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 MARCH 31, 2006





Commission
      File Number: #033-31067





ITEC
      ENVIRONMENTAL GROUP, INC.


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





Delaware


(State
      or
      other jurisdiction of incorporation or organization)





31-1705310


(IRS
      Employer Identification Number)





5300
      Claus Road


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 [x] No [ ]





The
      number of shares of the Company's common stock outstanding on May 31, 2006:
      67,619, 186










ITEC
      ENVIRONMENTAL GROUP, INC.


FORM
      10-QSB




TABLE
      OF
      CONTENTS


PART
                I
            
            FINANCIAL
                INFORMATION
            3Item
                1
            
            Financial
                Statements
            3Item
                2
            
            Management's
                Discussion and Analysis or Plan of Operation
            19Item
                3
            
            Controls
                and Procedures
            24PART
                II
            
            OTHER
                INFORMATION
            24Item
                1
            
            Legal
                Proceedings
            24Item
                2
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            24Item
                3
            
            Defaults
                Upon Senior Securities
            25Item
                4
            
            Submission
                of Matters to a Vote of Security Holders
            25Item
                5
            
            Other
                Information
            25Item
                6
            
            Exhibits
            25SIGNATURES
            
            
            25







2





ITEC
      ENVIRONMENTAL GROUP, INC.


FORM
      10-QSB








PART
      I -
      FINANCIAL INFORMATION





Item
      1.
      Financial Statements




**ITEC
                  Environmental Group, Inc. and Subsidiary****Condensed
                  Consolidated Balance Sheet****(unaudited)**
  **March
                  31,****2006**Current
                  assetsCash
                  and cash equivalents
              
              $
              10,190Inventories
              
              
              59,555Prepaid
                  expenses and other current assets
              
              
              10,845Total
                  current assets
              
              
              80,590Property
                  and equipment, net
              
              
              3,061,771Notes
                  receivable - officer
              
              
              147,973Other
                  assets
              
              
              79,986Total assets
              
              $
              3,370,320Current
                  liabilitiesAccounts
                  payable
              
              $
              621,814Accounts
                  payable - related party
              
              
              249,932Accrued
                  compensation and other amounts due officers
              
              
              959,241Accrued
                  liabilities
              
              
              634,413Current
                  portion of capital lease obligations
              
              
              9,233Notes
                  and convertible notes payable, net of $504,167 debt
                  discount
              
              
              1,432,833Current
                  portion of California Integrated Waste Management Board note
                  payable
              
              
              140,337Fair
                  value liability for convertible notes payable embedded
                  derivative
              
              
              924,669Fair
                  value liability for warrants
              
              
              4,730,266Loans
                  payable issued prior to 2004
              
              
              353,981Total
                  current liabilities
              
              
              10,056,719Capital
                  lease obligations, net of current portion
              
              
              13,484Note
                  payable to California Integrated Waste Management Board,
                  net
              
              
              1,850,413Total
                  liabilities
              
              
              11,920,616Commitments
                  and contingencies (Note 9)Stockholders'
                  DeficitPreferred
                  stock, $0.001 par value, 10,000,000 sharesauthorized
                  , none issued and outstanding
              
              
              -Common
                  stock, $0.001 par value, 750,000,000 sharesauthorized,
                  63,077,755 shares issued and outstanding
              
              
              63,078Additional
                  paid-in capital
              
              
              19,439,486Accumulated
                  deficit
              
              
              (28,052,860
              )Total stockholders' deficit
              
              
              (8,550,296
              )Total liabilities and stockholders' deficit
              
              $
              3,370,320


See
        accompanying notes to condensed consolidated financial
        statements.




3





**ITEC
                  Environmental Group, Inc. and Subsidiary**
                **Condensed
                  Consolidated Statements of Operations****(unaudited)**
  Three
                  months ended March 31,2006
              
              2005Revenue
              
              $
              36,773
              
              $
              -Cost
                  of goods sold
              
              
              25,959
              
              
              -Gross
                  profit
              
              
              10,814
              
              
              -Operating
                  expensesTechnology
                  development
              
              
              285,479
              
              
              16,042Consulting
                  and legal fees
              
              
              1,011,579
              
              
              761,998General
                  and administrative
              
              
              299,417
              
              
              322,971Total operating expenses
              
              
              1,596,475
              
              
              1,101,011Loss  from
                  operations
              
              
              (1,585,661
              )
              
              (1,101,011
              )Other
                  expenseInterest
                  expense
              
              
              114,108
              
              
              15,052Change
                  in fair value liability of warrants and derivatives
              
              
              966,687
              
              
              -Total
                  other expense
              
              
              1,080,795
              
              
              15,052Net
                  loss before income taxes
              
              
              (2,666,456
              )
              
              (1,116,063
              )Provision
                  for income taxes
              
              
              -
              
              
              -Net
                  loss
              
              $
              (2,666,456
              )
              $
              (1,116,063
              )Net
                  loss per share, basic and diluted
              
              $
              (0.04
              )
              $
              (0.11
              )Weighted
                  average shares usedin
                  computing net loss per share, basic and diluted
              
              
              62,818,481
              
              
              10,364,890


See
          accompanying notes to condensed consolidated financial statements.


4







**ITEC
                Environmental Group, Inc. and Subsidiary**
              **Condensed
                Consolidated Statements of Cash Flows**
              **(unaudited)**




Three
                months ended March 31,2006
            
            2005Cash
                flows from operating activities:Net
                loss
            
            $
            (2,666,456
            )
            $
            (1,116,063
            )Adjustments
                to reconcile net loss to net cashused  in
                operating activities:Depreciation
                and amortization
            
            
            45,673
            
            
            12,282Change in fair value of warrants and derivatives
            
            
            966,687
            
            
            -Issuance
                of warrants or common stock for services
            
            
            -
            
            
            745,764Issuance
                of warrants for services recorded as derivative
                liabilities
            
            
            331,250
            
            
            -Issuance
                of warrants for compensation
            
            
            120,000
            
            
            172,016Amortization of deferred stock-based consulting
            
            
            508,000
            
            
            -Amortization of debt issue costs  and discount
            
            
            52,011
            
            
            -Changes
                in operating assets and liabilities:Inventory
            
            
            8,109
            
            
            -Accounts
                payable
            
            
            88,928
            
            
            (28,993
            )Accrued
                liabilities
            
            
            127,741
            
            
            160,113Other
            
            
            (6,572
            )
            
            (250
            )Net cash used by operating activities
            
            
            (424,629
            )
            
            (55,131
            )Cash
                flows from investing activities:Purchase of property, plant & equipment
            
            
            (301,900
            )
            
            -Net
                cash used by investing activities
            
            
            (301,900
            )
            
            -Cash
                flows from financing activities:Cash draws from CIWMB restricted escrow funds
            
            
            57,854
            
            
            -Proceeds from issuance of notes payable
            
            
            550,000
            
            
            50,000Proceeds from notes payable - officers
            
            
            96,500
            
            
            -Net
                cash provided  by financing activities
            
            
            704,354
            
            
            50,000Net
                increase (decrease)  in cash and cash
                equivalents
            
            
            (22,175
            )
            
            (5,131
            )Cash
                and cash equivalents, beginning of period
            
            
            32,365
            
            
            5,366Cash
                and cash equivalents, end of period
            
            $
            10,190
            
            $
            235**Supplemental
                disclosures of cash flow information:**Cash
                paid for interest
            
            $
            25,856
            
            $
            -Cash
                paid for income taxes
            
            $
            -
            
            $
            -**Supplemental
                Disclosure of  non-cash investing and financing
                activities**Common stock issued for future legal fees
            
            $
            -
            
            $
            716,513Deferred debt issue costs
            
            $
            49,426
            
            $
            -Reclassification of temporary equity on termination of contingent
                price
                reduction
            
            $
            163,955
            
            $
            -


See
          accompanying notes to condensed consolidated financial
          statements.




5


**ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)


**Note
        1.** **Description
        of Business and Summary of Significant Accounting
        Policies**
  Organization
        and Business - Itec
        Environmental Group, Inc. (“Itec” or the “Company”) was incorporated under the
        laws of the State of Delaware in March 2000. Itec was formed for the purpose
        of
        acquiring certain patented technology and the development of a worldwide
        market
        for its usage. The Company's subsidiary, ECO2 Environmental Systems, Inc.
        (“ECO2”), was incorporated under the laws of the State of Delaware in April
        2000. Unless the context indicates otherwise, all references herein to the
        Company include Itec and its wholly-owned subsidiary, ECO2.
 
 The
        Company is primarily engaged in activities to become a worldwide supplier
        of
        recycled plastics using its proprietary process and equipment and to form
        strategic alliances to become a supplier of recycling equipment outside of
        the
        United States. The Company has nearly completed construction of its first
        recycling line at its Riverbank, California plant and at March 31, 2006 had
        invested approximately $3.1 million and commenced initial production activities
        in 2006. O n
        May 31,
        2006 announced that it has commenced recycling operations.
 
 In
        June
        2005, pursuant to terms of a 4.25% promissory note, the Company received
        into an
        escrow account $1,990,000, after deduction of $10,000 for loan fees to the
        lender, from the California Integrated Waste Management Board (the “CIWMB”). The
        CIWMB makes low interest loans to local government agencies and private business
        entities within a Recycling Market Development Zone to increase diversion
        of
        nonhazardous solid waste from landfills and to promote market demand for
        secondary and post consumer materials. Approval for the loan was based on
        the
        Company's projection to build its first ECO2 Environmental System Plant and
        to
        divert post consumer plastic bottles as a result of the loan. Borrowing of
        CIWMB
        funds required, among other things, verification of matching funds, which
        will
        co-fund equipment purchases. In August 2005 the Company received an investment
        and deposited funds sufficient to enable the Company to begin construction
        of
        its first ECO2 Environmental Recycling System Plant.
 
 Business
        risks and uncertainties - The
        Company operates in the evolving field of plastics materials recycling. New
        developments could both significantly and adversely affect existing and emerging
        technologies in the field. The Company's success in developing additional
        marketable products and processes and achieving a competitive position will
        depend on its ability to attract and retain qualified management personnel
        and
        to raise sufficient capital to meet its operating and development needs.
        While
        the Company is seeking financing through equity and loans, there can be no
        assurance that the Company will be successful in accomplishing its
        objectives.
  Basis
        of presentation and Going Concern - The
        accompanying consolidated financial statements have been prepared in conformity
        with generally accepted accounting principles, which contemplate continuation
        of
        the Company as a going concern. The Company has reported recurring losses,
        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 year ended December 31, 2005, the Company reported a net loss
        of
        approximately $15.3 million and used cash in operating activities of
        approximately $1.4 million, and during the three months ended March 31, 2006
        reported a net loss of approximately $2.7 million and used cash in operating
        activities of approximately $425,00 and as of March 31, 2006, had a working
        capital deficiency of approximately $10.0 million and total stockholders'
        deficit of $8.5 million, which includes accumulated losses from inception
        of
        $28.0 million. Additionally, in November and December 2005 the Company received
        notice from certain note holders that the Company had defaulted on the principal
        and accrued interest payment on a total of $1.2 million of notes payable.
        Demand
        notices were received by the Company in April 2006. As discussed in Note
        5, the
        Company is in the process of meetings and discussions with these note holders
        with respect to continued forbearance.
  Company
        management intends to raise additional debt and/or equity financing to fund
        future capital expenditures, operations and to provide additional working
        capital, and in this regard has raised approximately $1.4 million pursuant
        to
        sales of securities in connection with its 2006 private placement as described
        in Note 6. However, there is no assurance that such financing will be obtained
        in sufficient amounts necessary to meet the Company's needs. In view of these
        matters, continuation as a going concern is dependent upon the Company's
        ability
        to meet its financing requirements, raise additional capital, and the success
        of
        its future operations or completion of a successful business
        combination.
  The
        accompanying consolidated financial statements do not include any adjustments
        to
        reflect the possible future effects on the recoverability and classification
        of
        assets or the amounts and classifications of liabilities that may result
        from
        the possible inability of the Company to continue as a going
        concern.
  Use
        of
        estimates in the preparation of financial statements - 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. 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 inventory, valuation of equity related instruments and derivatives
        issued, and valuation allowance for deferred income tax
        assets.
  6
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 Unaudited
        Interim Consolidated Financial Statements - The
        unaudited interim condensed consolidated financial statements have been prepared
        in accordance with the rules and regulations of the Securities and Exchange
        Commission with regard to interim financial information. Accordingly, the
        condensed consolidated 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 to present fairly the Company’s financial
        position, results of operations and cash flows for the interim periods presented
        have been included. Results for the three months ended March 31, 2006 are
        not
        necessarily indicative of results to be expected for the year ending December
        31, 2006 or for any other future period. These interim condensed consolidated
        financial statements should be read in conjunction with the Company’s audited
        annual financial statements and related notes thereto, which are include
        in the
        Company’s December 31, 2005 Annual Report on Form 10-KSB.
  Principles
        of Consolidation **-** The
        consolidated financial statements include the accounts of ITEC Environmental
        Group, Inc. and its wholly-owned subsidiary. All material intercompany balances
        and transactions have been eliminated in consolidation
 
 Cash
        and cash equivalents - The
        Company considers deposits that can be redeemed on demand and investments
        that
        have original maturities of less than three months when purchased to be cash
        equivalents.
  Restricted
        cash in escrow - In
        2005, the Company received cash from the California Integrated Waste Management
        Board pursuant to a $2,000,000 note payable, and received cash from an investor
        fund pursuant to $600,000 notes payable. Funds received from these borrowings
        were placed in escrow, with draws made by the Company upon satisfaction of
        certain conditions, including among others, presentation of invoices for
        purchases of authorized equipment to be financed. These funds were classified
        as
        Restricted Cash in Escrow as they were not otherwise available for use by
        the
        Company.
  Inventory -
        Inventory is comprised of raw materials and recorded at cost determined on
        a
        first-in-first out basis.
  Property
        and equipment -
        Property and equipment are recorded at cost less accumulated depreciation
        and
        amortization. Expenditures for major additions and improvements are capitalized,
        and minor maintenance, repairs and replacements are charged to expense as
        incurred. When property and equipment are retired or otherwise disposed of,
        the
        cost and accumulated depreciation are removed from the accounts and any
        resulting gain or loss is included in the results of operations. Depreciation
        and amortization are provided using the straight-line method over the estimated
        useful lives of the respective assets, which are 3 years for computer equipment
        and software and furniture and fixtures, 5 to 7 years for manufacturing
        equipment and 7 years for the recycling plant.
  Contingencies -
        Certain conditions may exist as of the date financial statements are issued,
        which may result in a loss to the Company, but which will only be resolved
        when
        one or more future events occur or fail to occur. Company management and
        its
        legal counsel assess such contingent liabilities, and such assessment inherently
        involves an exercise of judgment. In assessing loss contingencies related
        to
        legal proceedings that are pending against the Company or unasserted claims
        that
        may result in such proceedings, the Company's legal counsel evaluates the
        perceived merits of any legal proceedings or unasserted claims as well as
        the
        perceived merits of the amount of relief sought or expected to be sought
        therein. If the assessment of a contingency indicates that it is probable
        that a
        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.
  Fair
        value of financial instruments - The
        Company measures its financial assets and liabilities in accordance with
        generally accepted accounting principles. For certain of the Company's financial
        instruments, including cash and cash equivalents, accounts payable and accrued
        liabilities, the carrying amounts approximate fair value due to their short
        maturities. Amounts recorded for notes payable also approximate fair value
        because current interest rates offered to the Company for debt of similar
        maturities are substantially the same **.**
 
 Accounting
        for Derivatives - The
        Company evaluates its convertible debt, options, warrants or other contracts
        to
        determine if those contracts or embedded components of those contracts qualify
        as derivatives to be separately accounted for under Statement of Financial
        Accounting Standards 133 “Accounting for Derivative Instruments and Hedging
        Activities” and related interpretations including EITF 00-19 “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock”. The result of this accounting treatment is that the fair
        value of the derivative is marked-to-market each balance sheet date and recorded
        as a liability. In the event that the fair value is recorded as a liability,
        the
        change in fair value is recorded in the consolidated statement of operations
        as
        other income or expense. Upon conversion or exercise of a derivative instrument,
        the instrument is marked to fair value at the conversion date and then that
        fair
        value is reclassified to equity. Equity instruments that are initially
        classified as equity that become subject to reclassification under SFAS 133
        are
        reclassified to liability at the fair value of the instrument on the
        reclassification date.
  7
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 Revenue
        recognition - The
        Company recognizes revenue when there is persuasive evidence of an arrangement,
        the product has been delivered or the services have been provided to the
        customer, the sales price is fixed or determinable, and collectibility is
        reasonably assured. The Company recognizes revenues from sales of recycled
        products upon delivery to customers. The Company will recognize revenues
        from
        sales of equipment or systems once configuration of such systems are completed
        and accepted by the customer.
  Income
        taxes - The
        Company 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 provision for
        income
        taxes represents the tax payable for the period and change during the period
        in
        net deferred tax assets and liabilities.
  Research
        and development cost -
        Research and development represent internal costs incurred in connection
        with
        the Company’s development of recycling processes, and such costs are expensed as
        incurred and included in technology development expenses.
 
 Stock-based
        compensation - In
        December 2004, the Financial Accounting Standards Board (“FASB”) released a
        revision to Statement of Financial Accounting Standard (“SFAS”) No. 123,
        Accounting for Stock-Based Compensation (“FAS 123R”). FAS 123R sets forth the
        accounting for share-based payment transactions in which an enterprise receives
        employee services in exchange for (a) equity instruments of the enterprise
        or
        (b) liabilities that are based on the fair value of the enterprise's equity
        instruments or that may be settled by the issuance of such equity instruments.
        The statement eliminates the ability to account for share-based compensation
        transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees,
        and generally requires instead that such transactions be accounted for using
        a
        fair-value-based method, which requires recording an expense over the requisite
        service period for the fair value of all options or warrants granted employees
        and consultants. The Company adopted FAS 123R effective beginning January
        1,
        2005. The Company did not issue options or warrants to employees prior to
        2005.
 
 Basic
        and diluted net loss per share - Basic
        net loss per common share is computed by dividing net loss applicable to
        common
        shareholders by the weighted-average number of common shares outstanding
        during
        the period. Diluted net loss per common share is determined using the
        weighted-average number of common shares outstanding during the period, adjusted
        for the dilutive effect of common stock equivalents, consisting of shares
        that
        might be issued upon exercise of common stock options, warrants or convertible
        promissory notes. In periods where losses are reported, the weighted-average
        number of common shares outstanding excludes common stock equivalents, because
        their inclusion would be anti-dilutive. Potentially dilutive securities include
        stock options and warrants, and convertible debt securities. Computations
        of net
        loss per share for the three months ended March 31, 2005, exclude 2,469,491
        shares issuable upon exercise of outstanding warrants. Computations of net
        loss
        per share for the three months ended March 31, 2006, exclude 12,273,679 shares
        relating to common shares issuable upon conversion of convertible notes payable,
        46,217,930 shares issuable upon exercise of outstanding warrants and 19,458,403
        shares issuable upon exercise of rights to purchase common stock. These common
        stock equivalents could have the effect of decreasing diluted net income
        per
        share in future periods.
  Concentrations -
        Financial instruments that potentially subject the Company to concentrations
        of
        credit risk consist principally of cash equivalents, restricted cash held
        in
        escrow and trade accounts receivables. At times, amounts of cash or cash
        equivalents in U.S. financial institutions exceed amounts insured by agencies
        of
        the U.S. Government.
 
 The
        Company’s business is reliant on its licensing of technology from Honeywell
        International, Inc. See Note 4 for a discussion of this concentration and
        associated risks.
  Development-stage
        company -
        Through December 31, 2005, the Company presented its consolidated financial
        statements in accordance with SFAS No. 7 “Accounting and Reporting by
        Development Stage Enterprises”. This statement specifies the guidelines for
        identifying an enterprise in the development stage and the standards of
        financial accounting and reporting for such an enterprise, which includes
        among
        other things, presentation of inception to date consolidated statements of
        operations and cash flows. Activities during the development stage include
        raising capital, research and development and related activities to become
        a
        worldwide supplier of recycled plastics and major supplier of recycling
        equipment outside of the United States. During the three months ended March
        31,
        2006, the Company commenced initial production activities at its recycling
        plant
        in Riverbank, and accordingly, it has been determined that the Company is
        no
        longer in the development stage for financial statement presentation
        purposes.
  8
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 Reclassifications -
        Certain amounts in 2005 financial statements have been reclassified to conform
        to 2006 classifications.
  Recent
        accounting pronouncements - 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. Implementation of this
        new
        standard did not have a material impact on the Company’s financial position,
        results of operations or cash flows.
  **Note
        2**  **Inventories**
 
 Inventories
        at March 31, 2006 consist of the following:
 
 Raw
                  materials
              
              $
              59,555
  **Note
        3.** **Property
        and Equipment**
 
 Property
        and equipment at March 31, 2006 consist of the following:
 Manufacturing
                  tools
              
              $
              23,464Office
                  furniture and equipment
              
              
              57,690Recycling
                  plant
              
              
              3,166,117****Total
                  property and equipment
              
              
              3,247,271Less
                  accumulated depreciation and amortization
              
              
              (185,500
              )****Property
                  and equipment, net
              
              $
              3,061,771
 
 During
        the three months ended March 31, 2006, the Company capitalized $43,408 of
        interest into the recycling plant during the construction period.
 
 **Note
        4. Technology License**
 
 In
        July
        2005, the Company and Honeywell International, Inc. (Honeywell) amended certain
        terms of the license agreement entered into by the parties in 2000, which,
        among
        other things, extended the agreement to be in effect for the life of the
        patent.
        Pursuant to terms of the Agreement, the Company obtained certain worldwide
        license rights to practice the methods and to make, use, and sell, the products
        which are covered by the proprietary rights, limited to the field of use
        of
        separating and recovering motor oil from high density polyethylene plastic.
        Under this amended Agreement, the Company is required to pay minimum annual
        royalties of $50,000 for 2006, $100,000 for 2007, $200,000 for 2008 and $300,000
        for 2009 and for years thereafter. The royalty provision was amended whereby
        the
        Company shall pay a royalty rate of $.005 per pound of recycled plastics
        sold in
        the United States which shall be due within 30 days of the close of the previous
        quarter. The first annual minimum payment was due in March, which was unpaid
        as
        of June 1, 2006, and Company management has been engaged in discussions with
        Honeywell relating to payment deferrals.
 
 Honeywell
        may terminate this agreement in the event of a bankruptcy filing or insolvency
        of the Company, an assignment for the benefit of creditors of the Company,
        the
        nationalization of the industry which encompasses any products or services,
        any
        suspension of payments under the terms of the agreement by government
        regulation, the Company's failure to commence manufacture, a substantial
        change
        in ownership of the Company (whether resulting from merger, acquisition,
        consolidation or otherwise), another company or person acquiring control
        of the
        Company, or the existence of a state of war between the United States and
        any
        country where the Company has a license to manufacture products or provide
        services. In addition, if either party to the agreement defaults for any
        reason
        in any of the obligations under the terms of the agreement, the other party
        will
        have the right to terminate the agreement by giving at least 60 days' written
        notice. Among other things, pursuant to terms of the agreement here are no
        rights to sub-license granted and 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.
 
  9
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  **Note
        5.** **Notes
        Payable**
 
 Pursuant
        to terms of Business Loan Agreement, Security Agreements, and $2,000,000
        Promissory Note with the California Integrated Waste Management Board (“CIWMB”),
        in June 2005, the Company received into an escrow account $1,990,000, after
        deduction of $10,000 for loan fees paid to CIWMB. The loan fee was recorded
        as a
        debt discount being amortized over the 10-year loan term.  Approval for the
        loan was based on the Company's projection to build its first ECO2 Environmental
        System Plant and to divert post consumer plastic bottles as a result of the
        loan. The promissory note bears interest at 4.25% per annum, with interest
        only
        monthly payments during the first year, commencing in June, and then principal
        and interest monthly payments of $22,548 starting in July 2006 until fully
        paid
        in May 2015. The promissory note is collateralized by equipment purchased
        for
        the recycling plant, a secondary security interest in all other machinery
        and
        equipment and other Company assets, and is guaranteed by the Company's Chief
        Executive Officer. The Company is permitted to make draws from cash in escrow
        upon meeting certain conditions, including presentation of equipment invoices,
        with 75% of each invoice to be paid from the CIWMB loan funds, with the
        remaining 25% being paid from the Company's working capital. Minimum annual
        principal payments approximate $93,000 in 2006, $192,000 in 2007, $200,000
        in
        2008, $209,000 in 2009, $219,000 in 2010 and $1,087,000 thereafter during
        2011
        through 2015.
 
 In
        January 2005, the Company issued for cash a 10% note payable for $50,000
        due in
        July 2005. The proceeds were used for working capital. In June 2005, the
        Company
        issued 2,576,750 shares of its common stock upon conversion of the note payable.
        The Company recorded the excess of estimated fair value of the shares issued
        (based on the $0.115 per share quoted market price on the conversion date)
        of
        $156,140 as an increase in additional paid-in capital and as a loss on
        conversion of notes payable for common stock.
  In
        April
        2005, the Company issued for cash a 10% note payable for $60,000 due in August
        2005, and convertible into shares of Company common stock at a per share
        price
        of the lesser of approximately $0.02, or 50% of the closing stock price on
        the
        date of conversion. The embedded conversion option qualified as a derivative
        pursuant to SFAS 133 since the conversion price is variable and the ability
        to
        have enough authorized common shares to fulfill its potential obligations
        under
        convertible debt contracts is not under the Company control. The fair value
        of
        the conversion option of $258,643 was computed using a Black-Scholes option
        pricing method with the following assumptions: term of .5 years, volatility
        of
        207%, zero dividends and interest rate of 4.45%. The $258,643 was allocated
        $60,000 to debt discount the maximum to be recorded, and $198,643 to operations
        as a change in fair value of warrants and derivatives. The discount is amortized
        to interest expense over the term of the note. In June 2005, the note was
        converted into 3,029,100 shares of Company common stock in accordance with
        conversion terms and the then fair value liability of $166,669 was reclassified
        to equity. The full amount of the $60,000 debt discount has been amortized
        to
        interest expense as of December 31, 2005.
 
 In
        August
        2005, the Company borrowed $33,400 on a short-term borrowing arrangement.
        The
        proceeds were used for working capital. In August 2005, the Company issued
        1,708,472 shares of its common stock upon conversion of the note payable,
        and
        recorded the excess of estimated fair value of the shares issued (based on
        the
        $.23 per share quoted market price on the conversion date) of $359,724 as
        an
        increase in additional paid-in capital and as a loss on conversion of notes
        payable for common stock.
  In
        June
        2005, the Company issued for cash a 10% note payable for $128,000 due in
        October
        2005, and convertible into shares of Company common stock at the lesser of
        50%
        of the quoted trade price on the conversion date or $0.045 per share. The
        embedded conversion option qualified as a derivative pursuant to SFAS 133
        since
        the conversion price is variable and the ability to have enough authorized
        common shares to fulfill its potential obligations under convertible debt
        contracts is not under the Company control. The fair value of the conversion
        option of $155,729 was computed using a Black-Scholes option pricing method
        with
        the following assumptions: term of .33 years, volatility of 207%, zero dividends
        and interest rate of 4.45%. The $155,729 was allocated $128,000 to debt discount
        the maximum to be recorded, and $27,729 to operations as a change in fair
        value
        of warrants and derivatives. The discount is amortized to interest expense
        over
        the term of the note. The full amount of the $128,000 debt discount was
        amortized to interest expense in 2005. In October 2005, the note was converted
        into 2,937,937 common shares and the then fair value liability of $310,050
        was
        reclassified to equity.
  In
        July
        2005, the Company issued for cash a 10% note payable for $250,000 due in
        October
        2005, and convertible into shares of Company common stock at the lesser of
        50%
        of the quoted trade price on the conversion date or $0.028 per share. The
        embedded conversion option qualified as a derivative pursuant to SFAS 133
        since
        the conversion price is variable and the ability to have enough authorized
        common shares to fulfill its potential obligations under convertible debt
        contracts is not under the Company control. The fair value of the conversion
        option of $441,820 was computed using a Black-Scholes option pricing method
        with
        the following assumptions: term of .33 years, volatility of 207%, zero dividends
        and interest rate of 4.45%. The $441,820 was allocated $250,000 to debt discount
        the maximum to be recorded, and $191,820 to operations as a change in fair
        value
        of warrants and derivatives. The discount is amortized to interest expense
        over
        the term of the note. The full amount of the $250,000 debt discount was
        amortized to interest expense in 2005. In November 2005, the note was converted
        to 9,404,718 shares of Company common stock and the then fair value liability
        of
        $931,829 was reclassified to equity.
  10
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 In
        July
        2005, the Company issued for cash a 10% note payable for $30,000 due in November
        2005, and convertible into shares of Company common stock at the lesser of
        50%
        of the quoted trade price on the conversion date or $0.035 per share. In
        addition, the Company issued to the lender warrants to purchase 300,000 shares
        of its common stock at a per share price of $0.25 per share. The embedded
        conversion option qualified as a derivative pursuant to SFAS 133 since the
        conversion price is variable and the ability to have enough authorized common
        shares to fulfill its potential obligations under convertible debt contracts
        is
        not under the Company control. The fair value of conversion option of $53,734
        was computed using a Black-Scholes option pricing method with the following
        assumptions: term of .33 years, volatility of 207%, zero dividends and interest
        rate of 4.45%, and was allocated $30,000 to debt discount the maximum to
        be
        recorded, and $23,734 to operations as a change in fair value of warrants
        and
        derivatives. The discount is amortized to interest expense over the term
        of the
        note. The full amount of the $30,000 debt discount was amortized into interest
        expense in 2005. In November 2005, the note was converted to 885,326 shares
        of
        Company common stock and the then fair value liability of $81,430 was
        reclassified to equity.
 
 In
        August
        2005, the Company received from The Elevation Fund, LLC (“The Elevation Fund” or
“Elevation”) cash of $600,000 in consideration for (i) a $600,000 promissory
        note, bearing interest at the greater of prime plus 5% or 10.75% (18% if
        there
        is an event of default) and due in 90 days or earlier in certain circumstances
        (the “Bridge Notes”), and (ii) cashless exercise warrants to purchase 8,500,000
        shares of the Company's common stock at an exercise price of $0.001 per share,
        immediately exercisable for ten years (the “Bridge Warrants”). The warrant value
        was recorded at approximately $352,000, the proportionate portion of the
        value
        of the warrant using a Black-Scholes option pricing method to the total of
        the
        warrant value and face amount of the note, as an increase in additional paid-in
        capital and as a debt discount to be amortized to interest expense over the
        term
        of the note. The full amount of the $352,000 debt discount was amortized
        into
        interest expense in 2005. The $20,000 origination fee to be paid directly
        to
        Elevation was also deferred as a debt discount and amortized to interest
        expense. The bridge notes are collateralized by a second position lien in
        all
        Company equipment and a blanket lien on all other assets. In April 2006 the
        Company received notice from Elevation that the Company defaulted on the
        loan,
        accrued interest and fees on November 1, 2005 and notified the Company that
        interest is accruing at the default rate of 18% since November 1, 2005 and
        that
        accrued fees accrue interest at the default rate of 18% since August 1, 2005.
        In
        addition, Elevation notified the Company that it has declared all amounts
        due
        and payable and intends to exercise any and all remedies provided under the
        loan
        agreement, note and security agreement (including without limitation, collect,
        receive, appropriate and realize upon the Collateral (as such term is defined
        in
        the security agreement) and sell, lease, assign, transfer or otherwise dispose
        of such collateral in accordance with the terms f the security agreement)
        and
        any and all other remedies available at law or equity. The Company continues
        to
        be in the process of meetings and discussions with Elevation with respect
        to
        continued forbearance.
 
 Additionally
        in August 2005, the Company received from another investor (“Investor”) cash of
        $100,000 in consideration for (i) a $100,000 Bridge Note, and (ii) Bridge
        Warrants for 1,418,439 shares of Company common stock. The warrant value
        was
        recorded at $65,156 as an increase in additional paid-in capital and as a
        debt
        discount to be amortized to interest expense over the term of the note. The
        full
        amount of the debt discount was amortized into interest expense in 2005.
        In
        April 2006 the Company received notice from the Investor that the Company
        has
        defaulted on the loan in December 2005. The notification states that interest
        is
        accruing at the default rate of 18% since December 2005 and declares that
        all
        unpaid amounts of principle and interest are immediately due and payable
        with
        such interest continuing to accrue until the note is paid in full. In addition
        the Lender further reserves all other rights pursuant to the loan agreement
        and
        promissory note including the rights to collect all costs and expenses of
        collection. The Company continues to be in the process of meetings and
        discussions with the Investor with respect to continued
        forbearance.
 
 Bridge
        Notes are convertible in whole or in part into securities offered by the
        Company
        in its private placement offering of debentures and warrants (the “Private
        Placement”) on the same terms as such securities are sold to the other investors
        in the Private Placement, and in this regard the Company has granted the
        lender
        the right to invest up to the Bridge Notes amount on the same terms as are
        offered to other investors in the Private Placement. The Company has agreed
        to
        prepare and, as soon as practicable, but in no event later than 75 days
        following the closing date of the Private Placement (the “Filing Deadline”),
        file with the Securities and Exchange Commission (the “SEC”) a registration
        statement on Form SB-2 covering the resale of all shares of common stock
        underlying the Bridge Warrants, and has further agreed to use its reasonable
        best efforts to have such registration statement declared effective by the
        SEC
        as soon as practicable, but in no event later than the date which is 180
        days
        following the closing date of the Private Placement (the “Effectiveness
        Deadline”). In the event the registration statement required to be filed is not
        filed by the Filing Deadline, the Company shall issue to the lender additional
        cashless warrants to purchase shares of the Company's common stock (“Additional
        Warrants”) in an amount equal to 10% of the number of shares underlying the
        Bridge Warrant issued to the lender for each 30 day period (or a portion
        thereof) during which time such registration statement has not been filed
        with
        the SEC, which Additional Warrants shall be issued on the first day of each
        30
        day period commencing on the Filing Deadline. In addition, in the event the
        registration statement required to be filed is not declared effective by
        the SEC
        by the Effectiveness Deadline, the Company shall issue to the Lender Additional
        Warrants in an amount equal to 10% of the number of shares underlying the
        Warrant issued to the Lender for each 30 day period (or portion thereof)
        during
        which time such registration statement has not been declared effective by
        the
        SEC, which Additional Warrants shall be issued on the first day of each 30
        day
        period and commencing on the Effectiveness Deadline. The exercise price for
        the
        Additional Warrants issued shall be the same as the exercise price of the
        warrants that are issued in the Private Placement. Additionally, pursuant
        to
        terms of the loan agreement relating to the Bridge Notes and Bridge Warrants
        for
        a period of three years following the date of borrowing, the Company shall
        provide to lender with a first right to purchase up to 50% of any equity
        or
        equity linked securities to be issued by the Company, except for certain
        Excluded Securities, as defined, on the same terms as such securities are
        offered to all other parties during such three year period. Due to the
        contingent nature of the conversion rights and related registration rights
        and
        penalties, the Company does not consider this debt convertible until the
        contingency, which is under control of the Company, occurs. At that time
        the
        Company will evaluate whether this debt has an embedded derivative subject
        to
        separate accounting pursuant to SFAS 133 or any beneficial conversion value.
  11
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 In
        August, September and October 2005, the Company received from other investors
        (the “Lenders”) cash of $650,000 in consideration for promissory notes totaling
        $650,000, bearing interest at 10% (18% if there is an event of default),
        due in
        120 days or earlier in certain circumstances (the “Lenders Notes”), and
        convertible into shares of the Company's common stock at a per share price
        of
        the lesser of 75% of (i) $.13, or (ii) the price of the common stock of the
        Company on the Over The Counter Bulletin Board on the day the Lenders elect
        to
        convert. The embedded conversion option qualified as a derivative pursuant
        to
        SFAS 133 since the conversion price is variable and the ability to have enough
        authorized common shares to fulfill its potential obligations under convertible
        debt contracts is not under the Company control. The fair value of the
        conversion options of $832,928 was computed using a Black-Scholes option
        pricing
        method with the following assumptions: term of .33 years, volatility of 207%,
        zero dividends and interest rate of 4.45%. The $797,284 was allocated $635,644
        to debt discount the maximum to be recorded, and $197,284 to operations as
        a
        change in fair value of warrants and derivatives. The discount is amortized
        to
        interest expense over the term of the note The full amount of the $600,000
        debt
        discount was amortized into interest expense in 2005. At December 31, 2005
        the
        fair value liability has been marked down to $159,033 using the Black-Scholes
        option pricing method with the following assumptions: term of .01 years,
        volatility of 207%, zero dividends and interest rate of 4.45%. Changes in
        the
        quoted stock price and the expected term in the Black-Scholes method was
        the
        primary cause of the decrease in value. In April 2006 the Company received
        notice from a representative of some of the Lenders representing $500,000
        of
        these notes that the Company has defaulted on the loans principal in 2005.
        The
        notification states that interest is accruing at the default rate of 18%
        since
        December 2005 and declares that all unpaid amounts of principle and interest
        are
        immediately due and payable with such interest continuing to accrue until
        the
        notes are paid in full. In addition the Lenders further reserve all other
        rights
        pursuant to the loan agreements and promissory notes including the rights
        to
        collect all costs and expenses of collection. The Company continues to be
        in the
        process of meetings and discussions with the Lenders with respect to continued
        forbearance.
 
 During
        2006, the Company has received subscriptions and related funds into escrow
        pursuant to a private placement memorandum in which $2.5 million, which can
        be
        increased to $5 million, of bridge financing is to be raised 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 in 12 months from issuance (“maturity date”), convertible immediately and up
        to the maturity date, into shares of the Company’s common stock at a price of
        $0.0975 per share, and a warrant, with a cashless exercise provision, to
        purchase 75,000 shares of restricted common stock of the Company, exercisable
        for approximately 10 years (expires April 15, 2015) at an exercise price
        of
        $0.06 per share. 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, and subject to other adjustments
        as described below relating to the registration rights. The security is
        subordinated only to the security interest granted to CIWMB. The shares
        underlying the debentures and warrants are subject to piggy back registration
        rights. In addition a registration statement must be filed within 30 days
        after
        an investor elects to convert all or any portion of the debenture. If the
        registration statement is not filed within that time frame the investor shall
        be
        paid 10% of the shares of common stock into which the debenture converts
        in
        additional cashless exercise warrants at an exercise price of $.06 per share
        for
        each 30 days beyond the initial 30 day period. If the registration statement
        is
        not effective within 180 days after filing, the investor will get paid 10%
        of
        the shares of common stock into which the debenture converts in additional
        cashless exercise warrants at an exercise price of $.06 for each 30 days
        beyond
        the initial 150 day period. Should the Securities and Exchange Commission
        fail
        to declare a registration statement effective on or before May 1, 2007 or
        should
        such registration statement thereafter cease to be effective, then the
        conversion price shall decrease by $.03 upon the occurrence of every 30-day
        period thereafter (or part thereof) that the registration statement shall
        not be
        declared or remain effective, provided, however, that in no event shall the
        aggregate reduction in conversion price be greater than $.0975. Through March
        31, 2006, the Company received $550,000 from the offering subscriptions escrow
        account from proceeds received in escrow relating to 22 units, and as a result
        has recorded convertible notes payable of $550,000 and 1,650,000 of warrants.
        Inasmuch as the offering has not closed and the debentures and warrants have
        not
        been issued, the Company has not recorded escrow funds prior to receipt of
        cash
        from escrow. At March 31, 2006, an additional $100,000 of subscription funds
        had
        been received in escrow, but not disbursed to the Company. Subsequent to
        March
        31, 2006, an additional $885,000 of proceeds has been received into escrow
        upon
        subscription for Units, and during April and May 2006, the Company received
        approximately $625,000 from escrow and approximately $340,000 was disbursed
        from
        escrow for payments on the Company’s behalf for legal and other professional
        fees. In addition, in April 2006 one holder of Lender Notes converted notes
        of
        $50,000 plus accrued interest into subscription unit securities and two others
        have agreed to convert but conversion agreements have not yet been completed.
        The embedded conversion option in the debenture qualifies as a derivative
        under
        FASB Statement 133 and related interpretations since the debenture conversion
        price is variable, and thus the debenture instrument is separated into a
        debt
        instrument and embedded option instrument for financial statement purposes
        and
        the embedded option instrument is recorded as a liability at fair value and
        marked to fair value at each reporting date through statement of operations
        as
        other income or expense. Due to the authorized shares issue this causes under
        EITF 00-19, the warrants are also classified as a warrant liability and marked
        to fair value through the statement of operations. At the debt issuance dates
        the total fair value liability recorded for the embedded conversion options
        and
        warrants was approximately $772,000 and at March 31, 2006, the total fair
        value
        liability recorded approximated $850,000 for securities sold through that
        date.
        The fair value of the embedded conversion option and warrant was computed
        using
        a Black-Scholes option pricing method with the following assumptions: term
        of 1
        and 10 years, respectively, volatility of 207% and 300%, respectively, zero
        dividends and interest rate of 4.8%. The value of the embedded conversion
        feature was allocated $550,000 to debt discount, the maximum to be recorded,
        and
        remaining $221,803 to operations as a change in fair value of warrants and
        derivatives. The discount is amortized to interest expense over the term
        of the
        note, and during the three months ended March 31, 2006, $41,667 was amortized
        and included in interest expense.
  12
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 Notes
        and
        convertible notes payable outstanding at March 31, 2006 consists of the
        following:
 
 Notes
                  PayableBridge
                  Notes
              
              $
              700,000
              
              
              (in
                  default - as disclosed above)Other
                  short-term notes
              
              
              37,000Convertible
                  notes payableLenders
                  Notes
              
              
              650,000
              
              
              ($500,000
                  in default - as disclosed above)Private
                  Placement Notes
              
              
              550,000Total
                  notes and convertible notes payable
              
              
              1,937,000Debt
                  discount, net of amortization
              
              
              (504,167
              )Notes
                  and convertible notes payable, net
              
              $
              1,432,833
 
 CIWMB
        Note payable outstanding at March 31, 2006 consists of the
        following:
 
 CIWMB
                  Note
              
              $
              2,000,000Debt
                  discount
              
              
              (9,250
              )1,990,750Less
                  Current portion
              
              
              140,337Long
                  term portion
              
              $
              1,850,413
 
 **Note
        6.** **Common
        Stock, Stock Warrants and Other Rights to Purchase Common
        Stock**
 
 Common
        Stock Issued for Services and Settlement
 
 In
        2004,
        Itec executed an agreement with Cornell Capital Partners, LP (“Cornell”) whereby
        the Company issued a 24% note payable for $500,000. The Company put in escrow
        with a law firm 303,030 shares of the Company's common stock (“escrowed shares”)
        and twenty (20) advance notices of not less than $25,000 each. The law firm
        released these advance notices to the holder commencing in April 2004, all
        of
        which were released. At the option of the note holder, interest was payable
        by
        the Company either in common stock or cash. During 2005, the Company issued
        an
        additional 3,000,000 shares of common stock to Cornell for services. Such
        shares
        were valued at $330,000 based on the quoted trading price of $.11 per share
        on
        the grant date. In July 2005, the Company entered into a settlement and release
        agreement with Cornell pursuant to which, among other things, the Company
        paid
        Cornell $90,353 and received 1,342,692 shares of it's common stock back from
        escrow, valued at $120,843, which were the remaining amount of the 3,000,000
        shares issued to Cornell in 2005. All amounts due and payable between the
        companies were considered fully-settled, and the note payable and agreement
        were
        cancelled and terminated. In connection with this settlement, the Company
        recorded a gain on forgiveness of debt of approximately $292,000 during the
        year
        ended December 31, 2005, which includes a decrease in additional paid-in
        capital
        of approximately $121,000, the fair value of shares cancelled.
  13
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 During
        2005, the Company issued 17,207,634 shares, valued at $2,390,154 based on
        quoted
        trade prices at the grant dates ranging from $.07 to $.24 per share and
        averaging approximately $.14 per share, to consultants for services. The
        value
        is recognized over the respective terms of the agreements resulting in a
        deferred stock based expense of approximately $365,000 at December 31, 2005
        and
        was fully amortized at March 31, 2006.
 
 The
        Company has an agreement with a related party for legal services whereby
        the
        related party is periodically issued vested non-forfeitable common shares
        of the
        Company and any proceeds from the sale of such shares by the related party
        are
        credited against invoice amounts due to that related party for legal services.
        The agreement has no stated term. Due to the contingent nature of the proceeds
        and the unstated term of the legal service agreement, the fair value of shares
        issued has been expensed when issued in 2005. The related party invoices
        are
        accrued to accounts payable, periodically paid in cash and the accounts payable
        and legal expenses are credited for any proceeds in the period the proceeds
        are
        received by the related party and reported to the Company. During the year
        2005
        the Company issued 9,957,692 common shares pursuant to the legal services
        agreement. The shares were valued at the quoted trading prices on the respective
        grant dates which ranged from $.09 to $.23 per share or an average of
        approximately $.16 per share, resulting in an expense of $1,635,269. The
        Company
        also recognized in 2005, $1,177,418 of stock based legal expenses, relating
        to
        this same services provider that had been deferred at December 31, 2004.
        There
        were no stock sale proceeds during the three months ended March 31, 2006.
        Accounts payable to the related party for legal services was $249,932 at
        March
        31, 2006.
 
 During
        2005, pursuant to the “safe harbor” private offering exemption provided by Rule
        506 of Regulation D under Section 4(2) and of the Securities Act of 1933
        (the
“Securities Act”), the Company issued 2,737,220 shares of its common stock (and
        certain registration rights) to an investment banker as retainer for certain
        corporate finance and investment banking services being provided pursuant
        to the
        corporate finance representation agreement between the parties entered into
        in
        May 2005. The agreement is for a period of one year, which shall be extended
        to
        two years upon completion of a successful financing. In the event of a
        consummated transaction, the Company will pay the investment banker fees
        ranging
        from 2% to 8% of amounts raised and issued to the investment banker varying
        amounts of securities issued in the financing, depending of the type of
        securities and nature of transaction. The shares were valued at $246,350
        based
        on a $.09 quoted trade price on the grant date. The $246,350 was deferred
        and
        amortized over the service term resulting in a deferred expense of $143,000
        at
        December 31, 2005 and was fully amortized at March 31, 2006.
 
 In
        October 2005, the Company issued 744,542 shares of its common stock to an
        investment banker as consideration for services provided pursuant to terms
        of a
        corporate finance representation agreement in connection with Company borrowings
        in August 2005, and recorded deferred debt issue costs asset of $74,466,
        based
        on the $.10 quoted trade price at the grant date. Additionally, the Company
        has
        recorded additional deferred debt issue costs of $135,000 relating to warrants
        issued to the investment banker and another consultant for services provided
        in
        connection with the borrowing transaction. Warrants are for the purchase
        of
        900,000 shares of common stock at a per share price of $0.001 for a term
        of 5
        years (850,000 warrants) and 10 years (50,000 warrants). The full amount
        of debt
        issue costs was amortized into interest expense in 2005.
 
 Common
        Stock Issued for Cash
 
 In
        November 2005, pursuant to the “safe harbor” private offering exemption provided
        by Rule 506 of Regulation D under Section 4(2) and of the Securities Act,
        the
        Company received cash for working capital purposes of $175,000 and issued
        to an
        investor 1,029,411 shares of its common stock and the right to purchase an
        additional 7,794,117 shares (“option shares”) of common stock at $0.17 per share
        pursuant to terms of a Common Stock Purchase Agreement, Investor Rights
        Agreement, Covenant to Adjust and First Right of Refusal Agreement.
        Additionally, in November 2005, pursuant to the “safe harbor” private offering
        exemption provided by Rule 506 of Regulation D under Section 4(2) and of
        the
        Securities Act, the Company received cash for working capital purposes of
        $167,000 and issued 1,192,857 shares of its common stock and the right to
        purchase an additional 9,521,429 shares of common stock at $0.14 per share
        pursuant to terms of a Common Stock Purchase Agreement, Investor Rights
        Agreement, Covenant to Adjust and First Right of Refusal Agreement.
        Additionally, in December 2005, pursuant to the “safe harbor” private offering
        exemption provided by Rule 506 of Regulation D under Section 4(2) and of
        the
        Securities Act of 1933, the Company received cash for working capital purposes
        of $50,000 and issued 357,143 shares of its common stock and the right to
        purchase an additional 2,142,857 shares of common stock at $.14 per share
        pursuant to terms of a Common Stock Purchase Agreement, Investor Rights
        Agreement, Covenant to Adjust and First Right of Refusal Agreement. Additional
        investment rights are exercisable for two of the investors for 60 days after
        the
        Company notifies the investors that it has extended the due dates for the
        Bridge
        Notes discussed in Note 5. The additional investment rights are exercisable
        for
        one of the investors (the $167,000 investor) for 60 days after the Company
        notifies the investors that it has met the Efficiency condition (see below).
        The
        Covenant to adjust requires a decrease in the original purchase price if
        certain
“efficiency” conditions, as defined in the agreement are not met. The Shares
        purchase prices are subject to reduction to a minimum $.11 per share for
        the
        $.17 shares and $0.08 per share for the $.14 shares, conditional upon when
        certain recycling volume and purity specifications are met (the “Efficiency”
conditions) .The reduction in purchase price is payable, at the investors
        option, in cash or additional shares of common stock. The $164,571 maximum
        redemption values of the above shares were reclassified to temporary equity
        at
        December 31, 2005. In January 2006 the Company issued additional shares at
        the
        investors election of 198,810 and 416,666 shares, based on a reduced purchase
        price of $.12 (for the $.14 purchase price shares), and 137,255 shares for
        a
        reduced purchase price of $.15 (for the $.17 purchase price shares) and the
        covenant to adjust was amended to eliminate any further adjustments to the
        original purchase price. The temporary equity was reclassified to permanent
        equity at that January 2006 date. The investor rights agreement contains
        registration rights on the issued shares and option shares which requires
        the
        Company to prepare and file a registration statement and use its best efforts
        to
        cause such registration statement to become effective and keep it effective
        for
        90 days including filing any required amendments.
  14
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 Stock
        Options
 
 The
        Company has adopted an incentive stock option plan (the “Plan”) under which
        options granted are intended to qualify as “incentive stock options' under
        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, 2006, no
        Plan
        options have been granted.
  Effective
        pursuant to resolution of the Board of Directors in 2005 the Company adopted
        a
        2005 Stock Plan to provide a source for the issuance of common stock of Itec
        in
        connection with compensatory programs sponsored by the Company and any other
        circumstances deemed by the Board of Directors as such a special situation.
        The
        number of shares available for granting awards under the Plan is 15,000,000
        shares. The Plan is eligible to any employee of the Company, any individual
        who
        is a member of the board of directors of the Company or any individual
        performing services for the Company as a Non-employee Contractor and any
        individual who has accepted an offer of employment with the Company. Unless
        the
        Board of Directors determines otherwise, shares of non-vested Stock awarded
        to a
        Participant will be forfeited if the Participant terminates employment or
        service for any reason other than death, disability, retirement or involuntary
        termination.
  Stock
        Warrants
 
 Warrants have
        been granted at prices that are equal to, or more or less than the current
        fair value of the Company's common stock at the date of grant. All warrants
        granted to date are fully vested, have cashless exercise rights and there
        were no defined terms for any underlying services. Therefore they were expensed
        at the grant date. The fair value of warrants issued during 2005 was estimated
        using the Black-Scholes option-pricing model with the following assumptions:
        a
        dividend yield of 0%; expected volatility of 200% to 427%; risk-free interest
        rates of 3.6 to 4.6%; and expected lives of 5 and 10 years. The fair value
        of
        warrants issued during 2006 was estimated using the Black-Scholes option-pricing
        model with the following assumptions: a dividend yield of 0%; expected
        volatility of 300%; risk-free interest rates of 4.8%; and expected lives
        of 10
        years. The weighted-average fair value of warrants granted during 2005
        approximated $0.12, and $0.13 during the three months ended March 31, 2006.
 
 In
        February 2006, in connection with and upon their resignation, the Company
        granted cashless exercise warrants to purchase 500,000 shares of the Company’s
        common stock to each of two directors of the Company, having an exercise
        price
        of $0.12 and expiring in 10 years. The Company recorded $120,000, the fair
        value
        as determined utilizing the Black-Scholes valuation model, as general and
        administrative expense since there is no vesting requirement.
 
 During
        the quarter ended March 31, 2006 the CEO assigned 3,213,889 of his warrants
        to
        service providers of the Company. Such warrants have an exercise price of
        $.06.
        The Company recognized immediate expense of $413,347 since there was no stated
        terms for the services.
 
  15
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  In
        connection with sales of Private Placement units comprised of Private Placement
        Notes and warrants as disclosed in Note 5, during the three months ended
        March
        31, 2006, the Company received subscription proceeds relating to $550,000
        of
        notes and 1,650,000 warrants. These warrants are excisable at $0.06 per share
        for 10 years and include cashless exercise terms.
 
 In
        2005,
        pursuant to the terms of a common stock purchase agreements (see Stock Issued
        for Cash above), the Company issued additional investment rights (“option
        shares”) to purchase 9,521,429 common shares at $.17 per share, 7,794,117 common
        shares at $.14 per share and 2,142,857common shares at $.14 per share. (total
        of
        19,458,403 additional investment rights common shares) The additional investment
        rights are exercisable for 60 days after the Company notifies the investors
        that
        it has extended the due dates for the Bridge Notes discussed in Note 5. The
        Option Shares exercise prices were subject to reduction to $.11 per share
        for
        the $.17 options and $0.08 per share for the $.14 options, conditional upon
        when
        certain recycling volume and purity specifications are met (the “Efficiency”
conditions). The reduction in purchase price is payable, at the investor’s
        option, in cash or additional shares of common stock. In January 2006 the
        Company reduced the purchase prices to $.12 and $.15 (for the $.14 and $.17
        option, respectively) and the covenant to adjust was amended to eliminate
        further adjustments to the option shares purchase price. The investor rights
        agreement contains registration rights on the issued shares and option shares
        which require the Company to prepare and file a registration statement and
        use
        its best efforts to cause such registration statement to become effective
        and
        keep it effective for 90 days including filing any required amendments. Since
        this is a best efforts clause and there are no liquidating damages or penalties,
        the option shares qualify as equity pursuant to EITF 00-19 as the Company
        may
        issue unregistered shares upon exercise of the options and there is no cash
        penalty, and other criteria for equity classification are met. However, since
        there is an authorized shares issue derived from the variable conversion
        rate
        convertible debt, theses option shares must be classified as liabilities
        at fair
        value. The fair value at the issuance date was recorded at $1,603,566 with
        a
        charge to operations to change in fair value liability of warrants and
        derivatives of approximately $1,212,000. The reduction in fair value credited
        to
        the change in fair value liability of warrants and derivatives from the issuance
        date through December 31, 2005 was $468,000 resulting in a warrant liability
        of
        $1,136,000 at December 31, 2005. At March 31, 2006, the fair value liability
        was
        $1,089,000 and the reduction in fair value was credited to the change in
        fair
        value of warrants and derivatives by $47,000.
 
 The
        Company has determined that pursuant to EITF 00-19, all of the Company’s
        warrants granted to non-employees must be classified as liabilities. Since
        the
        Company has issued convertible debt with variable conversion terms, the ability
        to have enough authorized common shares to fulfill its potential obligations
        under convertible debt and warrant contracts is not under the Company control
        and accordingly the criteria for classification as equity instruments under
        EITF
        00-19 is not met. Accordingly, as of December 31, 2005 and March 31, 2006,
        the
        warrant liability recorded was approximately $3,446,000 and $4,730,000,
        respectively, which represents the fair value of outstanding warrants at
        those
        dates computed using the Black-Scholes option pricing method with the
        assumptions as discussed above. During the three months ended March 31, 2006
        the
        Company recognized approximately $967,000 of expense relating to the change
        in
        fair value of the warrants during the period. Such amount is included in
        the
        accompanying statement of operations as the change in fair value liability
        of
        warrants and derivatives.
 
 The
        following summarizes activity for stock warrants, not including Additional
        Investment Rights discussed above, all of which are exercisable:
 
 Weighted
                  averageOutstanding
              
              exercise
                  priceBalance
                  at December 31, 2005
              
              
              43,567,930
              
              $
              0.05Granted/
                  Issuable
              
              
              2,650,000
              
              
              0.06Exercised
              
              
              -
              
              
              -Expired/
                  Cancelled
              
              
              -
              
              
              -Balance
                  at March 31, 2006
              
              
              46,217,930
              
              $
              0.06
 
 Additional
        information regarding warrants outstanding as of March 31, 2006, is as
        follows:
 
 Weighted
                  average
              
              Weighted
                  averageRange
                  of exercise prices
              
              Shares
              
              remaining
                  life
              
              exercise
                  price$0.001
              
              
              11,288,439
              
              
              9.0years
              
              $
              0.001$
                  0.02 -   $0.05
              
              
              760,000
              
              
              6.6years
              
              $
              0.04$0.06
              
              
              29,357,370
              
              
              7.7years
              
              $
              0.06$
                  0.09 -   $0.12
              
              
              2,500,000
              
              
              4.3years
              
              $
              0.10$0.25
              
              
              300,000
              
              
              4.3years
              
              $
              0.25$ 29.70
              
              
              12,121
              
              
              1.6years
              
              $
              29.70Total
              
              
              46,217,930
              
              
              7.5years
              
              $
              0.06
 
  16
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 **Note
        8.** **Related
        Party Transactions**
  In
        July
        2000, the Company's Board of Directors approved and authorized the Company
        to
        make a loan of $250,000 to the Company's Chief Executive Officer. 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. As of March 31, 2006,
        a
        balance of $147,973 (unchanged from December 31, 2004 and 2005) was
        due.
  In
        2004,
        the Company received advances totaling $76,100 from its Chief Executive Officer
        primarily to accommodate working capital needs of the Company. Such advances
        are
        unsecured, bear interest at 10% and due on demand. During 2005, $61,500 was
        repaid. At December 31, 2005 and March 31, 2006 advances payable were
        $6,600.
  The
        Company has an agreement with its attorney, who at times during fiscal year
        2005
        was related party principal stockholder and who became a director in 2006,
        for
        legal services whereby the attorney is periodically issued vested,
        non-forfeitable common shares of the Company and any proceeds from the sale
        of
        such shares by the related party are credited against invoice amounts due
        to
        that related party for legal services. The agreement has no stated term.
        Due to
        the contingent nature of the proceeds and the unstated term of the agreement,
        the fair values of shares granted are expensed on the grant date. Legal
        fee invoices are accrued to accounts payable, periodically paid in cash and
        the accounts payable and legal expenses are credited for proceeds received
        by
        the related party and reported to the Company. During the year 2005 the Company
        issued 9,957,692 common shares pursuant to the legal services agreement.
        The
        shares were valued at the quoted trading prices on the respective issue dates
        which ranged from $.09 to $.23 per share or an average of approximately $.164
        per share, resulting in expense of approximately $1.6 million. During 2005,
        the
        Company also recognized approximately $1.2 million of stock based legal expenses
        relating to this same services provider that had been deferred at December
        31,
        2004. The Company incurred $179,984 to this related party legal services
        provider for the three months ended March 31, 2006 of which $49,426 was recorded
        as deferred debt issue costs. Accounts payable to the related party for legal
        services was $249,932 at March 31, 2006.
 
 **Note
        9.** **Commitments
        and Contingencies**
  Legal
        Matters
 
 During
        the three months ended March 31, 2006, a judgment was awarded against the
        Company relating to amounts owed as claimed by the plaintiff. In April 2006,
        the
        Company paid the judgment award of approximately $70,000 in satisfaction
        of the
        judgment. The Company has recorded an accrued liability and expense during
        the
        three months ended March 31, 2006 to provide for the full amount of the
        award.
 
 As
        described in Note 5, in April 2006 the Company received notice from The
        Elevation Fund that the Company has defaulted on the $600,000 loan, accrued
        interest and accrued fees on November 1, 2005 and has notified the Company
        that
        interest is accruing at the default rate of 18% since November 1, 2005, and
        the
        accrued fees accrue interest at the default rate of 18% since August 1, 2005.
        In
        addition, the lender notified the Company that it has declared all amounts
        due
        and payable and intends to exercise any and all remedies provided under the
        loan
        agreement, note and security agreement (including without limitation, collect,
        receive, appropriate and realize upon the Collateral (as such term is defined
        in
        the security agreement) and sell, lease, assign, transfer or otherwise dispose
        of such collateral in accordance with the terms of the security agreement)
        and
        any and all other remedies available at law or equity.
 
 As
        described in Note 5, in April 2006 the Company received notice from a Lender
        representing themselves for a $100,000 loan and as representative of some
        Investors representing $500,000 of notes that the Company has defaulted on
        the
        loans principal in 2005. The notification states that interest is accruing
        at
        the default rate of 18% since December 2005 and declares that all unpaid
        amounts
        of principal and interest are immediately due and payable with such interest
        continuing to accrue until the notes are paid in full. In addition the Lender
        and Investors further reserve all other rights pursuant to the loan agreements
        and promissory notes including the rights to collect all costs and expenses
        of
        collection.
 
 The
        Company continues to be in the process of meetings and discussions with these
        note holders with respect to continued forbearance.
 
 In
        May
        2006, a complaint was filed against the Company by Rose Waste Systems, Inc.
        (“plaintiff”). The proceeding is an action for monetary damages for, among other
        claims, the purchase price of certain
        plastic recycling processing equipment (the “equipment”) acquired by the Company
        from a third party vendor. The equipment is currently installed in the Company’s
        Riverbank plastic recycling facility (“Riverbank Plant”). The aggregate money
        damages for all claims made by plaintiff is approximately $250,000, plus
        costs,
        which may include attorney fees. In addition to monetary damages or in partial
        lieu thereof, plaintiff has demanded possession of the equipment. If plaintiff
        were to successfully obtain an order from the Court that plaintiff was entitled
        to possession of the installed equipment and if plaintiff recovered possession
        of the equipment, the Company would be incapable of operating the Riverbank
        Plant until such time as the equipment could be replaced and installed. The
        Company intends to vigorously defend this lawsuit and is advised by legal
        counsel that the claims made by plaintiff against the Company, at least as
        to
        the right in plaintiff to possess the equipment, are substantially without
        merit.
  17
  **ITEC
        Environmental Group, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
 **March
        31, 2006**
 (Unaudited)
  
 Other
        Commitments and Contingencies
 
 The
        Company leases space for its recycling plant, research and development and
        offices in Riverbank, California pursuant to a March 2004 lease expiring
        in
        March 2009. Future minimum lease payments under the lease approximate $220,000
        during 2006 through 2008 and $37,000 in 2009.
  In
        November 2005, pursuant to an arbitration award, the Company has been ordered
        to
        pay EnvioPlastic Hungary the sum of $150,000, plus fees and costs, for the
        return of a deposit previously paid to the Company. The deposit of $75,000
        has
        previously been reported as deferred revenue, and has been reclassified to
        accrued liabilities at December 31, 2005. The Company has recorded an additional
        accrued liability and expense during 2005 to provide for the full amount
        of the
        award.
 
 In
        February 2006, the Company entered into an agreement with an investment advisor
        to act as placement agent in connection with the private placement of the
        Company’s securities for a term of six months. The Company shall pay
        compensation of 7% of the gross proceeds of the proposed offering to be paid
        at
        closing of the proposed offering and a warrant to purchase that number of
        shares
        of common stock of the Company equal to the aggregate of (a) 7% of the shares
        of
        common stock sold at a per share exercise price equal to the per share price
        of
        such shares in the offering, and (b) to the extent the securities are not
        common
        stock, 7% of the common stock acquirable upon exercise, exchange or conversion
        of such securities at a per share exercise price equal to the minimum per
        share
        price payable by an investor.
 
 In
        March
        2006, the Company entered into an agreement with a financial advisor to act
        as
        an exclusive financial advisor for a term of six months. The agreement requires
        a retainer of $30,000 of which $15,000 is payable upon execution of agreement
        with remaining $15,000 payable 30 days from execution of agreement. The retainer
        will be credited against the following financing or acquisition fees (i)
        7% of
        gross proceeds of any financing executed by the Company; (ii) a warrant to
        purchase a number of shares of common stock equal to 10% of shares sold in
        the
        financing with an exercise price equal to the offering price of the shares
        of
        common stock to be sold in the financing. (iii) an acquisition fee equal
        to 3%
        of the transaction value payable in cash upon the closing of a transaction,
        subject to a minimum fee of $350,000.
 
 In
        April
        2006 the Company executed a non-binding letter intent to acquire certain
        assets
        constituting the operations of two plastics recycling plants and to enter
        into a
        supply agreement with the seller for the seller to supply plastics to the
        two
        operations.
  **Note
        10.** **Subsequent Events**
 
 Subsequent
        to March 31, 2006, the Company raised additional funds under its private
        placement (see Note 5).




18


**ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATIONS**
 
 FORWARD
        LOOKING STATEMENTS CAUTIONARY
 
 This
        Item
        6. and the report on Form 10-QSB for the three months ended March 31, 2006
        may
        contain "forward-looking statements." In some cases, you can identify
        forward-looking statements by terminology such as "may," "will," "should,"
        "could," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
        "predicts," "potential" or "continue" or the negative of such terms and other
        comparable terminology. These forward-looking statements include, without
        limitation, statements about our market opportunity, our strategies,
        competition, expected activities and expenditures as we pursue our business
        plan, and the adequacy of our available cash resources. Although we believe
        that
        the expectations reflected in any forward-looking statements are reasonable,
        we
        cannot guarantee future results, levels of activity, performance or
        achievements. Actual results may differ materially from the predictions
        discussed in these forward-looking statements. Changes in the circumstances
        upon
        which we base our predictions and/or forward-looking statements could materially
        affect our actual results. Additional factors that could materially affect
        these
        forward-looking statements and/or predictions include, among other things:
        (1)
        our limited operating history; (2) our ability to pay down existing debt;
        (3)
        our ability to retain the professional advisors necessary to guide us through
        our corporate restructuring; (4) the risks inherent in the investigation,
        involvement and acquisition of a new business opportunity; (5) unforeseen
        costs
        and expenses; (6) potential litigation with our shareholders, creditors and/or
        former or current investors; (7) the Company's ability to comply with federal,
        state and local government regulations; and (8) other factors over which
        we have
        little or no control.
  Business - Itec
        Environmental Group, Inc. and its subsidiary ECO2 Environmental Systems,
        Inc.,
        (together, the “Company”) is primarily engaged in activities to become a
        worldwide supplier of recycled plastics using its proprietary process and
        equipment and to form strategic alliances to become a supplier of recycling
        equipment outside of the United States. During 2005, the Company commenced
        construction of its first recycling line at its Riverbank, California plant
        and
        on May 31, 2006 announced that it has commenced recycling operations. After
        months of equipment and product testing as well as several successful trial
        runs
        of its patented Eco2(tm) plastic recycling system, the Riverbank plant has
        begun
        operating eight hours a day, five days a week, producing approximately 14,000
        pounds of recycled PET flakes per day. The Company expects to increase
        production to twenty-four hours a day, seven days per week over the next
        two
        months and add additional capacity, increasing daily production to approximately
        19,000 pounds of recycled PET flakes per day. Over
        the
        next eight months, Itec expects to acquire and install additional equipment
        that
        will improve output to 198,000 pounds of recycled PET flakes per day. During
        this time, Itec also anticipates the installation of a pellet production
        system.
        The processing of the PET flakes into pellets will increase the overall value
        of
        the recycled product and generate greater return on the recycled PET sold
        by the
        Company.
  In
        June
        2005, pursuant to terms of a 4.25% promissory note the Company received into
        an
        escrow account $1,990,000, after deduction of $10,000 for loan fees to the
        lender, from the California Integrated Waste Management Board (the “CIWMB”). The
        CIWMB makes low interest loans to local government agencies and private business
        entities within a Recycling Market Development Zone to increase diversion
        of
        nonhazardous solid waste from landfills and to promote market demand for
        secondary and post consumer materials. Approval for the loan was based on
        the
        Company's projection to build its first Eco2 Environmental System Plant and
        to
        divert post consumer plastic bottles as a result of the loan. Borrowing of
        CIWMB
        funds required, among other things, verification of matching funds, which
        will
        co-fund equipment purchases. In August 2005 the Company received an investment
        and deposited funds sufficient to enable the Company to begin construction
        of
        its first Eco2 Environmental Recycling System Plant .
 
 We
        use
        patented technology and proprietary equipment to recycle plastic. We license
        environmental technology using a carbon dioxide cleaning process from Honeywell
        International, Inc.  The narrowest application of this environmental
        technology allows for the 100% recycling of plastic motor oil containers
        and the
        residual oil left inside each container.  By using the carbon dioxide
        cleaning process, the Company can focus on environmental protection and
        environmental safety by creating no chemical waste disposal in the oil recycling
        and plastic recycling process.
   19
 
 The
        Company operates in the evolving field of plastics materials recycling. New
        developments could both significantly and adversely affect existing and emerging
        technologies in the field. The Company's success in developing additional
        marketable products and processes and achieving a competitive position will
        depend on its ability to attract and retain qualified management personnel
        and
        to raise sufficient capital to meet its operating and development needs.
 
 Critical
        Accounting Policies and Estimates - The
        preparation of financial statements included in this Quarterly Report on
        Form
        10-QSB requires management to make estimates and assumptions that affect
        the
        reported amounts of assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period.  On an on-going basis, management evaluates its estimates
        and judgments. Management bases its estimates and judgments on historical
        experiences and on various other factors that are believed to be reasonable
        under the circumstances, the results of which form the basis for making
        judgments about the carrying value of assets and liabilities that are not
        readily apparent from other sources.  Actual results may differ from these
        estimates under different assumptions or conditions.  The more significant
        accounting estimates inherent in the preparation of the Company's financial
        statements include estimates as to the depreciable lives of property and
        equipment, valuation of equity related instruments and derivatives issued,
        and
        valuation allowance for deferred income tax assets. Our accounting policies
        are described in the notes to financial statements included in this Quarterly
        Report on Form 10-QSB and our December 31, 2005 Annual Report on Form 10-KSB.
        The more critical accounting policies are as described below.
  Going
        concern presentation - The
        accompanying consolidated financial statements have been prepared in conformity
        with generally accepted accounting principles, which contemplate continuation
        of
        the Company as a going concern. The Company has incurred recurring losses
        from
        operations and has a net working capital deficiency and net capital deficiency
        that raises substantial doubt about its ability to continue as a going concern.
        The Report of Independent Registered Public Accounting Firm included in the
        Company’s December 31, 2005 Annual Report on Form 10-KSB stated that these
        conditions, among others, raise substantial doubt about the Company’s ability to
        continue as a going concern. Company management intends to raise additional
        debt
        and equity financing to fund future operations and to provide additional
        working
        capital. However, there is no assurance that such financing will be obtained
        in
        sufficient amounts necessary to meet the Company’s needs. The accompanying
        consolidated financial statements do not include any adjustments to reflect
        the
        possible future effects on the recoverability and classification of assets
        or
        the amounts and classifications of liabilities that may result from the outcome
        of this uncertainty.
 
 Accounting
        for Derivatives - The
        Company evaluates its convertible debt, options, warrants or other contracts
        to
        determine if those contracts or embedded components of those contracts qualify
        as derivatives to be separately accounted for under Statement of Financial
        Accounting Standards 133 “Accounting for Derivative Instruments and Hedging
        Activities” and related interpretations including EITF 00-19 “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock”. The result of this accounting treatment is that the fair
        value of the derivative is marked-to-market each balance sheet date and recorded
        as a liability. In the event that the fair value is recorded as a liability,
        the
        change in fair value is recorded in the consolidated statement of operations
        as
        other income or expense. Upon conversion or exercise of a derivative instrument,
        the instrument is marked to fair value at the conversion date and then that
        fair
        value is reclassified to equity. Equity instruments that are initially
        classified as equity that become subject to reclassification under SFAS 133
        are
        reclassified to liability at the fair value of the instrument on the
        reclassification date.
 
 Revenue
        recognition - The
        Company recognizes revenue when there is persuasive evidence of an arrangement,
        the product has been delivered or the services have been provided to the
        customer, the sales price is fixed or determinable, and collectibility is
        reasonably assured. The Company recognizes revenues from sales of recycled
        products upon delivery to customers. The Company will recognize revenues
        from
        sales of equipment or systems once configuration of such systems are completed
        and accepted by the customer.
   20
  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 provision for income taxes represents the tax payable
        for
        the period and change during the period in net deferred tax assets and
        liabilities.
  Stock-based
        compensation - The
        Company did not issue options or warrants to employees prior to 2005. Effective
        January 1, 2005, the Company accounts for all options and warrant grants
        to
        employees and consultants in accordance with SFAS 123R, which requires recording
        an expense over the requisite service period for the fair value of all options
        or warrants granted employees and consultants.
 
 Results
        of Operations - We
        had
        revenues of $36,773 during the three months ended March 31, 2006 as compared
        to
        $0 in 2005. Revenues in 2006 are the result of commencing recycling operations
        and initial sales of recycled product. We expect revenues to continue to
        increase in future periods. The absence of revenues in 2005 was the result
        of a
        change in business strategy from the marketing of equipment and licensing
        of the
        System technology, to building our own plant for the recycling of plastic.
  Total
        operating expense for the three months ended March 31, 2006 was $1,596,475
        compared with $1,101,011in the comparative prior year period. The increase
        is
        due primarily to increases in consulting and legal expenses and technology
        development expenses. Consulting and legal expenses increased to $1,011,579
        during the three months ended March 31, 2006 from $761,998 for the comparative
        prior year period, due primarily to increases in amortization of previously
        deferred stock-based consulting of $508,000. These expenses are directly
        related
        to the use by the Company of legal and strategic business consultants, who
        have
        assisted us in our redirection and recapitalization efforts, which have been
        paid through issuance of common stock and warrants. Consulting and legal
        fees
        were approximately $1,023,000 and $762,000 for the three months ended March
        31,
        2006 and 2005, respectively.
  The
        Company recorded interest expense of $114,108 for the three months ended
        March
        31, 2006, as compared to $15,052 for the comparative prior year period. The
        increase is due to increased average borrowings during the 2006 period as
        compared to the comparative prior year period, and the inclusion of
        approximately $46,000 of debt discount amortization relating to 2006 borrowings.
 
 During
        the three months ended March 31, 2006, the Company recorded expense of $966,687
        relating to the change in fair value liability of warrants and derivatives,
        as
        described in notes 5 and 6 in the accompanying condensed consolidated financial
        statements. There was no such similar expense during the three months ended
        March 31, 2005.
  Net
        loss
        increased to $2,666,456 for the three months ended March 31, 2006, compared
        with
        $1,116,063 for the three months ended March 31, 2005, due primarily to the
        2006
        change in fair value liability of warrants and derivatives, and to a lesser
        extent, to increased technology development, consulting and legal fees, as
        described above.
  At
        March
        31, 2006, the Company has net operating loss carry-forwards available to
        offset
        future income taxes which expire through 2025.  Realization is dependent on
        generating sufficient taxable income prior to expiration of the loss
        carry-forwards.  A change of greater than 50% of the Company ownership
        could significantly reduce the availability of these carryforwards.  The
        Company continues to provide a full valuation allowance to reduce its net
        deferred tax asset to zero, inasmuch as Company management has not determined
        that realization of deferred tax assets is more likely than
        not.
   21
  Liquidity
        and Capital Resources - Historically,
        our cash needs have been satisfied primarily through proceeds from private
        placements of our equity securities and debt instruments including debt
        instruments convertible into our equity securities.  We expect to continue
        to be required to raise capital in the future, but cannot guarantee that
        such
        financing activities will be sufficient to fund our current and future projects
        and our ability to meet our cash and working capital needs.
  At
        March
        31, 2006, we had a working capital deficit of approximately $10.0 million
        (including fair value liabilities for warrants and embedded derivative of
        approximately $5.7 million), compared to a working capital deficit of $7.4
        million at December 31, 2005.  At March 31, 2006, we had total assets of
        approximately $3.4 million and a total stockholders’ deficit of approximately
        $8.5 million, compared with total assets of approximately $3.1 million and
        total
        stockholder's deficit of approximately $6.5 million at December 31, 2005.
  During
        the three months ended March 31, 2006, cash used by operating activities
        increased to approximately $425,000 from $55,000 during the comparative prior
        year period, due primarily to an increase in net loss.
 
 During
        the three months ended March 31, 2006, cash used by investing activities
        increased to approximately $302,000 relating to capital expenditures on the
        recycling plant as compared to $0 during the comparative prior year
        period.
 
 During
        the three months ended March 31, 2006, cash provided by financing activities
        increased to approximately $704,000 from $0,000 during the comparative prior
        year period. The Company received proceeds of approximately $550,000 from
        sales
        of private placement units, comprised of convertible promissory notes and
        warrants, and of approximately $103,000 from advances from the Company’s
        CEO.
  At
        March
        31, 2006, the Company does not have sufficient cash to meet its needs for
        the
        next twelve months. However, the Company continues to be in the process of
        raising funds, and Company management anticipates being able to raise sufficient
        cash to meet the Company’s needs through 2006. There is no guarantee, however,
        that our efforts will result in raising cash in amounts sufficient to meet
        the
        Company’s needs.
  During
        2006, the Company has received subscriptions and related funds into escrow
        pursuant to a private placement memorandum in which $2.5 million, which can
        be
        increased to $5 million, of bridge financing is to be raised 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 in 12 months from issuance (“maturity date”), convertible immediately and up
        to the maturity date, into shares of the Company’s common stock at a price of
        $0.0975 per share, and a warrant, with a cashless exercise provision, to
        purchase 75,000 shares of restricted common stock of the Company, exercisable
        for approximately 10 years (expires April 15, 2015) at an exercise price
        of
        $0.06 per share. 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, and subject to other adjustments
        as described below relating to the registration rights. The security is
        subordinated only to the security interest granted to CIWMB. The shares
        underlying the debentures and warrants are subject to piggy back registration
        rights. In addition a registration statement must be filed within 30 days
        after
        an investor elects to convert all or any portion of the debenture. If the
        registration statement is not filed within that time frame the investor shall
        be
        paid 10% of the shares of common stock into which the debenture converts
        in
        additional cashless exercise warrants at an exercise price of $.06 per share
        for
        each 30 days beyond the initial 30 day period. If the registration statement
        is
        not effective within 180 days after filing, the investor will get paid 10%
        of
        the shares of common stock into which the debenture converts in additional
        cashless exercise warrants at an exercise price of $.06 for each 30 days
        beyond
        the initial 150 day period. Should the Securities and Exchange Commission
        fail
        to declare a registration statement effective on or before May 1, 2007 or
        should
        such registration statement thereafter cease to be effective, then the
        conversion price shall decrease by $.03 upon the occurrence of every 30-day
        period thereafter (or part thereof) that the registration statement shall
        not be
        declared or remain effective, provided, however, that in no event shall the
        aggregate reduction in conversion price be greater than $.0975. Through March
        31, 2006, the Company received $550,000 from the offering subscriptions escrow
        account from proceeds received in escrow relating to 22 units, and as a result
        has recorded convertible notes payable of $550,000 and 1,650,000 of warrants.
        Inasmuch as the offering has not closed and the debentures and warrants have
        not
        been issued, the Company has not recorded escrow funds prior to receipt of
        cash
        from escrow. At March 31, 2006, an additional $100,000 of subscription funds
        had
        been received in escrow, but not disbursed to the Company. Subsequent to
        March
        31, 2006, an additional $885,000 of proceeds has been received into escrow
        upon
        subscription for Units, and during April and May 2006, the Company received
        approximately $625,000 from escrow and approximately $340,000 was disbursed
        from
        escrow for payments on the Company’s behalf for legal and other professional
        fees. In addition, one holder of Lender Notes converted notes of $50,000
        plus
        accrued interest into subscription unit securities and two others have agreed
        to
        convert but conversion agreements have not yet been completed. The embedded
        conversion option in the debenture qualifies as a derivative under FASB
        Statement 133 and related interpretations since the debenture conversion
        price
        is variable, and thus the debenture instrument is separated into a debt
        instrument and embedded option instrument for financial statement purposes
        and
        the embedded option instrument is recorded as a liability at fair value to
        be
        marked to fair value at each reporting date through statement of operations
        as
        other income or expense. Due to the authorized shares issue this causes under
        EITF 00-19, the warrants are also classified as a warrant liability to be
        marked
        to fair value through the statement of operations. At the debt issuance dates
        the total fair value liability recorded for the embedded conversion options
        and
        warrants was approximately $772,000 and at March 31, 2006, the total fair
        value
        liability recorded approximated $850,000 for securities sold through that
        date.
  22
 
 Off-Balance
        Sheet Arrangements - We
        do not
        have any off balance sheet arrangements that have or are likely to have a
        material current or future effect on the Company's financial condition, or
        changes in financial condition, liquidity or capital resources or
        expenditures.
 
 Recent
        accounting pronouncements - In May
        2005, the FASB issued Statement of Financial Accounting Standards No. 154,
        “Accounting Changes and Error Corrections”, (SFAS 154”). SFAS 154 replaces APB
        Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting
        Changes in Interim Financial Statements,” and changes the requirements for the
        accounting for and reporting of a change in accounting principle. The Company
        is
        required to adopt SFAS 154 in 2007. The Company's results of operations and
        financial condition will only be impacted by SFAS 154 if the Company implements
        changes in accounting principles that are addressed by the standard or correct
        accounting errors in future periods.




23





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 controls over financial reporting during the
      quarter ended March 31, 2006 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.





PART
      II -
      OTHER INFORMATION




Item
      1.
      Legal Proceedings





On
      or
      about May 17, 2006 a complaint was filed against registrant by Rose Waste
      Systems, Inc. (“plaintiff”) in the Superior Court of the State of California in
      and for Stanislaus County. The proceeding is an action for money damages for,
      among other claims not material here, the purchase price of certain plastic
      recycling processing equipment (the “equipment”) acquired by registrant from a
      third party vendor. The equipment is currently installed in registrant’s
      Riverbank plastic recycling facility (“Riverbank Plant”). The aggregate money
      damages for all claims made by plaintiff is approximately $249,706, plus costs
      which costs may include attorney fees.





In
      addition to money damages or in partial lieu thereof, plaintiff has demanded
      possession of the equipment by virtue of a purchase money security interest
      in
      the equipment plaintiff alleges has been perfected. If plaintiff were to
      successfully obtain an order from the Court that plaintiff was entitled to
      possession of the equipment installed at the Riverbank Plant and if plaintiff
      recovered possession of the equipment, registrant would be incapable of
      operating the Riverbank Plant until such time as the equipment could be replaced
      and installed.


Registrant
      intends to vigorously defend this lawsuit and is advised by legal counsel that
      the claims made by plaintiff against registrant, at least as to the right in
      plaintiff to possess the equipment, are substantially without merit.





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





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





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




24





Item
      3.
      Defaults Upon Senior Securities





The
      registrant is in default on certain senior securities. Disclosure regarding
      the
      defaults is included in Note 5 to the financial statements presented in Part
      I
      of this report on Form 10-QSB which is hereby incorporated herein by this
      reference.





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]








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.June
                5, 2006
            
            
            /s/
                Gary M. De LaurentiisGary
                M. De LaurentiisChairman
                & Chief Executive Officer(Principal
                Executive Officer)June
                5, 2006
            
            
            /s/
                Frederick Smith, Jr.Frederick
                Smith, Jr.Chief
                Financial Officer










25








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, 200231.1
            Certification
                of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
            
            Attached31.2
            Certification
                of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
            
            Attached32
            Certification
                of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley
                Act
            
            Attached








26