.

      During the nine months  ended  September  30, 2005,  one of the  Company's
      customers  loaned  $50,000 to the Company at the rate of 9% per year.  The
      principal and interest is due and payable in June 2006.

10.   SUBSEQUENT EVENTS

      On  or  about  January  4,  2006,  the  majority  shareholder  transferred
      2,130,000  shares of common  stock to  various  Transferees  and  reissued
      certificates with restrictive  transfer legend to the Transferees pursuant
      to Section 4(1) of the Act.

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<PAGE>

                                 CEREPLAST, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

      On or about January 15, 2006, the Company commenced a private placement of
      up to eight million  (8,000,000) shares of its common stock (the "Shares")
      at a price of twelve  and half  cents  ($0.125)  per  Share.  The  private
      placement,  which was made in reliance upon an exemption from registration
      under Rule 506 of  Regulation  D  promulgated  under  Section  4(2) of the
      Securities  Act of 1933,  as  amended,  was  terminated  by the Company on
      February 15, 2006.  The Company raised  approximately  $1,346,275 in gross
      proceeds from this offering.

      In February  2006,  the Company  entered  into a new lease  agreement  for
      additional  industrial and warehouse space,  with monthly rents of $2,250,
      and expires in January 2010.

      February 2006, the Company entered into a $10,000,000  private equity line
      of financing agreement with Cumorah Capital,  Inc. (the Investor),  with a
      commitment  period  of  twenty-four  months.  Based on the  amount  of the
      advance,  the Investor can purchase  shares of common stock at an exchange
      rate  equal to 90% of the  market  price  during  the  pricing  period.  A
      5,000,000  shares  commitment  fee  was  paid  by the  Company  at time of
      closing.
                                       39