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, 2007





Commission
      File Number: #033-31067





ECO2
      PLASTICS, INC.


(f.k.a.,
      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)





680
      Second Street, Suite 200


San
      Francisco, CA 94107


(Address
      of principal executive offices)(Zip Code)





(415)
      829-6000


(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 [ ]





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





The
      number of shares of the Company's common stock issued and outstanding on October
      31, 2007 is 199,610,182.













Transitional
      Small Business Disclosure Format (Check One):  Yes
      [  ]    No [ X ]





1










ECO2
      PLASTICS, 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
            16Item
                3
            
            Controls
                and Procedures
            21PART
                II
            
            OTHER
                INFORMATION
            22Item
                1
            
            Legal
                Proceedings
            22Item
                2
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            22Item
                3
            
            Defaults
                Upon Senior Securities
            22Item
                4
            
            Submission
                of Matters to a Vote of Security Holders
            22Item
                5
            
            Other
                Information
            22Item
                6
            
            Exhibits
            22SIGNATURES
            
            
            23












2










PART
      I - FINANCIAL INFORMATION




**ECO****2****Plastics, Inc.**
 Condensed
          Balance Sheets
 (in
          thousands, except share
          data)


September
                  30,
              
              
              December
                  31,2007
              
              
              2006Current
                  assets
              
              (unaudited)Cash
                  and cash equivalents
              
              $
              281
              
              
              $
              97Receivable
                  for cash in escrow for securities sold
              
              
              9
              
              
              
              1,244Accounts
                  receivable
              
              
              539
              
              
              
              -Inventory
              
              
              286
              
              
              
              213Prepaid
                  expenses and other current assets
              
              
              2
              
              
              
              62Total
                  current assets
              
              
              1,117
              
              
              
              1,616Property
                  and equipment, net
              
              
              8,049
              
              
              
              5,894Deferred
                  debt issue costs, net
              
              
              866
              
              
              
              2,736Other
                  assets
              
              
              47
              
              
              
              37Total
                  assets
              
              $
              10,079
              
              
              $
              10,283Current
                  liabilitiesAccounts
                  payable
              
              $
              2,301
              
              
              $
              534Accounts
                  payable - related party
              
              
              533
              
              
              
              468Accrued
                  liabilities
              
              
              388
              
              
              
              709Current
                  portion of capital lease obligations
              
              
              2
              
              
              
              7Accrued
                  interest on notes payable
              
              
              1,195
              
              
              
              374Notes
                  payable to directors, net of debt discount of $1,239
              
              
              1,112
              
              
              
              -Current
                  portion of convertible notes payable, net of debt discountHeld
                  by related party Directors, net of debt discount of $2,997 and
                  $1,567
              
              
              3,424
              
              
              
              783Held
                  by others, net of debt discount of $2,439 and $1,613
              
              
              4,423
              
              
              
              1,409Current
                  portion of note payable to California Integrated Waste Management
                  Board
              
              
              198
              
              
              
              192Participation
                  Certificates obligations issued prior to 2004
              
              
              354
              
              
              
              354Total
                  current liabilities
              
              
              13,930
              
              
              
              4,830Non-current
                  liabilitiesCapital
                  lease obligations, net of current portion
              
              
              -
              
              
              
              9Convertible
                  notes payable, net of debt discount and current portionHeld
                  by related party Directors, net of debt discount of $0 and
                  $4,264
              
              
              -
              
              
              
              420Held
                  by others, net of debt discount of $ 0 and $417
              
              
              -
              
              
              
              588Note
                  payable to California Integrated Waste Management Board, net of
                  current
                  portion
              
              
              1,537
              
              
              
              1,706Total
                  non-current liabilities
              
              
              1,537
              
              
              
              2,723Total
                  liabilities
              
              
              15,467
              
              
              
              7,553Commitments
                  and contingencies (Note 6)Stockholders'
                  Equity (deficit)Preferred
                  stock, $0.001 par value, 10,000,000 shares authorized, none
                  issued
              
              
              -
              
              
              
              -Common
                  stock, $0.001 par value, 750,000,000 shares authorized,178,312,457
                  and 114,263,824 shares issued and outstanding
              
              
              178
              
              
              
              1148,450,456
                  and 15,083,715 shares issuable
              
              
              9
              
              
              
              15Additional
                  paid-in capital
              
              
              63,945
              
              
              
              48,747Deferred
                  stock-based consulting
              
              
              (98
              )
              
              
              -Accumulated
                  deficit
              
              
              (69,422
              )
              
              
              (46,146
              )Total
                  stockholders' equity (deficit)
              
              
              (5,388
              )
              
              
              2,730Total
                  liabilities and stockholders' equity (deficit)
              
              $
              10,079
              
              
              $
              10,283





See
      accompanying notes to condensed financial statements.


3


**ECO****2****Plastics, Inc.**
 Condensed
        Statements of Operations


(in
        thousands, except share
        data)
 (unaudited)


Three
                    months ended
                
                
                Nine
                    months endedSeptember
                    30, 2007
                
                
                
                
                
                September
                    30, 20072007
                
                
                2006
                
                
                2007
                
                
                2006Revenue
                
                $
                1,449
                
                
                $
                -
                
                
                $
                1,966
                
                
                $
                50Cost
                    of goods sold
                
                
                1,247
                
                
                
                -
                
                
                
                1,850
                
                
                
                45Gross
                    profit
                
                
                202
                
                
                
                -
                
                
                
                116
                
                
                
                5Operating
                    expensesPlant
                    operations and technology development
                
                
                1,708
                
                
                
                543
                
                
                
                4,264
                
                
                
                1,250Consulting
                    and legal fees
                
                
                136
                
                
                
                1,257
                
                
                
                614
                
                
                
                3,474General
                    and administrative
                
                
                1,823
                
                
                
                3,651
                
                
                
                6,000
                
                
                
                4,069Settlement
                    expense
                
                
                (60
                )
                
                
                282
                
                
                
                680
                
                
                
                403Total
                    operating expenses
                
                
                3,607
                
                
                
                5,733
                
                
                
                11,558
                
                
                
                9,196Loss  from
                    operations
                
                
                (3,405
                )
                
                
                (5,733
                )
                
                
                (11,442
                )
                
                
                (9,191
                )Other
                    income (expense)Interest
                    expense
                
                
                (4,686
                )
                
                
                (1,058
                )
                
                
                (11,834
                )
                
                
                (1,902
                )Gain
                    on extinguishment of debt
                
                
                -
                
                
                
                87
                
                
                
                -
                
                
                
                87Change
                    in fair value liability of warrants and derivatives
                
                
                -
                
                
                
                3,024
                
                
                
                -
                
                
                
                1,071Total
                    other income (expense)
                
                
                (4,686
                )
                
                
                2,053
                
                
                
                (11,834
                )
                
                
                (744
                )Loss
                    before income taxes
                
                
                (8,091
                )
                
                
                (3,680
                )
                
                
                (23,276
                )
                
                
                (9,935
                )Income
                    taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
                    loss
                
                $
                (8,091
                )
                
                $
                (3,680
                )
                
                $
                (23,276
                )
                
                $
                (9,935
                )Net
                    loss per share, basic and diluted
                
                $
                (0.05
                )
                
                $
                (0.05
                )
                
                $
                (0.16
                )
                
                $
                (0.14
                )Weighted
                    average shares used in computingnet
                    loss per share, basic and diluted
                
                
                156,997
                
                
                
                77,616
                
                
                
                141,168
                
                
                
                70,951


See
      accompanying notes to condensed financial statements.


4


**ECO****2****Plastics, Inc.**
 Condensed
        Statement of Changes in Stockholder
        Equity (Deficit)
 For
        the Nine Months Ended September 30,
        2007
 (in
        thousands, except share
        data)
 (unaudited)
 Common
                    Stock
                
                
                Additional
                
                
                DeferredCommon
                    stock
                
                
                Issuable
                
                
                paid-in
                
                
                stock-based
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                capital
                
                
                consulting
                
                
                deficit
                
                
                TotalBalance
                    at December 31, 2006
                
                
                114,263,824
                
                
                $
                114
                
                
                
                15,083,715
                
                
                $
                15
                
                
                $
                48,747
                
                
                $
                -
                
                
                $
                (46,146
                )
                
                $
                2,730Shares
                    issued and issuable for warrant exercises
                
                
                3,269,596
                
                
                
                3
                
                
                
                850,000
                
                
                
                1
                
                
                
                (2
                )
                
                
                
                
                
                
                
                
                
                
                2Shares
                    issued and issuable for services
                
                
                3,042,419
                
                
                
                3
                
                
                
                527,992
                
                
                
                1
                
                
                
                616
                
                
                
                (98
                )
                
                
                
                
                
                
                522Issuance
                    of shares for accrued compensation
                
                
                492,308
                
                
                
                1
                
                
                
                
                
                
                
                
                
                
                
                132
                
                
                
                
                
                
                
                
                
                
                
                133Issuance
                    of shares recorded as issuable in 2006
                
                
                15,083,715
                
                
                
                15
                
                
                
                (15,083,715
                )
                
                
                (15
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Shares
                    issued for executive compensation
                
                
                1,100,000
                
                
                
                1
                
                
                
                
                
                
                
                
                
                
                
                291
                
                
                
                
                
                
                
                
                
                
                
                292Shares
                    issuable for settlement
                
                
                
                
                
                
                
                
                
                
                5,000,000
                
                
                
                5
                
                
                
                670
                
                
                
                
                
                
                
                
                
                
                
                675Warrants
                    issued for services
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                482
                
                
                
                
                
                
                
                
                
                
                
                482Stock-based
                    compensation expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,490
                
                
                
                
                
                
                
                
                
                
                
                2,490Value
                    of beneficial conversion featureand
                    warrants issued with notes payable
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,433
                
                
                
                
                
                
                
                
                
                
                
                7,433Shares
                    vested for executive compensation
                
                
                11,040,000
                
                
                
                11
                
                
                
                
                
                
                
                
                
                
                
                (11
                )
                
                
                
                
                
                
                
                
                
                
                -Shares
                    issued and issuable upon conversionof
                    notes payable and related accrued interest
                
                
                30,020,595
                
                
                
                30
                
                
                
                2,072,464
                
                
                
                2
                
                
                
                3,097
                
                
                
                
                
                
                
                
                
                
                
                3,129Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (23,276
                )
                
                
                (23,276
                )Balance
                    at September 30, 2007
                
                
                178,312,457
                
                
                $
                178
                
                
                
                8,450,456
                
                
                $
                9
                
                
                $
                63,945
                
                
                $
                (98
                )
                
                $
                (69,422
                )
                
                $
                (5,388
                )


See
      accompanying notes to condensed financial statements.





5




**ECO****2****Plastics, Inc.**


**Notes
      to Condensed Financial Statements**


**September
      30, 2007**


**(unaudited)**





Nine
                Months ended September 30,2007
            
            
            2006Cash
                flows from operating activities:Net
                loss
            
            $
            (23,276
            )
            
            $
            (9,935
            )Adjustments
                to reconcile net loss to net cashused
                by operating activities:Depreciation
                and amortization
            
            
            788
            
            
            
            355Gain
                on extinguishment of debt
            
            
            -
            
            
            
            87Change
                in fair value of warrants and derivatives
            
            
            -
            
            
            
            (1,071
            )Stock-based
                compensation
            
            
            3,871
            
            
            
            6,139Amortization
                of debt issue costs  and discount
            
            
            10,658
            
            
            
            1,225Provision
                for settlement
            
            
            675
            
            
            
            -Expenses
                paid by issuance of notes payable
            
            
            75
            
            
            
            -Changes
                in operating assets and liabilities:
            
            
            
            
            
            
            -Accounts
                receivable
            
            
            (539
            )
            
            
            -Inventory
            
            
            (73
            )
            
            
            (8
            )Prepaid
                expenses and deposits
            
            
            50
            
            
            
            -Accounts
                payable
            
            
            1,832
            
            
            
            553Accrued
                liabilities, less converted accrued interest
            
            
            824
            
            
            
            589Other
            
            
            -
            
            
            
            (58
            )Net
                cash used by operating activities
            
            
            (5,115
            )
            
            
            (2,124
            )Cash
                flows from investing activities:Purchase
                of property, plant & equipment
            
            
            (2,943
            )
            
            
            (1,871
            )Net
                cash used by investing activities
            
            
            (2,943
            )
            
            
            (1,871
            )Cash
                flows from financing activities:Decrease
                in restricted cash in CIWMB escrow
            
            
            -
            
            
            
            58Payments
                on CIWMB note payable
            
            
            (163
            )
            
            
            (68
            )Principal
                payments on capital lease obligations
            
            
            (14
            )
            
            
            (5
            )Proceeds
                from issuance of notes payable
            
            
            6,235
            
            
            
            5,672Principal
                payments on notes payable
            
            
            -
            
            
            
            (1,200
            )Proceeds
                from exercise of warrants
            
            
            2
            
            
            
            -Payments
                of debt issue costs
            
            
            (169
            )
            
            
            (311
            )Proceeds
                from notes payable - directors and officers
            
            
            2,651
            
            
            
            96Repayment
                of notes payable - directors and officers
            
            
            (300
            )
            
            
            -Net
                cash provided  by financing activities
            
            
            8,242
            
            
            
            4,242Net
                decrease  in cash and cash equivalents
            
            
            184
            
            
            
            247Cash
                and cash equivalents, beginning of period
            
            
            97
            
            
            
            32Cash
                and cash equivalents, end of period
            
            $
            281
            
            
            $
            279**Supplemental
                disclosures of cash flow information:**Cash
                paid for interest
            
            $
            61
            
            
            $
            263Cash
                paid for income taxes
            
            $
            -
            
            
            $
            -**Supplemental
                disclosures of non-cash investing and financing
                activities:**Debt
                discount
            
            $
            7,351
            
            
            $
            4,707Debt
                issue costs
            
            $
            82
            
            
            $
            1,314Reclassification
                of derivative liability to equity
            
            $
            -
            
            
            $
            8,322Conversion
                of notes and interest to common stock
            
            $
            3,054
            
            
            $
            52




See
      accompanying notes to condensed financial
      statements.





6








**Note
      1. Description of Business and Summary of Significant Accounting
      Policies**




Organization
      and Business– ECO2 Plastics,
      Inc.
      (f.k.a. Itec Environmental Group, Inc.) was incorporated under the laws of
      the
      State of Delaware in 2000, and formed for the purpose of acquiring certain
      patented technology and the development of a worldwide market for its
      usage.  In March 2007, the Company changed its name to ECO2 Plastics,
      Inc.
      (“ECO2”) or the
      (“Company”).





ECO2
      has developed a
      unique and revolutionary patented process and system, referred to as the
      Eco2TM
      Environmental
      System (the “Eco2 Environmental
      System”). The Eco2 Environmental
      System cleans post-consumer plastics, without the use of water, at a substantial
      cost savings versus traditional methods (the “Process”). This Process is
      licensed from Honeywell Federal Manufacturing & Technologies, LLC
      (“Honeywell”) and the Department of Energy on an exclusive basis for the patent
      life. Since its inception, ECO2has invested
      in the
      development of the technology and equipment comprising the Eco2 Environmental
      System, which includes a “Process Patent” granted in August 2007. This included
      building several scaled up versions of the Prototype Eco2 Environmental
      System (the “Prototype”), testing of the Prototypes, building a pilot plant,
      evaluating the product produced by the Prototype and real-time testing. The
      Company’s first full scale production facility was constructed in Riverbank,
      California and is now producing saleable product and ramping up to full scale
      operations.  ECO2’s goal is
      to build
      and operate plastic recycling plants (the “ECO2Plants”) in the
      USA
      that utilize the Eco2 Environmental
      System and to expand the Eco2 Environmental
      System worldwide. ECO2’s growth
      strategy
      includes organic growth, strategic acquisitions and licensing or partnership
      agreements, where appropriate.





Business
      risks and uncertainties - The Company operates in the evolving field of
      plastics materials recycling and its business is reliant on its licensing of
      technology from Honeywell. 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, among other things, 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 condensed financial
      statements have been prepared in conformity with accounting principles generally
      accepted in the United States of America, which contemplate the Company’s
      continuation as a going concern. Since inception, 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. During the nine months ended September 30, 2007, the Company
      reported a net loss of approximately $23.3 million and used cash in operating
      activities of approximately $5.1 million, and as of September 30, 2007, had
      a
      working capital deficit of $12.8 million and a stockholders’ deficit of $5.4
      million, including accumulated losses from inception of $69.4
      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 the nine months ended September 30, 2007, the Company
      received cash of approximately $6.2 million pursuant to sales of securities
      in
      connection with its private placement and subordinated debt offerings, and
      received additional cash of approximately $2.4 million from certain members
      of
      the Company’s Board of Directors pursuant to terms of short-term notes
      payable.  Subsequent to September 30, 2007, the Company has received
      $100,000 of additional loans from Directors.  There is no assurance
      that continued financing proceeds 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 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.




Interim
      Financial Statements - The unaudited interim condensed financial statements
      and related notes are presented in accordance with the rules and regulations
      of
      the Securities and Exchange Commission with regard to interim financial
      information.  Accordingly, the condensed financial statements 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 for a fair
      presentation of the Company’s financial position, results of operations and cash
      flows for the interim periods presented have been included.  Results
      of operations for the interim periods ended September 30, 2007 are not
      necessarily indicative of results to be expected for the entire fiscal year
      ending December 31, 2007 or for any other future interim period.  The
      accompanying unaudited interim condensed financial statements should be read
      in
      connection with the audited annual financial statements included in the
      Company’s December 31, 2006 Annual Report on Form 10–KSB.





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 accounts receivable
      and inventories, valuation of equity related instruments and derivatives issued,
      and valuation allowance for deferred income tax assets.





7


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– In connection with the sale of its
      securities, cash is received into escrow for the sale of notes payable and
      warrants, a portion of which had not been transferred to the Company as of
      the
      reporting period date, and which has subsequently been received by the
      Company.




Accounts
      Receivable and allowance for doubtful accounts - The Company’s accounts
      receivable are due from companies in the packaging, manufacturing and recycling
      industries.  Payments from customers are due within 30 days after a
      satisfactory credit check.  If not satisfactory, payment is required
      in advance of shipment. Accounts receivable are stated at amounts due from
      customers net of an allowance for doubtful accounts.  Accounts
      outstanding beyond payment terms are considered past due.  The Company
      determines its allowance by considering a number of factors, including the
      length of time accounts receivable are past due, the Company’s previous loss
      history, the customer’s current ability to pay its obligation to the Company,
      and the condition of the general economy and the industry as a
      whole.  The Company writes off accounts receivable when they become
      uncollectible, and payments subsequently collected on such accounts are debited
      to the allowance for doubtful accounts and credited to bad debt
      expense.





Inventories–
      Inventories recorded at cost and determined on a first-in-first out basis,
      and  at September 30, 2007 consist of $155,000 of raw materials,
      $17,000 of work-in-process and $114,000 of finished goods.




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, 3 years for
      furniture and fixtures, 3 years for manufacturing equipment, 7 years for the
      recycling plant, and the lease term for leasehold improvements.





Impairment
      of long-lived assets– Long-lived assets are reviewed for impairment at least
      annually, and whenever events or changes in circumstances indicate that the
      carrying amount of the assets may not be recoverable. Impairment of long-lived
      assets would be recognized in the event that the net book values of such assets
      exceed the future undiscounted cash flows attributable to such
      assets.





Deferred
      debt issue costs– The Company capitalizes costs incurred in connection with
      borrowings.  These costs are amortized as an adjustment to interest
      expense over the life of the borrowing.





Debt
      discount– The Company records, as applicable, fees paid to lenders, the fair
      value of warrants issued with debt securities, value of beneficial conversion
      features of convertible debt, or fair value of derivatives embedded in
      convertible debt instruments relating to debt securities, as a debt discount,
      which is amortized as an adjustment to interest expense over the life of the
      borrowing.




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, receivables, accounts payable and accrued liabilities, the carrying
      amounts approximate fair value due to their short maturities. Amounts recorded
      for notes payable, net of discount, 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 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.





8


Revenue
      recognition - The Company recognizes revenue when there is persuasive
      evidence of an arrangement, the product has been delivered to the customer,
      the
      sales price is fixed or determinable, and collectability is reasonably assured.
      The Company recognizes revenues from sales of recycled products upon shipment
      to
      customers.   Amounts received in advance of when products are
      delivered are recorded as liabilities in the accompanying balance
      sheet.





Cost
      of goods sold– Cost of goods sold includes the cost of raw materials
      processed, and during 2007 includes write-downs for scrap and waste product
      of
      approximately $122,000.





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 taxes 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– The Company accounts for stock-based compensation in
      accordance with *Statement of Financial Accounting Standard (“SFAS”) No.
      123R, 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 requires that such transactions be accounted
      for using a fair-value-based method, which requires recording expense over
      the
      requisite service period for the fair value of options or warrants granted
      to
      employees and consultants.





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 periods,
      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, 2007, exclude 136,231,211 shares relating to common
      stock issuable upon conversion of convertible notes payable, and 172,914,521
      shares issuable upon exercise of outstanding and issuable warrants to purchase
      common stock. 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.




Reclassifications–
      Certain amounts in 2006 financial statements have been reclassified or rounded
      to conform to 2007 presentations.





Recent
      accounting pronouncements - In July 2006, the FASB issued FASB
      Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(“FIN  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. FIN 48 is effective for the Company beginning January 1,
      2007, and the adoption did not have a significant impact on the Company’s
      consolidated results of operations or financial position.





In
      December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2
“*Accounting for Registration Payment Arrangements*” (FSP EITF 00-19-2”),
      which addresses an issuer’s accounting and disclosures relating to registration
      payment arrangements.  Unless the Company was to enter into
      registration payment arrangements, it is not expected that FSP EITF 00-19-2
      will
      have a significant impact on the Company’s financial position, results of
      operations, or cash flows.





9


**Note
      2.  Technology License**





Pursuant
      to terms of a license agreement entered into by the Company and Honeywell
      International, Inc. (“Honeywell”), as amended, the Company obtained an
      exclusive, nontransferable, worldwide license rights for the life of the
      underlying patent to practice the methods and to make, use, and sell the
      products and/or services and to certain sublicense rights, 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 agreement, the
      Company is required to pay royalties at a rate of $0.005 per pound of recycled
      plastics sold, with 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.  Honeywell may terminate this agreement in the event of,
      among other things, the nationalization of the industry which encompasses any
      products or services, any suspension of payments under the terms of the
      agreement by government regulation, 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.





**Note
      3.  Convertible Notes Payable**





Convertible
      notes payable and related unamortized debt discount at September 30, 2007,
      all
      of which are classified as current liabilities, consist of the following (in
      thousands):


**Unamortized**                                           **Notes, net of**


**Notes**                       **Debt
      discount**                                          **debt
      discount**


Private
      Placement
      Notes                                          $
      12,934                        $
      (  5,436)                                                  $    7,498


Subordinated
      Notes                                                  349                          (          -)                                                  349


Total                                                                       $
      13,283                       $
      (  5,436)                                                  
$    7,847





Private
      Placement Notes- The Company received funds into escrow pursuant to a
      private placement memorandum (the “PPM”) 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 until April 15, 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 Private Placement Notes are collateralized by a security interest
      in
      substantially all of the Company’s assets, which such security interest is
      subordinated only to the security interest granted to CIWMB.  The
      Private Placement notes rank pari passu with the Subordinated Notes described
      below.  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.  During 2006, proceeds for
      approximately $7.9 million of Private Placement Notes had been received into
      escrow, and as a result the Company has recorded convertible notes payable
      and
      approximately 23.7 million warrants.  At December 31, 2006,
      approximately $1.2 million of escrowed funds had not been disbursed to the
      Company, which was reported as a receivable for cash in escrow for securities
      sold, and which was received by the Company in 2007.  During 2006,
      holders of $150,000 of other notes payable converted those notes, plus accrued
      interest into subscription units comprised of approximately $159,000 of Private
      Placement Notes and 450,000 warrants, and the Company also issued $60,000 of
      Private Placement Notes and 180,000 Private Placement Warrants.  In
      2006, debt discount of approximately $7.7 million was recorded, of which
      approximately $3.0 million was recorded during the nine months ended September
      30, 2006.  As of December 31, 2006, the offering had not closed and
      the debentures and warrants not been issued.   On February 1,
      2007, the offering closed and subsequently, the debentures and warrants were
      issued.





Prior
      to
      August 18, 2006, the Company had certain notes payable outstanding that included
      a variable conversion price, which qualified the embedded conversion option
      as a
      derivative pursuant to SFAS 133 and related interpretations, since the
      conversion price the ability to have enough authorized common shares to fulfill
      its potential obligations under convertible debt contracts was not under Company
      control.  In such circumstances, the debenture instrument is separated
      into a debt instrument and an 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 the statement
      of
      operations as other income or expense.  The existence of the absence
      of the ability to have enough authorized common shares to fulfill its potential
      obligations for the repaid notes, required that all conversion features and
      all
      warrants outstanding also be accounted for at fair value and marked to fair
      value through the statement of operations.





At
      Private Placement Note issuance dates through August 18, 2006, the total fair
      value liability recorded for Private Placement Note embedded conversion options
      and Private Placement Warrants was approximately $3.8 million and at August
      18,
      2006, the total fair value liability recorded was $2.4 million. The full fair
      value of the warrants of approximately $1.1 million, and $1.5 million of the
      $2.7 million fair value of the embedded conversion feature were allocated to
      debt discount, the maximum to be recorded, and the remaining $1.2 million to
      operations for the year ended December 31, 2006, respectively, as a change
      in
      fair value of warrants and derivatives.  At August 18, 2006, when the
      Company no longer had an inability to have enough authorized common shares
      to
      fulfill its potential obligations, the fair value liability of approximately
      $2.4 million recorded was reclassified to additional paid-in
      capital.





During
      the three and nine months ended September 30, 2007, the Company received
      approximately $1 million and $5 million, respectively, pursuant to investment
      terms substantially similar to the PPM (the “Additional
      Investment”).  As a result the Company issued $5 million junior
      secured subordinated convertible debentures, 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 15,000,000
      shares of restricted common stock of the Company, exercisable until April 15,
      2015, at an exercise price of $0.06 per share.  The conversion price
      of the debenture 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 debentures rank pari passu with Private Placement Notes
      and Subordinated Notes and is subordinated only to the security interest granted
      to CIWMB.  Shares underlying the debenture and warrants are subject to
      piggy back registration rights.  In connection with the Additional
      Investment, the Additional Investment’s placement agent received cash fees of
      approximately $100,000 and received warrants, with a cashless exercise
      provision, to purchase 382,429 shares of restricted common stock of the Company
      at a per share price of $0.06 exercisable for 10 years.  Pursuant to
      rights and terms of the Additional Investment purchase agreement, the holder
      of
      $2 million of the Additional Investment notes has designated one person to
      become a member of the Company’s Board of Directors, which such person was
      appointed in 2007.  Additionally, in February 2007, the Company issued
      three PPM Units, comprised of $75,000 of Private Placement Notes and 225,000
      Private Placement Warrants in exchange for accrued liabilities, which such
      notes
      were immediately converted into 769,231 shares of Company common stock in
      accordance with the terms of the notes.  During the three and nine
      months ended September 30, 2007, debt discount, comprised of warrant and
      beneficial conversion feature values, of approximately $1 million and $5
      million, respectively, was recorded, The fair value of warrants was computed
      using a Black-Scholes option pricing method with the following assumptions:
      expected term of 8 years (based on the contractual term), volatility of 180%
      (based on historical volatility), zero dividends and interest rate of
      4.6%.  During the three and nine months ended September 30, 2007,
      approximately $2.1 million and $5.5 million of the discount relating to Private
      Placement and Additional Investment notes was amortized to interest expense,
      and
      approximately $243,000 and $647,000 was amortized to interest expense during
      the
      three and nine months ended September 30, 2006. During the three months ended
      September 30, 2007, Private Placement Notes in the amount of approximately
      $125,000, together with accrued interest of approximately $13,000, were
      converted into approximately 1.4 million shares of common stock.  At
      September 30, 2007, there were Private Placement Notes of $550,000 that were
      due
      beyond their maturity date.




Subordinated
      Notes - During 2006, the Company received $2.8 million 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, 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, exercisable until April 2015
      at an
      exercise price of $0.12 per share (the “Subordinated Notes
      Warrants”).  The conversion price of the debentures is 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
      price. The Subordinated Notes rank pari passu with Private Placement Notes
      and
      are 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.  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 holders of
      Subordinated Notes elect to convert such notes into shares of Company common
      stock, the Company will issue Subordinated Notes 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,
      a total of 16,260,833 warrants if all notes are converted. The Subordinated
      Notes became due during the three months ended September 30, 2007, and during
      the three months ended September 30, 2007, Subordinated Notes in the amount
      of
      approximately $2.7 million, together with accrued interest of approximately
      $263,000, were converted into approximately 29.9 million shares of common
      stock.  At September 30, 2007, there were Subordinated Notes of
      $349,000 that were due beyond their maturity date.





During
      the three months ended September 30, 2006, debt discount relating to these
      Subordinated Notes of approximately $3.2 million was recorded, of which
      approximately $530,000 was amortized to interest expense during the three and
      nine months September 30, 2006, and $421,000 and $1.9 million during three
      and
      nine months ended September 30, 2007.  The debt discount has been
      fully amortized at September 30, 2007.





10


**Note
      4. Common Stock, Stock Warrants and Other Rights to Purchase Common
      Stock**





Common
      Stock Issued for Services - During July 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 received
      44,000,000 shares of Company common stock, of which 26,400,000 were fully
      vested, issued and outstanding at December 31, 2006, and of which 8,800,000
      shares vested in September 2007, and the remaining 8,800,000 vest pro-rata
      from
      October 2007 to September 2008.  The total value of the shares based
      on the grant date quoted trading price of the Company’s common stock was
      approximately $5.7 million.  A total of 44,000,000 shares of Company
      common stock were issued to the executive in 2006, a portion of which is subject
      to return in accordance with vesting provisions.  As of December 31,
      2006, there was approximately $1.8 million of unrecognized compensation expense
      related to unvested stock awards, which is expected to be recognized as expense
      of approximately $1.4 million in 2007 and $405,000 in 2008. During the three
      months ended September 30, 2006, the Company recognized stock-based compensation
      expense of approximately $2.4 million.  During the three and nine
      months ended September 30, 2007, the Company recognized stock-based compensation
      expense of approximately $381,000 and $1.2 million, respectively, and as of
      September 30, 2007, there was approximately $549,000 of unrecognized
      compensation expense related to unvested stock.





Pursuant
      to an agreement with an executive recruiter and placements of the Company’s
      Chief Executive and Operating Officers in 2006, the recruiter is entitled to
      receive 11,456,923 shares of Company common stock, of which 9,036,923 shares
      were immediately fully-vested, and of which 2,420,000 shares vested in September
      2007, and warrants to purchase 519,750 shares of Company common stock at a
      per
      share price of $0.06 per share exercisable for 10 years, and warrants to
      purchase 4,950,000 shares of Company common stock at a per share price of
      $0.0975 exercisable for 10 years.  In connection with this agreement,
      the shares are valued at approximately $1.5 million based on the quoted trading
      prices of $0.13 and $0.135 on the effective dates and the warrants are valued
      at
      approximately $737,000 computed using a Black-Scholes option pricing method
      with
      the following assumptions: contractual term of 10 years, volatility of 183%
      (based on historical volatility over the term), zero dividends and interest
      rate
      of 4.8%.  As of December 31, 2006, there was approximately $446,000 of
      unrecognized compensation expense related to unvested stock-based awards, which
      is expected to be recognized as expense in 2007. During the three months ended
      September 30, 2006, the Company recognized stock-based compensation expense
      of
      approximately $1.4 million.  During the three and nine months ended
      September 30, 2007, the Company recognized stock-based compensation expense
      of
      approximately $121,000 and $389,000, respectively, and as of September 30,
      2007,
      there was approximately $57,000 of unrecognized compensation expense related
      to
      unvested stock and stock warrants, which is expected to be recognized as expense
      in 2007.





In
      February 2007, the Company entered into an employment agreement with an
      individual to serve as its Vice President of Sales & Marketing, pursuant to
      which, among other things, the executive received 4.4 million shares of Company
      common stock, 1.1 million of which are fully-vested and the remainder vesting
      evenly over the next three years, and is entitled to receive warrants to
      purchase 1.1 million shares of Company common stock at $0.30 per share on the
      one year anniversary of the employment agreement and warrants to purchase 1.1
      million shares of Company common stock at $0.40 per share on the second year
      anniversary.  The warrants are to have a four-year term and vest
      ratably over 3 years.  In connection with this agreement, the shares
      are valued at approximately $1.1 million based on the quoted trading price
      of
      $0.25 on the effective dates and the warrants are valued at approximately
      $511,000 computed using a Black-Scholes option pricing method with the following
      assumptions: contractual terms of 4 and 10 years, volatility of 184% (based
      on
      historical volatility over the term), zero dividends and interest rate of
      4.5%.  In connection with this agreement, the Company will record
      compensation expense for fully-vested shares and for a portion of the unvested
      shares amortized on a straight-line basis over the vesting
      periods.  The Company recorded compensation expense of approximately
      $155,000 and $637,000 during the three and nine months ended September 30,
      2007.  As of September 30, 2007, there was approximately $975,000 of
      unrecognized compensation expense related to unvested stock and warrants, which
      is expected to be recognized as expense of approximately $155,000 in 2007,
      $620,000 in 2008 and $185,000 in 2009, and $15,000 in 2010.





During
      the nine months ended September 30, 2007, the Company issued 3,570,411 shares
      of
      Company common stock to various non-employee service providers and has recorded
      the fair value of shares issued based on the closing market price of stock
      on
      the respective measurement dates of approximately $602,000 as an increase in
      additional paid-in capital, and records stock-based compensation expense over
      the requisite service periods.  At September 30, 2007, the $98,000 of
      excess of the fair value of shares issued over expense recognized is recorded
      as
      deferred stock-based consulting, a component of stockholders’ deficit, which is
      expected to be recognized as expense in 2007.





11


Stock
      Issued for Settlement Agreement - During the three months ended September
      30, 2007, the Company entered into a settlement agreement, pursuant to which,
      among other things, the Company agreed to issue 5 million shares of common,
      the
      issuance of such shares are in process at September 30, 2007, and as a result
      recorded settlement expense of $680,000 based on a quoted trading price of
      $0.135 per share during the nine months ended September 30, 2007, which included
      $5,000 of related legal expenses, based on the closing price on the settlement
      date of the Company’s common stock.





Stock
      Issued for Conversion of Notes Payable– During the three months ended
      September 30, 2007, Subordinated Notes in the amount of approximately $2.7
      million, together with accrued interest of approximately $263,000, were
      converted into approximately 29.9 million shares of common stock., and Private
      Placement Notes in the amount of approximately $125,000, together with accrued
      interest of approximately $13,000, were converted into approximately 1.4 million
      shares of common stock.





Stock
      Issued for Consulting Agreement - In February 2007, the Company entered into
      a consulting services agreement, which terminates December 31, 2007, with the
      Company’s former Chief Financial Officer, pursuant to which, among other things,
      the Company issued to the former officer 492,308 fully-vested shares of its
      common stock, and agreed to pay annual compensation of $120,000 in consideration
      for services during the term and in exchange for release of any claim to accrued
      compensation while previously employed by the Company, which such amount was
      $168,000 at December 31, 2006.  In connection with this agreement, the
      Company recorded the shares issued as an increase in common stock and additional
      paid-in capital of approximately $133,000 based on the $0.27 quoted trading
      price on the agreement date and compensation expense of approximately
      $85,000.





Stock
      Issued Upon Exercise of Warrants - During the nine months ended September
      30, 2007, pursuant to receipt of notices of cash and cashless exercises of
      5,178,439 warrants, the Company issued 3,269,596 shares of its common stock
      and
      received proceeds of approximately $1,400.  During the three months
      ended September 30, 2007, the holder of a warrant to purchase 850,000 shares
      of
      common stock at a per share price of $0.001 elected to exercise the warrants
      for
      which the Company received approximately $1,000, and at September 30, 2007,
      the
      issuance of 850,000 shares of common stock were in process of being issued
      and
      have been recorded as common stock issuable.





Stock
      Warrants - The fair value of warrants issued during 2006 and 2007 was
      estimated using the Black-Scholes option-pricing model with the following
      assumptions: dividend yield of 0%; expected volatility of approximately 172%
      to
      183% (based on historical volatility over the terms); risk-free interest rates
      of approximately 5%; and terms of 3.5 to 10 years.  The
      weighted-average fair value of warrants granted during the nine months ended
      September 30, 2006 and 2007 approximated $0.13 and $0.19,
      respectively.





In
      October 2006, the Company entered into an employment agreement with an
      individual to serve as its Chief Operating Officer, pursuant to which, among
      other things, 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.  The executive received
      options to purchase 24,000,000 shares (shares were not elected) of Company
      common stock, of which 12,000,000 are fully-vested, and of which 6,000,000
      warrants vest in October 2007 and the remaining 6,000,000 vest pro-rata from
      November 2007 to October 2008. The warrants are exercisable at $0.0975 per
      share
      for ten years, and have an estimated fair value of  approximately $3.2
      million as determined utilizing the Black-Scholes valuation model as of the
      Effective Date with the following assumptions: contractual term of 10 years,
      volatility of 174% (based on historical volatility over the term), zero
      dividends and interest rate of 4.8%.  As of December 31, 2006, there
      was approximately $1.5 million of unrecognized compensation expense related
      to
      unvested stock warrants, which is expected to be recognized as expense of
      approximately $810,000 in 2007 and $655,000 in 2008.  During the three
      and nine months ended September 30, 2007, the Company recognized stock-based
      compensation expense of approximately $203,000 and $607,000, respectively,
      and
      as of September 30, 2007, there was approximately $857,000 of unrecognized
      compensation expense related to unvested stock warrants.





Prior
      to
      August 18, 2006, the Company determined that pursuant to EITF 00-19, all of
      the
      Company’s warrants and investment rights granted to non-employees are to be
      classified as liabilities, since the Company had 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 was not under the Company control and accordingly the criteria for
      classification as equity instruments under EITF 00-19 was not
      met.  During the three and nine months ended September 30, 2006, the
      Company recognized approximately $3.0 million and $1.1 million, 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. At August 18, 2006, when
      the
      Company no longer had the inability to have enough authorized common shares
      to
      fulfill its potential obligations, the fair value liability of all outstanding
      warrants and investment rights recorded at that date was reclassified to
      additional paid-in capital.




During
      the three months ended June 30, 2007, the Company issued warrants to a new
      Director to purchase 500,000 shares of its common stock at an exercise price
      of
      $0.19 per share with a 4-year term and recorded compensation expense of
      approximately $89,000 based on the fair value as determined utilizing the
      Black-Scholes valuation model. Additionally, the Company issued warrants to
      a new employee to purchase 2,000,000 shares of its common stock at an exercise
      price of $0.0975 with a ten year term and recorded compensation expense of
      approximately $380,000 based on the fair value as determined utilizing the
      Black-Scholes valuation model. The warrants issued to the new employee were
      assigned to the Company by one of its other executive officers, which was
      recorded as a contribution of capital in accordance with the provisions of
      SFAS
      123R.




In
      August
      2007, the Company entered into an employment agreement with an individual to
      serve as its Chief Financial Officer, pursuant to which, among other things,
      the
      executive received warrants to purchase 5 million shares of Company common
      stock, 25% of which are fully-vested and the remainder vesting 125,000 per
      year
      over the remaining three years.  The warrants have a four-year term
      and an exercise price of $0.12 per share, and are valued at approximately
      $540,000 ($0.108 per warrant) computed using a Black-Scholes option pricing
      method with the following assumptions: contractual term of 4 years, volatility
      of 160% (based on historical volatility over the term), zero dividends and
      interest rate of 4.6%.  In connection with this agreement, the Company
      will record compensation expense for fully-vested shares and for a portion
      of
      the unvested shares amortized on a straight-line basis over the vesting
      periods.  The Company recorded compensation expense of approximately
      $169,000 during the three months ended September 30, 2007.  As of
      September 30, 2007, there was approximately $371,000 of unrecognized
      compensation expense related to unvested stock and warrants, which is expected
      to be recognized as expense of approximately $62,000 in 2007, $195,000 in 2008,
      $86,000 in 2009 and $28,000 in 2010.




The
      intrinsic value of stock warrants is calculated by aggregating the difference
      between the closing market price of the Company’s common stock and the exercise
      price of stock warrants which have an exercise price less than that market
      price.





The
      following summarizes activity for stock warrants issued to lenders in connection
      with borrowings, all of which are exercisable:





****Weighted
      average                      Aggregate


Weighted
      average                     remaining
      contractual                intrinsic
      value


Outstanding                                exercise
      price                         
life in
      years                         
(in thousands)


Balance
      at December 31,
      2006                             59,858,439                                       $    0.09                                                 
5.8                                       
$ 3,518


Granted                                                                   48,952,221                                             0.08


Exercised                                                              
       (5,198,439)                                            
0.06


Expired/Cancelled                                                 
      -                                                 -


Balance
      at September 30,
      2007                            103,612,221                                    
$    0.09                                                
 6.5                                       
$ 2,720





The
      following summarizes activity for stock warrants issued to consultants for
      services, all of which are exercisable:





****Weighted
      average                   
Aggregate


Weighted
      average                       
remaining
      contractual             
intrinsic value


Outstanding                                exercise
      price                           
life in
      years                        
(in thousands)


Balance
      at December 31,
      2006                             32,194,871                                       $    0.08                                                
 7.4                                       $
      2,433


Granted                                                                        382,429                                             0.08


Exercised                                                                   
      (850,000)                                           0.001


Expired/Cancelled                            (12,121)                                                  -


Balance
      at September 30,
      2007                            31,715,179                                      
 $    0.08                                                5.9                                        $    821





The
      following summarizes activity for stock warrants issued to
      employees:


****Weighted
      average                   Aggregate


Weighted
      average                      remaining
      contractual            
intrinsic value


Outstanding                                exercise
      price                           life
      in
      years                       (in
      thousands)


Balance
      at December 31,
      2006                             31,850,000                                       $    0.07                                               
 9.2                                     $
      2,416


Granted                                                                    
      5,725,000                                             0.13


Exercised                                                                                   
       -                                               -


Expired/Cancelled                                                 -                                               -


Balance
      at September 30,
      2007                                
37,575,000                                  $    0.09                                                
7.4                                      $    931


The
      following summarizes activity for all stock warrants:


****Weighted
      average                   Aggregate


Weighted
      average                     
remaining
      contractual            
intrinsic value


Outstanding                                exercise
      price                          life
      in
      years                       
(in thousands)


Balance
      at December 31,
      2006                              123,903,310                                       $    0.08                                            
6.9                                      $  8,425


Granted                                                                      
      55,059,650                                           
0.08


Exercised                                                               
          
(6,048,439)                                          
0.06


Expired/Cancelled                                                    
      (12,121)                                                
-


Balance
      at September 30,
      2007                              172,902,400                                       $    0.09                                           6.6                             
         $  4,472





Additional
      information regarding all warrants outstanding as of September 30, 2007, is
      as
      follows:





Weighted
      average    weighted average


Range
      of exercise
      prices                                                                Sharesremaining
      life                                           exercise
      price


$  0.001                                                               60,000                                  3.9
      years                              $   0.001


$   0.05                                                          1,100,000                                  3.8
      years                                   0.05


$   0.06                                                      111,242,971                                  7.7
      years                                   0.06


$  0.09
      -   
 $   0.11                                                        26,451,429                                  6.5
      years                                   0.10


$ 0.12
      -     $   0.13                                                        33,248,000                                  3.1
      years                                   0.12


$   0.19                                                             500,000                                  3.5
      years                                   0.19


$   0.25                                                      300,000                                  3.0
      years                                   0.25


Total           172,902,400                                  6.6
      years                              $   0.09





12


**Note
      5.  Notes Payable to Directors and Other Related Party
      Transactions**




Certain
      of the Company’s Directors are holders of the Company’s Private Placement Notes
      and Subordinated Notes in the aggregate amount of approximately $6.4 million
      at
      September 30, 2007 and $7.0 million at December 31, 2006.





In
      addition, during the three months ended September 30, 2007, the Company received
      loans of approximately $2.4 million from various members of the Company’s Board
      of Directors (the “Director Loans”).  In accordance with the Director
      Loans, each Loan Participant received a promissory note with an interest rate
      of
      15% per annum (the “Note”).  All or any portion of the Note, any
      accrued interest thereon and all other sums due under the Note, is due and
      payable on demand within 90 days of the Note (the Maturity
      Date”).  Beginning on the Maturity Date, the Company will make monthly
      installment payments until the principal and any accrued interest have been
      paid
      in full.  In connection with the Director Loans, Loan Participant
      received common stock purchase warrants to purchase 18,157,000 shares of Company
      common stock with an exercise price of $0.06 per share that expires in April
      2015.  The shares underlying the warrants are subject to piggy back
      registration rights.  The exercise price of the warrants is subject to
      anti-dilution downward adjustments in the event the Company sells common stock
      at a price below the exercise price.  Debt discount relating to the
      value of warrants issued of approximately $2.3 million was
      recorded.  The fair value of warrants was computed using a
      Black-Scholes option pricing method with the following assumptions: expected
      term of 7.8 years (based on the contractual term), volatility of approximately
      180% (based on historical volatility), zero dividends and interest rate of
      approximately 4.6%.  During the three months ended September 30, 2007,
      approximately $1.0 million of the discount was amortized to interest expense,
      and the remaining unamortized discount is expected to be recognized as expense
      in 2007.





During
      the three months ended June 30, 2007, two of the Company’s Directors made loans
      to the Company in the aggregate total of $577,000, which were due on demand
      and
      bear interest at 10% per annum.  In July 2007, the loan from one
      Director in the amount of $300,000 was repaid, and the other $277,000 was
      cancelled and replaced with Director Loans.





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. There were
      no
      reported stock sale proceeds during 2006.  The agreement had no stated
      term. 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.  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 the nine months ended September 30, 2007
      and 2006, the Company incurred OLG legal fee services of approximately $263,000
      and $836,000, respectively.   Accounts payable to OLG for legal
      services was approximately $533,000 at September 30, 2007 and reported as
      accounts payable – related party in the accompanying balance sheet.





During
      2006, the Company issued 2,802,925 shares of its common stock to Cambridge
      Partners, LLC (“Cambridge”) 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.  The managing partner of OLG, one of the Company’s Directors, is
      one of the two members of Cambridge.





In
      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, as amended, 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 varying rates
      of
      warrants for funds raised based on securities sold.  In connection
      with sales of Private Placement units and Subordinated Notes and warrants in
      2006, the Company has recorded debt issue costs of approximately $2.1 million
      based on the fair value of 14,625,000 warrants exercisable at $0.06 per share
      for approximately eight and one-half years, determined utilizing the
      Black-Scholes valuation model, which such warrants were issued to KW in
      2007.  Upon the closing of the PPM in 2007, the agreement with KW
      terminated.





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, who is also one
      of the Company’s Directors, and KW, 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.  Pursuant to a consulting agreement between ICG and
      Excipio Group, S.A. (“Excipio”), an entity affiliated with Hudson Investment
      Advisors, Inc., 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, 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
      approximately $429,000 (in addition to $296,000 previously paid) 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 eight 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 three and one-half
      years.  The $429,000 was payable $200,000 upon execution of the
      settlement agreement and in varying amounts based on certain conditions, and
      was
      paid in full in 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 accrue or become due in accordance
      with the Funding Agreement.





13


**Note
      6. Commitments and Contingencies**




Legal
      Matters - In December 2006, Brean Murray Carret & Co. (“BMC”) filed an
      arbitration claim against the Company with the NASD seeking in excess of $1
      million from the Company pursuant to a corporate finance representation
      agreement between the parties entered into in 2005.  The Company filed
      a response and affirmative defenses and a counterclaim against BMC, and BMC
      subsequently filed its response and affirmative defenses to the Company’s
      counterclaim in March 2007.  The Company has been engaged in
      settlement negotiations, and in this regard, inasmuch as Company management
      believed that it was probable that a settlement would occur and determined
      an
      estimated value of such settlement, in accordance with Statement of Financial
      Accounting Standards No. 5 “*Accounting for Contingencies’*during the
      three months ended June 30, 2007, the Company recorded a provision for
      settlement.  During the three months ended September 30, 2007, the
      Company and BMC entered into a settlement agreement, pursuant to which, among
      other things, the Company agreed to issue 5 million shares of common to BMC,
      the
      issuance of such shares are in process at September 30, 2007, and as a result
      recorded settlement expense of $680,000 during the nine months ended September
      30, 2007, based on the closing price on the settlement date of the Company’s
      common stock.





Agency
      Agreement - In 2005, the Companyentered
      into a
      three year Agency Agreement with H. Muehlstein & Co., Inc. (“Muehlstein”),
      pursuant to which Muehlstein will act as the Company’s exclusive agent for the
      annual purchase and sale of up to sixty million pounds, subject to increase
      under certain circumstances, of ECO2’s PET flake
      and
      post-consumer HDPE natural flake and pellets in the USA and
      Canada.  This agreement prohibits the Company from engaging additional
      sales agents, but does not limit the Company’s direct sales to
      customers.





14


**Note
      7. Concentrations**





During
      the nine months ended September 30, 2007 the Company had revenues of over 10%
      of
      total revenue from individual customers and related accounts receivable
      concentration over 10% of total accounts receivable at that date as
      follows:





per
      cent of
      total                                             per
      cent of total


revenues                                           accounts
      receivable


Customer
      1                                        31%                                           43%


Customer
      2                                        28%                                           17%


Customer
      3                                        13%


Customer
      4                                        12%                                           17%

























15





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





**ECO2
      Plastics,
      Inc.**


**September
      30, 2007 Form 10-QSB**





*This
      Item 2 and the September 30, 2007 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.*





The
      following should be read in conjunction with the Company’s unaudited financial
      statements included in this Quarterly Report on Form 10-QSB and with the
      Company’s audited annual financial statements included in its December 31, 2006
      Annual Report on Form 10-KSB.





**Business****–**  ECO2Plastics,
      Inc.
      (f.k.a. Itec Environmental Group, Inc.) and its wholly-owned subsidiary,
      ECO2Environmental
      Systems, Inc., were incorporated under the laws of
      the State of Delaware in 2000, and formed for the purpose of acquiring certain
      patented technology and the development of a worldwide market for its usage.
      Unless the context indicates otherwise, all references herein to “ECO2”
or the “Company”
      include ECO2Plastics,
      Inc and its wholly-owned inactive subsidiary. In March
      2007, the Company changed its name to ECO2Plastics,
      Inc.





ECO2has
      developed a
      unique and revolutionary patent pending process and system, referred to as
      the
      ECO2Environmental
      System (the “ECO2Environmental
      System”). The ECO2Environmental
      System cleans post-consumer plastics, without the use
      of water, at a substantial cost savings versus traditional methods (the
“Process”). This Process is licensed from Honeywell FM&T (“Honeywell”) and
      the Department of Energy (“DOE”) on an exclusive basis for the life of the
      patent. Since its inception, ECO2has invested
      in the
      development of the technology and equipment comprising the ECO2Environmental
      System, which includes the filing of a new “Process Patent” in May 2005. This
      included building several scaled up versions of the Prototype ECO2Environmental
      System (the “Prototype”), testing of the Prototypes, building a pilot plant,
      evaluating the product produced by the Prototype and real-time testing. The
      Company’s first full scale production facility was constructed in Riverbank,
      California and is now producing saleable product and ramping up to full scale
      operations. ECO2’s goal is
      to build
      and operate plastic recycling plants (the “ECO2Plants”) in the
      USA
      that utilize the ECO2Environmental
      System and to expand the ECO2Environmental
      System worldwide. ECO2’s growth
      strategy
      includes organic growth, strategic acquisitions and licensing or partnership
      agreements, where appropriate.





ECO2intends
      to locate
      its second plant in the greater Los Angeles basin, which includes over 18.5
      million residential customers. The Company’s research indicates that the greater
      Los Angeles basin generates an enormous amount of plastic containers. The
      Company has engaged a team of engineers to conduct the preliminary design
      efforts and has engaged a team of location and logistics specialists to support
      the Company in the site selection process currently underway.




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.





16


**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 issued, and the 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 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, 2006 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.





Revenue
      recognition - The Company recognizes revenue when there is persuasive
      evidence of an arrangement, the product has been delivered to the customer,
      the
      sales price is fixed or determinable, and collectability is reasonably assured.
      The Company recognizes revenues from sales of recycled products
      upon shipment to customers. Amounts received in advance of when products
      are delivered are recorded as liabilities until earned.




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 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.





17


**Results
      of Operations**- Revenues were $1.4 million and $2.0
      million during the three and nine months ended September 30, 2007 as compared
      to
      $0 and $50,000 in the three and nine months ended September 30, 2006. Revenues
      are expected to continue to increase in future periods. Cost of goods sold
      consists of the cost of raw materials processed and were $1.2 million and $1.9
      million during the three and nine months ended September 30, 2007 as compared
      to
      $0 and $45,000 in the three and nine months ended September 30, 2006. Gross
      profit was $202,000 and $116,000 for the three and nine months ended September
      30, 2007 as compared to $0 and $5,000 for the three and nine months ended
      September 30, 2006.  The plant has begun ramping towards full-scale
      operation and as a result, significant volumes of inventory are consumed for
      quality testing during these periods. Most of the tested material is shipped
      out
      of the plant at prices significantly lower than market standard, which has
      resulted in a relatively low gross profit in 2007. Gross profit is expected
      to
      increase in future periods.





Plant
      operations and technology development expenses increased to $1.7 million and
      $4.3 million for the three and nine months ended September 30, 2007 as compared
      to $543,000 and $1.3 million for the three and nine months ended September
      30,
      2006.  As the Company ramps up the Riverbank Plant, operating expenses
      are increasing commensurate with the increase in operating activity, comprised
      primarily of payroll and related, utilities, occupancy, supplies, and repairs
      and maintenance expenses.  These expenses are expected to continue to
      increase in future periods.  As production increases to closer to
      capacity volumes, certain plant operations expenses will be included in cost
      of
      goods sold.





Consulting
      and legal fees decreased to $136,000 and $614,000 for the three and nine months
      ended September 30, 2007 as compared to $1.3 million and $3.5 million for the
      three and nine months ended September 30, 2006.   Decreases were
      primarily due to there being fewer stock-based based awards to consultants
      during 2007 as compared to 2006.





General
      and administrative expenses decreased to $1.8 million for the three months
      ended
      September 30, 2007 as compared to $3.7 million for the comparative prior year
      period, and increased to $6.0 million for the nine months ended September 30,
      2007 from $4.1 million for the nine months ended September 30,
      2006.  The decrease in the three month period was primarily due to
      higher non-cash stock-based compensation relating to equity awards in the 2006
      period relating to the employment agreement entered into during that
      period.  The increase in the nine month period was primarily due to
      non-cash stock-based compensation relating to equity awards issued and issuable
      in connection with employment agreements entered into with certain executive
      officers and related recruiter fees payable in equity securities, as well as
      continuing to build our sales and management team.





During
      the nine months ended September 30, 2007, the Company issued 5 million shares
      of
      its common stock pursuant to terms of a settlement agreement entered into in
      August recorded settlement expense of approximately $680,000 in connection
      with
      litigation with a former investment advisor, which included a decrease in
      expense of $60,000 during the three months ended September 30, 2007,
      representing an adjustment to the settlement provision previously
      recorded.  Shares issued were valued based on the closing stock price
      at the settlement agreement date at a total of $675,000.  During the
      three and nine months ended September 30, 2006, the Company recorded settlement
      expense of approximately $282,000 and $403,000.





The
      Company recorded interest expense of approximately $4.7 million and $11.8
      million in the three and nine months ended September 30, 2007 as compared to
      $1.1 million and $1.9 million in the three and nine months ended September
      30,
      2006. Interest expense includes amortization of debt issue costs and debt
      discount of approximately $4.2 million and $10.6 million for the three and
      nine
      months ended September 30, 2007 and $699,000 and $1.2 million for the three
      and
      nine months ended September 30, 2006, respectively, which represents most of
      the
      increase year over year. The increase in interest expense for 2007 as compared
      to the prior year was also, to a lesser extent, due to increased average
      borrowings during 2006 and 2007.




The
      Company’s net loss increased approximately $4.4 million to $8.1 million for the
      three months ended September 30, 2007 from $3.7 million for the three months
      ended September 30, 2006 and increased approximately $13.3 million to $23.3
      million for the nine months ended September 30, 2007 from $9.9 million during
      the comparative prior year period due primarily to the increase in interest
      expense, and to a lesser extent, increase in loss from operations resulting
      from
      increases in plant operations and technology development, offset by a decrease
      in consulting and legal expenses.,





The
      Company has approximately $21 million of net operating loss carry-forwards
      at
      December 31, 2006 potentially available to offset future income taxes which
      expire through 2026.  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 limit the
      utilization of these loss 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.





18


**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 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, 2007, we had a working capital deficit of approximately $12.8
      million, compared to a working capital deficit of $3.2 million at December
      31,
      2006.  At September 30, 2007, we had total assets of approximately $10.1
      million and a total stockholders’ deficit of $5.4 million compared with total
      assets of approximately $10.3 million and total stockholder's equity of
      approximately $2.7 million at December 31, 2006.




During
      the nine months ended September 30, 2007 cash used by operating activities
      increased to approximately $5.1 million from $2.1 million during the comparative
      prior year period, due primarily to an increase in loss from
      operations.





During
      the nine months ended September 30, 2007, cash used by investing activities
      increased to approximately $2.9 million relating to capital expenditures on
      the
      recycling plant as compared to $1.9 million during the comparative prior year
      period.





During
      the nine months ended September 30, 2007, cash provided by financing activities
      increased to approximately $8.3 million from $4.2 million during the comparative
      prior year period. During 2007, the Company received proceeds of approximately
      $6.2 million (including approximately $1.2 million receivable for cash in escrow
      for securities sold in 2006) from sales of private placement units comprised
      of
      convertible promissory notes and warrants and subordinated notes and warrants,
      and approximately $2.4 million from loans from Company Directors.




At
      September 30, 2007, 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 in the next twelve months. There is
      no guarantee, however, that our efforts will result in raising cash in amounts
      sufficient to meet the Company’s needs.




19


**Recent
      accounting pronouncements****-**In July 2006, the FASB
      issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income
      Taxes*(“FIN  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. FIN 48 is effective for the Company beginning January 1,
      2007, and its adoption did not have a significant impact on the Company’s
      consolidated financial position, results of operations or cash
      flows.




In
      December 2006, the FASB issued FASB Staff Position No. EITF
      00-19-2 “A*ccounting for Registration Payment Arrangements*” (FSP EITF
      00-19-2”), which addresses an issuer’s accounting and disclosures relating to
      registration payment arrangements. Inasmuch as the Company does not have any
      such registration payment arrangements, it is not expected that adoption of
      the
      provision of FSP EITF 00-19-2 will have a significant impact on the Company’s
      financial position, results of operations or cash flows





**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.





**Quantitative
      and Qualitative Disclosures about Market Risk** - We do
      not use derivative financial instruments. Our financial instruments consist
      of
      cash and cash equivalents, trade accounts receivable, accounts payable and
      short
      and long-term borrowing obligations. Investments in highly liquid instruments
      purchased with a remaining maturity of 90 days or less at the date of purchase
      are considered to be cash equivalents.





Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      short-term investments and short and long-term obligations, all of which have
      fixed interest rates. Thus, fluctuations in interest rates would not have a
      material impact on the fair value of these securities.


20


**ITEM
                3.**
            **CONTROLS
                AND PROCEDURES**





(a)
      Disclosure controls and procedures.





The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the Company’s Exchange Act reports
      is recorded, processed, summarized and reported within the time periods
      specified in the SEC’s rules and forms, and that such information is accumulated
      and communicated to the Company’s management, including its Chief Executive
      Officer and Chief Financial Officer, as appropriate, to allow timely decisions
      in accordance with the required "disclosure controls and  procedures"
      as defined in Rule 13a-15(e).  The Company’s disclosure and control
      procedures are designed to provide reasonable assurance of achieving their
      objectives, and the principal executive officer and principal financial officer
      of the Company concluded that the Company’s disclosure controls and procedures
      were effective at the reasonable assurance level.





At
      the
      end of the period covered by this Quarterly Report, the Company carried out
      an
      evaluation, under the supervision and with the participation of the Company's
      management, including the Company's principal executive officer and principal
      financial officer, of the effectiveness of the design and operation of the
      Company's disclosure controls and procedures.  Based on the foregoing,
      the principal executive officer and principal financial officer of the Company
      concluded that the Company’s disclosure controls and procedures were effective
      to ensure that the information required to be disclosed in the Company’s
      Exchange Act reports is recorded, processed, summarized and reported within
      the
      time periods specified in the SEC’s rules and forms, and that such information
      is accumulated and communicated to the Company’s management including the
      Company’s principal executive officer and principal financial officer to allow
      timely decisions regarding required disclosure.




(b)
      Changes in internal control over financial reporting.





We
      are
      assessing the effectiveness of our internal controls over financial reporting
      on
      an account by account basis as a part of our on-going accounting and financial
      reporting review process in order to comply with Section 404 of the
      Sarbanes-Oxley Act of 2002, which requires our management to assess the
      effectiveness of our existing internal controls for the fiscal year ended
      December 31, 2007.  This effort includes documenting, evaluating the
      design of and testing the effectiveness of our internal controls over financial
      reporting.  We intend to continue to refine and improve our internal
      controls on an ongoing basis.  During this process, we may identify
      items for review or deficiencies in our system of internal controls over
      financial reporting that may require strengthening or remediation.




There
      have been no changes in our internal controls over financial reporting during
      our most recent fiscal quarter that have materially affected, or are reasonably
      likely to materially affect, our internal controls over financial
      reporting.



















21





PART
      II - OTHER INFORMATION




**Item
      1. Legal Proceedings**





On
      or about November 3, 2006, Brean Murray Carret
& Co., LLC (“BMC”) filed a claim for arbitration against ECO2 and its
      Director
      and CTO, Gary De Laurentiis, with the National Association of Securities
      Dealers.  BMC is alleging that their service agreement with ECO2, dated
      May 9, 2005,
      was breached and that they are due fees and expenses in excess of $1
      million.  On or about January 30, 2007, ECO2filed its
      answer,
      affirmative defenses and counterclaims in response to BMC’s
      claim.  ECO2’s counterclaim
      against BMC alleges, among other things, that BMC breached their service
      agreement with ECO2, unjust
      enrichment,
      fraud, misrepresentation and unlawful contract.  The relief sought by
      ECO2estimates
      damages of $36 million and requests attorney fees and other miscellaneous costs
      and the cancellation of BMC’s common stock certificates and common stock
      purchase warrant.  During the three months ended June 30, 2007, the
      Company recorded a provision for settlement in connection with its settlement
      agreement with a former investment advisor.  On August 30, 2007, the
      Company entered into a settlement agreement with BMC whereby ECO2caused its
      counsel
      to (i) deliver to BMC an opinion letter, pursuant to Rule 144(k), providing
      for
      the removal of restrictive legends from the certificate representing 2,737,220
      shares of ECO2stock held
      by BMC for more than two years upon BMC’s counsel
      providing ECO2’s counsel
      with a
      customary seller’s representation letter, broker’s representation letter and a
      duly completed and executed Form 144; (ii) deliver to BMC an opinion letter
      providing for the sale of 744,655 shares of ECO2stock pursuant
      to
      Rule 144 upon BMC’s counsel providing ECO2’s counsel
      with a
      customary seller’s representation letter, broker’s representation letter, and a
      duly completed and executed Form 144.  Additionally, and in connection
      with the settlement agreement, BMC executed an affidavit of lost common stock
      purchase warrant and ECO2reissued
      to BMC a warrant to purchase 850,000 shares of ECO2common stock
      at
      $.001/share on a cashless basis, which warrant was dated August 1, 2005 and
      ECO2provided
      to BMC a certificate representing 5,000,000 shares of ECO2common stock
      and an
      opinion letter pursuant to Rule 144(k), and/or any other documentation requested
      by ECO2’s
      transfer agent, to provide for the removal of the restrictive legend on the
      newly issued certificate.  Immediately upon ECO2’s complete
      performance under the terms of this settlement agreement, BMC forwarded a
      letter, on behalf of counsel for both sides, to the National Association of
      Securities Dealers advising that the action has been discontinued with
      prejudice.





On
      October 16, 2007, Robert Trotter, dba Bob Trotter’s Welding (“Trotter”) filed a
      claim against ECO2and its
      Director and CTO, Gary De Laurentiis in Tuolumne County
      Superior Court.  Trotter is alleging breach of contract and that he is
      due fees for services provided in excess of $68,000.





The
      Company is unaware of any other threatened or pending litigation against it
      not
      in the ordinary course of business and that has not previously been
      disclosed.





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





During
      the September 30, 2007, the Company received approximately $2.4 million from
      loans from Company Directors.  These loans were secured by promissory
      notes (the “Notes”) and common stock purchase warrants (the
“Warrants”).  The Notes have an interest rate of fifteen percent (15%)
      per annum. All or any portion of the Note, any accrued interest thereon and
      all
      other sums due under the Note, is due and payable on demand within ninety (90)
      days of execution of the Note (the “Maturity Date”). ECO2will
      make an
      installment payment on or prior to the sixth (6th) day of
      each month
      beginning on the Maturity Date until the principal and any accrued interest
      have
      been paid in full. Upon default of the Note, the default interest remains
      fifteen percent (15%) per annum.  An aggregate amount of 21,600,000
      shares of common stock underlie the Warrants.  The Warrants have an
      exercise price of Six Cents ($0.06) per share/cashless and expire on April
      15,
      2015.





**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**





Not
      applicable.





**Item
      6.Exhibits**





[See
      Exhibit Index below after signatures]











22





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.








ECO2
      PLASTICS,
      INC.











/s/
      Rodney S.
      Rougelot


Rodney
      S. Rougelot


Director
      and Chief Executive
      Officer





DATE








November
      5,
      2007





23