UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





FOR
      THE
      QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006





Commission
      File Number: #033-31067





ITEC
      ENVIRONMENTAL GROUP, INC.


(Exact
      name of small business issuer as specified in its charter)





Delaware


(State
      or
      other jurisdiction of incorporation or organization)





31-1705310


(IRS
      Employer Identification Number)





5300
      Claus Road, Box 760


Riverbank,
      CA 95367


(Address
      of principal executive offices)(Zip Code)





(209)
      848-3900


(Registrant's
      telephone no., including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No o





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





The
      number of shares of the Company's common stock outstanding on October 30, 2006: 86,799,405







Transitional
      Small Business Disclosure Format (Check One): Yes o No x










ITEC
      ENVIRONMENTAL GROUP, INC.


FORM
      10-QSB




TABLE
      OF
      CONTENTS


PART
                I
            
            FINANCIAL
                INFORMATION
            3Item
                1
            
            Financial
                Statements
            3Item
                2
            
            Management's
                Discussion and Analysis or Plan of Operation
            23Item
                3
            
            Controls
                and ProceduresPART
                II
            
            OTHER
                INFORMATION
            26Item
                1
            
            Legal
                Proceedings
            26Item
                2
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            26Item
                3
            
            Defaults
                Upon Senior Securities
            26Item
                4
            
            Submission
                of Matters to a Vote of Security Holders
            26Item
                5
            
            Other
                Information
            26Item
                6
            
            Exhibits
            27SIGNATURES
            
            
            28




2







PART
      I -
      FINANCIAL INFORMATION


Item
      1.
      Financial Statements


**ITEC
                  Environmental Group, Inc. and Subsidiary****Condensed
                  Consolidated Balance Sheet****September
                  30, 2006****(unaudited)**
  Current
                  assetsCash
                  and cash equivalents
              
              $
              278,511Receivable
                  for cash in escrow for securities sold
              
              
              1,060,518Inventory
              
              
              75,797Prepaid
                  expenses and other current assets
              
              
              43,149Total
                  current assets
              
              
              1,457,975Property
                  and equipment, net
              
              
              4,321,560Deferred
                  debt issue costs, net
              
              
              1,304,476Other
                  assets
              
              
              38,120Total
                  assets
              
              $
              7,122,131Current
                  liabilitiesAccounts
                  payable
              
              $
              913,961Accounts
                  payable - related party
              
              
              413,313Accrued
                  compensation and other amounts due officers
              
              
              168,000Accrued
                  liabilities
              
              
              1,266,221Current
                  portion of capital lease obligations
              
              
              8,519Current
                  portion of convertible notes payable, net of debt discount of
                  $1,646,280
              
              
              1,905,720Current
                  portion of note payable to California Integrated Waste Management
                  Board
              
              
              189,437Notes
                  payable issued prior to 2004
              
              
              353,980Total
                  current liabilities
              
              
              5,219,151Non-current
                  liabilitiesCapital
                  lease obligations, net of current portion
              
              
              9,229Convertible
                  notes payable, net of debt discount of $2,157,581 and net of current
                  portion
              
              
              1,243,549Note
                  payable to California Integrated Waste Management Board, net of
                  discount
                  of $8,750 and current portion
              
              
              1,733,476Total
                  non-current liabilities
              
              
              2,986,254Total
                  liabilities
              
              
              8,205,405Commitments
                  and contingencies (Note 10)Stockholders'
                  DeficitPreferred
                  stock, $0.001 par value, 10,000,000 shares authorized, none issued
                  and
                  outstanding
              
              
              -Common
                  stock, $0.001 par value, 750,000,000 shares authorized, 85,363,824
                  shares
                  issued and outstanding
              
              
              85,364Common
                  stock, at par value, 31,917,561 shares issuable
              
              
              31,918Additional
                  paid-in capital
              
              
              34,121,021Accumulated
                  deficit
              
              
              (35,321,577
              )Total
                  stockholders' deficit
              
              
              (1,083,274
              )Total
                  liabilities and stockholders' deficit
              
              $
              7,122,131




See
      accompanying notes to condensed consolidated
      financial statements.




3




**ITEC
                  Environmental Group, Inc. and Subsidiary****Condensed
                  Consolidated Statements of Operations****(unaudited)**
  Three
                  months ended September 30,
              
              Nine
                  months ended September 30,2006
              
              2005
              
              2006
              
              2005Revenue
              
              $
              -
              
              $
              -
              
              $
              50,293
              
              $
              -Cost
                  of goods sold
              
              
              -
              
              
              -
              
              
              44,602
              
              
              -Gross
                  profit
              
              
              -
              
              
              -
              
              
              5,691
              
              
              -Operating
                  expensesTechnology
                  development
              
              
              542,459
              
              
              29,624
              
              
              1,250,649
              
              
              59,339Consulting
                  and legal fees
              
              
              1,256,616
              
              
              2,742,316
              
              
              3,474,563
              
              
              5,007,208General
                  and administrative
              
              
              3,651,331
              
              
              367,210
              
              
              4,069,611
              
              
              1,191,079Settlement
                  expense
              
              
              282,051
              
              
              -
              
              
              402,051
              
              
              -Total
                  operating expenses
              
              
              5,732,457
              
              
              3,139,150
              
              
              9,196,874
              
              
              6,257,626Loss
                  from operations
              
              
              (5,732,457
              )
              
              (3,139,150
              )
              
              (9,191,183
              )
              
              (6,257,626
              )Other
                  expense (income)Interest
                  expense
              
              
              1,058,083
              
              
              1,150,126
              
              
              1,901,499
              
              
              1,266,516Loss
                  on conversion of notes payable for stock
              
              
              -
              
              
              359,724
              
              
              -
              
              
              515,864Gain
                  on extinguishment of debt
              
              
              (86,609
              )
              
              (292,389
              )
              
              (86,609
              )
              
              (292,416
              )Change
                  in fair value liability of warrants and derivatives
              
              
              (3,023,667
              )
              
              -
              
              
              (1,070,900
              )
              
              -Total
                  other (income) expense
              
              
              (2,052,193
              )
              
              1,217,461
              
              
              743,990
              
              
              1,489,964Net
                  loss before income taxes
              
              
              (3,680,264
              )
              
              (4,356,611
              )
              
              (9,935,173
              )
              
              (7,747,590
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              $
              (3,680,264
              )
              $
              (4,356,611
              )
              $
              (9,935,173
              )
              $
              (7,747,590
              )Net
                  loss per share, basic and diluted
              
              $
              (0.05
              )
              $
              (0.12
              )
              $
              (0.14
              )
              $
              (0.33
              )Weighted
                    average shares used in computing net loss
                    per share, basic and diluted
              
              
              77,616,114
              
              
              36,545,559
              
              
              70,951,257
              
              
              23,779,468




See
      accompanying notes to condensed consolidated
      financial statements.




4


**ITEC
                  Environmental Group, Inc. and Subsidiary****Condensed
                  Consolidated Statements of Cash Flows****(unaudited)**
  Nine
                  months ended September 30,2006
              
              2005Cash
                  flows from operating activities:Net
                  loss
              
              $
              (9,935,173
              )
              $
              (7,747,590
              )Adjustments
                  to reconcile net loss to net cash used
                  in operating activities:Depreciation
                  and amortization
              
              
              355,395
              
              
              34,596Gain
                  on extinguishment of debt
              
              
              86,609
              
              
              (292,390
              )Change
                  in fair value of warrants and derivatives
              
              
              (1,070,900
              )
              
              -Loss
                  on conversion of debt for common stock
              
              
              -
              
              
              515,864Stock
                  based compensation
              
              
              5,631,394
              
              
              3,921,973Amortization
                  of deferred stock-based consulting
              
              
              508,000
              
              
              1,177,418Amortization
                  of debt issue costs and discount
              
              
              1,225,333
              
              
              762,025Changes
                  in operating assets and liabilities:Inventory
              
              
              (8,133
              )
              
              (46,800
              )Accounts
                  payable
              
              
              552,954
              
              
              364,754Accrued
                  liabilities
              
              
              589,182
              
              
              405,985Other
              
              
              (58,835
              )
              
              (95,649
              )Net
                  cash used by operating activities
              
              
              2,124,174
              
              
              (999,814
              )Cash
                  flows from investing activities:Purchase
                  of property, plant & equipment
              
              
              (1,871,410
              )
              
              (1,262,849
              )Net
                  cash used by investing activities
              
              
              (1,871,410
              )
              
              (1,262,849
              )Cash
                  flows from financing activities:Decrease
                  (increase) in restricted cash in escrow
              
              
              57,854
              
              
              (1,299,192
              )Proceeds
                  from (payments on) CIWMB notes payable
              
              
              (68,337
              )
              
              2,000,000Payments
                  of debt issue costs
              
              
              (311,300
              )
              
              -Proceeds
                  from issuance of notes payable
              
              
              5,671,982
              
              
              1,907,302Payments
                  on notes payable
              
              
              (1,200,000
              )
              
              (90,353
              )Principal
                  payments on capital lease obligations
              
              
              (4,969
              )
              
              (4,691
              )Proceeds
                  from notes payable - officers
              
              
              96,500
              
              
              -Payments
                  on notes payable - officers
              
              
              -
              
              
              (111,500
              )Net
                  cash provided by financing activities
              
              
              4,241,730
              
              
              2,401,566Net
                  increase in cash and cash equivalents
              
              
              246,146
              
              
              138,903Cash
                  and cash equivalents, beginning of period
              
              
              32,365
              
              
              5,366Cash
                  and cash equivalents, end of period
              
              $
              278,511
              
              $
              144,269**Supplemental
                  disclosures of cash flow information:**Cash
                  paid for interest
              
              $
              262,936
              
              $
              35,111Cash
                  paid for income taxes
              
              $
              -
              
              $
              -**Non-cash
                  investing and financing activities**Common
                  stock issued for debt conversion
              
              $
              -
              
              $
              143,402Reclassification
                  of derivative liability to equity
              
              $
              8,322,304
              
              $
              -Derivative
                  liabilities recorded as debt discount
              
              $
              4,707,405
              
              $
              -Deferred
                  debt issue costs
              
              $
              1,314,215
              
              $
              197,200Common
                  stock issued for debt and receivables
              
              $
              691,448
              
              $
              -Exercise
                  of warrant in exchange for accounts payable
              
              $
              8,500
              
              $
              -Restricted
                cash loan proceeds
              
              $
              -
              
              $
              1,990,000Debt
                discounts
              
              $
              -
              
              $
              1,484,881Deferred
                stock based consulting
              
              $
              -
              
              $
              613,765




See
      accompanying notes to condensed consolidated
      financial statements.




5
 
 **ITEC
          Environmental Group, Inc. and Subsidiary**
 **Notes
          to Unaudited Condensed Consolidated Financial Statements**
 **September
          30, 2006**
 **Note
          1. Description of Business and Summary of Significant Accounting
          Policies**
  Organization
          and Business - Itec
          Environmental Group, Inc. (“Itec” or the “Company”) was incorporated under the
          laws of the State of Delaware in March 2000. Itec was formed for the purpose
          of
          acquiring certain patented technology and the development of a worldwide
          market
          for its usage. The Company's subsidiary, ECO2 Environmental Systems, Inc.
          (“ECO2”), was incorporated under the laws of the State of Delaware in April
          2000. Unless the context indicates otherwise, all references herein to
          the
          Company include Itec and its wholly-owned subsidiary, ECO2.
 
 The
          Company is engaged in activities to become a worldwide supplier of recycled
          plastics using its proprietary process and equipment and to form strategic
          alliances to become a supplier of recycling equipment outside of the United
          States. The Company has constructed its first recycling line at its Riverbank,
          California plant and in May 2006 commenced recycling operations.
 
 Business
          risks and uncertainties - The
          Company operates in the evolving field of plastics materials recycling.
          New
          developments could both significantly and adversely affect existing and
          emerging
          technologies in the field. The Company's success in developing additional
          marketable products and processes and achieving a competitive position
          will
          depend on its ability to attract and retain qualified management personnel
          and
          to raise sufficient capital to meet its operating and development needs.
          While
          the Company is seeking financing through equity and loans, there can be
          no
          assurance that it will be successful in accomplishing its
          objectives.
  Basis
          of presentation and Going Concern - The
          accompanying unaudited condensed consolidated financial statements have
          been
          prepared in conformity with generally accepted accounting principles, which
          contemplate continuation of the Company as a going concern. The Company
          has
          reported recurring losses and cash used by operating activities, and has
          a net
          working capital deficiency that raises substantial doubt about its ability
          to
          continue as a going concern. The Report of Independent Registered Public
          Accounting Firm included in the Company’s December 31, 2005 Annual Report on
          Form 10-KSB stated that these conditions, among others, raise substantial
          doubt
          about the Company’s ability to continue as a going concern. During the year
          ended December 31, 2005, the Company reported a net loss of approximately
          $15.3
          million and used cash in operating activities of approximately $1.4 million,
          and
          during the nine months ended September 30, 2006 reported a net loss of
          approximately $9.9 million and used cash in operating activities of
          approximately $2.1 million and as of September 30, 2006, had a working
          capital
          deficiency of approximately $3.8 million and total stockholders' deficit
          of $1.1
          million, which includes accumulated losses from inception of $35.3 million.
  Company
          management intends to raise additional debt and equity financing to fund
          future
          capital expenditures, operations and to provide additional working capital,
          and
          in this regard during 2006 through September 30, has raised approximately
          $6.8
          million pursuant to sales of securities in connection with its 2006 private
          placement and subordinated debt offerings as described in Note 5. Further,
          subsequent to September 30, 2006, the Company has raised approximately
          $2.1
          million in connection with these offerings. There is no assurance that
          such
          financing will be obtained in sufficient amounts necessary to meet the
          Company's
          needs. In view of these matters, continuation as a going concern is dependent
          upon the Company's ability to meet its financing requirements, raise additional
          capital, and the success of its future operations or completion of a successful
          business combination.
  The
          accompanying condensed consolidated financial statements do not include
          any
          adjustments to reflect the possible future effects on the recoverability
          and
          classification of assets or the amounts and classifications of liabilities
          that
          may result from the possible inability of the Company to continue as a
          going
          concern.
  Use
          of
          estimates in the preparation of financial statements - Preparation of financial statements in conformity with generally accepted
          accounting principles requires management to make estimates and assumptions
          that
          affect reported amounts of assets and liabilities and disclosure of contingent
          assets and liabilities at the date of the financial statements and reported
          amounts of revenue and expenses during the reporting period. Actual results
          could differ from those estimates. The more significant accounting estimates
          inherent in the preparation of the Company's financial statements include
          estimates as to the depreciable lives of property and equipment, valuation
          of
          inventories, valuation of equity related instruments and derivatives issued,
          and
          valuation allowance for deferred income tax assets.
 
 Unaudited
          Interim Condensed Consolidated Financial Statements ***-*** The
          unaudited interim condensed consolidated financial statements have been
          prepared
          in accordance with the rules and regulations of the Securities and Exchange
          Commission with regard to interim financial information, and accordingly,
          do not
          include all of the information and notes to financial statements required
          by
          accounting principles generally accepted in the United States for complete
          financial statements. In the opinion of management, all adjustments, consisting
          of normal recurring adjustments, considered necessary to present fairly
          the
          Company’s financial position, results of operations and cash flows for the
          interim periods presented have been included. Results for the 2006 interim
          periods are not necessarily indicative of results to be expected for the
          year
          ending December 31, 2006 or for any other future period. These interim
          condensed
          consolidated financial statements should be read in conjunction with the
          Company’s audited annual consolidated financial statements and related notes
          thereto, which are included in the Company’s December 31, 2005 Annual Report on
          Form 10-KSB.
  6
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 Principles
          of Consolidation **-** The
          consolidated financial statements include the accounts of ITEC Environmental
          Group, Inc. and its wholly-owned subsidiary. All material intercompany
          balances
          and transactions have been eliminated in consolidation
 
 Cash
          and cash equivalents - The
          Company considers deposits that can be redeemed on demand and investments
          that
          have original maturities of less than three months when purchased to be
          cash
          equivalents.
 
 Receivable
          for cash in escrow for securities sold - During
          the three months ended September 30, 2006, the Company received cash in
          escrow
          for the sale of notes payable and warrants, a portion of which had not
          been
          released to the Company as of September 30, 2006, and which has subsequently
          been received by the Company.
  Restricted
          cash in escrow - In
          2005, the Company received cash from the California Integrated Waste Management
          Board pursuant to a $2,000,000 note payable, and received cash from an
          investor
          fund pursuant to $600,000 notes payable. Funds received from these borrowings
          were placed in escrow, with draws made by the Company upon satisfaction
          of
          certain conditions, including among others, presentation of invoices for
          purchases of authorized equipment to be financed. These funds were classified
          as
          Restricted Cash in Escrow at December 31, 2005, as they were not otherwise
          available for use by the Company.
  Inventories -
          Inventories are comprised of raw materials and recorded at cost determined
          on a
          first-in-first out basis.
  Property
          and equipment -
          Property and equipment are recorded at cost less accumulated depreciation
          and
          amortization. Expenditures for major additions and improvements are capitalized,
          and minor maintenance, repairs and replacements are charged to expense
          as
          incurred. When property and equipment are retired or otherwise disposed
          of, the
          cost and accumulated depreciation are removed from the accounts and any
          resulting gain or loss is included in the results of operations. Depreciation
          and amortization are provided using the straight-line method over the estimated
          useful lives of the respective assets, which are 3 years for computer equipment
          and software and furniture and fixtures, 5 to 7 years for manufacturing
          equipment and 7 years for the recycling plant.
  Contingencies -
          Certain conditions may exist as of the date financial statements are issued,
          which may result in a loss to the Company, but which will only be resolved
          when
          one or more future events occur or fail to occur. Company management and
          its
          legal counsel assess such contingent liabilities, and such assessment inherently
          involves an exercise of judgment. In assessing loss contingencies related
          to
          legal proceedings that are pending against the Company or unasserted claims
          that
          may result in such proceedings, the Company's legal counsel evaluates the
          perceived merits of any legal proceedings or unasserted claims as well
          as the
          perceived merits of the amount of relief sought or expected to be sought
          therein. If the assessment of a contingency indicates that it is probable
          that a
          liability has been incurred and the amount of the liability can be estimated,
          then the estimated liability would be accrued in the Company's financial
          statements. If the assessment indicates that a potentially material loss
          contingency is not probable but is reasonably possible, or is probable
          but
          cannot be estimated, then the nature of the contingent liability, together
          with
          an estimate of the range of possible loss if determinable would be
          disclosed.
  Fair
          value of financial instruments - The
          Company measures its financial assets and liabilities in accordance with
          generally accepted accounting principles. For certain of the Company's
          financial
          instruments, including cash and cash equivalents, accounts payable and
          accrued
          liabilities, the carrying amounts approximate fair value due to their short
          maturities. Amounts recorded for notes payable also approximate fair value
          because current interest rates offered to the Company for debt of similar
          maturities are substantially the same **.**
 
 Accounting
          for Derivatives - The
          Company evaluates its convertible debt, options, warrants or other contracts
          to
          determine if those contracts or embedded components of those contracts
          qualify
          as derivatives to be separately accounted for under Statement of Financial
          Accounting Standards 133 “Accounting for Derivative Instruments and Hedging
          Activities” and related interpretations including EITF 00-19 “Accounting for
          Derivative Financial Instruments Indexed to, and Potentially Settled in,
          a
          Company’s Own Stock”. The result of this accounting treatment is that the fair
          value of the derivative is marked-to-market each balance sheet date and
          recorded
          as a liability. In the event that the fair value is recorded as a liability,
          the
          change in fair value is recorded in the consolidated statement of operations
          as
          other income or expense. Upon conversion or exercise of a derivative instrument,
          the instrument is marked to fair value at the conversion date and then
          that fair
          value is reclassified to equity. Equity instruments that are initially
          classified as equity that become subject to reclassification under SFAS
          133 are
          reclassified to liability at the fair value of the instrument on the
          reclassification date.
 
 Revenue
          recognition - The
          Company recognizes revenue when there is persuasive evidence of an arrangement,
          the product has been delivered or the services have been provided to the
          customer, the sales price is fixed or determinable, and collectibility
          is
          reasonably assured. The Company recognizes revenues from sales of recycled
          products upon delivery to customers. The Company will recognize revenues
          from
          sales of equipment or systems once configuration of such systems are completed
          and accepted by the customer.
  7
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 Income
          taxes - The
          Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
          for Income Taxes,” which requires recognition of deferred tax assets and
          liabilities for expected future tax consequences of events that have been
          included in financial statements or tax returns. Under this method, deferred
          income taxes are recognized for the tax consequences in future years of
          differences between the tax bases of assets and liabilities and their financial
          reporting amounts at each period end based on enacted tax laws and statutory
          tax
          rates applicable to the periods in which the differences are expected to
          affect
          taxable income. Valuation allowances are established, when necessary, to
          reduce
          deferred tax assets to amounts expected to be realized. The
          Company continues to provide a full valuation allowance to reduce its net
          deferred tax asset to zero, inasmuch as Company management has not determined
          that realization of deferred tax assets is more likely than not. The
          provision for income taxes represents the tax payable for the period and
          change
          during the period in net deferred tax assets and liabilities.
  Research
          and development cost -
          Research and development represent costs incurred in connection with the
          Company’s development of recycling processes, and such costs are expensed as
          incurred and included in technology development expenses.
 
 Stock-based
          compensation - In
          December 2004, the Financial Accounting Standards Board (“FASB”) released a
          revision to Statement of Financial Accounting Standard (“SFAS”) No. 123,
          Accounting for Stock-Based Compensation (“FAS 123R”). FAS 123R sets forth the
          accounting for share-based payment transactions in which an enterprise
          receives
          employee services in exchange for (a) equity instruments of the enterprise
          or
          (b) liabilities that are based on the fair value of the enterprise's equity
          instruments or that may be settled by the issuance of such equity instruments.
          The statement eliminates the ability to account for share-based compensation
          transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees,
          and generally requires instead that such transactions be accounted for
          using a
          fair-value-based method, which requires recording an expense over the requisite
          service period for the fair value of all options or warrants granted to
          employees and consultants. The Company adopted FAS 123R effective beginning
          January 1, 2005. The Company did not issue options or warrants to employees
          prior to 2005.
 
 Basic
          and diluted net loss per share - Basic
          net loss per common share is computed by dividing net loss by the
          weighted-average number of common shares outstanding during the period.
          Diluted
          net loss per common share is determined using the weighted-average number
          of
          common shares outstanding during the period, adjusted for the dilutive
          effect of
          common stock equivalents, consisting of shares that might be issued upon
          exercise of common stock options, warrants or convertible promissory notes.
          In
          periods where losses are reported, the weighted-average number of common
          shares
          outstanding excludes common stock equivalents, because their inclusion
          would be
          anti-dilutive. Computations of net loss per share for the interim periods
          ended
          September 30, 2005, exclude 20,717,930 shares issuable upon exercise of
          outstanding warrants, and 18,914,945 shares relating to common stock issuable
          upon conversion of convertible notes payable. Computations of net loss
          per share
          for the interim periods ended September 30, 2006, exclude 71,314,154 shares
          relating to common stock issuable upon conversion of convertible notes
          payable,
          81,703,454 shares issuable upon exercise of outstanding and issuable warrants,
          and 19,458,403 shares issuable upon exercise of rights to purchase common
          stock.
          These common stock equivalents could have the effect of decreasing diluted
          net
          income per share in future periods.
  Concentrations -
          Financial instruments that potentially subject the Company to concentrations
          of
          credit risk consist principally of cash equivalents. At times, amounts
          of cash
          or cash equivalents in U.S. financial institutions exceed amounts insured
          by
          agencies of the U.S. Government.
 
 The
          Company’s business is reliant on its licensing of technology from Honeywell
          International, Inc. See Note 4 for a discussion of this concentration and
          associated risks.
  Development-stage
          company -
          Through December 31, 2005, the Company presented its consolidated financial
          statements in accordance with SFAS No. 7 “Accounting and Reporting by
          Development Stage Enterprises”. This statement specifies the guidelines for
          identifying an enterprise in the development stage and the standards of
          financial accounting and reporting for such an enterprise, which includes
          among
          other things, presentation of inception to date consolidated statements
          of
          operations and cash flows. During 2006, the Company commenced initial production
          activities at its recycling plant in Riverbank, and accordingly, it has
          been
          determined that the Company is no longer in the development stage for financial
          statement presentation purposes.
 
 Reclassifications -
          Certain amounts in 2005 financial statements have been reclassified to
          conform
          to 2006 classifications.
  Recent
          accounting pronouncements - In
          May
          2005, the FASB issued Statement of Financial Accounting Standards No. 154,
          “Accounting Changes and Error Corrections”, (“SFAS 154”). SFAS 154 replaces APB
          Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting
          Changes in Interim Financial Statements,” and changes the requirements for the
          accounting for and reporting of a change in accounting principle. The Company
          is
          required to adopt SFAS 154 in 2006. The Company’s results of operations and
          financial condition will only be impacted by SFAS 154 if the Company implements
          changes in accounting principles that are addressed by the standard or
          corrects
          accounting errors in future periods.
 
 8
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 In
          July
          2006, the FASB issued FASB Interpretation No. 48, *Accounting
          for Uncertainty in Income Taxes* (“FIN No. 48”),
          which prescribes a recognition threshold and measurement process for recording
          in the financial statements uncertain tax positions taken or expected to
          be
          taken in a tax return. Additionally, FIN No. 48 provides guidance on
          the recognition, classification, accounting in interim periods and disclosure
          requirements for uncertain tax positions. The accounting provisions of
          FIN No. 48 will be effective for the Company beginning January 1,
          2007. The Company is in the process of determining the effect, if any,
          that the
          adoption of FIN No. 48 will have on its consolidated results of
          operations or financial position.
 
 In
          September 2006, the SEC issued Staff Accounting Bulletin No. 108, “ *Considering
          the Effects of Prior Year Misstatements when Quantifying Misstatements
          in
          Current Year Financial Statements* ”
(SAB
          108).  SAB 108 provides interpretive guidance on how the effects of the
          carryover or reversal of prior year misstatements should be considered
          in
          quantifying a current year misstatement.  The SEC staff believes that
          registrants should quantify errors using both a balance sheet and income
          statement approach and evaluate whether either approach results in quantifying
          a
          misstatement that, when all relevant quantitative and qualitative factors
          considered, is material.  SAB 108 is effective for fiscal years ending on
          or after November 15, 2006, with early application encouraged.  The Company
          believes that SAB 108 will not have a significant impact on its consolidated
          results of operations or financial position.
 
 In
          September 2006, the FASB released SFAS No. 158, “Employers’ Accounting for
          Defined Benefit Pension and Other Postretirement Plans, an amendment of
          FASB
          Statements No. 87, 88, 106, and 132(R).” Under the new standard, companies must
          recognize a net liability or asset to report the funded status of their
          defined
          benefit pension and other postretirement benefit plans on their balance
          sheets.
          The recognition and disclosure provisions of SFAS No. 158 are effective
          for
          periods beginning after December 15, 2006. Although the Company is still
          evaluating the potential effects of this standard, it is expected that
          the
          adoption of SFAS No. 158 will not have a significant impact on its consolidated
          results of operations or financial position.
 
 In
          October 2006, the FASB issued FASB Staff Position No. 123R-5, “ *Amendment
          of FASB Staff Position FAS 123(R)-1* ”.
          The
          FSP amends FSP 123(R)-1 for equity instruments that were originally issued
          as
          employee compensation and then modified, with such modification made to
          the
          terms of the instrument solely to reflect an equity restructuring that
          occurs
          when the holders are no longer employees. In such circumstances, no change
          in
          the recognition or the measurement date of those instruments will result
          if both
          of the following conditions are met: a. There is no increase in fair value
          of
          the award (or the ratio of intrinsic value to the exercise price of the
          award is
          preserved, that is, the holder is made whole), or the antidilution provision
          is
          not added to the terms of the award in contemplation of an equity restructuring;
          and b. All holders of the same class of equity instruments (for example,
          stock
          options) are treated in the same manner. The Company believes that FSP
          123(R)-5
          will not have a significant impact on its consolidated results of operations
          or
          financial position.
 
 **Note
          2.**  **Inventories**
 
 Inventories
          at September 30, 2006 consist of the following:
  Raw
                  materials
                
                $
                75,797
  **Note
          3. Property and Equipment**
 
 Property
          and equipment at September 30, 2006 consist of the following:
 Manufacturing
                      tools
                  
                  $
                  26,482Office
                      furniture and equipment
                  
                  
                  74,812Recycling
                      plant
                  
                  
                  4,715,489Total
                      property and equipment
                  
                  
                  4,816,783Less
                      accumulated depreciation and amortization
                  
                  
                  (495,223
                  )Property
                      and equipment, net
                  
                  $
                  4,321,560
  During
          2006, the Company capitalized interest of $43,408 into the recycling plant
          during the construction period.
  9
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 **Note
          4. Technology License**
 
 In
          July
          2005, the Company and Honeywell International, Inc. (Honeywell) amended
          certain
          terms of the license agreement entered into by the parties in 2000, which,
          among
          other things, extended the agreement to be in effect for the life of the
          patent.
          Pursuant to terms of the Agreement, the Company obtained certain worldwide
          license rights to practice the methods and to make, use, and sell, the
          products
          which are covered by the proprietary rights, limited to the field of use
          of
          separating and recovering motor oil from high density polyethylene plastic.
          Under this amended Agreement, the Company is required to pay minimum annual
          royalties of $50,000 for 2006, $100,000 for 2007, $200,000 for 2008 and
          $300,000
          for 2009 and for years thereafter. The royalty provision was amended whereby
          the
          Company shall pay a royalty rate of $.005 per pound of recycled plastics
          sold in
          the United States which shall be due within 30 days of the close of the
          previous
          quarter. In November 2006, the Company and Honeywell amended certain terms
          of
          the license agreement, which among other things, made the license grant
          to the
          Company an exclusive, nontransferable, worldwide license to practice the
          methods
          and to make, use, and sell, the products and/or services covered by the
          Proprietary Rights limited to the field of use, as defined, and to certain
          sublicense rights. Pursuant to terms of the amendment, the first annual
          minimum
          payment is due in February 2007.
 
 Honeywell
          may terminate this agreement in the event of a bankruptcy filing or insolvency
          of the Company, an assignment for the benefit of creditors of the Company,
          the
          nationalization of the industry which encompasses any products or services,
          any
          suspension of payments under the terms of the agreement by government
          regulation, the Company's failure to commence manufacture, a substantial
          change
          in ownership of the Company (whether resulting from merger, acquisition,
          consolidation or otherwise), another company or person acquiring control
          of the
          Company, or the existence of a state of war between the United States and
          any
          country where the Company has a license to manufacture products or provide
          services. In addition, if either party to the agreement defaults for any
          reason
          in any of the obligations under the terms of the agreement, the other party
          will
          have the right to terminate the agreement by giving at least 60 days' written
          notice. Among other things, terms of the agreement require the Company
          to
          observe all applicable United States and foreign laws, regulations, rules,
          and
          decrees with respect to the transfer of the proprietary rights and related
          technical data to foreign countries and failure to conform to such laws,
          regulations, rules and decrees may result in criminal liability.
 
 **Note
          5.  Notes Payable to California Integrated Waste Management
          Board**
 
 Pursuant
          to terms of Business Loan Agreement, Security Agreements, and $2,000,000
          Promissory Note with the California Integrated Waste Management Board (“CIWMB”),
          in June 2005, the Company received into escrow $1,990,000, after deduction
          of
          $10,000 for loan fees paid to CIWMB. The loan fee was recorded as a debt
          discount, which is amortized over the loan term.  Approval for the loan was
          based on the Company's projection to build its first ECO2 Environmental
          System
          Plant and to divert post consumer plastic bottles as a result of the loan.
          The
          promissory note bears interest at 4.25% per annum, with interest only monthly
          payments during the first year, and then principal and interest monthly
          payments
          of $22,548 starting in July 2006 until fully paid in May 2015. The promissory
          note is collateralized by equipment purchased for the recycling plant,
          a
          secondary security interest in all other machinery and equipment and other
          Company assets, and guaranteed by the Company's Chief Technical Officer
          (former
          Chief Executive Officer). The Company made draws from cash in escrow upon
          meeting certain conditions, including presentation of equipment invoices.
          Minimum annual principal payments approximate $93,000 in 2006, $192,000
          in 2007,
          $200,000 in 2008, $209,000 in 2009, $219,000 in 2010 and $1,087,000 thereafter
          during 2011 through 2015. Notes payable and related unamortized debt discount
          at
          September 30, 2006 consist of the following:
 Note
                        payable to CIWMB
                    
                    $
                    1,931,663Debt
                        discount, net of amortization
                    
                    
                    (8,750
                    )1,922,913Less
                        current portion
                    
                    
                    189,437Note
                        payable to CIWMB, net of discount and net of current
                        portion
                    
                    $
                    1,733,476
 
 **Note
          6. Convertible Notes Payable**
 
 Private
          Placement Notes
 
 As
          of
          September 30, 2006, the Company has received subscriptions and related
          funds
          into escrow pursuant to a private placement memorandum of up to $9 million,
          through the offering of a minimum of 20 Units for $25,000 per unit. Each
          Unit
          consists of a $25,000 junior secured subordinated convertible debenture
          (the
“Private Placement Notes”), bearing interest at 10% with principal and accrued
          interest due 18 months from issuance (“maturity date”), convertible into shares
          of the Company’s common stock at a price of $0.0975 per share, and a warrant,
          with a cashless exercise provision, to purchase 75,000 shares of restricted
          common stock of the Company, exercisable for approximately 10 years (expires
          April 2015) at an exercise price of $0.06 per share (the “Private Placement
          Warrants”). The conversion price of the debentures and exercise price of the
          warrant are subject to anti-dilution downward adjustments in the event
          the
          Company sells common stock or securities convertible into common stock
          at a
          price below the conversion or exercise prices. The security is subordinated
          only
          to the security interest granted to CIWMB. The shares underlying the debentures
          and warrants are subject to piggy back registration rights. In addition,
          a
          registration statement must be filed within 30 days after an investor elects
          to
          convert all or any portion of the debenture. The Company has amended the
          private
          placement memorandum to eliminate the penalty provisions relating to the
          registration rights agreement which had the effect of potentially lowering
          the
          conversion price of the convertible debentures based on filing and effectiveness
          deadlines. Therefore, the convertible notes are now considered conventional
          convertible debt and no longer cause an authorized share problem requiring
          the
          bifurcation of the debt instrument into an debt instrument and embedded
          derivative. The convertible debentures are therefore presented as one financial
          instrument in the accompanying consolidated financial statements. The Company,
          via written notice, has notified existing subscribers who relied on the
          prior
          private placement document, of the amendment, and such notification requested
          their acceptance of the new terms as applied to their existing investment.
          As of
          the date of this report, a majority of the investors have accepted the
          new terms
          and if any would not accept the new terms, they would be offered a refund
          of
          their investment. The Company believes the remaining investors will accept
          the
          terms and therefore does not believe a contingency exists to refund investments.
          Through September 30, 2006, proceeds for $3,732,500 of Private Placement
          Notes
          had been received into escrow, and as a result the Company has recorded
          convertible notes payable of $3,732,500 and 11,197,500 of warrants. The
          offering
          has not closed and the debentures and warrants have not been issued. At
          September 30, 2006, approximately $710,000 of funds had been received in
          escrow,
          but not disbursed to the Company, which is reported as receivable for cash
          in
          escrow for securities sold, and which was disbursed to the Company in October
          2006. Through September 30, 2006 holders of $150,000 of other notes payable
          converted those notes, plus accrued interest into a subscription units
          comprised
          of approximately $159,000 of Private Placement Notes and 450,000 warrants.
          Additionally, through September 30, 2006, the Company also issued $50,000
          of
          Private Placement Notes and 150,000 Private Placement Warrants, to a consultant
          for services to be provided pursuant to a one-year consulting agreement,
          and
          $10,000 of Private Placement Notes and 30,000 Private Placement Warrants
          for an
          expense reimbursement.
  10
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 During
          2005 and through August 18, 2006, the date the notes were repaid, the Company
          had certain notes payable outstanding that included a variable conversion
          price,
          which qualifies the embedded conversion option as a derivative pursuant
          to SFAS
          133 and related interpretations since the conversion price is variable
          and the
          ability to have enough authorized common shares to fulfill its potential
          obligations under convertible debt contracts is not under the Company control.
          Accordingly, the debenture instrument is separated into a debt instrument
          and
          embedded option instrument for financial statement purposes and the embedded
          option instrument is recorded as a liability at fair value and marked to
          fair
          value at each reporting date through statement of operations as other income
          or
          expense. Due to the authorized shares issue this causes under EITF 00-19,
          warrants to purchase Company common stock are also classified as a warrant
          liability and marked to fair value through the statement of operations.
          The
          existence of the absence of the ability to have enough authorized common
          shares
          to fulfill its potential obligations for the repaid notes payable, required
          that
          all conversion features and all warrants outstanding also be accounted
          for at
          fair value.
 
 At
          the
          Private Placement Note issuance dates through August 18, 2006, the total
          fair
          value liability recorded for the Private Placement Note embedded conversion
          options and Private Placement Warrants was approximately $3,773,000 and
          at
          August 18, 2006, the total fair value liability recorded approximated
          $2,414,000. The fair value of the embedded conversion option and warrant
          was
          computed using a Black-Scholes option pricing method with the following
          assumptions: contractual term of 1 year (due to its short term) and contractual
          term of 10 years (since no historical basis yet exists), respectively,
          volatility of approximately 207% and 300% (based on historical volatility
          over
          the expected term), respectively, zero dividends and interest rate of
          approximately 5%. The full fair value of the warrants of $1,093,000 and
          $1,544,000 of the $2,679,000 fair value of the embedded conversion feature
          were
          allocated to debt discount, the maximum to be recorded, and the remaining
          $38,000 and $1,135,000 to operations for the three and nine months ended
          September 30, 2006, respectively, as a change in fair value of warrants
          and
          derivatives. At August 18, 2006, when the Company no longer has an inability
          to
          have enough authorized common shares to fulfill its potential obligations,
          the
          $2,414,000 fair value liability recorded at that date is reclassified to
          additional paid-in capital.
 
 Subsequent
          to August 18, 2006, the relative fair value of warrants issuable with Private
          Placement Notes is recorded as debt discount, to be amortized to interest
          expense over the note term.
 
 Through
          September 30, 2006, debt discount of approximately $3.0 million has been
          recorded, of which $243,000 and $647,000 was amortized to interest expense
          during the three and nine months ended September 30, 2006, respectively.
          The
          fair value of warrants was computed using a Black-Scholes option pricing
          method
          with the following assumptions: contractual term of 10 years, volatility
          of
          approximately 300%, zero dividends and interest rate of approximately 5%.
 
 Subsequent
          to September 30, 2006, proceeds from the sale of Private Placement Notes
          of
          approximately $1,108,000 have been received in escrow and the Company has
          received substantially all escrow funds.
 
 Subordinated
          Notes
 
 During
          August through September 2006, the Company received $2.8 million into escrow
          pursuant to a private placement of subordinated convertible notes (the
          “Subordinated Notes”), bearing interest at 10%, with principal and accrued
          interest due 12 months from issuance (“maturity date”), convertible into shares
          of the Company’s common stock at a price of $0.0975 per share, and warrants,
          with cashless exercise provisions, to purchase 28,000,000 shares of restricted
          common stock of the Company, exercisable until April 2015 at an exercise
          price
          of $0.12 per share (the “Subordinated Notes Warrants”). The conversion price of
          the debentures and exercise price of the warrant are subject to anti-dilution
          downward adjustments in the event the Company sells common stock or securities
          convertible into common stock at a price below the conversion or exercise
          prices. The security is subordinated only to the security interest granted
          to
          CIWMB. The shares underlying the notes and warrants are subject to piggy
          back
          registration rights. In addition, a registration statement must be filed
          within
          30 days after an investor elects to convert all or any portion of the note.
          At
          September 30, 2006, approximately $350,000 of funds had been received in
          escrow,
          but not disbursed to the Company, which is reported as receivable for cash
          in
          escrow for securities sold, and which was disbursed to the Company in October
          2006. In August 2006, the holder of a $200,000 short-term convertible note
          payable converted the note, plus accrued interest into a Subordinated Note
          of
          $202,000 and 2,020,000 warrants. In the event the holders of Subordinated
          Notes
          elect to convert such notes into shares of Company common stock, the Company
          will issue warrants exercisable into that number of shares of the Company’s
          common stock equal to the quotient of (i) 65% of the value of the converted
          notes divided by (ii) a per share price of $0.12.
  11
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 Convertible
          notes payable and related unamortized debt discount at September 30, 2006
          consist of the following:
 **Notes**
                  
                  **Unamortized**
                      **Debt
                        discount**
                  
                  **Notes,
                      net of**
                    **debt
                      discount**Private
                      Placement Notes
                  
                  $
                  3,951,130
                  
                  $
                  (2,371,469
                  )
                  $
                  1,579,661Subordinated
                      Notes
                  
                  
                  3,002,000
                  
                  
                  (1,432,392
                  )
                  
                  1,569,608Total
                  
                  
                  6,953,130
                  
                  
                  (3,803,861
                  )
                  
                  3,149,269Less
                      current portion
                  
                  
                  (3,552,000
                  )
                  
                  1,646,280
                  
                  
                  (1,905,720
                  )Convertible
                      Notes payable, net
                  
                  $
                  3,401,130
                  
                  $
                  (2,157,581
                  )
                  $
                  1,243,549
  **Note
          7. Notes payable that have been repaid or converted prior to September
          30,
          2006**
 
 In
          January 2005, the Company issued for cash a 10% note payable for $50,000
          due in
          July 2005. The proceeds were used for working capital. In June 2005, the
          Company
          issued 2,576,750 shares of its common stock upon conversion of the note
          payable.
          The Company recorded the excess of estimated fair value of the shares issued
          (based on the $0.115 per share quoted market price on the conversion date)
          of
          $156,140 as an increase in additional paid-in capital and as a loss on
          conversion of notes payable for common stock.
  In
          April
          2005, the Company issued for cash a 10% note payable for $60,000 due in
          August
          2005, and convertible into shares of Company common stock at a per share
          price
          of the lesser of approximately $0.02, or 50% of the closing stock price
          on the
          date of conversion. The embedded conversion option qualified as a derivative
          pursuant to SFAS 133 since the conversion price is variable and the ability
          to
          have enough authorized common shares to fulfill its potential obligations
          under
          convertible debt contracts is not under the Company control. The fair value
          of
          the conversion option of $258,643 was computed using a Black-Scholes option
          pricing method with the following assumptions: contractual term of .5 years
          (due
          to its short term), volatility of 207% (based on historical volatility
          over the
          expected term), zero dividends and interest rate of 4.45%. The $258,643
          was
          allocated $60,000 to debt discount, the maximum to be recorded, and $198,643
          to
          operations as a change in fair value of warrants and derivatives. The discount
          is amortized to interest expense over the term of the note. In June 2005,
          the
          note was converted into 3,029,100 shares of Company common stock in accordance
          with conversion terms and the then fair value liability of $166,669 was
          reclassified to equity. The full amount of the $60,000 debt discount was
          amortized to interest expense in 2005.
 
 In
          June
          2005, the Company issued for cash a 10% note payable for $128,000 due in
          October
          2005, and convertible into shares of Company common stock at the lesser
          of 50%
          of the quoted trade price on the conversion date or $0.045 per share. The
          embedded conversion option qualified as a derivative pursuant to SFAS 133
          since
          the conversion price is variable and the ability to have enough authorized
          common shares to fulfill its potential obligations under convertible debt
          contracts is not under the Company control. The fair value of the conversion
          option of $155,729 was computed using a Black-Scholes option pricing method
          with
          the following assumptions: contractual term of .33 years (due to its short
          term), volatility of 207% (based on historical volatility over the expected
          term), zero dividends and interest rate of 4.45%. The $155,729 was allocated
          $128,000 to debt discount, the maximum to be recorded, and $27,729 to operations
          as a change in fair value of warrants and derivatives. The discount was
          amortized to interest expense over the note term. The full amount of the
          $128,000 debt discount was amortized to interest expense in 2005. In October
          2005, the note was converted into 2,937,937 common shares and the then
          fair
          value liability of $310,050 was reclassified to equity.
  12
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
  In
          July
          2005, the Company issued for cash a 10% note payable for $250,000 due in
          October
          2005, and convertible into shares of Company common stock at the lesser
          of 50%
          of the quoted trade price on the conversion date or $0.028 per share. The
          embedded conversion option qualified as a derivative pursuant to SFAS 133
          since
          the conversion price is variable and the ability to have enough authorized
          common shares to fulfill its potential obligations under convertible debt
          contracts is not under the Company control. The fair value of the conversion
          option of $441,820 was computed using a Black-Scholes option pricing method
          with
          the following assumptions: contractual term of .33 years (due to its short
          term), volatility of 207% (based on historical volatility over the expected
          term), zero dividends and interest rate of 4.45%. The $441,820 was allocated
          $250,000 to debt discount, the maximum to be recorded, and $191,820 to
          operations as a change in fair value of warrants and derivatives. The discount
          was amortized to interest expense over the note term. The full amount of
          the
          $250,000 debt discount was amortized to interest expense in 2005. In November
          2005, the note was converted to 9,404,718 shares of Company common stock
          and the
          then fair value liability of $931,829 was reclassified to equity.
 
 In
          July
          2005, the Company issued for cash a 10% note payable for $30,000 due in
          November
          2005, and convertible into shares of Company common stock at the lesser
          of 50%
          of the quoted trade price on the conversion date or $0.035 per share. In
          addition, the Company issued to warrants to purchase 300,000 shares of
          its
          common stock at a per share price of $0.25 per share. The embedded conversion
          option qualified as a derivative pursuant to SFAS 133 since the conversion
          price
          is variable and the ability to have enough authorized common shares to
          fulfill
          its potential obligations under convertible debt contracts is not under
          the
          Company control. The fair value of conversion option of $53,734 was computed
          using a Black-Scholes option pricing method with the following assumptions:
          contractual term of .33 years, volatility of 207% (based on historical
          volatility over the expected term), zero dividends and interest rate of
          4.45%,
          and was allocated $30,000 to debt discount the maximum to be recorded,
          and
          $23,734 to operations as a change in fair value of warrants and derivatives.
          The
          discount is amortized to interest expense over the term of the note. The
          full
          amount of the $30,000 debt discount was amortized into interest expense
          in 2005.
          In November 2005, the note was converted to 885,326 shares of Company common
          stock and the then fair value liability of $81,430 was reclassified to
          equity.
 
 In
          August
          2005, the Company borrowed $33,400 on a short-term borrowing arrangement.
          The
          proceeds were used for working capital. In August 2005, the Company issued
          1,708,472 shares of its common stock upon conversion of the note payable,
          and
          recorded the excess of estimated fair value of the shares issued (based
          on the
          $.23 per share quoted market price on the conversion date) of $359,724
          as an
          increase in additional paid-in capital and as a loss on conversion of notes
          payable for common stock.
 
 In
          August
          2005, the Company received from The Elevation Fund, LLC (“The Elevation Fund” or
“Elevation”) cash of $600,000 in consideration for (i) a $600,000 promissory
          note, bearing interest at the greater of prime plus 5% or 10.75% (18% if
          there
          is an event of default) and due in 90 days or earlier in certain circumstances
          (the “Bridge Notes”), and (ii) cashless exercise warrants to purchase 8,500,000
          shares of the Company's common stock at an exercise price of $0.001 per
          share,
          immediately exercisable for ten years (the “Bridge Warrants”). The warrant value
          was recorded at approximately $352,000, the proportionate portion of the
          value
          of the warrant using a Black-Scholes option pricing method to the total
          of the
          warrant value and face amount of the note, as an increase in additional
          paid-in
          capital and as a debt discount to be amortized to interest expense over
          the term
          of the note. The full amount of the $352,000 debt discount was amortized
          into
          interest expense in 2005. The $20,000 origination fee to be paid directly
          to
          Elevation was also deferred as a debt discount and amortized to interest
          expense. The Bridge Notes are collateralized by a second position lien
          in all
          Company equipment and a blanket lien on all other assets. In April 2006,
          the
          Company received notice from Elevation that the Company defaulted on the
          loan,
          accrued interest and fees on November 1, 2005, and notified the Company
          that
          interest is accruing at the default rate of 18% since November 1, 2005
          and that
          accrued fees accrue interest at the default rate of 18% since August 1,
          2005. In
          addition, Elevation notified the Company that it has declared all amounts
          due
          and payable and intends to exercise any and all remedies provided under
          the loan
          agreement, note and security agreement (including without limitation, collect,
          receive, appropriate and realize upon the Collateral (as such term is defined
          in
          the security agreement) and sell, lease, assign, transfer or otherwise
          dispose
          of such collateral in accordance with the terms of the security agreement)
          and
          any and all other remedies available at law or equity. In June 2006, the
          Company
          entered into a Forbearance Agreement with Elevation, which provides for,
          among
          other things, payments, comprised first of costs and expenses, then interest,
          fees and then to principal, of $8,500 upon execution of the Forbearance
          Agreement, $100,000 on June 26, 2006, $200,000 on July 26, 2006 and payment
          in
          full on August 15, 2006, and payment of legal costs and expenses. The Company
          fully repaid amounts owed in August 2006. On August 15, 2006, the Company
          and
          Elevation executed a Settlement Agreement and Release.
 
 Additionally
          in August 2005, the Company received from another investor (“Investor”) cash of
          $100,000 in consideration for (i) a $100,000 Bridge Note, and (ii) Bridge
          Warrants for 1,418,439 shares of Company common stock. The warrant value
          was
          recorded at $65,156 as an increase in additional paid-in capital and as
          a debt
          discount and was amortized to interest expense over the note term . The
          full
          amount of debt discount was amortized to interest expense in 2005. In April
          2006
          the Company received notice from the Investor that the Company has defaulted
          on
          the loan in December 2005. The notification states that interest is accruing
          at
          the default rate of 18% since December 2005 and declares that all unpaid
          amounts
          of principal and interest are immediately due and payable. In addition
          the
          Lender further reserves all other rights pursuant to the loan agreement
          and
          promissory note including the rights to collect all costs and expenses
          of
          collection. In May 2006, the Company entered into a Forbearance Agreement
          with
          the Investor and other note holders as described in the following paragraph,
          which provides for, among other things, payments, comprised first of costs
          and
          expenses, then interest, fees and then to principal, of $7,500 upon execution
          of
          the Forbearance Agreement, $100,000 on June 26, 2006, $200,000 on July
          26, 2006
          and payment in full on August 15, 2006, and payment of $7,500 for legal
          costs
          and expenses. The Company fully repaid amounts owed in August 2006. On
          August
          15, 2006, the Company and the Investor executed a Settlement Agreement
          and
          Release.
  13
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 Additionally,
          in 2005, the Company received from other investors (the “Lenders”) cash of
          $650,000 in consideration for promissory notes totaling $650,000, bearing
          interest at 10% (18% if there is an event of default), due in 120 days
          or
          earlier in certain circumstances (the “Lenders Notes”), and convertible into
          shares of the Company's common stock at a per share price of the lesser
          of 75%
          of (i) $.13, or (ii) the price of the common stock of the Company on the
          Over
          The Counter Bulletin Board on the day the Lenders elect to convert. The
          embedded
          conversion option qualified as a derivative pursuant to SFAS 133 since
          the
          conversion price is variable and the ability to have enough authorized
          common
          shares to fulfill its potential obligations under convertible debt contracts
          is
          not under the Company control. The fair value of the conversion options
          of
          $832,928 was computed using a Black-Scholes option pricing method with
          the
          following assumptions: contractual term of .33 years (due to its short
          term),
          volatility of 207% (based on historical volatility over the expected term),
          zero
          dividends and interest rate of 4.45%, and was allocated $635,644 to debt
          discount, the maximum to be recorded, and $197,284 to operations as a change
          in
          fair value of warrants and derivatives. The discount was amortized to interest
          expense over the note term. The full amount of the $600,000 debt discount
          was
          amortized to interest expense in 2005. At December 31, 2005 the fair value
          liability has been marked down to $159,033 using the Black-Scholes option
          pricing method with the following assumptions: contractual term of .01
          years
          (due to its short term), volatility of 207% (based on historical volatility
          over
          the expected term), zero dividends and interest rate of 4.45%. In April
          2006,
          the Company received notice from a representative of some of the Lenders
          representing $500,000 of these notes that the Company defaulted on the
          loans
          principal in 2005. The notification states that interest is accruing at
          the
          default rate of 18% since December 2005 and declares that all unpaid amounts
          of
          principal and interest are immediately due and payable with such interest
          continuing to accrue until the notes are paid in full. In addition, the
          Lenders
          further reserve all other rights pursuant to the loan agreements and promissory
          notes including the rights to collect all costs and expenses of collection.
          In
          May 2006, the Company entered into a Forbearance Agreement with the notifying
          Lenders and the Investor as described in the previous paragraph, which
          provides
          for, among other things, payments, comprised first of costs and expenses,
          then
          interest, fees and then to principal, of $7,500 upon execution of the
          Forbearance Agreement, $100,000 on June 26, 2006, $200,000 on July 26,
          2006 and
          payment in full on August 15, 2006 (or sooner if the Company closes on
          $5
          million of financing), and payment of $7,500 legal costs and expenses.
          The
          Company fully repaid $500,000 of amounts owed in August 2006. On August
          15,
          2006, the Company and Lenders executed a Settlement Agreement and
          Release.
 
 During
          the nine months ended September 30, 2006, holders of $150,000 converted
          Lenders
          Notes, together with accrued interest, into approximately $159,000 of Private
          Placement Notes and 450,000 Subordinated Note Warrants.
 
 Bridge
          Notes were convertible in whole or in part into securities offered by the
          Company in its private placement offering of debentures and warrants (the
          “Private Placement”) on the same terms as such securities are sold to the other
          investors in the Private Placement, and in this regard the Company has
          granted
          the lender the right to invest up to the Bridge Notes amount on the same
          terms
          as are offered to other investors in the Private Placement. The Company
          has
          agreed to prepare and, as soon as practicable, but in no event later than
          75
          days following the closing date of the Private Placement (the “Filing
          Deadline”), file with the Securities and Exchange Commission (the “SEC”) a
          registration statement on Form SB-2 covering the resale of all shares of
          common
          stock underlying the Bridge Warrants, and has further agreed to use its
          reasonable best efforts to have such registration statement declared effective
          by the SEC as soon as practicable, but in no event later than the date
          which is
          180 days following the closing date of the Private Placement (the “Effectiveness
          Deadline”). In the event the registration statement required to be filed is not
          filed by the Filing Deadline, the Company shall issue to the lender additional
          cashless warrants to purchase shares of the Company's common stock (“Additional
          Warrants”) in an amount equal to 10% of the number of shares underlying the
          Bridge Warrant issued to the lender for each 30 day period (or a portion
          thereof) during which time such registration statement has not been filed
          with
          the SEC, which Additional Warrants shall be issued on the first day of
          each 30
          day period commencing on the Filing Deadline. In addition, in the event
          the
          registration statement required to be filed is not declared effective by
          the SEC
          by the Effectiveness Deadline, the Company shall issue to the Lender Additional
          Warrants in an amount equal to 10% of the number of shares underlying the
          Warrant issued to the Lender for each 30 day period (or portion thereof)
          during
          which time such registration statement has not been declared effective
          by the
          SEC, which Additional Warrants shall be issued on the first day of each
          30 day
          period and commencing on the Effectiveness Deadline. The exercise price
          for the
          Additional Warrants issued shall be the same as the exercise price of the
          warrants that are issued in the Private Placement. Due to the contingent
          nature
          of the conversion rights and related registration rights and penalties,
          the
          Company does not consider this debt convertible until the contingency,
          which is
          under control of the Company, occurs, whereupon the Company will evaluate
          whether this debt has an embedded derivative subject to separate accounting
          pursuant to SFAS 133 or any beneficial conversion value.
 
 In
          July
          2006, the Company entered into a loan agreement pursuant to which the Company
          received cash of $200,000 in consideration for a $200,000 promissory note
          bearing interest at 12% and due in one month from issuance and 600,000
          ten-year
          warrants to purchase Company common stock at $0.12 per share. The note
          was
          convertible at the holder’s option and in August 2006, $202,000, including
          accrued interest, was converted into $202,000 of Subordinated Notes and
          2,020,000 warrants to purchase shares of Company common stock at $0.12
          per share
          until April 2015.
  14
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 **Note
          8. Common Stock, Stock Warrants and Other Rights to Purchase Common
          Stock**
 
 Common
          Stock Issued for Services and Settlement
 
 In
          2004,
          Itec executed an agreement with an investment advisor whereby the Company
          issued
          a 24% note payable for $500,000. The Company put in escrow 303,030 shares
          of the
          Company's common stock (“escrowed shares”) and twenty (20) advance notices of
          not less than $25,000 each. The escrow agent released these advance notices
          to
          the holder commencing in April 2004, all of which were released. At the
          option
          of the note holder, interest was payable by the Company either in common
          stock
          or cash. During 2005, the Company issued an additional 3,000,000 shares
          of
          common stock for services. Such shares were valued at $330,000 based on
          the
          quoted trading price of $.11 per share on the grant date. In July 2005,
          the
          Company entered into a settlement and release agreement with the investment
          advisor pursuant to which, among other things, the Company paid $90,353
          and
          received 1,342,692 shares of it's common stock back from escrow, valued
          at
          $120,843, which were the remaining amount of the 3,000,000 shares issued
          in
          2005. All amounts due and payable between the companies were considered
          fully-settled, and the note payable and agreement were cancelled and terminated.
          In connection with this settlement, the Company recorded a gain on forgiveness
          of debt of approximately $292,000 in 2005, which included a decrease in
          additional paid-in capital of approximately $121,000, the fair value of
          shares
          cancelled.
 
 During
          2005, the Company issued 17,207,634 shares, valued at $2,390,154 based
          on quoted
          trade prices at the grant dates ranging from $.07 to $.24 per share and
          averaging approximately $.14 per share, to consultants for services. The
          value
          was recognized over the respective terms of the agreements resulting in
          deferred
          stock based consulting expense of approximately $365,000 at December 31,
          2005
          and was fully amortized during 2006.
 
 Pursuant
          to an agreement with The Otto Law Group, PLLC (“OLG”), a law firm, the managing
          partner of which is one of the Company’s Directors, for legal services, the
          Company periodically issued vested non-forfeitable common shares, and any
          proceeds from the sale of such shares by OLG and reported to the Company
          were
          credited against invoice amounts due to OLG for legal services. The agreement
          had no stated term. Due to the contingent nature of the proceeds and the
          unstated term of the agreement, the fair value of shares issued has been
          expensed when issued. During 2005 the Company issued 9,957,692 common shares
          pursuant to the legal services agreement. The shares were valued at the
          quoted
          trading prices on the respective grant dates which ranged from $.09 to
          $.23 per
          share or an average of approximately $.16 per share, resulting in an expense
          of
          $1,635,000. During 2005, the Company also recognized approximately $1.2
          million
          of stock based legal expenses relating to this same services provider that
          had
          been deferred. During 2006, the Company issued 2,802,925 shares of its
          common
          stock and recorded legal expense of approximately $336,000, which was determined
          based on the $0.12 per share quoted trading price on date of issuance.
          There
          were no reported stock sale proceeds during 2006. In August 2006, the Company
          entered into an engagement agreement with OLG, whereby the prior agreement
          was
          superseded and replaced, and among other things, the Company issued 2,500,000
          shares of its common stock. The shares were valued at the quoted trading
          prices
          of $0.11 on the grant date, resulting in an expense of $275,000.
 
 During
          2005, pursuant to the “safe harbor” private offering exemption provided by Rule
          506 of Regulation D under Section 4(2) and of the Securities Act of 1933
          (the
“Securities Act”), the Company issued 2,737,220 shares of its common stock (and
          certain registration rights) to Brean Murray Carret & Co., LLC (“BMC”) as
          retainer for certain corporate finance and investment banking services
          to be
          provided pursuant to the corporate finance representation agreement between
          the
          parties entered into in 2005. The agreement was for a period of one year,
          extendable to two years upon completion of a successful financing. In the
          event
          of a consummated transaction, the Company will pay the investment banker
          fees
          ranging from 2% to 8% of amounts raised, varying in amounts of securities
          issued
          in the financing, depending of the type of securities and nature of transaction.
          The shares were valued at $246,350 based on a $.09 quoted trade price on
          the
          grant date. The $246,350 was deferred and amortized over the service term
          resulting in a deferred expense of $143,000 at December 31, 2005 and was
          fully
          amortized in 2006. In October 2005, the Company issued 744,542 shares of
          its
          common stock to BMC as consideration for services provided pursuant to
          terms of
          a corporate finance representation agreement in connection with Company
          borrowings in August 2005, and recorded deferred debt issue costs asset
          of
          $74,466, based on the $.10 quoted trade price at the grant date. Additionally,
          the Company has recorded additional deferred debt issue costs of $135,000
          relating to warrants issued to BMC for services provided in connection
          with the
          borrowing transaction. Warrants are for the purchase of 850,000 shares
          of common
          stock at a per share price of $0.001 for a term of 5 years. The full amount
          of
          debt issue costs was amortized to interest expense in 2005.
 
 During
          2006, the Company issued 2,802,925 shares of its common stock to Cambridge
          Partners, LLC for investor advisory services provided to the Company and
          recorded consulting expense of approximately $336,000, which was determined
          based on the $0.12 per share quoted trading price on the issuance
          date.
  15
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 During
          2006, the Company issued 5,000,000 shares of its common stock to Hudson
          Investment Advisors, Inc. for consulting services provided to the Company
          and
          recorded consulting expense of approximately $550,000, which was determined
          based on the $0.11 per share quoted trading price on the issuance
          date.
  During
          2006, the Company issued 358,974 shares of its common stock to Robert Gold
          for
          consulting services provided to the Company and recorded consulting expense
          of
          approximately $39,000, which was determined based on the $0.11 per share
          quoted
          trading price on the issuance date.
 
 During
          2006, as further described in Note 9, the Company entered into an employment
          agreement with its former Chief Executive Officer, pursuant to which, among
          other things, the executive will receive 24,000,000 fully-vested shares
          or share
          equivalents (warrants), of which he had previously received 17,953,208
          of such
          shares and share equivalents, or an additional 6,046,792 shares. In connection
          with this agreement, the Company recorded an increase in additional paid-in
          capital of $847,000, which was determined on the $0.14 per share quoted
          trading
          price on the date of issuance.
 
 Additionally,
          in 2006, the Company entered into an employment agreement with an individual
          to
          serve as its Chief Executive Officer and a Director, pursuant to which,
          among
          other things, the executive will receive shares of Company common stock
          (or
          stock options, at the executive’s election) covering 8% of Common Stock
          Equivalents, as defined in the agreement. The Effective Date of the employment
          agreement is September 18, 2006, at which date the executive is to receive
          35,200,000 shares (options were not elected) of Company common stock, of
          which
          17,600,000 (50%) shares are fully-vested, and of which 8,800,000 shares
          vest in
          September 2007 and the remaining 8,800,000 vest pro-rata from October 2007
          to
          September 2008. In connection with this agreement, the Company recorded
          compensation expense of approximately $2,288,000 based on the $0.13 per
          share
          quoted trading price on the Effective Date for fully-vested shares, and
          $72,000
          for a portion of the unvested shares amortized on a straight-line basis
          over the
          vesting periods.
 
 In
          connection with an agreement with an executive recruiter, the Company is
          obligated to pay compensation based on first-year compensation of placed
          executives. Pursuant to the agreement and placement of the Company’s Chief
          Executive Officer, the recruiter is entitled to receive 8,190,769 shares
          of
          Company common stock, of which 5,770,769 shares are fully-vested, and of
          which
          2,420,000 shares vest in September 2007. In connection with this agreement,
          the
          Company recorded compensation expense of approximately $786,000 based on
          the
          $0.13 per share quoted trading price on the Effective Date for fully-vested
          shares, and $52,000 for a portion of the unvested shares amortized on a
          straight-line basis over the vesting periods.
  In
          May 2006, a complaint was filed against the
          Company by Rose Waste Systems, Inc. (“plaintiff”) in an action for monetary
          damages for, among other claims, the purchase price of certain
          plastic recycling processing equipment (the “equipment”) acquired by the Company
          from a third party vendor. In September 2006, the Company entered into
          a
          settlement agreement with the plaintiff, and in connection therewith, among
          other things, issued the plaintiff 2,564,103 shares of the Company’s common
          stock, which has been recorded as settlement expense of approximately $282,000
          and which is included in general and administrative expense.
  Common
          Stock Issued for Cash
 
 In
          November 2005, pursuant to the “safe harbor” private offering exemption provided
          by Rule 506 of Regulation D under Section 4(2) and of the Securities Act,
          the
          Company received cash for working capital purposes of $175,000 and issued
          to an
          investor 1,029,411 shares of its common stock and the right to purchase
          an
          additional 7,794,117 shares (“option shares”) of common stock at $0.17 per share
          pursuant to terms of a Common Stock Purchase Agreement, Investor Rights
          Agreement, Covenant to Adjust and First Right of Refusal Agreement.
          Additionally, in November 2005, pursuant to the “safe harbor” private offering
          exemption provided by Rule 506 of Regulation D under Section 4(2) and of
          the
          Securities Act, the Company received cash for working capital purposes
          of
          $167,000 and issued 1,192,857 shares of its common stock and the right
          to
          purchase an additional 9,521,429 shares of common stock at $0.14 per share
          pursuant to terms of a Common Stock Purchase Agreement, Investor Rights
          Agreement, Covenant to Adjust and First Right of Refusal Agreement.
          Additionally, in December 2005, pursuant to the “safe harbor” private offering
          exemption provided by Rule 506 of Regulation D under Section 4(2) and of
          the
          Securities Act of 1933, the Company received cash for working capital purposes
          of $50,000 and issued 357,143 shares of its common stock and the right
          to
          purchase an additional 2,142,857 shares of common stock at $.14 per share
          pursuant to terms of a Common Stock Purchase Agreement, Investor Rights
          Agreement, Covenant to Adjust and First Right of Refusal Agreement. Additional
          investment rights are exercisable for a 60 day period after notice is given
          regarding certain events. The Company gave notice regarding such certain
          events
          to holders of additional investment rights in October 2006. The Covenant
          to
          adjust required a decrease in the original purchase price if certain
“efficiency” conditions, as defined in the agreement were not met. The Shares
          purchase prices were subject to reduction to a minimum $.11 per share for
          the
          $.17 shares and $0.08 per share for the $.14 shares, conditional upon when
          certain recycling volume and purity specifications were met (the “Efficiency”
conditions) .The reduction in purchase price was payable, at the investors
          option, in cash or additional shares of common stock. The $164,571 maximum
          redemption values of the above shares were reclassified to temporary equity
          at
          December 31, 2005. In January 2006 the Company issued additional shares
          at the
          investors election of 198,810 and 416,666 shares, based on a reduced purchase
          price of $.12 (for the $.14 purchase price shares), and 137,255 shares
          for a
          reduced purchase price of $.15 (for the $.17 purchase price shares) and
          the
          covenant to adjust was amended to eliminate any further adjustments to
          the
          original purchase price, and the temporary equity was reclassified to permanent
          equity in 2006. The investor rights agreement contains registration rights
          on
          the issued shares and option shares which require the Company to prepare
          and
          file a registration statement and use its best efforts to cause such
          registration statement to become effective and keep it effective for 90
          days
          including filing any required amendments.
  16
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 Stock
          Options
 
 The
          Company has adopted an incentive stock option plan (the “Plan”) under which
          options granted are intended to qualify as “incentive stock options” under the
          Internal Revenue Code of 1986, as amended. Pursuant to the Plan, options
          to
          purchase up to 275 shares of the Company's common stock may be granted
          to
          employees of the Company. The Plan is administered by the Board of Directors
          which is empowered to determine the terms and conditions of each option
          subject
          to the limitation that the exercise price can not be less than market value
          of
          the common stock on the date of grant (110% of the market value in the
          case of
          options granted to an employee who owns 10% or more of the Company's outstanding
          common stock) and no option can have a term in excess of 10 years (5 years
          in
          the case of options granted to an employee who owns 10% or more of the
          Company's
          outstanding common stock). As of September 30, 2006, no Plan options have
          been
          granted.
  Effective
          pursuant to resolution of the Board of Directors in 2005, the Company adopted
          a
          2005 Stock Plan to provide a source for the issuance of common stock of
          Itec in
          connection with compensatory programs sponsored by the Company and any
          other
          circumstances deemed by the Board of Directors as such a special situation.
          The
          number of shares available for granting awards under the Plan is 15,000,000
          shares. The Plan is eligible to any employee of the Company, any individual
          who
          is a member of the board of directors of the Company or any individual
          performing services for the Company as a Non-employee Contractor and any
          individual who has accepted an offer of employment with the Company. Unless
          the
          Board of Directors determines otherwise, shares of non-vested Stock awarded
          to a
          Participant will be forfeited if the Participant terminates employment
          or
          service for any reason other than death, disability, retirement or involuntary
          termination.
  Stock
          Warrants
 
 Warrants have
          been granted at prices that are equal to, or more or less than, the current
          fair value of the Company's common stock at the date of grant. All warrants
          granted to date are fully vested, have cashless exercise rights and there
          were no defined terms for any underlying services. Therefore they were
          expensed
          at the grant date. The fair value of warrants issued during 2005 was estimated
          using the Black-Scholes option-pricing model with the following assumptions:
          a
          dividend yield of 0%; expected volatility of 200% to 427% (based on historical
          volatility over the expected term); risk-free interest rates of 3.6 to
          4.6%; and
          contractual terms of 5 and 10 years. The fair value of warrants issued
          during
          2006 was estimated using the Black-Scholes option-pricing model with the
          following assumptions: a dividend yield of 0%; expected volatility of 300%
          (based on historical volatility over the expected term); risk-free interest
          rates of approximately 5%; and contractual term of 10 years. The
          weighted-average fair value of warrants granted during 2005 and 2006
          approximated $0.12 and $0.13, respectively.
 
 In
          February 2006, in connection with and upon their resignation, the Company
          granted cashless exercise warrants for the purchase 500,000 shares of the
          Company’s common stock to each of two former Directors of the Company, having an
          exercise price of $0.12 and expiring in 10 years. The Company recorded
          $120,000,
          the fair value as determined utilizing the Black-Scholes valuation model,
          as
          general and administrative expense since the warrants are fully-vested.
 
 During
          2006 the Company’s former Chief Executive Officer assigned 3,213,889 of his
          warrants to service providers of the Company for services provided to the
          Company. Such warrants have an exercise price of $.06. The Company recognized
          expense of $413,347 since there were no stated terms for the
          services.
 
 In
          connection with sales of Private Placement units comprised of Private Placement
          Notes and warrants as disclosed in Note 5, during the nine months ended
          September 30, 2006, the Company received subscription proceeds relating
          to
          approximately 11,546,000 warrants. These warrants are excisable at $0.06
          per
          share for 10 years and include cashless exercise terms.
 
 Additionally,
          in connection with sales of Private Placement units and Subordinated Notes
          and
          Warrants, pursuant to terms of a funding agreement with a related party,
          as
          further described in Note 9, the Company agreed to issue warrants based
          on
          securities sold and common shares convertible or exercisable into. Through
          September 30, 2006, the Company has recorded debt issue costs of approximately
          $427,000 based on the fair value of approximately 934,200 warrants exercisable
          at $0.06 per share for approximately three and one-half years and 2,400,000
          warrants exercisable at $0.12 per share for approximately eight and one-half
          years.
 
 Additionally,
          in connection with sales of Private Placement units, pursuant to terms
          of a
          placement agent agreement with KW Securities, as further described in Note
          9,
          the Company agreed to issue warrants based on securities sold. Through
          September
          30, 2006, the Company has recorded debt issue costs of approximately $518,000
          based on the fair value of approximately 3,732,500 warrants exercisable
          at $0.06
          per share for approximately eight and one-half years.
  17
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**
 **September
            30, 2006**
 In
          2005,
          pursuant to the terms of a common stock purchase agreements (see Stock
          Issued
          for Cash above), the Company issued additional investment rights (“Option
          Shares”) to purchase 9,521,429 common shares at $.17 per share, 7,794,117 common
          shares at $.14 per share and 2,142,857common shares at $.14 per share (for
          a
          total of 19,458,403 additional investment rights common shares). Additional
          investment rights are exercisable for a 60 day period after notice is given
          regarding certain events. The Company gave notice regarding such certain
          events
          to holders of additional investment rights in October 2006. The Option
          Shares
          exercise prices were subject to reduction to $.11 per share for the $.17
          options
          and $0.08 per share for the $.14 options, conditional upon when certain
          recycling volume and purity specifications are met (the “Efficiency”
conditions). In January 2006 the Company reduced the purchase prices to
          $.12 and
          $.15 (for the $.14 and $.17 option, respectively) and the covenant to adjust
          was
          amended to eliminate further adjustments to the option shares purchase
          price.
          The investor rights agreement contain registration rights on the issued
          shares
          and option shares which require the Company to prepare and file a registration
          statement and use its best efforts to cause such registration statement
          to
          become effective and keep it effective for 90 days including filing any
          required
          amendments. Since this is a best efforts clause and there are no liquidating
          damages or penalties, the option shares qualify as equity pursuant to EITF
          00-19
          as the Company may issue unregistered shares upon exercise of the options
          and
          there is no cash penalty, and other criteria for equity classification
          are met.
          However, since there is an authorized shares issue derived from the variable
          conversion rate convertible debt, theses option shares were classified
          as
          liabilities at fair value until August 18, 2006. The fair value at the
          issuance
          date was recorded at $1,603,566 with a charge to operations to change in
          fair
          value liability of warrants and derivatives of approximately $1,212,000.
          The
          reduction in fair value credited to the change in fair value liability
          of
          warrants and derivatives from the issuance date through December 31, 2005
          was
          $468,000 resulting in a warrant liability of $1,136,000 at December 31,
          2005.
          During the three and nine months ended September 30, 2006, the Company
          recognized other income of approximately $1,059,000 and $816,000, respectively,
          relating to the decrease in the fair value liability of such investment
          rights,
          which such fair value liability approximated $321,000 at August 18, 2006.
          At
          August 18, 2006, when the Company no longer had an inability to have enough
          authorized common shares to fulfill its potential obligations, the $321,000
          fair
          value liability recorded at that date was reclassified to additional paid-in
          capital.
 
 The
          Company determined that pursuant to EITF 00-19, all of the Company’s warrants
          and investment rights granted to non-employees are classified as liabilities,
          since the Company has issued convertible debt with variable conversion
          terms,
          the ability to have enough authorized common shares to fulfill its potential
          obligations under convertible debt and warrant contracts is not under the
          Company control and accordingly the criteria for classification as equity
          instruments under EITF 00-19 is not met. Accordingly, as of December 31,
          2005
          and August 18, 2006, the warrant liability recorded was approximately $3,446,000
          and $2,823,000, respectively, which represents the fair value of outstanding
          warrants at those dates computed using the Black-Scholes option pricing
          method
          with the assumptions as discussed above. During the three and nine months
          ended
          September 30, 2006, the Company recognized approximately $1,252,000 and
          approximately $623,000, respectively, of other income relating to the change
          in
          fair value of warrants during the periods, which is included in the accompanying
          statement of operations as the change in fair value liability of warrants
          and
          derivatives.
 
 The
          following summarizes activity for stock warrants, not including additional
          investment rights discussed above, all of which are exercisable:
  Outstanding
                  
                  Weighted
                        average
                      exercise
                        priceBalance
                      at December 31, 2005
                  
                  
                  43,567,930
                  
                  $
                  0.05Granted/Issuable
                  
                  
                  53,892,894
                  
                  
                  0.09Exercised
                  
                  
                  (8.800,000
                  )
                  
                  0.002Expired/Cancelled
                  
                  
                  (6,957,370
                  )
                  
                  0.06Balance
                      at September 30, 2006
                  
                  
                  81,703,454
                  
                  $
                  0.09
 
 Additional
          information regarding warrants outstanding as of September 30, 2006, is
          as
          follows:
 Range
                    of exercise prices
                
                Shares
                
                Weighted
                    average
                  remaining
                    life
                
                Weighted
                    average
                  exercise
                    price$0.001
                
                
                
                2,328,439
                
                
                7.0
                    years
                
                $
                0.001$0.045-
                    $ 0.05
                
                
                
                1,960,000
                
                
                3.9
                    years
                
                $
                0.05$0.06
                
                
                
                41,534,894
                
                
                8.0
                    years
                
                $
                0.06$0.09
                    - $ 0.10
                
                
                
                1,000,000
                
                
                3.7
                    years
                
                $
                0.10$0.12
                
                
                
                34,068,000
                
                
                7.9
                    years
                
                $
                0.12$0.13
                    - $ 0.25
                
                
                
                800,000
                
                
                7.5
                    years
                
                $
                0.25$29.70
                
                
                
                12,121
                
                
                1.1
                    years
                
                $
                29.70Total
                
                
                81,703,454
                
                
                7.8
                    years
                
                $
                0.09
 18
 **ITEC
              Environmental Group, Inc. and Subsidiary**
 **Notes
              to Unaudited Condensed Consolidated Financial Statements**
 **September
              30, 2006**
 **Note
          9.  Related Party Transactions**
  During
          July 2006, the Company entered into an employment agreement with its former
          Chief Executive Officer, pursuant to which, among other things, the executive
          will serve at its Chief Technology Officer and as a Director, at an annual
          compensation rate of $290,000, and will receive 24,000,000 shares or share
          equivalents (warrants), of which he had previously received 17,953,208
          of such
          shares and share equivalents, or an additional 6,046,792 shares. Further,
          such
          share awards are in consideration for the release and forgiveness of amounts
          due
          to or from such executive, which included amounts receivable of approximately
          $179,000 and amounts payable of approximately $798,000. In connection with
          this
          agreement, the Company recorded compensation expense of approximately $227,000,
          and an increase in additional paid-in capital of $847,000.
 
 In
          2000,
          the Company's Board of Directors authorized the Company to make a loan
          of
          $250,000 to the Company's Chief Executive Officer. The loan is interest
          only for
          ten years with the total principal due at the end of ten years. As of the
          effective date of the executive’s employment agreement in August 2006, the
          outstanding balance of $147,973 was forgiven in consideration of equity
          awards.
          Additionally, the Company received advances from its Chief Executive Officer
          primarily to accommodate working capital needs. During 2006, additional
          advances
          of $96,500 were made. Such advances are unsecured, bear interest at 10%
          and due
          on demand. As of the effective date of the executive’s employment agreement in
          August 2006, the balance of $103,100 was forgiven in consideration of equity
          awards.
 
 Pursuant
          to an agreement with The Otto Law Group, PLLC (“OLG”), a law firm, the managing
          partner of which is one of the Company’s Directors, for legal services, the
          Company periodically issued vested non-forfeitable common shares, and any
          proceeds from the sale of such shares by OLG and reported to the Company
          were
          credited against invoice amounts due to OLG for legal services. The agreement
          had no stated term. Due to the contingent nature of the proceeds and the
          unstated term of the agreement, the fair value of shares issued has been
          expensed when issued. During 2005 the Company issued 9,957,692 common shares
          pursuant to the legal services agreement. The shares were valued at the
          quoted
          trading prices on the respective grant dates which ranged from $.09 to
          $.23 per
          share or an average of approximately $.16 per share, resulting in an expense
          of
          $1,635,000. During 2005, the Company also recognized approximately $1.2
          million
          of stock based legal expenses relating to this same services provider that
          had
          been deferred During 2006, the Company issued 2,802,925 shares of its common
          stock and recorded legal expense of approximately $336,000, which was determined
          based on the $0.12 per share quoted trading price on date of issuance.
          There
          were no reported stock sale proceeds during 2006. In August 2006, the Company
          entered into an engagement agreement with OLG, whereby the prior agreement
          was
          superseded and replaced, and among other things, the Company issued 2,500,000
          shares of its common stock. The shares were valued at the quoted trading
          prices
          of $0.11 on the grant date, resulting in an expense of $275,000. The Company
          incurred OLG legal fee services of totaling $836,000 for the nine months
          ended
          September 30, 2006, of which $128,000 was recorded as deferred debt issue
          costs.
          Accounts payable to OLG for legal services was approximately $413,000 at
          September 30, 2006.
 
 In
          2006,
          the Company entered into a Funding Agreement with Itec Capital Group, LLC
          (“ICG”), a Washington limited liability company owned by the managing partner
          of
          OLG, who is one of the Company’s Directors, and Lawrence Krause, one of the
          Company’s Directors, and KW Securities, Inc., (“KW”), a registered broker
          dealer, a company owned by Mr. Krause. Pursuant to terms of the Funding
          Agreement, the Company agreed to pay fees of 8% of Notes payable issued
          pursuant
          to certain financings and issue warrants based on securities sold and common
          shares convertible or exercisable into. Through September 30, 2006, pursuant
          to
          terms of the Funding Agreement, the Company has recorded fees of approximately
          $551,000 ($258,000 of which has been paid as of September 30, 2006) and
          warrants
          issuable for approximately 934,200 warrants exercisable at $0.06 per share
          for
          approximately three and one-half years and 2,400,000 warrants exercisable
          at
          $0.12 per share for approximately eight and one-half years. Pursuant to
          a
          consulting agreement between ICG and Excipio Group, S.A. (“Excipio”), ICG agreed
          to pay Excipio a dollar amount and securities to be agreed upon from time
          to
          time upon completion of certain defined objectives and projects, and in
          this
          regard, as of September 30, 2006, ICG has agreed to pay Excipio fees and
          warrants in the amounts ICG receives from the Company. In November 2006,
          Excipio, ICG and the Company entered into a mutual settlement and release
          agreement, pursuant to which, among other things, in full satisfaction
          of
          amounts owed under all prior agreements or arrangements, the Company agreed
          to
          pay $428,700 and issue a warrant to purchase 1,440,000 shares of Company
          common
          stock with an exercise price of $0.06 per share for approximately three
          and
          one-half years and a warrant to purchase 3,748,000 shares of Company common
          stock with an exercise price of $0.12 per share for approximately eight
          and
          one-half years. Additionally, if certain Company notes payable convert
          into
          Company common stock before February 6, 2007, Excipio shall be issued shares
          of
          Company common stock based on amounts of notes converted. The $428,700
          is
          payable $200,000 upon execution of the settlement agreement and in varying
          amounts based on certain conditions, and in full no later than May 2007.
          In
          connection with the settlement agreement, the consulting agreement between
          ICG
          and Excipio was cancelled and any further obligation under the consulting
          agreement has been waived and dismissed, and the Funding Agreement between
          the
          Company and ICG was amended to reflect the settlement of fees and expenses
          owed
          and paid under the Funding Agreement and that no additional fees or expenses
          shall accrued or become due in accordance with the Funding
          Agreement.
  19
 **ITEC
              Environmental Group, Inc. and Subsidiary**
 **Notes
              to Unaudited Condensed Consolidated Financial Statements**
 **September
              30, 2006**
 **Note
          10. Commitments and Contingencies**
  Legal
          Matters
 
 In
          2005,
          pursuant to an arbitration award, the Company has been ordered to pay
          EnviroPlastic Hungary the sum of $150,000, plus fees and costs, for the
          return
          of a deposit previously paid to the Company. The Company recorded an additional
          accrued liability and expense during 2005 to provide for the full amount
          of the
          award.
 
 In
          2006,
          a judgment was awarded against the Company relating to amounts owed as
          claimed
          by a former employee, and the Company paid the judgment award of approximately
          $70,000 in satisfaction of the judgment.
 
 In
          May
          2006, a complaint was filed against the Company by Rose Waste Systems,
          Inc.
          (“plaintiff”) in an action for monetary damages for, among other claims, the
          purchase price of certain
          plastic recycling processing equipment (the “equipment”) acquired by the Company
          from a third party vendor. In September 2006, the Company entered into
          a
          settlement agreement with the plaintiff, and in connection therewith, among
          other things, issued the plaintiff 2,564,103 shares of the Company’s common
          stock, which has been recorded as settlement expense of approximately $282,000
          and which is included in general and administrative expense.
 
 Employment
          Agreements
 
 In
          August
          2006, the Company entered into an employment agreement with no stated term
          with
          its former Chief Executive Officer, pursuant to which, among other things,
          the
          executive will serve at its Chief Technology Officer and as a Director,
          at an
          annual compensation rate of $290,000, and receive other customary employment
          benefits, receive additional stock-based awards (as described in Note 8)
          and be
          eligible to receive additional compensation as cash bonuses, and in certain
          circumstances, severance on termination.
 
 Additionally,
          in 2006, the Company entered into an employment agreement with no stated
          term
          with an individual to serve as the Company’s Chief Executive Officer and a
          Director, at an annual compensation rate of $300,000 (subject to increase
          under
          certain conditions), and receive other customary employment benefits, and
          be
          eligible to received additional compensation as cash bonuses, and in certain
          circumstances, severance on termination. Additionally, pursuant to terms
          of the
          employment agreement the executive will receive shares of Company common
          stock
          (or stock options, at the executive’s election) covering 8% of Common Stock
          Equivalents, as defined in the agreement. The Effective Date of the employment
          agreement is September 18, 2006, at which date the executive is to receive
          35,200,000 shares (options were not elected) of Company common stock, of
          which
          17,600,000 (50%) shares are fully-vested, and of which 8,800,000 shares
          vest in
          September 2007 and the remaining 8,800,000 vest pro-rata from October 2007
          to
          September 2008.. In connection with this agreement, the Company recorded
          compensation expense of approximately $2,288,000 based on the $0.13 per
          share
          quoted trading price on the Effective Date for fully-vested shares, and
          $72,000
          for a portion of the unvested shares amortized on a straight-line basis
          over the
          vesting periods. In addition, the executive is entitled to receive additional
          shares upon closing(s) of specified Financing(s), as defined. Based upon
          having
          closed a Financing subsequent to September 30, 2006, an additional 8,800,000
          of
          fully-vested shares are issuable and will be recorded as expense in the
          period
          in which the Financing closed.
 
 In
          October 2006, the Company entered into an employment agreement with no
          stated
          term with an individual to serve as the Company’s Chief Operating Officer and
          Executive Vice President, at an annual compensation rate of $300,000, and
          receive other customary employment benefits, relocation expenses, and be
          eligible to received additional compensation as cash bonuses, and in certain
          circumstances, severance on termination. Additionally, pursuant to terms
          of the
          employment agreement the executive will receive shares of Company common
          stock
          (or stock options, at the executive’s election) covering 5% of Common Stock
          Equivalents, as defined in the agreement.
 
 Executive
          Search Agreement
 
 In
          connection with an agreement with an executive recruiter, the Company is
          obligated to pay compensation based on first-year compensation of placed
          executives. Pursuant to the agreement and placement of the Company’s Chief
          Executive Officer effective in September 2006, the recruiter is entitled
          to
          receive 8,190,769 shares of Company common stock, of which 5,770,769 shares
          are
          fully-vested, and of which 2,420,000 shares vest in September 2007. In
          connection with this agreement, the Company recorded compensation expense
          of
          approximately $786,000 based on the $0.13 per share quoted trading price
          on the
          Effective Date for fully-vested shares, and $52,000 for a portion of the
          unvested shares amortized on a straight-line basis over the vesting periods.
          Based upon the placed executive having earned additional equity awards
          subsequent to September 30, 2006, the recruiter is entitled to an additional
          2,420,000 fully-vested shares of Company common stock and will be recorded
          as
          expense in the period in which earned by the executive.
 
 In
          connection with the placement of an additional executive in October 2006,
          the
          recruiter will earn compensation based on first-year compensation for the
          placed
          executive.
  20
 **ITEC
              Environmental Group, Inc. and Subsidiary**
 **Notes
              to Unaudited Condensed Consolidated Financial Statements**
 **September
              30, 2006**
 Consulting
          Agreements
  During
          2005, the Company issued 2,737,220 shares of its common stock (and certain
          registration rights) to Brean Murray Carret & Co., LLC (“BMC”) as retainer
          for certain corporate finance and investment banking services to be provided
          pursuant to the corporate finance representation agreement between the
          parties
          entered into in 2005. The agreement was for a period of one year, extendable
          to
          two years upon completion of a successful financing. In the event of a
          consummated transaction, the Company would pay BMC fees ranging from 2%
          to 8% of
          amounts raised, varying in amounts of securities issued in the financing,
          depending of the type of securities and nature of transaction. The shares
          were
          valued at $246,350 based on a $.09 quoted trade price on the grant date.
          The
          $246,350 was deferred and amortized over the service term resulting in
          a
          deferred expense of $143,000 at December 31, 2005 and was fully amortized
          in
          2006. In October 2005, the Company issued 744,542 shares of its common
          stock and
          warrants to purchase 850,000 shares of Company common stock at a per share
          price
          of $0.001 for a term of 5 years to BMC as consideration for services provided
          pursuant to terms of a corporate finance representation agreement in connection
          with Company borrowings in August 2005. It is the Company’s position that the
          corporate finance representation agreement was abandoned by BMC in February
          2006, and accordingly, the agreement terminated.
 
 In
          February 2006, the Company entered into an agreement with Knight Capital
          Markets, LLC to act as placement agent in connection with the private placement
          of the Company’s securities for a term of six months. The Company shall pay
          compensation of 7% of the gross proceeds of the proposed offering to be
          paid at
          closing of the proposed offering and a warrant to purchase that number
          of shares
          of common stock of the Company equal to the aggregate of (a) 7% of the
          shares of
          common stock sold at a per share exercise price equal to the per share
          price of
          such shares in the offering, and (b) to the extent the securities are not
          common
          stock, 7% of the common stock acquirable upon exercise, exchange or conversion
          of such securities at a per share exercise price equal to the minimum per
          share
          price payable by an investor. The agreement expired August 17, 2006, and
          no
          compensation was paid or payable.
 
 In
          March
          2006, the Company entered into an agreement with Sanders Morris Harris,
          Inc. to
          act as an exclusive financial advisor for a term of six months. The agreement
          requires a retainer of $30,000 of which $15,000 is payable upon execution
          of
          agreement with remaining $15,000 payable 30 days from execution of agreement.
          The retainer will be credited against the following financing or acquisition
          fees (i) 7% of gross proceeds of any financing executed by the Company;
          (ii) a
          warrant to purchase a number of shares of common stock equal to 10% of
          shares
          sold in the financing with an exercise price equal to the offering price
          of the
          shares of common stock to be sold in the financing. (iii) an acquisition
          fee
          equal to 3% of the transaction value payable in cash upon the closing of
          a
          transaction, subject to a minimum fee of $350,000.
 
 In
          January 2006, the Company entered into an agreement with KW Securities,
          Inc.
          (“KW”), a registered broker dealer and a company owned by Lawrence Krause, one
          of the Company’s Directors, for KW to serve as placement agent for the Private
          Placement Offering. Pursuant to terms of the agreement, among other things,
          the
          Company shall pay compensation of warrants to purchase Company common stock
          at a
          per share price of $0.06 until April 2015, at a rate of 1 warrants for
          $1.00
          raised in the Private Placement Offering. Through
          September 30, 2006, pursuant to terms of this agreement, the Company has
          recorded warrants issuable for approximately 3,732,500 warrants exercisable
          at
          $0.06 per share for approximately eight and one-half years. Subsequent
          to
          September 30, 2006, terms of the agreement were clarified, which resulted
          in,
          among other things, additional warrants to be issued based on defined financings
          for the purchase of up to approximately 10,900,000 shares of Company common
          stock at a per share price of $0.06 until April 2015.
 
 In
          2006,
          the Company entered into a Funding Agreement with Itec Capital Group, LLC
          (“ICG”), a Washington limited liability company owned by the managing partner
          of
          OLG, who is one of the Company’s Directors, and Lawrence Krause, one of the
          Company’s Directors, and KW. Pursuant to terms of the Funding Agreement, the
          Company agreed to pay fees of 8% of Notes payable issued pursuant to certain
          financings and issue warrants based on securities sold and common shares
          convertible or exercisable into. Through September 30, 2006, pursuant to
          terms
          of the Funding Agreement, the Company has recorded fees of approximately
          $551,000 ($258,000 of which has been paid as of September 30, 2006) and
          warrants
          issuable for approximately 934,200 warrants exercisable at $0.06 per share
          for
          approximately three and one-half years and 2,400,000 warrants exercisable
          at
          $0.12 per share for approximately eight and one-half years. Pursuant to
          a
          consulting agreement between ICG and Excipio Group, S.A. (“Excipio”), ICG agreed
          to pay Excipio a dollar amount and securities to be agreed upon from time
          to
          time upon completion of certain defined objectives and projects, and in
          this
          regard, through September 30, 2006, ICG has agreed to pay Excipio fees
          and
          warrants in the amounts ICG receives from the Company. In November 2006,
          Excipio, ICG and the Company entered into a mutual settlement and release
          agreement, pursuant to which, among other things, in full satisfaction
          of
          amounts owed under all prior agreements or arrangements, the Company agreed
          to
          pay $428,700 and issue a warrant to purchase 1,440,000 shares of Company
          common
          stock with an exercise price of $0.06 per share for approximately three
          and
          one-half years and a warrant to purchase 3,748,000 shares of Company common
          stock with an exercise price of $0.12 per share for approximately eight
          and
          one-half years. Additionally, if certain Company notes payable convert
          into
          Company common stock before February 6, 2007, Excipio shall be issued shares
          of
          Company common stock based on amounts of notes converted. The $428,700
          is
          payable $200,000 upon execution of the settlement agreement and in varying
          amounts based on certain conditions, and in full no later than May 2007.
          In
          connection with the settlement agreement, the consulting agreement between
          ICG
          and Excipio was cancelled and any further obligation under the consulting
          agreement has been waived and dismissed, and the Funding Agreement between
          the
          Company and ICG was amended to reflect the settlement of fees and expenses
          owed
          and paid under the Funding Agreement and that no additional fees or expenses
          shall accrued or become due in accordance with the Funding
          Agreement.
  21
 **ITEC
              Environmental Group, Inc. and Subsidiary**
 **Notes
              to Unaudited Condensed Consolidated Financial Statements**
 **September
              30, 2006**
 In
          June
          2006, the Company entered into an agreement with an Alvin Tang to provide
          consulting services on a non-exclusive basis to assist the Company in finding
          licensing and distribution agreements, equity capital, debt financing and
          joint
          venture partners. The initial term of the agreement was 90 days, and would
          be
          automatically extended for an additional five-year term from the funding
          date
          following completion of debt funding pursuant to which the Company received
          no
          less than $30 million (the “Financing Amount”). As compensation, the Company
          would pay fees of 10% of the gross proceeds of funds raised and exercisable,
          five-year warrants to purchase that number of shares of common stock of
          the
          Company equal to 40% of all issued and outstanding stock of the Company
          at a per
          share price of $0.001. Should the Company accept an amount less than the
          Financing Amount, the consultant would be paid a fee of 10% of the lesser
          amount
          and proportionately less warrants depending on funds raised. Additionally,
          the
          consultant will be paid fees based on revenues for licensing agreements,
          distribution agreements or joint ventures or other business relationships
          entered into by the Company with parties that were referred by the consultant.
          The agreement expired in September 2006, and no compensation was paid or
          payable.
 
 Other
          Commitments and Contingencies
 
 The
          Company leases space for its recycling plant and offices in Riverbank,
          California pursuant to a lease expiring in March 2009. Future minimum lease
          payments under the lease approximate $220,000 during 2006 through 2008
          and
          $37,000 in 2009.
 
 In
          April
          2006, the Company executed a non-binding letter of intent to acquire certain
          assets constituting the operations of two plastics recycling plants and
          to enter
          into a supply agreement with the seller for the seller to supply plastics
          to the
          two operations.


22




**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATIONS**





FORWARD
      LOOKING STATEMENTS CAUTIONARY





This
      Item
      2 and the September 30, 2006 Quarterly Report on Form 10-QSB may contain
      "forward-looking statements." In some cases, you can identify forward-looking
      statements by terminology such as "may," "will," "should," "could," "expects,"
      "plans," "intends," "anticipates," "believes," "estimates," "predicts,"
      "potential" or "continue" or the negative of such terms and other comparable
      terminology. These forward-looking statements include, without limitation,
      statements about our market opportunity, our strategies, competition, expected
      activities and expenditures as we pursue our business plan, and the adequacy
      of
      our available cash resources. Although we believe that the expectations
      reflected in any forward-looking statements are reasonable, we cannot guarantee
      future results, levels of activity, performance or achievements. Actual results
      may differ materially from the predictions discussed in these forward-looking
      statements. Changes in the circumstances upon which we base our predictions
      and/or forward-looking statements could materially affect our actual results.
      Additional factors that could materially affect these forward-looking statements
      and/or predictions include, among other things: (1) our limited operating
      history; (2) our ability to pay down existing debt; (3) our ability to retain
      the professional advisors necessary to guide us through our corporate
      restructuring; (4) the risks inherent in the investigation, involvement and
      acquisition of a new business opportunity; (5) unforeseen costs and expenses;
      (6) potential litigation with our shareholders, creditors and/or former or
      current investors; (7) the Company's ability to comply with federal, state
      and
      local government regulations; and (8) other factors over which we have little
      or
      no control.




**Business** **** -
      Itec
      Environmental Group, Inc. and its subsidiary ECO2 Environmental Systems, Inc.,
      (together, the “Company”) is primarily engaged in activities to become a
      worldwide supplier of recycled plastics using its proprietary process and
      equipment and to form strategic alliances to become a supplier of recycling
      equipment outside of the United States. During 2005, the Company commenced
      construction of its first recycling line at its Riverbank, California plant
      and
      on May 31, 2006 announced that it has commenced recycling operations. After
      months of equipment and product testing as well as several successful trial
      runs
      of its patented Eco2(tm) plastic recycling system, the Riverbank plant has
      begun
      operating eight hours a day, five days a week, producing recycled PET flake.
      The
      Company expects to increase production to twenty-four hours a day, seven days
      per week over the next few months and add additional capacity, increasing daily
      production to approximately 175,000 pounds of recycled PET flake per day.




In
      June
      2005, pursuant to terms of a 4.25% promissory note the Company received into
      an
      escrow account $1,990,000, after deduction of $10,000 for loan fees to the
      lender, from the California Integrated Waste Management Board (the “CIWMB”). The
      CIWMB makes low interest loans to local government agencies and private business
      entities within a Recycling Market Development Zone to increase diversion of
      nonhazardous solid waste from landfills and to promote market demand for
      secondary and post consumer materials. Approval for the loan was based on the
      Company's projection to build its first Eco2 Environmental System Plant and
      to
      divert post consumer plastic bottles as a result of the loan. Borrowing of
      CIWMB
      funds required, among other things, verification of matching funds, which
      co-funded equipment purchases. In August 2005, the Company received an
      investment and deposited funds sufficient to enable the Company to begin
      construction of its first Eco2 Environmental Recycling System Plant.





We
      use
      patented technology and proprietary equipment to recycle plastic. We license
      environmental technology using a carbon dioxide cleaning process from Honeywell
      International, Inc. pursuant to an exclusive, world-wide license and right
      to
      sublicense agreement.  The narrowest application of this environmental
      technology allows for the 100% recycling of plastic motor oil containers and
      the
      residual oil left inside each container.  By using the carbon dioxide
      cleaning process, the Company can focus on environmental protection and
      environmental safety by creating no chemical waste disposal in the oil recycling
      and plastic recycling process.




The
      Company operates in the evolving field of plastics materials recycling. New
      developments could both significantly and adversely affect existing and emerging
      technologies in the field. The Company's success in developing additional
      marketable products and processes and achieving a competitive position will
      depend on its ability to attract and retain qualified management personnel
      and
      to raise sufficient capital to meet its operating and development needs.





**Critical
      Accounting Policies and Estimates**  - The
      preparation of financial statements included in this Quarterly Report on Form
      10-QSB requires management to make estimates and assumptions that affect the
      reported amounts of assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period.  On an on-going basis, management evaluates its estimates
      and judgments. Management bases its estimates and judgments on historical
      experiences and on various other factors that are believed to be reasonable
      under the circumstances, the results of which form the basis for making
      judgments about the carrying value of assets and liabilities that are not
      readily apparent from other sources.  Actual results may differ from these
      estimates under different assumptions or conditions.  The more significant
      accounting estimates inherent in the preparation of the Company's financial
      statements include estimates as to the depreciable lives of property and
      equipment, valuation of equity related instruments and derivatives issued,
      and
      valuation allowance for deferred income tax assets. Our accounting policies
      are described in the notes to financial statements included in this Quarterly
      Report on Form 10-QSB and our December 31, 2005 Annual Report on Form 10-KSB.
      The more critical accounting policies are as described below.




Going
      concern presentation - The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States, which
      contemplate continuation of the Company as a going concern. The Company has
      incurred recurring losses from operations and has a net working capital
      deficiency and net capital deficiency that raises substantial doubt about its
      ability to continue as a going concern. The Report of Independent Registered
      Public Accounting Firm included in the Company’s December 31, 2005 Annual Report
      on Form 10-KSB stated that these conditions, among others, raise substantial
      doubt about the Company’s ability to continue as a going concern. Company
      management intends to raise additional debt and equity financing to fund future
      operations and to provide additional working capital. However, there is no
      assurance that such financing will be obtained in sufficient amounts necessary
      to meet the Company’s needs. The accompanying consolidated financial statements
      do not include any adjustments to reflect the possible future effects on the
      recoverability and classification of assets or the amounts and classifications
      of liabilities that may result from the outcome of this
      uncertainty.




23




Accounting
      for Derivatives - The
      Company evaluates its convertible debt, options, warrants or other contracts
      to
      determine if those contracts or embedded components of those contracts qualify
      as derivatives to be separately accounted for under Statement of Financial
      Accounting Standards 133 “Accounting for Derivative Instruments and Hedging
      Activities” and related interpretations including EITF 00-19 “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company’s Own Stock”. Under certain circumstances, the result of this accounting
      treatment is that the fair value of the derivative is marked-to-market each
      balance sheet date and recorded as a liability. In the event that the fair
      value
      is recorded as a liability, the change in fair value is recorded in the
      consolidated statement of operations as other income or expense. Upon conversion
      or exercise of a derivative instrument, the instrument is marked to fair value
      at the conversion date and then that fair value is reclassified to equity.
      Equity instruments that are initially classified as equity that become subject
      to reclassification under SFAS 133 are reclassified to liability at the fair
      value of the instrument on the reclassification date.





Revenue
      recognition - The
      Company recognizes revenue when there is persuasive evidence of an arrangement,
      the product has been delivered or the services have been provided to the
      customer, the sales price is fixed or determinable, and collectibility is
      reasonably assured. The Company recognizes revenues from sales of recycled
      products upon delivery to customers. The Company will recognize revenues from
      sales of equipment or systems once configuration of such systems are completed
      and accepted by the customer.




Income
      taxes - The
      Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to amounts expected
      to be realized. The
      Company continues to provide a full valuation allowance to reduce its net
      deferred tax asset to zero, inasmuch as Company management has not determined
      that realization of deferred tax assets is more likely than not. The
      provision for income taxes represents the tax payable for the period and change
      during the period in net deferred tax assets and liabilities.




Stock-based
      compensation - The
      Company did not issue options or warrants to employees prior to 2005. Effective
      January 1, 2005, the Company accounts for all options and warrant grants to
      employees and consultants in accordance with SFAS 123R, which requires recording
      an expense over the requisite service period for the fair value of all options
      or warrants granted employees and consultants.





Results
      of Operations - We
      had
      revenues of $0 and $50,000 during the three and nine months ended September
      30,
      2006 as compared to $0 in 2005. Revenues in 2006 are the result of commencing
      recycling operations and initial sales of recycled product. We temporarily
      stopped production in the third quarter of 2006 in order to upgrade, expand
      and
      retool the production line and therefore had no revenues in the third quarter
      of
      2006. We expect revenues to continue to increase in future periods. The absence
      of revenues in 2005 was the result of a change in business strategy from the
      marketing of equipment and licensing of the System technology, to building
      our
      own plant for the recycling of plastic.




Total
      operating expenses for the three and nine months ended September 30, 2006
      approximated $5.7 million and $9.2 million compared with $3.1 million and $6.3
      million in the comparative prior year periods. Operating expenses increased
      during the three and nine months ended September 30, 2006 from the comparative
      prior year periods due to increases in general and administrative expenses,
      due
      primarily to non-cash stock-based compensation of approximately $3.5 million
      relating to equity awards issuable in connection with employment agreements
      entered into during the quarter with the Company’s Chief Technical Officer and
      Chief Executive Officer and related recruiter fees payable in equity securities,
      and increases in technology development expenses, offset by decreases in
      consulting and legal expenses due to fewer equity based awards to consultants
      during 2006 as compared to 2005.




The
      Company recorded interest expense of approximately $1.1 million and $1.9 million
      for the three and nine months ended September 30, 2006, as compared to $1.2
      million and $1.3 million for the comparative prior year periods. Interest
      expense for the nine months ended September 30, 2006 and 2005 includes
      amortization of debt issue costs and debt discount of approximately $1.2 million
      and $762,000, respectively. The increase in interest expense for the 2006 nine
      month period as compared to the prior year period is due to increased average
      borrowings during the 2006.




During
      the three and nine months ended September 30, 2006, the Company recorded other
      income of approximately $3.0 million and $1.1 million relating to the change
      in
      fair value liability of warrants and derivatives, as described in notes 5 and
      6
      in the accompanying condensed consolidated financial statements. There was
      no
      such similar expense during the three or nine months ended September 30, 2005.
      The primary reason there was other income as compared to other expense recorded
      in prior periods is due to a decrease in stock price from prior
      periods.




Net
      loss
      decreased to $3.7 million for the three months ended September 30, 2006, from
      $4.4 million for the comparative prior year period due to an increase in loss
      from operations of approximately $2.6 million, due primarily to non-cash
      stock-based compensation in 2006, offset by approximately $3.0 million of other
      income recorded for the change in fair value liabilities of warrants and
      embedded derivatives. Net loss increased to $9.9 million for the nine months
      ended September 30, 2006, from $7.7 million for the comparative prior year
      period due to an increase in loss from operations of approximately $2.9 million,
      due primarily to non-cash stock based compensation in 2006, offset by
      approximately $1.1 million of other income recorded for the change in fair
      value
      liabilities of warrants and embedded derivatives.




24




The
      Company has approximately $13 million of net operating loss carry-forwards
      at
      December 31, 2005 potentially available to offset future income taxes which
      expire through 2025.  Realization is dependent on generating sufficient
      taxable income prior to expiration of the loss carry-forwards.  A change of
      greater than 50% of the Company ownership could significantly reduce the
      availability of these carryforwards.  The Company continues to provide a
      full valuation allowance to reduce its net deferred tax asset to zero, inasmuch
      as Company management has not determined that realization of deferred tax assets
      is more likely than not.





Liquidity
      and Capital Resources - Historically,
      our cash needs have been satisfied primarily through proceeds from private
      placements of our equity securities and debt instruments including debt
      instruments convertible into our equity securities.  We expect to continue
      to be required to raise capital in the future, but cannot guarantee that such
      financing activities will be sufficient to fund our current and future projects
      and our ability to meet our cash and working capital needs.




At
      September 30, 2006, we had a working capital deficit of approximately $3.8
      million, compared to a working capital deficit of $7.4 million at December
      31,
      2005 (which included $3.6 million of fair value liabilities for warrants and
      embedded derivatives, or $3.8 million excluding fair value liabilities).
 At September 30, 2006, we had total assets of approximately $7.1 million
      and a total stockholders’ deficit of approximately $1.1 million compared with
      total assets of approximately $3.1 million and total stockholder's deficit
      of
      approximately $6.5 million at December 31, 2005.




During
      the nine months ended September 30, 2006, cash used by operating activities
      increased to approximately $2.1 million from $1.0 million during the comparative
      prior year period, due primarily to an increase in net loss.





During
      the nine months ended September 30, 2006, cash used by investing activities
      increased to approximately $1.9 million relating to capital expenditures on
      the
      recycling plant as compared to $1.3 during the comparative prior year
      period.





During
      the nine months ended September 30, 2006, cash provided by financing activities
      increased to approximately $4.2 million from $2.4 million during the comparative
      prior year period. During 2006, the Company received net (of offering related
      costs) proceeds of approximately $5.7 million (excluding receivable for cash
      in
      escrow for securities sold) from sales of private placement units comprised
      of
      convertible promissory notes and warrants and subordinated notes and warrants.
      Also during 2006, the Company repaid $1.2 million of notes payable.




At
      September 30, 2006, the Company does not have sufficient cash to meet its needs
      for the next twelve months. However, the Company continues to be in the process
      of raising funds, and Company management anticipates being able to raise
      sufficient cash to meet the Company’s needs into 2007. There is no guarantee,
      however, that our efforts will result in raising cash in amounts sufficient
      to
      meet the Company’s needs.




Off-Balance
      Sheet Arrangements **** - We
      do not
      have any off balance sheet arrangements that have or are likely to have a
      material current or future effect on the Company's financial condition, or
      changes in financial condition, liquidity or capital resources or
      expenditures.





Recent
      accounting pronouncements - In
      May
      2005, the FASB issued Statement of Financial Accounting Standards No. 154,
      “Accounting Changes and Error Corrections,” (“SFAS 154”). SFAS 154 replaces APB
      Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting
      Changes in Interim Financial Statements,” and changes the requirements for the
      accounting for and reporting of a change in accounting principle. The Company
      is
      required to adopt SFAS 154 in 2006. The Company’s results of operations and
      financial condition will only be impacted by SFAS 154 if the Company implements
      changes in accounting principles that are addressed by the standard or corrects
      accounting errors in future periods.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN No. 48”),
      which prescribes a recognition threshold and measurement process for recording
      in the financial statements uncertain tax positions taken or expected to be
      taken in a tax return. Additionally, FIN No. 48 provides guidance on
      the recognition, classification, accounting in interim periods and disclosure
      requirements for uncertain tax positions. The accounting provisions of
      FIN No. 48 will be effective for the Company beginning January 1,
      2007. The Company is in the process of determining the effect, if any, that
      the
      adoption of FIN No. 48 will have on its consolidated results of
      operations or financial position.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, “ *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* ”
(SAB
      108).  SAB 108 provides interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement.  The SEC staff believes that
      registrants should quantify errors using both a balance sheet and income
      statement approach and evaluate whether either approach results in quantifying
      a
      misstatement that, when all relevant quantitative and qualitative factors
      considered, is material.  SAB 108 is effective for fiscal years ending on
      or after November 15, 2006, with early application encouraged.  The Company
      believes that SAB 108 will not have a significant impact on its consolidated
      results of operations or financial position.





In
      September 2006, the FASB released SFAS No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
      Statements No. 87, 88, 106, and 132(R).” Under the new standard, companies must
      recognize a net liability or asset to report the funded status of their defined
      benefit pension and other postretirement benefit plans on their balance sheets.
      The recognition and disclosure provisions of SFAS No. 158 are effective for
      periods beginning after December 15, 2006. Although the Company is still
      evaluating the potential effects of this standard, it is expected that the
      adoption of SFAS No. 158 will not have a significant impact on its consolidated
      results of operations or financial position.




In
      October 2006, the FASB issued FASB Staff Position No. 123R-5, “ *Amendment
      of FASB Staff Position FAS 123(R)-1* ”.
      The
      FSP amends FSP 123(R)-1 for equity instruments that were originally issued
      as
      employee compensation and then modified, with such modification made to the
      terms of the instrument solely to reflect an equity restructuring that occurs
      when the holders are no longer employees. In such circumstances, no change
      in
      the recognition or the measurement date of those instruments will result if
      both
      of the following conditions are met: a. There is no increase in fair value
      of
      the award (or the ratio of intrinsic value to the exercise price of the award
      is
      preserved, that is, the holder is made whole), or the antidilution provision
      is
      not added to the terms of the award in contemplation of an equity restructuring;
      and b. All holders of the same class of equity instruments (for example, stock
      options) are treated in the same manner. The Company believes that FSP 123(R)-5
      will not have a significant impact on its consolidated results of operations
      or
      financial position.





25




PART
      II -
      OTHER INFORMATION





**Item
      1.** **Legal
      Proceedings**





In
      May
      2006, a complaint was filed against the Company by Rose Waste Systems, Inc.
      (“plaintiff”) in an action for monetary damages for, among other claims, the
      purchase price of certain
      plastic recycling processing equipment (the “equipment”) acquired by the Company
      from a third party vendor. In September 2006, the Company entered into a
      settlement agreement with the plaintiff, and in connection therewith, among
      other things, issued the plaintiff 2,564,103 shares of the Company’s common
      stock, which has been recorded as settlement expense of approximately $282,000
      and which is included in general and administrative expense.





Other
      than as disclosed, the Company is not currently involved in any legal proceeding
      not previously reported that is not in the ordinary course of business or is
      material to the assets of the Company.




**Item
      2.** **Unregistered
      Sales of Equity Securities and Use of Proceeds**





Registrant
      has sold securities in reliance on an exemption from the registration
      requirements of the Securities Act of 1933 during the period covered by this
      report. Disclosure of such sales is included in Note 6 to the financial
      statements presented in Part I of this report on Form 10-QSB which is hereby
      incorporated herein by reference, to the extent not previously disclosed in
      any
      other prior report.




**Item
      3.****Defaults
      Upon Senior Securities**





Not
      applicable.




**Item
      4.** **Submission
      of matters to a Vote of Securities Holders**





Not
      applicable.




**Item
      5.** **Other
      Information**





Entry
      Into a Material Definitive Agreement





In
      January 2006, the Company entered into an agreement with KW Securities, Inc.
      (“KW”), a registered broker dealer and company owned by Mr. Krause, one of the
      Company’s Directors. Under the terms of this agreement, KW is to act as
      placement agent and provide services related to the Company’s private offering
      for a term of eighteen months. Pursuant to this agreement, the Company agreed
      to
      pay KW for the initial $5,000,000 raised under the private offering one warrant
      share for each $1.00 raised by KW with a strike price of $0.06 per
      share/cashless; and for any remaining amounts raised, 1.875 warrant shares
      for
      each $1.00 raised by KW with a strike price of $0.06 per share/cashless. The
      warrant shall be issued at the closing based on the number of securities sold
      at
      the closing of the private offering.





In
      March
      2006, the Company entered into an agreement with TSG, LLC (“TSG”) for executive
      recruiting services. Pursuant to the terms of the engagement agreement, the
      Company is obligated to pay compensation based on first-year compensation of
      placed executives. Pursuant to the agreement and placement of the Company’s
      Chief Executive Officer, TSG is entitled to receive 8,190,769 shares of Company
      common stock, of which 5,770,769 shares are fully-vested, and of which 2,420,000
      shares vest in September 2007.





In
      2006,
      the Company entered into a Funding Agreement (referenced above) with Itec
      Capital Group, LLC (“ICG”), a Washington limited liability company owned by the
      managing partner of OLG, who is one of the Company’s Directors, and Lawrence
      Krause, one of the Company’s Directors, and KW Securities, Inc., (“KW”), a
      registered broker dealer, a company owned by Mr. Krause. Pursuant to terms
      of
      the Funding Agreement, the Company agreed to pay fees of 8% of Notes payable
      issued pursuant to certain financings and issue warrants based on securities
      sold and common shares convertible or exercisable into.





In
      November 2006, the Company, ICG and Excipio mutually agreed to terminate the
      prior Funding Agreement prior to the end of its term and entered into a mutual
      settlement and release agreement, pursuant to which, among other things, the
      Company agreed to pay $428,700 and issue a warrant to purchase 1,440,000 shares
      of Company common stock with an exercise price of $0.06 per share for
      approximately three and one-half years and a warrant to purchase 3,748,000
      shares of Company common stock with an exercise price of $0.12 per share for
      approximately eight and one-half years.





Additionally,
      if certain Company notes payable convert into Company common stock before
      February 6, 2007, Excipio shall be issued shares of Company common stock based
      on amounts of notes converted. The $428,700 is payable, $200,000 was due upon
      execution of the settlement agreement and the remainder is due in varying
      amounts based on certain conditions, in full no later than May 2007. In
      connection with the settlement agreement, the consulting agreement between
      ICG
      and Excipio was cancelled and any further obligation under the consulting
      agreement has been waived and dismissed. The Funding Agreement between the
      Company and ICG was amended to reflect the settlement of fees and expenses
      owed
      and paid under the Funding Agreement and that no additional fees or expenses
      shall accrued or become due in accordance with the Funding
      Agreement.




In
        November 2006, the Company and Honeywell International, Inc. (Honeywell)
        amended
        certain terms of the license agreement entered into by the parties in 2000;
        which, among other things, made the license grant to the Company an exclusive,
        nontransferable, worldwide license to practice the methods and to make, use,
        and
        sell, the products and/or services covered by the Proprietary Rights limited
        to
        the field of use, as defined, and to certain sublicense rights. Pursuant
        to
        terms of the amendment, the first annual minimum payment is due in February
        2007.




26




**Item
      6.** **Exhibits**





[See
      Exhibit Index below after signatures]





27





SIGNATURES








Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      report has been signed by the following persons on behalf of the Registrant
      in
      the capacities and on the dates indicated.





ITEC
                ENVIRONMENTAL GROUP, INC.November
                  20, 2006
            
            
            /s/
                Rodney S. RougelotRodney
                S. RougelotDirector
                & Chief Executive Officer(Principal
                Executive Officer)November
                  20, 2006
            
            
            /s/
                Frederick Smith, Jr.Frederick
                Smith, Jr.Chief
                Financial Officer




28




EXHIBIT
      INDEX





Exhibit
                No.
            Description
            
            Location3.1(i)
            Amendment
                to Restated Certificate of Incorporation
            
            Incorporated
                by reference to Exhibit A to the DEFR14C filed by the Company on
                November
                30, 20053.2(i)
            Restated
                Certificate of Incorporation
            
            Incorporated
                by reference to Exhibit B to the DEF-14C filed by the Company on
                September
                9, 20023.3(i)
            Certificate
                of Incorporation
            
            Incorporated
                by reference to the Form S-18 Registration Statement filed by the
                Company
                File No. 33-31-673.4(ii)
            Bylaws
            
            Incorporated
                by reference to Exhibit B to the DEF-14C filed by the Company on
                September
                9, 200210.1
            Honeywell
                Patent License Agreement Amendment 4
            
            Attached10.2
            Funding
                Agreement
            
            Attached10.3
            Mutual
                Settlement and Release Agreement
            
            Attached10.4
            TSG,
                LLC Service Agreement
            
            Attached10.5
            KW
                Securities Corp. Engagement Agreement
            
            To
                be filed by amendment.31.1
            Certification
                of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
            
            Attached31.2
            Certification
                of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
            
            Attached32
            Certification
                of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley
                Act
            
            Attached





29