**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 MARCH 31, 2005**
 
 Commission
File Number: #333-44188
 
 **ITEC
ENVIRONMENTAL GROUP, INC.**
 (Exact
name of small business issuer as specified in its charter)
 
 Delaware
 (State or
other jurisdiction of incorporation or organization)
 
 31-1705310
 (IRS
Employer Identification Number)
 
 5300
Claus Road
 Riverbank,
CA 95367
 (Address
of principal executive offices)(Zip Code)
 
 (209)
881-3523
 (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 xNo o
   The
number of shares of the Company's common stock outstanding on March 31, 2005: 16,847,435
  
 
 **ITEC
ENVIRONMENTAL GROUP, INC.**
 **FORM
10-QSB**
  
  TABLE OF
CONTENTS
 
 PART I  FINANCIAL
INFORMATION
 
 Item1
    Financial
      Statements
 
 Item 2
    Management's
      Discussion and Analysis or Plan of Operation
 
 Item 3
    Controls
      and Procedures
 
 
 PART
II  OTHER
INFORMATION
 
 Item 1
    Legal
      Proceedings
 
 Item2
    Unregistered
      Sales of Equity Securities and Use of Proceeds
 
 Item3
    Defaults
      Upon Senior Securities
 
 Item 4
    Submission
      of Matters to a Vote of Security Holders
 
 Item 5
    Other
      Information
 
 Item 6
    Exhibits
 
 SIGNATURES
 
 
 
    **PART
I - FINANCIAL INFORMATION**
  
   **Item
1.**  **Financial
Statements**
 
 **ITEC
ENVIRONMENTAL GROUP, INC.**
 **A
DEVELOPMENT-STAGE COMPANY**
 
 **Consolidated
Financial Statements**
 
 **March
31, 2005**
  
  **ITEC
Environmental Group, Inc.**
 **A
Development-Stage Company**
 
 **Consolidated
Financial Statements**
 
 **March
31, 2005**
 
 
 
 **C
O N T E N T S**
 
 
 Consolidated
      Balance Sheets
    1 -
      2Consolidated
      Statements of Operations and Comprehensive Income
    3Consolidated
      Statements of Shareholders’ Deficit
    4Consolidated
      Statements of Cash Flows
    5 -
      6Notes
      to Consolidated Financial Statements
    7 -
      21
 
 **ITEC
Environmental Group, Inc.**
**A
Development-Stage Company**
**Consolidated
Balance Sheets**
**As
of March 31, 2005 and December 31,
2004**
  March
      31, 2005
    
    December
      31, 2004ASSETS
    
    (Unaudited)
    
    (Audited)Current
      AssetsCash
      & cash equivalents
    
    $
    235
    
    $
    5,366Total
      Current Assets
    
    
    235
    
    
    5,366Fixed
      AssetsFurniture
      & equipment, net
    
    
    183,818
    
    
    193,600Total
      Fixed Assets
    
    
    183,818
    
    
    193,600Other
      AssetsLicense
      fees, net
    
    
    2,500
    
    
    5,000Note
      receivable - officer
    
    
    147,973
    
    
    147,973Deposits
    
    
    37,514
    
    
    37,514Prepaid
      expenses
    
    
    16,696
    
    
    16,446Other
    
    
    17,250
    
    
    17,250Total
      Other Assets
    
    
    221,933
    
    
    224,183Total
      Assets
    
    $
    405,986
    
    $
    423,149
 
 
 (continued)
 
 
 See accompanying notes to financial
statements.
 
 1
 **ITEC
Environmental Group, Inc.**
**A
Development-Stage Company**
**Consolidated
Balance Sheets (continued)**
**As
of March 31, 2005 and December 31,
2004**
  March
      31, 2005
    
    December
      31, 2004LIABILITIES
      AND STOCKHOLDERS’ DEFICIT
    
    (Unaudited)
    
    (Audited)Current
      LiabilitiesAccounts
      payable
    
    $
    615,362
    
    $
    644,355Income
      taxes payable
    
    
    800
    
    
    -Accrued
      liabilities - officer
    
    
    144,520
    
    
    150,520Accrued
      liabilities
    
    
    835,729
    
    
    670,416Capital
      lease obligation - short term
    
    
    20,336
    
    
    18,032Notes
      payable
    
    
    200,000
    
    
    150,000Total
      Current Liabilities
    
    
    1,816,747
    
    
    1,633,323Other
      LiabilitiesNotes
      payable - Italian investors
    
    
    353,980
    
    
    353,980Capital
      lease obligation - long term
    
    
    13,701
    
    
    16,005Notes
      payable - officers
    
    
    126,100
    
    
    126,100Deferred
      revenue
    
    
    200,001
    
    
    200,001Total
      Other Liabilities
    
    
    693,782
    
    
    696,086Total
      Liabilities
    
    
    2,510,529
    
    
    2,329,409Preferred
      stock, $0.001 par value, 10,000,000 sharesauthorized,
      none issued and outstanding
    
    
    -
    
    
    -Common
      stock, $0.001 par value,750,000,000
      shares authorized, 16,847,435 and6,898,914
      issued and outstanding at March 31, 2005and
      December 31, 2004, respectively
    
    
    16,848
    
    
    6,900Additional
      paid-in capital
    
    
    9,056,172
    
    
    8,148,340Accumulated
      deficit during development stage
    
    
    (11,177,563
    )
    
    (10,061,500
    )Total
      Stockholders' Deficit
    
    
    (2,104,543
    )
    
    (1,906,260
    )Total
      Liabilities & Stockholders' Deficit
    
    $
    405,986
    
    $
    423,149
 
 
 See accompanying notes to financial
statements.
  2
 ITEC
Environmental Group, Inc.A Development-Stage Company
 Consolidated
Statements of Operations and Comprehensive IncomeFor the Three Months Ended
March 31, 2005 and 2004 and
 for the
Period from Inception (March 28, 2000) through March 31,
2005
  Three
      Months Ended
    
    For
      the periodfrom Inception(March 28, 2000)throughMarch
      31, 2005
    
    March
      31, 2004
    
    March
      31, 2005(Unaudited)
    
    (Unaudited)
    
    (Unaudited)**Income**Revenue
    
    $
    -
    
    $
    1,750
    
    $
    494,387Cost
      of goods
    
    
    -
    
    
    -
    
    
    (295,977
    )Gross
      Profit
    
    
    -
    
    
    1,750
    
    
    198,410**Operating
      Expenses**Plant
      expenses
    
    
    3,760
    
    
    5,635
    
    
    181,743Payroll
    
    
    255,416
    
    
    99,585
    
    
    2,391,586Consulting
      fees
    
    
    761,998
    
    
    117,802
    
    
    5,762,070Research
      and development
    
    
    -
    
    
    -
    
    
    177,490General
      and administrative
    
    
    66,782
    
    
    36,633
    
    
    2,369,450Depreciation
      & amortization
    
    
    12,282
    
    
    16,205
    
    
    168,397Total
      Operating Expenses
    
    
    1,100,238
    
    
    275,860
    
    
    11,050,736**Other
      expense (Income)**Interest
      expense
    
    
    15,052
    
    
    65,104
    
    
    699,660Gain
      from extinguishment of debt
    
    
    -
    
    
    -
    
    
    (634,211
    )Other
      expense (income)
    
    
    (27
    )
    
    -
    
    
    254,040Total
      Other Expense
    
    
    15,025
    
    
    65,104
    
    
    319,489Net
      Loss before Taxes
    
    
    (1,115,263
    )
    
    (339,214
    )
    
    (11,171,815
    )Provision
      for income taxes
    
    
    800
    
    
    800
    
    
    5,748Total
      Net Income (Loss)
    
    $
    (1,116,063
    )
    $
    (340,014
    )
    $
    (11,177,563
    )Shares
      Outstanding - Basic and Diluted
    
    
    10,364,890
    
    
    580,585
    
    
    948,482Loss
      per share - Basic
    
    $
    (0.11
    )
    $
    (0.59
    )
    $
    (11.78
    )Loss
      per share - Diluted
    
    $
    (0.11
    )
    $
    (0.59
    )
    $
    (11.78
    )
 
 
 See accompanying notes to financial
statements.
  
 3
 ITEC
Environmental Group, Inc.
 A
Development-Stage Company
 Consolidated
Statements of Shareholders’ Deficit
 For the
Period from Inception (March 28, 2000) through March 31,
2005
  Common
      Stock
    
    Preferred
      StockShares
    
    Amount
    
    Shares
    
    Amount
    
    Additional
      Paid-InCapital
    
    AccumulatedDeficit
    
    TotalBalance
      March 28, 2000
    
    
    -
    
    $
    -
    
    
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -Sale
      of common stock
    
    
    40,315
    
    
    40
    
    
    -
    
    
    -
    
    
    6,612
    
    
    -
    
    
    6,652Net
      Loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,215,313
    )
    
    (1,215,313
    )Balance
      December 31, 2000
    
    
    40,315
    
    $
    40
    
    
    -
    
    $
    -
    
    $
    6,612
    
    $
    (1,215,313
    )
    $
    (1,208,661
    )Common
      stock - reverse merger
    
    
    20,291
    
    
    21
    
    
    -
    
    
    -
    
    
    (21
    )
    
    -
    
    
    -Common
      stock issued for services
    
    
    16,315
    
    
    16
    
    
    -
    
    
    -
    
    
    1,092,112
    
    
    -
    
    
    1,092,128Net
      Loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (2,411,222
    )
    
    (2,411,222
    )Balance
      at December 31, 2001
    
    
    76,921
    
    $
    77
    
    
    -
    
    $
    -
    
    $
    1,098,703
    
    $
    (3,626,535
    )
    $
    (2,527,755
    )Sale
      of common stock
    
    
    135,182
    
    
    135
    
    
    -
    
    
    -
    
    
    1,641,767
    
    
    -
    
    
    1,641,902Common
      stock issued for services
    
    
    42,425
    
    
    42
    
    
    -
    
    
    -
    
    
    888,396
    
    
    -
    
    
    888,438Net
      Loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (2,563,732
    )
    
    (2,563,732
    )Balance
      at December 31, 2002
    
    
    254,528
    
    $
    254
    
    
    -
    
    $
    -
    
    $
    3,628,866
    
    $
    (6,190,267
    )
    $
    (2,561,147
    )Sale
      of common stock
    
    
    36,618
    
    
    37
    
    
    -
    
    
    -
    
    
    172,903
    
    
    -
    
    
    172,940Common
      stock issued for compensation
    
    
    (404
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Share
      adjustment
    
    
    12,121
    
    
    12
    
    
    -
    
    
    -
    
    
    71,988
    
    
    -
    
    
    72,000Common
      stock issued for services
    
    
    124,481
    
    
    125
    
    
    -
    
    
    -
    
    
    820,012
    
    
    -
    
    
    820,137Warrant
      issuance
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    6,000
    
    
    -
    
    
    6,000Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,633,534
    )
    
    (1,633,534
    )Balance
      December 31, 2003
    
    
    427,345
    
    $
    428
    
    
    -
    
    $
    -
    
    $
    4,699,769
    
    $
    (7,823,801
    )
    $
    (3,123,604
    )Shares
      issued for notes payable conversion
    
    
    1,006,625
    
    
    1,007
    
    
    -
    
    
    -
    
    
    1,863,235
    
    
    -
    
    
    1,864,242Shares
      issued for accounts payable conversion
    
    
    318,434
    
    
    318
    
    
    -
    
    
    -
    
    
    285,181
    
    
    -
    
    
    285,499Shares
      issued for debt conversion
    
    
    1,170,434
    
    
    1,171
    
    
    -
    
    
    -
    
    
    306,286
    
    
    -
    
    
    307,457Common
      stock issued for compensation - Directors
    
    
    149,775
    
    
    150
    
    
    -
    
    
    -
    
    
    240,350
    
    
    -
    
    
    240,500Common
      stock issued for services
    
    
    3,826,301
    
    
    3,826
    
    
    -
    
    
    -
    
    
    1,930,937
    
    
    -
    
    
    1,934,763Common
      stock issued for future legal fees
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,177,418
    )
    
    
    
    
    (1,177,418
    )Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (2,237,699
    )
    
    (2,237,699
    )Balance
      December 31, 2004
    
    
    6,898,914
    
    $
    6,900
    
    
    -
    
    $
    -
    
    $
    8,148,340
    
    $
    (10,061,500
    )
    $
    (1,906,260
    )Warrants
      issued for compensation
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    172,016
    
    
    -
    
    
    172,016Shares
      previously issued for services cancelled
    
    
    (8,024
    )
    
    (8
    )
    
    -
    
    
    -
    
    
    (875
    )
    
    -
    
    
    (883
    )Common
      stock issued for services
    
    
    9,956,545
    
    
    9,956
    
    
    -
    
    
    -
    
    
    1,453,204
    
    
    -
    
    
    1,463,160Common
      stock issued for future legal fees, net
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (716,513
    )
    
    -
    
    
    (716,513
    )Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,116,063
    )
    
    (1,116,063
    )Balance
      March 31, 2005
    
    
    16,847,435
    
    $
    16,848
    
    
    -
    
    $
    -
    
    $
    9,056,172
    
    $
    (11,177,563
    )
    $
    (2,104,543
    )
 
 See accompanying notes to financial
statements.
 4
 
 ITEC Environmental Group, Inc.
 A Development-Stage Company
 Consolidated Statements of Cash
Flows
 For the Three Months Ended March 31, 2005 and 2004
and
 For the Period from Inception (March 28, 2000) through
March 31, 2005
  Three
      Months Ended
    
    For
      the periodfrom inception(March 28,
      2000)throughMarch
      31,2005
    
    March
      31,2004
    
    March
      31,2005(Unaudited)
    
    (Unaudited)
    
    (Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Loss
    
    $
    (1,116,063
    )
    $
    (340,014
    )
    $
    (11,177,563
    )Adjustments
      to reconcile net loss to net cash usedby
      operating activities:Depreciation
      and amortization
    
    
    9,782
    
    
    13,705
    
    
    120,898Amortization
      of license fees
    
    
    2,500
    
    
    2,500
    
    
    47,500Gain
      on extinguishment of debt
    
    
    
    
    
    
    
    
    (634,211
    )Shares
      issued for Services
    
    
    745,764
    
    
    41,000
    
    
    4,303,812Shares
      / warrants issued for compensation
    
    
    172,016
    
    
    -
    
    
    484,516Amortization
      of loan origination fees
    
    
    -
    
    
    40,714
    
    
    -Warrants
      issuance costs
    
    
    -
    
    
    1,000
    
    
    6,000*Changes
      in assets and liabilities*Decrease
      (increase) in prepaid expenses and deposits
    
    
    (250
    )
    
    (117,998
    )
    
    (54,209
    )Decrease
      (increase) in other assets/liabilities
    
    
    -
    
    
    (786
    )
    
    (17,250
    )Increase
      in accounts payable
    
    
    (28,993
    )
    
    (96,665
    )
    
    900,861Increase
      in income taxes payable
    
    
    800
    
    
    (800
    )
    
    800Increase
      (decrease) in accrued liabilities
    
    
    159,313
    
    
    28,205
    
    
    1,145,491Increase
      (decrease) in deferred revenue
    
    
    -
    
    
    -
    
    
    475,190**Net
      cash used in operating activities**
    
    $
    (55,131
    )
    $
    (429,139
    )
    $
    (4,398,165
    )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
    
    $
    -
    
    $
    -
    
    $
    (255,688
    )Purchase
      of license fee
    
    
    -
    
    
    -
    
    
    (50,000
    )Advances
      made on notes receivable
    
    
    -
    
    
    -
    
    
    (147,973
    )**Net
      cash (used in) provided by investing activities**
    
    $
    -
    
    $
    -
    
    $
    (453,661
    )CASH
      FLOWS FROM FINANCING ACTIVITIESSale
      of common stock
    
    $
    -
    
    $
    -
    
    $
    1,821,494Proceeds
      from issuance of notes payable
    
    
    50,000
    
    
    500,000
    
    
    3,096,558Payments
      on notes payable
    
    
    -
    
    
    -
    
    
    (51,000
    )Payments
      on capital lease obligations
    
    
    -
    
    
    -
    
    
    (14,991
    )**Net
      cash provided by financing activities**
    
    $
    50,000
    
    $
    500,000
    
    $
    4,852,061
  (continued)
  See accompanying notes to financial
statements.
  5
 **ITEC
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Consolidated
Statements of Cash Flows (continued)**
 **For
the Three Months Ended March 31, 2005 and 2004 and**
 **For
the Period from Inception (March 28, 2000) through March 31,
2005**
  Three
      Months Ended
    
    
    For
      the period
      from
      inception
      (March
      28, 2000)
      ThroughMarch
      31,2005
    
    
    March
      31,
      2004
    
    
    March
      31,
      2005(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Increase
      (decrease) in cash and cash equivalents
    
    $
    (5,131
    )
    $
    70,861
    
    $
    235Balance
      at beginning of year
    
    
    5,366
    
    
    125
    
    
    -Balance
      at end of year
    
    $
    235
    
    $
    70,986
    
    $
    235**Supplemental
      disclosures:**Cash
      paid for interest
    
    $
    -
    
    $
    -
    
    $
    109,467Cash
      paid for taxes
    
    $
    -
    
    $
    1,600
    
    $
    4,000
  **Supplemental
      Schedule of Non-Cash Investing and Financing
Activities:**Three
      Months Ended
    
    
    For
      the period
      from
      inception
      (March
      28, 2000)
      ThroughMarch
      31,
      2005
    
    
    March
      31,
      2004
    
    
    March
      31,
      2005Common
      stock / warrants issued for compensation
    
    $
    172,016
    
    $
    -
    
    $
    484,516Common
      stock issued for services
    
    $
    745,764
    
    $
    41,000
    
    $
    4,303,812Common
      stock issued for debt conversion
    
    $
    -
    
    $
    20,000
    
    $
    3,091,408Common
      stock issued for legal fees, net
    
    $
    716,513
    
    $
    -
    
    $
    1,893,931Warrants
      issuance
    
    $
    -
    
    $
    1,000
    
    $
    6,000
 See accompanying notes to financial
statements.
  6
 **ITEC
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
  **1.** **Description
of Business and Significant Accounting Policies**
 
 This
summary of significant accounting policies of ITec Environmental Group, Inc.
(f/k/a Beechport Capital Corp.), is presented to assist in understanding the
Company’s financial statements and is stated in United States dollars. The
financial statements and notes are representations of the Company’s management,
who are responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles in the United
States of America and have been consistently applied in the preparation of the
financial statements.
  General
 
 ITec
Environmental Group, Inc. (“Itec” or the “Company”) was incorporated under the
laws of the State of Delaware on March 28, 2000. ITec was formed for the purpose
of acquiring certain patented technology and the development of a worldwide
market for its usage.
 
 The
Company's subsidiary, ECO2 Environmental Systems, Inc. (“ECO2”), was
incorporated under the laws of the State of Delaware on April 10, 2000. The only
activity to date has been the registration of a trademark for ECO2, and the
subsidiary is currently inactive.
 
 Unless
the context indicates otherwise, all references herein to the Company include
ITec Environmental Group, Inc., its predecessor, Beechport Capital Corporation,
and its wholly-owned subsidiary, ECO2 Environmental Systems, Inc.
 
 The
Company is a development stage entity and is primarily engaged in activities to
become a worldwide supplier of oil and agricultural chemical container recycling
equipment and related systems. The Company's business objective is to attempt to
build on the foundation of the licensed patented technology, to develop
proprietary recycling equipment, and to form strategic alliances to become a
supplier of recycling equipment and operate plastic waste recycling plants.
ITec's primary revenue source, the ECO2TM Environmental System, is a new
cost-effective, environmentally sensitive technology for cleaning plastic
contaminated by substances that make most types of plastic ineligible for
traditional recycling programs. The Company's initial marketing of its
technology is concentrated in Italy. In the future, the Company will market its
technology in the United States and other countries. The initial focus of the
Company’s research and development efforts will be the generation of products
for recycling of plastic waste. The Company has limited experience in
manufacturing of recycling systems and operating plastic waste recycling plants.
There can be no assurance that the Company will not encounter problems in
marketing and selling its proprietary recycling systems.
 
 The
Company’s success will depend in part on its ability to obtain patents and
maintain product license rights, maintain trade secrets and operate without
infringing on the proprietary rights of others, both in the United States and
other countries. There can be no assurance that patents licensed by the Company
will not be challenged, invalidated, or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to the
Company. The Company has the right to exploit recycling technology, which the
Company has licensed to use from Honeywell Corporation.
 
 7
 **ITEC
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 **1.** **Description
of Business and Significant Accounting Policies
(continued)**
 
 General
(continued)
 
 The
Company has no significant operating history and, from March 28, 2000,
(inception) to March 31, 2005, has generated a net loss of $11,177,563. The
accompanying financial statements for the quarter ended March 31, 2005, have
been prepared assuming the Company will continue as a going concern. During the
year 2005, management intends to raise additional debt and/or 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 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.
  History
 
 Beechport
Capital Corp. (“Beechport”) was organized as a Colorado corporation on January
24, 1989, in order to evaluate, structure and complete a merger with or
acquisition of prospects consisting of private companies, partnerships or sole
proprietorships. At a special September 27, 2002 meeting of the shareholders of
Beechport Capital Corp., the Company authorized a merger of Beechport into its
wholly-owned subsidiary, ITec Environmental Group, Inc.
 
 On April
11, 2001, ITec formed a wholly-owned subsidiary and incorporated it as a
Delaware corporation known as ECO2 Environmental Systems. The only activities to
date were the registration of a trademark for ECO2 and the sale of a recycling
machine to an Italian company operating in Italy.
  Basis
of presentation
 
 The
accompanying unaudited interim consolidated financial statements represent the
financial activity of ITec Environmental Group, Inc. and its subsidiaries. The
consolidated financial statements for the three months ended March 31, 2005 and
March 31, 2004, have been prepared in accordance with generally accepted
accounting principles for interim financial information in the US and in
accordance with the instructions to Form 10-QSB and Rule 10-01 of Regulation
S-X. Accordingly, the financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to consolidated financial
statements and footnotes thereto for the fiscal quarter ended March 31, 2005,
included herein. The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All inter-company transactions
were eliminated. The Company’s fiscal year ends on December 31 each year. The
financial statements and notes are representations of the management and the
Board of Directors who are responsible for their integrity and
objectivity.
 
 8
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **1.** **Description
of Business and Significant Accounting Policies
(continued)**
 
 Basis
of presentation (continued)
 
 The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period. The
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company’s Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2004.
  Use of
estimates in the preparation of financial statements
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
  Contingencies
 
 Certain
conditions may exist as of the date the 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. The Company’s 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 material loss
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 and material, would be
disclosed.
 
 Loss
contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the nature of the guarantee would be
disclosed.
  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.
  9
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **1.** **Description
of Business and Significant Accounting Policies
(continued)**
 
 Concentrations
 
 Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of temporary cash investments, cash equivalents and
trade accounts receivables. At March 31, 2005 the Company had no amounts of cash
or cash equivalents in U.S. financial institutions in excess of amounts insured
by agencies of the U.S. Government.
  Revenue
and expense recognition
 
 The
Company recognizes revenues from sales of equipment and products upon delivery
to customers. When products are configured to customer requirements, revenue is
recorded upon the successful completion of any final test procedures.
  Deferred
revenue
 
 Amounts
billed in advance of the period in which a service is rendered or a product is
delivered are recorded as a liability under “Deferred Revenue”. At March 31,
2005, deferred revenue for the period ended totaled $200,001 for the future sale
of ECO2 systems.
 
 The
Company contracts with others for the manufacturing of the
equipment.
  Assets
held under capital leases
 
 Assets
held under capital leases are recorded at the lower of the net present value of
the minimum lease payments or the fair value of the leased asset at the
inception of the lease. Amortization expense is computed using the straight-line
method over the shorter of the estimated useful lives of the assets or the
period of the related lease.
  Advertising
cost
 
 The
Company expenses advertising cost as incurred. There were no advertising costs
for the periods ended March 31, 2005 and March 31, 2004.
 
  10
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **1.** **Description
of Business and Significant Accounting Policies
(continued)**
  Basic
and diluted net earnings per share
 
 Basic net
earnings (loss) per common share is computed by dividing net earnings (loss)
applicable to common shareholders by the weighted-average number of common
shares outstanding during the period. Diluted net earnings (loss) per common
share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options or warrants. 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. Potentially
dilutive securities include stock options and warrants, and convertible debt
securities.
  Fair
value of financial instruments
 
 The
Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, accounts payable and accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. The amounts shown for notes payable also approximate fair value
because current interest rates offered to the Company for debt of similar
maturities are substantially the same.
  Income
taxes
 
 The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
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 the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
 
 Comprehensive
income (loss)
 
 Comprehensive
income consists of net income and other gains and losses affecting shareholders’
equity that, under generally accepted accounting principles are excluded from
net income in accordance with Statement on Financial Accounting Standards No.
130, “Reporting Comprehensive Income.” The Company, however, does not have any
components of other comprehensive income (loss) as defined by SFAS No. 130 and
therefore, for the periods ended March 31, 2005 and March 31, 2004 comprehensive
income (loss) is equivalent to the Company’s reported net income
(loss).
  11
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **1.** **Description
of Business and Significant Accounting Policies
(continued)**
  Stock-based
compensation
 
 Effective
January 1, 2005, the Company will account for all options and warrant grants to
employees and consultants in accordance with SFAS 123R, which requires recording
an expense for the fair value of all options or warrants granted employees and
consultants. The Company did not issue any options or warrants to employees or
consultants in 2004.
  Development-stage
company
 
 The
Company adopted SFAS No. 7 “Accounting and Reporting by Development Stage
Enterprises”. This statement specifies the guidelines for identifying an
enterprise in the development stage and the standards of financial accounting
and reporting for such an enterprise. Development stage companies use the same
accounting principles as established operating companies.
  Business
risks and uncertainties
 
 The
Company operates in the evolving field of materials recycling processing. 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 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 the Company will be successful in accomplishing its
objectives.
 
 Currently,
the Company is focused on sales of its recycling equipment in Italy. The
potential for adverse financial impact can result from negative effects of
economic conditions within Italy. Since the Company's business is principally in
one area, this concentration of operations results in an associated risk and
uncertainty.
  12
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **1.** **Description
of Business and Significant Accounting Policies
(continued)**
 
 
 Recent
accounting pronouncements
 
 In
December 2004, the Financial Accounting Standards Board (“FASB”) released a
revision to Statement of Financial Accounting Standard (“SFAS”) No. 123,
Accounting for Stock-Based Compensation (“FAS 123R”). FAS 123R addresses 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 would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, Accounting for Stock Issued
to Employees, and generally would require instead that such transactions be
accounted for using a fair-value-based method. The Company adopted FAS 123R
effective with the year beginning January 1, 2005. With the adoption of this new
statement, the Company will recognize substantially more compensation expense.
 
 In July
2004, the EITF issued a draft abstract for EITF Issue No. 04-08, “The Effect of
Contingently Convertible Debt on Diluted Earnings per Share” (“EITF 04-08”).
EITF 04-08 reflects the Task Force’s tentative conclusion that contingently
convertible debt should be included in diluted earnings per share computations
regardless of whether the market price trigger has been met. If adopted, the
consensus reached by the Task Force in this Issue will be effective for
reporting periods ending after December 15, 2004. Prior period earnings per
share amounts presented for comparative purposes would be required to be
restated to conform to this consensus and the Company would be required to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding Management does not expect the implementation of this new standard
to have a material impact on its computation of diluted earnings per share.
 
 In
September 2004, the EITF delayed the effective date for the recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and
investments accounted for under the cost method. The Company is currently
evaluating the effect of this proposed statement on its financial position and
results of operations.
 
 In
December 2004, the Financial Accounting Standards Board issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43, Chapter 4”, which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and charges regardless of whether they meet the criterion of “so
abnormal” that was originally stated in Accounting Research Bulletin No. 43,
chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed
production overheads to conversion costs be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not expect
the implementation of this new standard to have a material impact on its
financial position, results of operations or cash flows.
  13
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **1.** **Description
of Business and Significant Accounting Policies
(continued)**
 
 Recent
accounting pronouncements (continued)
 
 In
December 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29”,
which amends Opinion 29 by eliminating the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for a fiscal year beginning after June 15, 2005, and
implementation is done prospectively. Management does not expect the
implementation of this new standard to have a material impact on its financial
position, results of operations and cash flows.
  **2.**  **Going
Concern**
 
 The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. The Company has suffered recurring losses from
operations and has a net capital deficiency that raises substantial doubt about
its ability to continue as a going concern. The Company incurred a net loss of
$1,116,063 during the quarter ended March 31, 2005, and, as of that date, had a
working capital deficiency of $1,816,512 and net capital deficiency of
$2,104,543. Management is attempting to raise additional equity. The Company
filed a Form SB-2A on June 20, 2003, in an effort to raise up to $5 million in
additional financing. The Company obtained $520,000 in financing under this
arrangement in 2004. There is no guarantee, however, that this offering or any
other efforts will result in the Company raising sufficient capital or any
capital or additional financing.
 
 In 2004,
the Company received approval for a loan from the California Integrated Waste
Management Board. The loan is approved for $2 million, but requires the Company
to obtain $2 million in matching funds prior to funding.
 
 In view
of these matters, continuing 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. Management plans to pursue financing arrangements and aggressive
sales of equipment to remedy the capital and loss circumstances to provide the
opportunity for the Company to continue as a going concern.
  14
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **3.** **Property
and Equipment**
 
 Property
and equipment at March 31, 2005 and December 31, 2004 consist of the
following:
  March
      31, 2005
    
    
    December
      31, 2004Manufacturing
      equipment
    
    $
    233,639
    
    $
    233,639Office
      furniture
    
    
    12,502
    
    
    12,502Computer
      equipment and software
    
    
    34,883
    
    
    34,883Leasehold
      improvements
    
    
    14,870
    
    
    14,870Total
      property and equipment
    
    
    295,894
    
    
    295,894Less
      accumulated depreciation and amortization
    
    
    (112,076
    )
    
    (102,294
    )Total
    
    $
    183,818
    
    $
    193,600
  Depreciation
expense for the quarters ended March 31, 2005 and 2004 was $9,782 and $13,322,
respectively.
  **4.** **Accrued
Liabilities**
 
 Accrued
liabilities at March 31, 2005 and December 31, 2004 consist of the
following:
  March
      31, 2005
    
    
    December
      31, 2004Accrued
      payroll and benefits
    
    $
    550,276
    
    $
    466,876Accrued
      interest
    
    
    74,542
    
    
    59,490Accrued
      professional fees
    
    
    118,310
    
    
    112,810Accrued
      rent
    
    
    78,991
    
    
    17,630Other
    
    
    13,610
    
    
    13,610Total
    
    $
    835,729
    
    $
    670,416
 ****
 **5.**  **Common
Stock**
 
 The
Articles of Incorporation of ITec authorize a maximum of 750,000,000 shares of
$0.001 par value common stock and 10,000,000 shares of $0.001 par value
preferred stock. Each share of common stock is entitled to one voting right, the
right to share in earnings and the right to share in assets upon
liquidation.
  15
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **5.** **Common
Stock (continued)**
 
 As
described in Note 1, on May 4, 2001, Beechport entered into a merger agreement
with ITec to acquire all the issued and outstanding shares of common stock of
ITec in exchange for 40,315 shares of Beechport’s common stock. This business
combination resulted in the shareholders of ITec owning approximately 66.5% of
the issued and outstanding shares of the Company's common stock (60,606 shares
were outstanding upon completion of the transaction), and the Company holding
100% of the issued and outstanding shares of ITec's common stock. The
transaction was accounted for as a reverse merger. Therefore, ITec was deemed to
be the accounting acquirer.
 
 This
transaction is treated as a recapitalization of ITec, with no revaluation of
assets and liabilities. Beechport was a shell corporation at the time of the
exchange, and, therefore, the acquisition was recorded under the reverse merger
guidelines.
  Reverse
Stock Split
 
 Effective
December 20, 2004, the Board of Directors authorized a one-for-165 reverse stock
split to be effective in December 2004 to shareholders of record.
 
 On
December 20, 2004, the Company’s Board of Directors approved to keep the par
value of the Common Stock at $0.001 per share. As a result of reverse stock
split and the reduction in par value, the “Common stock” account was reduced,
and the “Additional paid-in capital” account was increased by the same
amount.
 
 All share
data presented is adjusted for the reverse stock split.
  Sale
of Common Stock
 
 There
were no sales of common stock in the quarter ended March 31, 2005.
  Common
Stock Issued for Services
 
 In the
three months ended March 31, 2005, the Company issued 5,000,000 shares of stock,
valued at $845,000, to a related party for prepaid legal services. The company
also issued an additional 4,956,545 shares, valued at $618,160, to other
consultants for services. The company also cancelled 8,024 shares previously
recorded for consultants in the prior year.
  16
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **6.** **Notes
Payable**
 
 On
February 24, 2004, ITec (“holder” or the “Company”) executed an agreement with
Cornell Capital Partners, LP whereby the Company issued $500,000 in notes
payable. This note bears an annual interest rate of 24% beginning ninety (90
days) from the date of the note. The Company agreed to put in an escrow with the
law firm, Butler Gonzalez, LLP, fifty million (50,000,000) shares of the
Company’s common stock (“escrowed shares”) and twenty (20) advance notices of
not less than $25,000 each. The law firm shall release these advance notices to
the holder every seven (7) calendar days commencing April 5, 2004. In the event
that the escrowed shares are insufficient to repay all amounts due under the
note, the Company will immediately place in escrow additional shares of common
stock sufficient to repay all the outstanding balance of the note. At the option
of the holder, the interest due can be paid either by Company’s common stock or
cash. At March 31, 2005, the remaining balance on these notes was $150,000 in
principal and $44,490 in accrued interest.
 
 On
January 26, 2005, the Company issued a note for $50,000 to a related party. The
note bears interest at 10% per annum and matures six months after issue. The
proceeds were used for working capital needs.
  **7.**  **Technology
License**
 
 Effective
June 30, 2000, the Company entered into a five-year patent license agreement
with Honeywell International, Inc. (Honeywell), whereby the Company obtained a
non-exclusive, nontransferable worldwide license to practice the methods and to
make, use, and sell, the products which are covered by the proprietary rights,
limited to the field of use of separating and recovering motor oil from high
density polyethylene plastic. Under the terms of the agreement, the Company
agreed to pay a $50,000 non-refundable initial license fee and an additional
minimum annual royalties commencing upon delivery of the first equipment to an
ITec customer, of the greater of $50,000 or 5% of the gross sales of all
products and or services sold in the United States and 3% of the products and or
services sold in countries other than the United States. The initial license fee
of $50,000 is not creditable toward the minimum annual royalty and was payable
in three equal installments. This license agreement automatically renews for
additional one-year periods after the end of the initial five-year term unless
written notice is given by either party of its intent to terminate the
agreement. Honeywell may terminate this agreement in the event of a bankruptcy
filing or insolvency of the Company, an assignment for the benefit of creditors
of the Company, the nationalization of the industry which encompasses any
products or services, any suspension of payments under the terms of the
agreement by government regulation, the Company's failure to commence
manufacture, a substantial change in ownership of the Company (whether resulting
from merger, acquisition, consolidation or otherwise), another company or person
acquiring control of the Company, or the existence of a state of war between the
United States and any country where the Company has a license to manufacture
products or provide services. In addition, if either party to the agreement
defaults for any reason in any of the obligations under the terms of the
agreement, the other party will have the right to terminate the agreement by
giving at least 60 days’ written notice.
  17
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **7.** **Technology
License (continued)**
 
 There are
no rights to sub-license granted under the terms of this agreement. The Company
has agreed to invest in the commercial development of the technology and market
the product by committing resources at minimum in accordance with various
requirements as set forth in the commercialization plan provided by the Company
for consideration to Honeywell when the Company applied for the license. The
terms of the agreement require the Company to observe all applicable United
States and foreign laws, regulations, rules, and decrees with respect to the
transfer of the proprietary rights and related technical data to foreign
countries and failure to conform to such laws, regulations, rules and decrees
may result in criminal liability.
  The
$50,000 license fee is recorded as an intangible asset and is being amortized
over the initial five year term of the license agreement on a straight-line
basis. Management's policy with respect to long-lived assets, including
intangible assets, is to periodically review the carrying amounts, at least
annually, to determine if there is any impairment in the carrying value. As of
March 31, 2005, management believes that there is no impairment in the carrying
value of any of its long-lived assets. Accumulated amortization at March 31,
2005 amounted to $47,500. Net book value at March 31, 2005 amounted to
$2,500.
  **8.** **Related
Party Transactions**
 
 On July
5, 2000, the Company's Board of Directors approved and authorized the Company to
make a loan of $250,000 to the Company's President. The loan, according to the
minutes of the Board meeting, is interest only for ten years with the total
principal due at the end of ten years. Interest in the amount of $0 has been
waived for the quarter ended March 31, 2005 and the year ended December 31,
2004; $21,197 has been waived for the year ended December 31, 2003; $18,958 has
been waived in the year ended December 31, 2002; and $9,479 in year ended
December, 2001 by the board of directors and was recorded as compensation
expense in the respective periods. As of March 31, 2005, a balance of $147,973
was still due on the loan.
 
 In 2004,
the Company received advances totaling $50,000 from its CFO primarily to
accommodate the working capital needs of the Company. Such advances are
unsecured, bear interest at 10% and are due on demand.
 
 In 2004,
the Company received advances totaling $76,100 from its CEO primarily to
accommodate the working capital needs of the Company. Such advances are
unsecured, bear interest at 10% and are due on demand.
 
 In the
three months ended March 31, 2005, the Company issued 5,000,000 shares of stock
to a shareholder, who has a greater than 10% ownership interest, for prepaid
legal services. These shares have a market value of $845,000. The Company issued
a note payable to this shareholder party for $50,000 due six months after issue
and bearing interest at 10% per annum.
  18
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **9.** **Stock
Options and Warrants**
 
 The
Company has adopted an incentive stock option plan (the “Plan”) under which
options granted are intended to qualify as “incentive stock options’ under
Section 422A of the Internal Revenue Code of 1986, as amended. Pursuant to the
Plan, options to purchase up to 275 shares of the Company’s common stock may be
granted to employees of the Company. The Plan is administered by the Board of
Directors which is empowered to determine the terms and conditions of each
option subject to the limitation that the exercise price can not be less than
market value of the common stock on the date of grant (110% of the market value
in the case of options granted to an employee who owns 10% or more of the
Company’s outstanding common stock) and no option can have a term in excess of
10 years (5 years in the case of options granted to an employee who owns 10% or
more of the Company’s outstanding common stock). As of March 31, 2005, no
options have been granted under the Plan.
 
 On May
28, 2001, the Company adopted the Beechport Capital Corporation 2001 Stock Plan
which covers the issuance of up to 6,060 shares of common stock either directly
or pursuant to options to eligible employees, directors, officers of and
consultants and advisors of the Company. The Company filed a registration
statement on Form S-8 with the Securities and Exchange Commission to register
the shares covered under the Plan.
 
 In May,
2002, the Company established Beechport Capital Corp 2002 Stock Plan which
covers issuance of 12,121 shares of common stock either directly or pursuant to
options to eligible employees, directors, officers of and consultants and
advisors of the Company. The Company filed a registration statement on Form S-8
with the Securities and Exchange Commission to register the shares covered under
the Plan.
 
 In
November 2002, the Company established the ITec Environmental Group, Inc., 2002
Stock Plan (“2002 Stock Plan”) which covers the issuance of 24,242 shares of
common stock either directly or pursuant to options to eligible employees,
directors, officers of and consultants and advisors of the Company. The Company
filed a registration statement on Form S-8 with the Securities and Exchange
Commission to register the shares covered under the Plan. In 2002, the Company
issued 24,242 shares under the terms of this Plan.
 
 In March
2003, the Company established the ITec Environmental Group, Inc., 2003 Stock
Plan (“2003 Stock Plan”) which covers the issuance of 121,212 shares of common
stock either directly or pursuant to options to eligible employees, directors,
officers of and consultants and advisors of the Company. The Company filed a
registration statement on Form S-8 with the Securities and Exchange Commission
to register the shares covered under the Plan. In 2003, the Company issued
warrants convertible into 1,212 shares of common stock under this plan to
employees and consultants. The warrants have an exercise price of $6.60 per
share. In 2003, the Company issued 60,845 shares under this plan.
 
 The
Company has adopted SFAS 123R as of January 1, 2005. Accordingly, the Company
applies SFAS 123R and related interpretations in accounting for its plans for
employees. In 2004, the Company did not issue options or warrants to
employees.
  19
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **9.** **Stock
Options and Warrants (continued)**
  Issuance
of Warrants
 
 In 2005,
the Company issued to its CEO warrants to purchase 2,457,370 shares of common
stock at an exercise price of $0.06 per share. The company recorded compensation
expense of $172,016 related to this issuance.
 
 Options
and warrants are granted at prices that are equal to the current fair value of
the Company’s common stock at the date of grant. The Company records
compensation expense on options granted based on fair value using the
Black-Scholes method. The vesting period is determined by the Board of
Directors, and it is usually related to the length of employment or consulting
contract period. However, all warrants granted to date are immediately
vested.
 
 The fair
value of these warrants was estimated during the period ending March 31, 2005
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: a dividend yield of 0%; expected volatility of 92%; risk-free
interest rate of 5.5%; and expected life of 5 years.
 
 The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. The weighted-average fair value
of options and warrants granted during the period ended March 31, 2005 was
$0.07.
 
 The
following table summarizes information with respect to stock options outstanding
and exercisable at March 31, 2005:
 
 Options
      and Warrants ExercisableNumberOutstandingas
      of March31, 2005
    
    Weighted
      Average
      RemainingContractualLife
    
    Weighted
      Average
      Exercise
      Price
    
    NumberExercisable
      asof March 31,2005
    
    Weighted
      Average
      Exercise
      Price2,457,370
    
    4.88
    
    $
    0.06
    
    2,457,370
    
    $
    0.0612,121
    
    2.58
    
    
    29.70
    
    12,121
    
    
    29.702,469,491
    
    2.83
    
    $
    29.70
    
    2,469,491
    
    $
    0.21
 
  20
 **ITec
Environmental Group, Inc.**
 **A
Development-Stage Company**
 **Notes
to Consolidated Financial Statements**
 **March
31, 2005**
 
 **9.** **Stock
Options and Warrants (continued)**
  The
following table summarizes the Company's stock option and warrants
activity:
 
 Warrants
      And
      Stock
      Options
      Outstanding
    
    Weighted
      Average
      Exercise
      PriceOutstanding
      December 31, 2004
    
    
    12,121
    
    $
    29.70Granted
    
    
    2,457,370
    
    $
    0.06Exercised
    
    
    -
    
    $
    -Expired/Cancelled
    
    
    -
    
    $
    -Outstanding
      March 31, 2005
    
    
    2,469,491
    
    $
    0.21
  **10.**  **Subsequent
Events**
 
 Issuance
of Stock
 
 In April
of 2005, the Company issued 3,000,000 shares of stock to convert $150,000 of
debt plus accrued interest and an additional 1,500,000 shares for compensation
for services rendered to the Company.
  Issuance
of Warrants
 
 In April
of 2005, the Company issued warrants for 4,750,000 shares of stock to officers,
directors and consultants.
  Issuance
of Convertible Note
 
 In April
of 2005, the Company issued a note for $60,000 convertible at the holder’s
option into Company stock.
  Litigation
concerning past due rent
 
 The
Company is in dispute with its landlord regarding accrued but unpaid rent on its
leased facility. The Company is negotiating with its landlord to resolve these
issues.
   21
 ****
 **Item
2.**  **Management’s
Discussion and Analysis or Plan of Operation**
 We use
patented technology and proprietary equipment to recycle plastic.
 
 We
license environmental technology using a carbon dioxide cleaning process from
Honeywell FM&T.  This new environmental technology, the System, is
believed by management to be the only pollution reduction and recycling system
on the market today that allows for the 100% recycling of plastic motor oil
containers and the residual oil left inside each container.  By using the
carbon dioxide cleaning process, the Company can focus on environmental
protection and environmental safety by creating no chemical waste disposal in
the oil recycling and plastic recycling process.
 
 We had
revenue of $0 for the three months ended March 31, 2005, compared with $1,750
for the three month period ended March 31, 2004, a decrease of 100%. The nominal
amount of revenue in 2004 and none in 2005 was a result of the change in
business strategy in the first quarter of 2004 from the marketing of equipment
and licensing of the System technology, to building our plant for the recycling
of plastic. This change in business strategy required our management to focus
their efforts on raising capital of approximately $7 million to fund our revised
business strategy. We are a development stage company and accordingly have not
as yet begun generating operational revenues.
 
 There
were no cost of goods sold related to sales for the first quarter of 2005 and
2004.
 
 Total
operating expenses increased by $824,378, or 299%, from $275,860 for the three
months ended March 31, 2004 to $1,100,238 for the three months ended March 31,
2005. The increase is mainly attributable to an increase of $644,196 in
consulting fees and an increase in payroll expense of $155,831 for the first
quarter of 2005, as compared to the same period in 2004.  These increases
were related to hiring of consultants legal and strategic business consultants
to assist us in our recapitalization efforts. Additionally, we granted warrants
to our CEO for his continued efforts in developing our business objectives.
Pursuant to guidelines of SFAS 123R, we recorded the fair value of the warrants
granted as compensation expense. The warrants we issued were immediately vested.
All remaining payroll expense represents payroll accruals for employees who are
providing services without receiving cash remuneration. In first quarter of
2005, the Company incurred more legal and consulting fees in association with
business issues and developing a plan to raise additional capital.  We
incurred legal fess of approximately $120,000 during the fiscal quarter ended
March 31, 2005.
 
 Depreciation
and amortization expense decreased to $12,282 for the three months ended March
31, 2005, compared to $16,205 for the three months ended March 31, 2004 a
decrease of $3,923 (24.2%).
 
 The
Company recorded net interest expense of $15,052 for the three months ended
March 31, 2005, as compared to $65,104 for the three months ended March 31,
2004, a decrease of $50,052 (76.9%). The decrease is attributed to the reduction
of debt through the conversion of debt to equity, which was accomplished in the
4 th quarter
of fiscal year 2004.
 
 22
 
 Our net
losses increased 228.2% for the three months ended March 31, 2005 to $1,116,063,
compared with $340,014 for the three months ended March 31, 2004.  The
increase is due to primarily increases in consulting and professional fees and
warrants issued to the CEO.
 
 At March
31, 2005, we have available approximately $10,100,000 and $7,800,000 in net
operating loss carry-forwards from prior years and current year to date,
respectively, available to offset future federal and state income taxes which
expire through 2024.  Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carry-forwards.  A change of
greater than 50% of the Company ownership could significantly reduce the
availability of these tax credits.  We have continued to provide a
valuation allowance to reduce its net deferred tax asset to zero.  The
amount of deferred tax asset considered realizable, however, can be revised in
the near term based upon future operating conditions during the carry-forwards
period.
 
 Liquidity
and Capital Resources
 
 Historically,
our working capital needs have been satisfied primarily through private
placements of our securities and other debt instruments, such as short and
long-term notes with certain investors.  We reasonably expect to continue
to do so 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 March
31, 2005, we had a working capital deficit of $1,815,512, compared to a working
capital deficit of $1,627,957 at December 31, 2004.  The 11.6% increase in
our working capital deficit is primarily attributed to increases in accrued
liabilities.
 
 As of
March 31, 2005, we had total assets of $405,986 and a total shareholders’
deficit of $2,104,543, compared with total assets of $423,149 and total
stockholder's deficit of $1,906,260 at December 31, 2004.  Total assets
decreased by $17,163 due to normal depreciation expense accruals. Total
shareholders' deficit increased by $198,283 or 10.4% in the first quarter of
2005 due to the fact that we incurred consulting and professional fees that
created the increase in net loss during the fiscal quarter ended March 31, 2005.
We were able acquire consulting services primarily through non-cash means,
stock-based compensation. These transactions contributed to a $907,832 increase
in our equity.
 
 For the
three months ended March 31, 2005, cash used by operating activities decreased
to $55,131, most of which was generated from borrowing. We were able to satisfy
the bulk of our other operating expenses through stock based compensation..
 
 23
 
 For the
three months ended March 31, 2005, we realized $50,000 in aggregate proceeds
from a new note payable.  For the comparable period in 2004, we had an
increase in notes payable of $500,000.
 
 During
the fiscal year ending December 31, 2004, the company issued approximately
2,800,000 shares of the company common stock having a market value of
approximately $1.2 million to David Otto, principal of the Otto Law Group of
Seattle, Washington. In the first Quarter of 2005, we issued an additional
5,000,000 shares to David Otto having a market value of approximately $850,000.
The purpose of the issuances of the shares was to pay for current and future
fees for strategic business consulting and legal services rendered and to be
rendered relating to the equity restructuring of the company and
recapitalization efforts. The issuance of these shares was necessary due to
secure the services of legal counsel as we continue our efforts to obtain
additional capital.
 
 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.
 
 We do not
have sufficient cash or lines of credit for the next twelve (12) months but we
are in the process of raising funds. We expect to have sufficient cash or lines
of credit to satisfy our needs for the twelve (12) months ending March 31, 2006.
There is no guarantee, however, that efforts will result in Itec raising
sufficient capital or any capital or additional financing.
 
 Our plan
for the next twelve (12) months is opening a plastic recycling plant in
Stanislaus County, California. We have signed a five (5) year lease on a
building and have moved all equipment necessary for the plastic recycling pilot
plant to our new plant in Riverbank, California. The recycling pilot plant
opened for operations in June 2003 and was located in Oakdale,
California.
 
 The lease
for the plant in Riverbank, California is currently in default, however, we are
attempting to negotiate a restructuring of the lease obligations with the
landlord. This lease is for a 58,000 square foot, steel frame building in a
heavy industrial complex and includes an additional 35,000 square feet of office
space. All infrastructures, including rail-sidings are in place. Installation of
equipment will take approximately three (3) months with the first testing of
Systems in September 2005. After completing the testing of the System, the
start-up operational phase will take an additional two (2) months. Employment
would ramp up with the new recycling plant, starting with four (4) new
employees, and then adding an additional forty-four (44) employees.
 
 Itec
recently entered into a three (3) year agency agreement with H. Muelstein &
Co., Inc., pursuant to which H. Muelstein will act as Itec’s exclusive agent for
the purchase and sale annually of up to 60 million pounds of Itec’s PET flake
and post-consumer HDPE natural flake/pellets in the United States and
Canada.
 
 24
 
 Strategic
Alliance Agreements
 
 Itec
continues to engage in discussions for the purpose of entering into
manufacturing, technology and sales alliances.  Such discussions are
ongoing.
 
 While the
Company has not signed any definitive agreements, the Company is also actively
seeking acquisitions or business opportunities to, among other things, increase
revenues and improve stockholder value, which businesses or lines of business
may or may not relate to the current core business of the Company.
 
 Significant
Accounting Policies and Estimates
 
 Management's
Discussion and Analysis of Financial Condition and Results of Operations
discusses the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.  The preparation of these financial statements
requires 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,
including those related to reserves and intangible assets.  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 most significant accounting estimates inherent in the
preparation of the Company's financial statements include estimates as to the
appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources, primarily the recovery of intangible
assets.  These accounting policies are described at relevant sections in
this discussion and analysis and in the notes to the consolidated financial
statements included in our Annual Report on Form l0-KSB for the fiscal year
ended December 31, 2004.
 
 Equity
 
 Based
upon the Board of Director’s position, on November 3, 2004, via a written
consent in lieu of a special meeting of the shareholders, a majority of the
shareholders of the common stock of the Company voted to amend the Articles of
Incorporation, as amended, of the Company to reverse-split the Company’s issued
and outstanding common stock at a ratio of 1 for 165. 396,436,171 shares of
common stock were voted in favor of the amendment. No votes were cast against
the amendment.
 
 In the
first quarter of 2005, the Company issued approximately 9,948,521 shares of
common stock for consulting and legal services rendered and to be rendered.
These issuances continue to reflect our efforts to obtain necessary services
that we need at a time when cash resources are limited for these services. We
are optimistic that our recent agreements signed with Brean, Murray &
Company, Inc., and an investment banking firm in New York will assist us to
obtain needed capital.
 
 Also
during the first quarter, the Company issued approximately 2,500,000 warrants to
purchase Company common stock for $0.06 per share, to Gary De Laurentiis, our
CEO, in recognition of his continuing efforts on behalf the Company. We
recognized compensation expense of approximately $172,000 related to this grant.
In April, we issued additional warrants exercisable for 4,250,000 shares of
common stock to officers and directors of the Company. ****
  25
  **Item
3.**  **Controls
and Procedures**
  Under the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15(b) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2005 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
   26
 
  **PART
II - OTHER INFORMATION**
 
 **Item
1.**  **Legal
Proceedings**
 
 None
 
 **Item
2.**  **Unregistered
Sales of Equity Securities and Use of Proceeds**
 
 None
 
 **Item
3.**  **Defaults
Upon Senior Securities**
 
 None
 
 **Item
4.**  **Submission
of matters to a Vote of Securities Holders**
 
 None
 
 **Item
5.**  **Other
Information**
 
 Pursuant
to the "safe harbor" private offering exemption provided by Rule 506 of
Regulation D under Section 4(2) of the Securities Act of 1933 (the "Exemption"),
on April 15 2005, in exchange for services provided to the Company, warrants to
purchase common stock of the Company, exercise price of $.06 per share, were
issued to the following individuals:
 
 **Name**
    
    **Warrant
      Shares**Gary
      De Laurentiis
    
    2,000,000George
      Kanakis
    
    500,000George
      Gitschel
    
    500,000
 
 Each of
the warrants contains a cashless exercise provision and “piggy-back”
registration rights. For purposes of establishing compliance with the Exemption,
the Company relied upon (i) certain representations and warranties of the
warrant holders’ contained in the warrants and (ii) its own independent
investigation to confirm the warrant holders’ representations and
warranties.
 
 **Item
6.**  **Exhibits**
 
 Exhibit
      No.
    Description3.1(i)
    Amendment
      to Restated Certificate of Incorporation3.2(i)
    Restated
      Certificate of Incorporation3.3(i)
    Certificate
      of Incorporation3.4(ii)
    Bylaws4.1
    Form
      of Common Stock Warrant issued to Gary M. De Laurentiis, George Kanakis
      and George Gitschel10.1
    Commitment
      Letter from the California Integrated Waste Management
    Board10.2
    Agreement
      with H. Muehlstein & Co., Inc.31.1
    Certification
      of CEO pursuant to Section 302 of the Sarbanes-Oxley
Act31.2
    Certification
      of CFO pursuant to Section 302 of the Sarbanes-Oxley
Act32
    Certification
      of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley
      Act
   27
 
 **SIGNATURES**
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
 
 ****
 
 ****ITEC
      ENVIRONMENTAL GROUP, INC.**May 13, 2005
    By:
    /s/Gary M. De LaurentiisChairman & Chief Executive
      Officer**
 ****
 ****
 
 ****May 13, 2005
    By:
    /s/Gary M. De Laurentiis
      Chairman & Chief Executive
Officer(Principal Executive
      Officer)
    ****May 13, 2005
    By:
    /s/Frederick Smith, Jr.
      Chief Financial Officer(Principal Financial Officer)
 
 
 28
 
 EXHIBIT
INDEX
 
 Exhibit
      No.
    Description
    
    Location3.1(i)
    Amendment
      to Restated Certificate of Incorporation
    
    Incorporated
      by reference to Exhibit A to the DEFR14C filed by the Company on November
      30, 20043.2(i)
    Restated
      Certificate of Incorporation
    
    Incorporated
      by reference to Exhibit B to the DEF-14C filed by the Company on September
      9, 20023.3(i)
    Certificate
      of Incorporation
    
    Incorporated
      by reference to the Form S-18 Registration Statement filed by the Company,
      File No. 33-31-673.4(ii)
    Bylaws
    
    Incorporated
      by reference to Exhibit B to the DEF-14C filed by the Company on September
      9, 20024.1
    Form
      of Common Stock Warrant issued to Gary M. De Laurentiis, George Kanakis
      and George Gitschel
    
    Incorporated
      by reference to Exhibit 4.5 to the 10-KSB filed by the Company on April
      15, 200510.1
    Commitment
      Letter from the California Integrated Waste Management
    Board
    
    Incorporated
      by reference to Exhibit 10.1 to the 10-QSB filed by the Company on
      November 15, 200410.2
    Agreement
      with H. Muehlstein & Co., Inc.
    
    Incorporated
      by reference to Exhibit 10.2 to the 10-KSB filed by the Company on April
      15, 200531.1
    Certification
      of CEO pursuant to Section302
      of the Sarbanes-Oxley Act
    
    Attached31.2
    Certification
      of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
    
    Attached32
    Certification
      of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley
      Act
    
    Attached
 
 
 
 29