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 JUNE 30, 2007





Commission
      File Number: #033-31067





ECO2
      PLASTICS, INC.


(f.k.a.,
      Itec Environmental Group, Inc.)


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





Delaware


(State
      or
      other jurisdiction of incorporation or organization)





31-1705310


(IRS
      Employer Identification Number)





680
      Second Street, Suite 200


San
      Francisco, CA 94107


(Address
      of principal executive offices)(Zip Code)





(415)
      829-6000


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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes xNo o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
oNo
x





The
      number of shares of the Company's common stock outstanding on August 9, 2007
      is
      160,497,411.




Transitional
      Small Business Disclosure Format (Check One): Yes oNo x










ECO2
      PLASTICS, INC.


FORM
      10-QSB




TABLE
      OF
      CONTENTS


PART
                I
            
            FINANCIAL
                INFORMATION
            3Item
                1
            
            Financial
                Statements
            3Item
                2
            
            Management's
                Discussion and Analysis or Plan of Operation
            17Item
                3
            
            Controls
                and Procedures
            19PART
                II
            
            OTHER
                INFORMATION
            21Item
                1
            
            Legal
                Proceedings
            21Item
                2
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            21Item
                3
            
            Defaults
                Upon Senior Securities
            21Item
                4
            
            Submission
                of Matters to a Vote of Security Holders
            21Item
                5
            
            Other
                Information
            21Item
                6
            
            Exhibits
            21SIGNATURES
            
            
            22




2




PART
      I -
      FINANCIAL INFORMATION




Item
      1.
      Financial Statements





**ECO2
      Plastics, Inc. and Subsidiary**


**Condensed
      Consolidated Balance Sheets**


**(in
        thousands, except share and per share data)**


June
                30,
            
            December
                31,2007
            
            2006Current
                assets
            
            (unaudited)Cash
                and cash equivalents
            
            $
            14
            
            $
            97Receivable
                for cash in escrow for securities sold
            
            
            9
            
            
            1,244Accounts
                receivable
            
            
            331
            
            
            -Inventory
            
            
            205
            
            
            213Prepaid
                expenses and other current assets
            
            
            17
            
            
            62Total
                current assets
            
            
            576
            
            
            1,616Property
                and equipment, net
            
            
            7,553
            
            
            5,894Deferred
                debt issue costs, net
            
            
            1,484
            
            
            2,736Other
                assets
            
            
            47
            
            
            37Total
                assets
            
            $
            9,660
            
            $
            10,283Current
                liabilitiesAccounts
                payable
            
            $
            1,489
            
            $
            534Accounts
                payable - related party
            
            
            563
            
            
            468Accrued
                interest
            
            
            1,042
            
            
            374Accrued
                liabilities
            
            
            1,129
            
            
            709Current
                portion of capital lease obligations
            
            
            5
            
            
            7Notes
                payable to directors
            
            
            577
            
            
            -Current
                portion of convertible notes payable, net of debt discountHeld
                by related party Directors, net of debt discount of $2,783 and
                $1,567
            
            
            4,775
            
            
            783Held
                by others, net of debt discount of $897 and $1,613
            
            
            2,616
            
            
            1,409Current
                portion of note payable to California Integrated Waste Management
                Board
            
            
            196
            
            
            192Participation
                Certificates obligations issued prior to 2004
            
            
            354
            
            
            354Total
                current liabilities
            
            
            12,746
            
            
            4,830Non-current
                liabilitiesCapital
                lease obligations, net of current portion
            
            
            -
            
            
            9Convertible
                notes payable, net of debt discount and current portionHeld
                by related party Directors, net of debt discount of $751 and
                $4,264
            
            
            154
            
            
            420Held
                by others, net of debt discount of $2,581 and $417
            
            
            514
            
            
            588Note
                payable to California Integrated Waste Management Board, net of discount
                and current portion
            
            
            1,589
            
            
            1,706Total
                non-current liabilities
            
            
            2,257
            
            
            2,723Total
                liabilities
            
            
            15,003
            
            
            7,553Commitments
                and contingencies (Note 6)Stockholders'
                Equity (deficit)Preferred
                stock, $0.001 par value, 10,000,000 shares authorized, none issued
                and
                outstanding
            
            
            -
            
            
            -Common
                stock, $0.001 par value, 750,000,000 shares authorized,136,546,687
                and 114,263,824 shares issued and outstanding
            
            
            137
            
            
            11436,664
                and 15,083,715 shares issuable
            
            
            -
            
            
            15Additional
                paid-in capital
            
            
            56,102
            
            
            48,747Deferred
                stock-based consulting
            
            
            (251
            )
            
            -Accumulated
                deficit
            
            
            (61,331
            )
            
            (46,146
            )Total
                stockholders' equity (deficit)
            
            
            (5,343
            )
            
            2,730Total
                liabilities and stockholders' equity (deficit)
            
            $
            9,660
            
            $
            10,283




See
      accompanying notes to condensed consolidated financial statements.




3


**ECO2
        Plastics, Inc. and Subsidiary**
 **Condensed
        Consolidated Statements of Operations**
 **(in
        thousands, except per share data)**
 (unaudited)
  Three
                  months ended June 30,
              
              Six
                  months ended June 30,2007
              
              2006
              
              2007
              
              2006Revenue
              
              $
              418
              
              $
              14
              
              $
              517
              
              $
              50Cost
                  of goods sold
              
              
              430
              
              
              19
              
              
              604
              
              
              45Gross
                  profit
              
              
              (12
              )
              
              (5
              )
              
              (87
              )
              
              5Operating
                  expensesPlant
                  operations and technology development
              
              
              1,515
              
              
              423
              
              
              2,556
              
              
              708Consulting
                  and legal fees
              
              
              165
              
              
              1,206
              
              
              478
              
              
              2,218General
                  and administrative
              
              
              2,204
              
              
              239
              
              
              4,176
              
              
              538Settlement
                  expense
              
              
              740
              
              
              -
              
              
              740
              
              
              -Total
                  operating expenses
              
              
              4,624
              
              
              1,868
              
              
              7,950
              
              
              3,464Loss
                  from operations
              
              
              (4,636
              )
              
              (1,873
              )
              
              (8,037
              )
              
              (3,459
              )Other
                  income (expense)Interest
                  expense
              
              
              (3,739
              )
              
              (729
              )
              
              (7,148
              )
              
              (843
              )Change
                  in fair value liability of warrants and derivatives
              
              
              -
              
              
              (986
              )
              
              -
              
              
              (1,953
              )Total
                  other income (expense)
              
              
              (3,739
              )
              
              (1,715
              )
              
              (7,148
              )
              
              (2,796
              )Loss
                  before income taxes
              
              
              (8,375
              )
              
              (3,588
              )
              
              (15,185
              )
              
              (6,255
              )Income
                  taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              $
              (8,375
              )
              $
              (3,588
              )
              $
              (15,185
              )
              $
              (6,255
              )Net
                  loss per share, basic and diluted
              
              $
              (0.06
              )
              $
              (0.05
              )
              $
              (0.11
              )
              $
              (0.09
              )Weighted
                  average shares used in computingnet
                  loss per share, basic and diluted
              
              
              135,024
              
              
              68,684
              
              
              133,139
              
              
              67,564


See
        accompanying notes to condensed consolidated financial statements.


4


**ECO2
        Plastics, Inc. and Subsidiary**
 **Condensed
        Consolidated Statement of Changes in Stockholders' Equity
        (Deficit)**
 **For
        the Six Months Ended June 30, 2007**
 **(in
        thousands, except share data)**
 (unaudited)
  Common
                  stock
              
              Common
                  Stock Issuable
              
              Additionalpaid-in
              
              Deferred
                  stock-based
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              consulting
              
              deficit
              
              TotalBalance
                  at December 31, 2006
              
              
              114,263,824
              
              $
              114
              
              
              15,083,715
              
              $
              15
              
              $
              48,747
              
              $
              -
              
              $
              (46,146
              )
              $
              2,730Issuance
                  of shares upon exercise of warrants
              
              
              2,089,911
              
              
              2
              
              
              
              
              
              
              
              
              (1
              )
              
              
              
              
              
              
              
              1Issuance
                  of shares for services
              
              
              2,747,698
              
              
              3
              
              
              
              
              
              
              
              
              521
              
              
              (251
              )
              
              
              
              
              273Issuance
                  of shares for accrued compensation
              
              
              492,308
              
              
              1
              
              
              
              
              
              
              
              
              132
              
              
              
              
              
              
              
              
              133Issuance
                  of shares recorded as issuable in 2006
              
              
              15,083,715
              
              
              15
              
              
              (15,083,715
              )
              
              (15
              )
              
              
              
              
              
              
              
              
              
              
              -Shares
                  issued for executive compensation
              
              
              1,100,000
              
              
              1
              
              
              
              
              
              
              
              
              291
              
              
              
              
              
              
              
              
              292Shares
                  issuable for services
              
              
              
              
              
              
              
              
              36,664
              
              
              -
              
              
              7
              
              
              
              
              
              
              
              
              7Warrants
                  issued for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              482
              
              
              
              
              
              
              
              
              482Stock-based
                  compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,681
              
              
              
              
              
              
              
              
              1,681Value
                  of beneficial conversion feature
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -and
                  warrants issued with notes payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,167
              
              
              
              
              
              
              
              
              4,167Issuance
                  of shares upon conversion of notes payable
              
              
              769,231
              
              
              1
              
              
              
              
              
              
              
              
              75
              
              
              
              
              
              
              
              
              76Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,185
              )
              
              (15,185
              )Balance
                  at June 30, 2007
              
              
              136,546,687
              
              $
              137
              
              
              36,664
              
              $
              -
              
              $
              56,102
              
              $
              (251
              )
              $
              (61,331
              )
              $
              (5,343
              )


See
        accompanying notes to condensed consolidated financial statements.


5


**ECO2
        Plastics, Inc. and Subsidiary**
 **Condensed
        Consolidated Statements of Cash Flows**
 **(in
        thousands)**
 (unaudited)
  Six
                  Months ended June 30,2007
              
              2006Cash
                  flows from operating activities:Net
                  loss
              
              $
              (15,185
              )
              $
              (6,255
              )Adjustments
                  to reconcile net loss to net cashused
                  by operating activities:Depreciation
                  and amortization
              
              
              492
              
              
              181Change
                  in fair value of warrants and derivatives
              
              
              -
              
              
              1,953Stock-based
                  compensation and settlement
              
              
              2,807
              
              
              1,751Amortization
                  of debt issue costs and discount
              
              
              6,438
              
              
              526Provision
                  for settlement
              
              
              740
              
              
              -Expenses
                  paid by issuance of notes payable
              
              
              75
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (331
              )
              
              -Inventory
              
              
              8
              
              
              27Prepaid
                  expenses and deposits
              
              
              34
              
              
              (80
              )Accounts
                  payable
              
              
              1,050
              
              
              341Accrued
                  liabilities
              
              
              396
              
              
              7Net
                  cash used by operating activities
              
              
              (3,476
              )
              
              (1,549
              )Cash
                  flows from investing activities:Purchase
                  of property, plant & equipment
              
              
              (2,151
              )
              
              (656
              )Net
                  cash used by investing activities
              
              
              (2,151
              )
              
              (656
              )Cash
                  flows from financing activities:Decrease
                  in restricted cash in CIWMB escrow
              
              
              -
              
              
              58Payments
                  on CIWMB note payable
              
              
              (113
              )
              
              (18
              )Principal
                  payments on capital lease obligations
              
              
              (11
              )
              
              (4
              )Proceeds
                  from issuance of notes payable
              
              
              5,245
              
              
              2,320Proceeds
                  from exercise of warrants
              
              
              2Payments
                  of debt issue costs
              
              
              (156
              )
              
              (219
              )Proceeds
                  from notes payable - directors and officers
              
              
              577
              
              
              97Net
                  cash provided by financing activities
              
              
              5,544
              
              
              2,234Net
                  decrease in cash and cash equivalents
              
              
              (83
              )
              
              29Cash
                  and cash equivalents, beginning of period
              
              
              97
              
              
              32Cash
                  and cash equivalents, end of period
              
              $
              14
              
              $
              61**Supplemental
                  disclosures of cash flow information:**Cash
                  paid for interest
              
              $
              40
              
              $
              149Cash
                  paid for income taxes
              
              $
              -
              
              $
              -**Supplemental
                  disclosures of non-cash investing and financing
                  activities:**Warrants
                  issued as debt issue costs
              
              $
              95
              
              $
              241Stock
                  issued in exchange for accrued compensation
              
              $
              48
              
              $
              -Notes
                  issued in exchange for expenses
              
              $
              75
              
              $
              -Debt
                  discount
              
              $
              4,010
              
              $
              2,320Deferred
                  debt issue costs
              
              $
              -
              
              $
              -Reclassification
                  of temporary equity on termination of contingent price
                  reduction
              
              $
              -
              
              $
              163Conversion
                  of note and interest to convertible note
              
              $
              -
              
              $
              52


See
        accompanying notes to condensed consolidated financial statements.


6




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)





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




Organization
      and Business -
      ECO 2 Plastics, Inc. (f.k.a. Itec Environmental Group, Inc.) was incorporated under
      the laws of the State of Delaware in 2000, and formed for the purpose of
      acquiring certain patented technology and the development of a worldwide market
      for its usage. In
      March
      2007, the Company changed its name to ECO 2 Plastics, Inc.





ECO 2 has
      developed a unique and revolutionary patented process and system, referred
      to as
      the Eco 2 TM Environmental System (the “Eco 2 Environmental System”). The Eco 2 Environmental System cleans post-consumer plastics, without the use of water,
      at
      a substantial cost savings versus traditional methods (the “Process”). This
      Process is licensed from Honeywell Federal Manufacturing & Technologies, LLC
      (“Honeywell”) and the Department of Energy on an exclusive basis for the patent
      life. Since its inception, ECO 2 has
      invested in the development of the technology and equipment comprising the
      Eco 2 Environmental System, which includes “Process Patent” granted on August 7,
      2007. This included building several scaled up versions of the Prototype
      Eco 2 Environmental System (the “Prototype”), testing of the Prototypes, building a
      pilot plant, evaluating the product produced by the Prototype and real-time
      testing. The Company’s first full scale production facility was constructed in
      Riverbank, California and is now producing saleable product and ramping up
      to
      full scale operations. ECO 2 ’s
      goal
      is to build and operate plastic recycling plants (the “ECO 2 Plants”)
      in the USA that utilize the Eco 2 Environmental System and to expand the Eco 2 Environmental System worldwide. ECO 2 ’s
      growth
      strategy includes organic growth, strategic acquisitions and licensing or
      partnership agreements, where appropriate.





Business
      risks and uncertainties - The
      Company operates in the evolving field of plastics materials recycling and
      its
      business is reliant on its licensing of technology from Honeywell. New
      developments could both significantly and adversely affect existing and emerging
      technologies in the field. The Company's success in developing additional
      marketable products and processes and achieving a competitive position will
      depend on, among other things, its ability to attract and retain qualified
      management personnel and to raise sufficient capital to meet its operating
      and
      development needs. While the Company is seeking financing through equity and
      loans, there can be no assurance that it will be successful in accomplishing
      its
      objectives.





Basis
      of presentation and Going Concern - The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate the Company’s continuation as a going concern. Since
      inception, the Company has reported recurring losses and cash used by operating
      activities, and has a net working capital deficiency that raises substantial
      doubt about its ability to continue as a going concern. During the six months
      ended June 30, 2007, the Company reported a net loss of approximately $15.2
      million and used cash in operating activities of approximately $3.5 million,
      and
      as of June 30, 2007, had a working capital deficit of $12.2 million and a
      stockholders’ deficit of $5.3 million, including accumulated losses from
      inception of $61.3 million.




Company
      management intends to raise additional debt and equity financing to fund future
      capital expenditures, operations and to provide additional working capital,
      and
      in this regard during the six months ended June 30, 2007, the Company received
      cash of approximately $5.2 million pursuant to sales of securities in connection
      with its private placement and subordinated debt offerings, and in July received
      additional cash of approximately $990,000 from the sale of these private
      placement securities. Further, subsequent to June 30, 2007, the Company has
      raised $750,500 from certain members of the Company’s Board of Directors
      pursuant to terms of short-term notes payable, and has received funding
      commitments for an additional $750,500. 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.




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




7




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)




Use
      of
      estimates in the preparation of financial statements - Preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect reported amounts of assets and liabilities and disclosure of contingent
      assets and liabilities at the date of the financial statements and reported
      amounts of revenue and expenses during the reporting period. Actual results
      could differ from those estimates. The more significant accounting estimates
      inherent in the preparation of the Company's financial statements include
      estimates as to the depreciable lives of property and equipment, valuation
      of
      inventories, valuation of equity related instruments and derivatives issued,
      and
      valuation allowance for deferred income tax assets.





Cash
      and cash equivalents - The
      Company considers deposits that can be redeemed on demand and investments that
      have original maturities of less than three months when purchased to be cash
      equivalents.





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




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





Inventories -
      Inventories are comprised primarily 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, 3 years for furniture and fixtures, 3 years for manufacturing
      equipment, 7 years for the recycling plant, and the lease term for leasehold
      improvements.





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





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





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




Contingencies -
      Certain conditions may exist as of the date financial statements are issued,
      which may result in a loss to the Company, but which will only be resolved
      when
      one or more future events occur or fail to occur. Company management and its
      legal counsel assess such contingent liabilities, and such assessment inherently
      involves an exercise of judgment. In assessing loss contingencies related to
      legal proceedings that are pending against the Company or unasserted claims
      that
      may result in such proceedings, the Company's legal counsel evaluates the
      perceived merits of any legal proceedings or unasserted claims as well as the
      perceived merits of the amount of relief sought or expected to be sought
      therein. If the assessment of a contingency indicates that it is probable that
      a
      liability has been incurred and the amount of the liability can be estimated,
      then the estimated liability would be accrued in the Company's financial
      statements. If the assessment indicates that a potentially material loss
      contingency is not probable but is reasonably possible, or is probable but
      cannot be estimated, then the nature of the contingent liability, together
      with
      an estimate of the range of possible loss if determinable would be
      disclosed.




8




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)




Fair
      value of financial instruments - The
      Company measures its financial assets and liabilities in accordance with
      generally accepted accounting principles. For certain of the Company's financial
      instruments, including cash and cash equivalents, receivables, accounts payable
      and accrued liabilities, the carrying amounts approximate fair value due to
      their short maturities. Amounts recorded for notes payable, net of discount,
      also approximate fair value because current interest rates offered to the
      Company for debt of similar maturities are substantially the same **.**





Accounting
      for Derivatives - The
      Company evaluates its convertible debt, options, warrants or other contracts
      to
      determine if those contracts or embedded components of those contracts qualify
      as derivatives to be separately accounted for under Statement of Financial
      Accounting Standards 133 “ *Accounting
      for Derivative Instruments and Hedging Activities* ”
and
      related interpretations including EITF 00-19 “ *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock* ”.
      The
      result of this accounting treatment is that the fair value of the derivative
      is
      marked-to-market each balance sheet date and recorded as a liability. In the
      event that the fair value is recorded as a liability, the change in fair value
      is recorded in the 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 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 shipment to customers. Amounts
      received in advance of when products are delivered are recorded as liabilities
      in the accompanying consolidated balance sheet.





Cost
      of goods sold - Cost
      of goods sold includes the cost of raw materials processed.





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




Research
      and development cost -
      Research and development represent costs incurred in connection with the
      Company’s development of recycling processes, and such costs are expensed as
      incurred and included in technology development expenses.





Stock-based
      compensation - On
      January 1, 2005 the Company adopted *Statement
      of Financial Accounting Standard (“SFAS”) No. 123R, Accounting for Stock-Based
      Compensation* (“FAS
      123R”). FAS 123R sets forth the accounting for share-based payment transactions
      in which an enterprise receives employee services in exchange for (a) equity
      instruments of the enterprise or (b) liabilities that are based on the fair
      value of the enterprise's equity instruments or that may be settled by the
      issuance of such equity instruments. The statement requires that such
      transactions be accounted for using a fair-value-based method, which requires
      recording expense over the requisite service period for the fair value of
      options or warrants granted to employees and consultants. Upon adoption, the
      Company applied the modified-prospective transition method for the transition
      from APB 25 to SFAS 123R. There was no cumulative effect from the change in
      accounting principles from APB 25 to SFAS 123R.





Basic
      and diluted net loss per share - Basic
      net loss per common share is computed by dividing net loss by the
      weighted-average number of common shares outstanding during the period. Diluted
      net loss per common share is determined using the weighted-average number of
      common shares outstanding during the periods, adjusted for the dilutive effect
      of common stock equivalents, consisting of shares that might be issued upon
      exercise of common stock options, warrants or convertible promissory notes.
      In
      periods where losses are reported, the weighted-average number of common shares
      outstanding excludes common stock equivalents, because their inclusion would
      be
      anti-dilutive. Computations of net loss per share for the interim periods ended
      June 30, 2007, exclude 154,570,564 shares relating to common stock issuable
      upon
      conversion of convertible notes payable, and 134,752,489 shares issuable upon
      exercise of outstanding and issuable warrants to purchase common stock.
      Computations of net loss per share for the interim periods ended June 30, 2006,
      exclude 29,948,533 shares relating to common stock issuable upon conversion
      of
      convertible notes payable, 50,205,363 shares issuable upon exercise of
      outstanding and issuable warrants, and 19,458,403 shares issuable upon exercise
      of rights to purchase common stock. These common stock equivalents could have
      the effect of decreasing diluted net income per share in future
      periods.




9




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)




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





Recent
      accounting pronouncements - In
      July 2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN  48”),
      which prescribes a recognition threshold and measurement process for recording
      in the financial statements uncertain tax positions taken or expected to be
      taken in a tax return. Additionally, FIN No. 48 provides guidance on
      the recognition, classification, accounting in interim periods and disclosure
      requirements for uncertain tax positions. FIN 48 is effective for the
      Company beginning January 1, 2007, and the adoption did not have a
      significant impact on the Company’s consolidated results of operations or
      financial position.





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





**Note
      2. Technology License**





Pursuant
      to terms of a license agreement entered into by the Company and Honeywell
      International, Inc. (“Honeywell”), as amended, the Company obtained an
      exclusive, nontransferable, worldwide license rights for the life of the
      underlying patent to practice the methods and to make, use, and sell the
      products and/or services and to certain sublicense rights, which are covered
      by
      the proprietary rights, limited to the field of use of separating and recovering
      motor oil from high density polyethylene plastic. Under this agreement, the
      Company is required to pay royalties at a rate of $0.005 per pound of recycled
      plastics sold, with minimum annual royalties of $50,000 for 2006, $100,000
      for
      2007, $200,000 for 2008 and $300,000 for 2009 and for years thereafter.
      Honeywell may terminate this agreement in the event of, among other things,
      the
      nationalization of the industry which encompasses any products or services,
      any
      suspension of payments under the terms of the agreement by government
      regulation, a substantial change in ownership of the Company (whether resulting
      from merger, acquisition, consolidation or otherwise), another company or person
      acquiring control of the Company, or the existence of a state of war between
      the
      United States and any country where the Company has a license to manufacture
      products or provide services.





**Note
      3. Convertible Notes Payable**





Convertible
      notes payable and related unamortized debt discount at June 30, 2007 consist
      of
      the following (in thousands):


**Unamortized**
                
                **Notes,
                    net of****Notes**
                
                **Debt
                    discount**
                
                **debt
                    discount**Private
                    Placement Notes
                
                $
                12,069
                
                $
                (6,591
                )
                $
                5,478Subordinated
                    Notes
                
                
                3,002
                
                
                (421
                )
                
                2,581Total
                
                
                15,071
                
                
                (7,012
                )
                
                8,059Less
                    current portion
                
                
                (11,071
                )
                
                3,680
                
                
                (7,391
                )Convertible
                    Notes payable, net
                
                $
                4,000
                
                $
                (3,332
                )
                $
                668




Private
      Placement Notes -
      The
      Company has received subscriptions and related funds into escrow pursuant to
      a
      private placement memorandum (the “PPM”) through the offering of a minimum of 20
      Units for $25,000 per unit. Each Unit consists of a $25,000 junior secured
      subordinated convertible debenture (the “Private Placement Notes”), bearing
      interest at 10% with principal and accrued interest due 18 months from issuance
      (“maturity date”), convertible into shares of the Company’s common stock at a
      price of $0.0975 per share, and a warrant, with a cashless exercise provision,
      to purchase 75,000 shares of restricted common stock of the Company, exercisable
      until April 15, 2015 at an exercise price of $0.06 per share (the “Private
      Placement Warrants”). The conversion price of the debentures and exercise price
      of the warrant are subject to anti-dilution downward adjustments in the event
      the Company sells common stock or securities convertible into common stock
      at a
      price below the conversion or exercise prices. The 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. During 2006, proceeds for
      approximately $7.9 million of Private Placement Notes had been received into
      escrow, and as a result the Company has recorded convertible notes payable
      and
      approximately 23.7 million warrants. At December 31, 2006, approximately $1.2
      million of escrowed funds had not been disbursed to the Company, which was
      reported as a receivable for cash in escrow for securities sold, and which
      was
      received by the Company in 2007. During 2006, holders of $150,000 of other
      notes
      payable converted those notes, plus accrued interest into subscription units
      comprised of approximately $159,000 of Private Placement Notes and 450,000
      warrants, and the Company also issued $60,000 of Private Placement Notes and
      180,000 Private Placement Warrants. In 2006, debt discount of approximately
      $7.7
      million was recorded, of which approximately $1.8 million and $2.3 million
      was
      recorded during the three and six months ended June 30, 2006. As of December
      31,
      2006, the offering had not closed and the debentures and warrants not been
      issued. On February 1, 2007, the offering closed and during the three months
      ended March 31, 2007, the debentures and warrants were issued.




10




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)




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





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





During
      the three and six months ended June 30, 2007, the Company received approximately
      $2.0 million and $4 million, respectively, pursuant to investment terms
      substantially similar to the PPM (the “Additional Investment”), and in July
      received additional cash of approximately $1 million from the sale of these
      private placement securities. As a result the Company issued $5 million junior
      subordinated convertible debentures, bearing interest at 10% with principal
      and
      accrued interest due 18 months from issuance (“maturity date”), convertible into
      shares of the Company’s common stock at a price of $0.0975 per share, and a
      warrant, with a cashless exercise provision, to purchase 15,000,000 shares
      of
      restricted common stock of the Company, exercisable for approximately 8 years
      (expires April 15, 2015) at an exercise price of $0.06 per share. The conversion
      price of the debenture and exercise price of the warrant are subject to
      anti-dilution downward adjustments in the event the Company sells common stock
      or securities convertible into common stock at a price below the conversion
      or
      exercise prices. The debenture ranks pari passu with Private Placement Notes
      and
      Subordinated Notes and is subordinated only to the security interest granted
      to
      CIWMB. Shares underlying the debenture and warrants are subject to piggy back
      registration rights. In connection with the Additional Investment, the
      Additional Investment’s placement agent received cash fees of approximately
      $100,000 and received warrants, with a cashless exercise provision, to purchase
      382,429 shares of restricted common stock of the Company at a per share price
      of
      $0.06 exercisable for 10 years. Pursuant to rights and terms of the Additional
      Investment purchase agreement, the holder of $2 million of the Additional
      Investment notes has designated one person to become a member of the Company’s
      Board of Directors, which such person was appointed in 2007. Additionally,
      in
      February 2007, the Company issued three PPM Units, comprised of $75,000 of
      Private Placement Notes and 225,000 Private Placement Warrants in exchange
      for
      accrued liabilities, which such notes were immediately converted into 769,231
      shares of Company common stock in accordance with the terms of the notes. During
      the three and six months ended June 30, 2007, debt discount, comprised of
      warrant and beneficial conversion feature values, of approximately $2 million
      and $4.1 million, respectively, was recorded, The fair value of warrants was
      computed using a Black-Scholes option pricing method with the following
      assumptions: expected term of 10 years (based on the contractual term),
      volatility of approximately 180% (based on historical volatility), zero
      dividends and interest rate of approximately 4.6%.




During
      the three and six months ended June 30, 2007, approximately $1.7 million and
      $3.3 million of the discount was amortized to interest expense, and
      approximately $359,000 and $405,000 was amortized to interest expense during
      the
      three and six months ended June 30, 2006.




11




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)




Subordinated
      Notes - During
      2006, the Company received $2.8 million pursuant to a private placement of
      subordinated convertible notes (the “Subordinated Notes”), bearing interest at
      10%, with principal and accrued interest due 12 months from issuance,
      convertible into shares of the Company’s common stock at a price of $0.0975 per
      share, and warrants, with cashless exercise provisions, to purchase 28,000,000
      shares of restricted common stock, exercisable until April 2015 at an exercise
      price of $0.12 per share (the “Subordinated Notes Warrants”). The conversion
      price of the debentures is subject to anti-dilution downward adjustments in
      the
      event the Company sells common stock or securities convertible into common
      stock
      at a price below the conversion price. The Subordinated Notes rank pari passu
      with Private Placement Notes and are subordinated only to the security interest
      granted to CIWMB. The shares underlying the notes and warrants are subject
      to
      piggy back registration rights. In addition, a registration statement must
      be
      filed within 30 days after an investor elects to convert all or any portion
      of
      the note. In August 2006, the holder of a $200,000 short-term convertible note
      payable converted the note, plus accrued interest into a Subordinated Note
      of
      $202,000 and 2,020,000 warrants. In the event holders of Subordinated Notes
      elect to convert such notes into shares of Company common stock, the Company
      will issue Subordinated Notes Warrants exercisable into that number of shares
      of
      the Company’s common stock equal to the quotient of (i) 65% of the value of the
      converted notes divided by (ii) a per share price of $0.12, a total of
      16,260,833 warrants if all notes are converted. The Subordinated Notes are
      due
      $500,000 on August 1, 2007, $1 million on August 15, 2007, $202,000 on August
      29, 2007 and $1.3 million on September 14, 2007. In July 2007, Subordinated
      Notes in the amount of $202,000, together with accrued interest of approximately
      $18,000, were converted into approximately 2.2 million shares of common stock,
      and in connection therewith, the holder of converted notes received warrants
      to
      purchase approximately 1.2 million shares of Company common stock. The holder
      of
      the $500,000 note due August 1, 2007 has advised the Company of their intention
      to convert the note and related accrued interest, which will result in the
      issuance of approximately 5.5 million shares and approximately 3 million
      warrants.





In
      2006,
      debt discount relating to these Subordinated Notes of approximately $3.2 million
      was recorded, none during the six months ended June 30, 2006, of which
      approximately $751,000 and $1.5 million was amortized to interest expense during
      the three and six months June 30, 2007. The remaining $421,000 of debt discount
      at June 30, 2007 will be amortized to interest expense over the remaining terms
      of the borrowings.





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





Common
      Stock Issued for Services -





During
      July 2006, the Company entered into an employment agreement with an individual
      to serve as its Chief Executive Officer and a Director, pursuant to which,
      among
      other things, the executive received 44,000,000 shares of Company common stock,
      of which 26,400,000 were fully vested, issued and outstanding at December 31,
      2006 and March 31, 2007, and of which 8,800,000 shares vest in September 2007,
      and the remaining 8,800,000 vest pro-rata from October 2007 to September 2008.
      The total value of the shares based on the grant date quoted trading price
      of
      the Company’s common stock was approximately $5.7 million. In connection with
      this agreement, the Company recorded compensation expense of approximately
      $3.4
      million for fully-vested shares, and $500,000 for a portion of the unvested
      shares amortized on a straight-line basis over the vesting periods. A total
      of
      44,000,000 shares of Company common stock were issued to the executive in 2006,
      a portion of which is subject to return in accordance with vesting provisions.
      As of December 31, 2006, there was approximately $1.8 million of unrecognized
      compensation expense related to unvested stock awards, which is expected to
      be
      recognized as expense of approximately $1.4 million in 2007 and $405,000 in
      2008. During the three and six months ended June 30, 2007, the Company
      recognized stock-based compensation expense of approximately $429,000 and
      $858,000, respectively, and as of June 30, 2007, there was approximately
      $930,000 of unrecognized compensation expense related to unvested
      stock.




Pursuant
      to an agreement with an executive recruiter and placements of the Company’s
      Chief Executive and Operating Officers in 2006, the recruiter is entitled to
      receive 11,456,923 shares of Company common stock, of which 9,036,923 shares
      are
      fully-vested, and of which 2,420,000 shares vest in September 2007, and warrants
      to purchase 519,750 shares of Company common stock at a per share price of
      $0.06
      per share exercisable for 10 years, and warrants to purchase 4,950,000 shares
      of
      Company common stock at a per share price of $0.0975 exercisable for 10 years.
      In connection with this agreement, the shares are valued at approximately $1.5
      million based on the quoted trading prices of $0.13 and $0.135 on the effective
      dates and the warrants are valued at approximately $737,000 computed using
      a
      Black-Scholes option pricing method with the following assumptions: contractual
      term of 10 years, volatility of 183% (based on historical volatility over the
      term), zero dividends and interest rate of approximately 4.8%. In 2006, the
      Company recorded compensation expense of approximately $1.7 million for
      fully-vested shares and fully-vested warrants, and $129,000 for a portion of
      the
      unvested shares and warrants amortized on a straight-line basis over the vesting
      periods. During the three and six months ended June 30, 2007, the Company
      recognized stock-based compensation expense of approximately $134,000 and
      $268,000, respectively, and as of June 30, 2007, there was approximately
      $178,000 of unrecognized compensation expense related to unvested stock and
      stock warrants, which is expected to be recognized as expense in
      2007.




12




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)




During
      the six months ended June 30, 2007, the Company issued 2,668,954 shares of
      Company common stock to various non-employee service providers and has recorded
      the fair value of shares issued based on the closing market price of stock
      of
      approximately $471,000 as an increase in additional paid-in capital. The excess
      of the fair value of shares issued over $220,000 of expense recognized is
      recorded as deferred stock-based consulting a component of stockholders’
deficit.





Stock
      Warrants - The
      fair value of warrants issued during 2006 and 2007 was estimated using the
      Black-Scholes option-pricing model with the following assumptions: a dividend
      yield of 0%; expected volatility of approximately 172% to 183% (based on
      historical volatility over the terms); risk-free interest rates of approximately
      5%; and contractual terms of 3.5 to 10 years. The weighted-average fair value
      of
      warrants granted during the six months ended June 30, 2006 and 2007 approximated
      $0.13 and $0.20, respectively.





During
      2006, the Company entered into an employment agreement with an individual to
      serve as its Chief Operating Officer, pursuant to which, among other things,
      the
      executive will receive shares of Company common stock (or stock options, at
      the
      executive’s election) covering 5% of Common Stock Equivalents, as defined in the
      agreement. The Effective Date of the employment agreement is October 19, 2006,
      at which date the executive is to receive options to purchase 24,000,000 common
      shares (shares were not elected) of Company common stock, of which 12,000,000
      (50%) warrant are fully-vested, and of which 6,000,000 warrants vest in October
      2007 and the remaining 6,000,000 vest pro-rata from November 2007 to October
      2008. The warrants are exercisable at $0.0975 per share for ten years. In
      connection with this agreement, the Company recorded compensation expense of
      approximately $1.6 million based on the fair value as determined utilizing
      the
      Black-Scholes valuation model as of the Effective Date for fully-vested shares,
      and $155,000 for a portion of the unvested shares amortized on a straight-line
      basis over the vesting periods. As of December 31, 2006, there was approximately
      $1.5 million of unrecognized compensation expense related to unvested stock
      warrants, which is expected to be recognized as expense of approximately
      $810,000 in 2007 and $655,000 in 2008. During the three and six months ended
      June 30, 2007, the Company recognized stock-based compensation expense of
      approximately $202,000 and $404,000, respectively, and as of June 30, 2007,
      there was approximately $1.1 million of unrecognized compensation expense
      related to unvested stock warrants.





Prior
      to
      August 18, 2006, the Company had determined that pursuant to EITF 00-19, all
      of
      the Company’s warrants and investment rights granted to non-employees are to be
      classified as liabilities, since the Company 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. During the
      three and six months ended June 30, 2006, the Company recognized approximately
      $986,000 and $2.0 million, respectively, of other expense relating to the change
      in fair value of warrants during the periods which is included in the
      accompanying statement of operations as the change in fair value liability
      of
      warrants and derivatives. At August 18, 2006, when the Company no longer had
      the
      inability to have enough authorized common shares to fulfill its potential
      obligations, the fair value liability of all outstanding warrants and investment
      rights recorded at that date was reclassified to additional paid-in
      capital.





In
      February 2007, the Company entered into an employment agreement with an
      individual to serve as its Vice President of Sales & Marketing, pursuant to
      which, among other things, the executive received 4.4 million shares of Company
      common stock, 1.1 million of which are fully-vested and the remainder vesting
      evenly over the next three years, and is entitled to receive warrants to
      purchase 1.1 million shares of Company common stock at $0.30 per share on the
      one year anniversary of the employment agreement and warrants to purchase 1.1
      million shares of Company common stock at $0.40 per share on the second year
      anniversary. The warrants are to have a four-year term and vest ratably over
      3
      years. In connection with this agreement, the Company recorded compensation
      expense of approximately $187,000 and $479,000 during the three and six months
      ended June 30, 2007 based on the fair value as determined utilizing the
      Black-Scholes valuation model as of the Effective Date for fully-vested shares
      and for a portion of the unvested shares amortized on a straight-line basis
      over
      the vesting periods. As of June 30, 2007, there was approximately $1.1 million
      of unrecognized compensation expense related to unvested stock and
      warrants.




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


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


During
      the six months ended June 30, 2007, pursuant to receipt of notices of cash
      and
      cashless exercises of 2,278,439 warrants, the Company issued 2,089,911 shares
      of
      its common stock and received proceeds of approximately $1,400.





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




13




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)





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


Weighted
              
              Weighted
                  average remaining
              
              Aggregateaverage
              
              contractual
              
              intrinsic
                  valueOutstanding
              
              exercise
                  price
              
              life
                  in years
              
              (in
                  thousands)Balance
                  at December 31, 2006
              
              
              59,858,439
              
              $
              0.09
              
              
              5.8
              
              $
              3,518Granted
              
              
              12,032,310
              
              
              0.06Exercised
              
              
              (2,278,439
              )
              
              0.01Expired/cancelled
              
              
              -
              
              
              -Balance
                  at June 30, 2007
              
              
              69,612,310
              
              $
              0.09
              
              
              6.5
              
              $
              7,062




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




Weighted
              
              Weighted
                  average remaining
              
              Aggregateaverage
              
              contractual
              
              intrinsic
                  valueOutstanding
              
              exercise
                  price
              
              life
                  in years
              
              (in
                  thousands)Balance
                  at December 31, 2006
              
              
              32,194,871
              
              $
              0.08
              
              
              7.4
              
              $
              2,433Granted
              
              
              382,429
              
              
              0.08Exercised
              
              
              -
              
              
              -Expired/Cancelled
              
              
              -
              
              
              -Balance
                  at June 30, 2007
              
              
              32,577,300
              
              $
              0.08
              
              
              7.0
              
              $
              3,583




The
      following summarizes activity for stock warrants issued to employees:




Weighted
              
              Weighted
                  average remaining
              
              Aggregateaverage
              
              contractual
              
              intrinsic
                  valueOutstanding
              
              exercise
                  price
              
              life
                  in years
              
              (in
                  thousands)Balance
                  at December 31, 2006
              
              
              31,850,000
              
              $
              0.07
              
              
              9.2
              
              $
              2,416Granted
              
              
              725,000
              
              
              0.12Exercised
              
              
              -
              
              
              -Expired/
                  Cancelled
              
              
              -
              
              
              -Balance
                  at June 30, 2007
              
              
              32,575,000
              
              $
              0.08
              
              
              8.9
              
              $
              3,525




The
      following summarizes activity for all stock warrants:


Weighted
              
              Weighted
                  average remaining
              
              Aggregateaverage
              
              contractual
              
              intrinsic
                  valueOutstanding
              
              exercise
                  price
              
              life
                  in years
              
              (in
                  thousands)Balance
                  at December 31, 2006
              
              
              123,903,310
              
              $
              0.08
              
              
              6.9
              
              $
              8,425Granted
              
              
              13,139,739
              
              
              0.06Exercised
              
              
              (2,278,439
              )
              
              0.01Expired/
                  Cancelled
              
              
              -
              
              
              -Balance
                  at June 30, 2007
              
              
              134,764,610
              
              $
              0.08
              
              
              6.6
              
              $
              14,170




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




Weighted
                  average
              
              weighted
                  averageRange
                  of exercise prices
              
              Shares
              
              remaining
                  life
              
              exercise
                  price$
                  0.001
              
              
              910,000
              
              
              3.5
                  years
              
              $
              0.001$ 0.05
              
              
              1,100,000
              
              
              3.6
                  years
              
              
              0.05$ 0.06
              
              
              78,124,489
              
              
              7.7
                  years
              
              
              0.06$
                  0.09 - $ 0.10
              
              
              17,950,000
              
              
              9.6
                  years
              
              
              0.10$
                  0.12 - $ 0.13
              
              
              35,868,000
              
              
              3.6
                  years
              
              
              0.12$ 0.19
              
              
              500,000
              
              
              3.9
                  years
              
              
              0.19$ 0.25
              
              
              300,000
              
              
              3.3
                  years
              
              
              0.25$
                  29.70
              
              
              12,121
              
              
              0.6
                  years
              
              
              29.70Total
              
              
              134,764,610
              
              
              6.7
                  years
              
              $
              0.08




14




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)




**Note
      5.  Related Party Transactions**




Certain
      of the Company’s Directors are holders or representatives of holders of the
      Company’s Private Placement Notes and Subordinated Notes in the aggregate amount
      of approximately $8.5 million at June 30, 2007 and $7.0 million at December
      31,
      2006.





During
      the three months ended June 30, 2007, two of the Company’s Directors made loans
      to the Company in the aggregate total of $577,000, which are due on demand
      and
      bear interest at 10% per annum. In July 2007, the loan from one Director in
      the
      amount of $300,000 was repaid, and the other $277,000 was cancelled and replaced
      with loans made by Directors as described in Note 7.





Pursuant
      to an agreement with The Otto Law Group, PLLC (“OLG”), a law firm, the managing
      partner of which is one of the Company’s Directors, for legal services, the
      Company periodically issued vested non-forfeitable common shares, and any
      proceeds from the sale of such shares by OLG and reported to the Company were
      credited against invoice amounts due to OLG for legal services. There were
      no
      reported stock sale proceeds during 2006. The agreement had no stated term.
      During 2006, the Company issued 2,802,925 shares of its common stock and
      recorded legal expense of approximately $336,000, which was determined based
      on
      the $0.12 per share quoted trading price on date of issuance. In August 2006,
      the Company entered into an engagement agreement with OLG, whereby the prior
      agreement was superseded and replaced, and among other things, the Company
      issued 2,500,000 shares of its common stock. The shares were valued at the
      quoted trading prices of $0.11 on the grant date, resulting in an expense of
      $275,000. During the six months ended June 30, 2007 and 2006, the Company
      incurred OLG legal fee services of approximately $223,000 and $967,000,
      respectively. Accounts payable to OLG for legal services was approximately
      $563,000 at June 30, 2007 and reported as accounts payable - related party
      in
      the accompanying consolidated balance sheet.





During
      2006, the Company issued 2,802,925 shares of its common stock to Cambridge
      Partners, LLC (“Cambridge”) for investor advisory services provided to the
      Company and recorded consulting expense of approximately $336,000, which was
      determined based on the $0.12 per share quoted trading price on the issuance
      date. The managing partner of OLG, one of the Company’s Directors, is one of the
      two members of Cambridge.





In
      2006,
      the Company entered into an agreement with KW Securities, Inc. (“KW”), a
      registered broker dealer and a company owned by Lawrence Krause, one of the
      Company’s Directors, for KW to serve as placement agent for the Private
      Placement Offering. Pursuant to terms of the agreement, as amended, among other
      things, the Company shall pay compensation of warrants to purchase Company
      common stock at a per share price of $0.06 until April 2015, at varying rates
      of
      warrants for funds raised based on securities sold. In connection with sales
      of
      Private Placement units and Subordinated Notes and warrants in 2006, the Company
      has recorded debt issue costs of approximately $2.1 million based on the fair
      value of 14,625,000 warrants exercisable at $0.06 per share for approximately
      eight and one-half years, determined utilizing the Black-Scholes valuation
      model, which such warrants were issued to KW in 2007. Upon the closing of the
      PPM in 2007, the agreement with KW terminated.





In
      2006,
      the Company entered into a Funding Agreement with Itec Capital Group, LLC
      (“ICG”), a Washington limited liability company owned by the managing partner of
      OLG, who is one of the Company’s Directors, and Lawrence Krause, who is also one
      of the Company’s Directors, and KW, a company owned by Mr. Krause. Pursuant to
      terms of the Funding Agreement, the Company agreed to pay fees of 8% of Notes
      payable issued pursuant to certain financings and issue warrants based on
      securities sold and common shares convertible or exercisable into. Pursuant
      to a
      consulting agreement between ICG and Excipio Group, S.A. (“Excipio”), an entity
      affiliated with Hudson Investment Advisors, Inc., ICG agreed to pay Excipio
      a
      dollar amount and securities to be agreed upon from time to time upon completion
      of certain defined objectives and projects, and in this regard, ICG has agreed
      to pay Excipio fees and warrants in the amounts ICG receives from the Company.
      In November 2006, Excipio, ICG and the Company entered into a mutual settlement
      and release agreement, pursuant to which, among other things, in full
      satisfaction of amounts owed under all prior agreements or arrangements, the
      Company agreed to pay approximately $429,000 (in addition to $296,000 previously
      paid) and issue a warrant to purchase 1,440,000 shares of Company common stock
      with an exercise price of $0.06 per share for approximately eight and one-half
      years and a warrant to purchase 3,748,000 shares of Company common stock with
      an
      exercise price of $0.12 per share for approximately three and one-half years.
      The $429,000 was payable $200,000 upon execution of the settlement agreement
      and
      in varying amounts based on certain conditions, and was paid in full during
      the
      three months ended March 31, 2007. In connection with the settlement agreement,
      the consulting agreement between ICG and Excipio was cancelled and any further
      obligation under the consulting agreement has been waived and dismissed, and
      the
      Funding Agreement between the Company and ICG was amended to reflect the
      settlement of fees and expenses owed and paid under the Funding Agreement and
      that no additional fees or expenses shall accrued or become due in accordance
      with the Funding Agreement.




15




**ECO** **2** **Plastics, Inc. and Subsidiary**


**(formerly
      Itec Environmental Group, Inc.)**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**June
      30, 2007**


(unaudited)




**Note
      6. Commitments and Contingencies**




Legal
      Matters - During
      2005, the Company issued 2,737,220 shares of its common stock (and certain
      registration rights) to Brean Murray Carret & Co., LLC (“BMC”) as retainer
      for certain corporate finance and investment banking services to be provided
      pursuant to the corporate finance representation agreement between the parties
      entered into in 2005. The agreement was for a period of one year, extendable
      to
      two years upon completion of a successful financing. In the event of a
      consummated transaction, the Company would pay BMC fees ranging from 2% to
      8% of
      amounts raised, varying in amounts of securities issued in the financing,
      depending of the type of securities and nature of transaction. In October 2005,
      the Company issued to BMC an additional 744,542 shares of its common stock
      and
      warrants to purchase 850,000 shares of Company common stock at a per share
      price
      of $0.001 for a term of 5 years. In December 2006, BMC filed an arbitration
      claim against the Company with the NASD seeking in excess of $1 million from
      the
      Company. The Company filed a response and affirmative defenses and a
      counterclaim against BMC, and BMC subsequently filed its response and
      affirmative defenses to the Company’s counterclaim in March 2007. The Company
      has been engaged in settlement negotiations, and in this regard, inasmuch as
      Company management believes that it is probable that a settlement will occur
      and
      determined an estimated value of such settlement, in accordance with Statement
      of Financial Accounting Standards No. 5 “ *Accounting
      for Contingencies’* during
      the three months ended June 30, 2007, the Company recorded an estimated
      provision for settlement for $740,000.





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





Agency
      Agreement - In
      2005, the Company  entered
      into a three year Agency Agreement with H. Muehlstein & Co., Inc.
      (“Muehlstein”), pursuant to which Muehlstein will act as the Company’s exclusive
      agent for the annual purchase and sale of up to sixty million pounds, subject
      to
      increase under certain circumstances, of ECO 2 ’s
      PET
      flake and post-consumer HDPE natural flake and pellets in the USA and Canada.
      This agreement prohibits the Company from engaging additional sales agents,
      but
      does not limit the Company’s direct sales to customers.





**Note
      7. Subsequent Events**





In
      July
      2007, the Company received loans of $750,500 from various members of the
      Company’s Board of Directors (the “Loans”). In accordance with the Loans, each
      Loan Participant received a promissory note with an interest rate of 15% per
      annum (the “Note”). All or any portion of the Note, any accrued interest thereon
      and all other sums due under the Note, is due and payable on demand within
      90
      days of the Note (the Maturity Date”). Beginning on the Maturity Date, the
      Company will make monthly installment payments until the principal and any
      accrued interest have been paid in full. In connection with the Loan, Loan
      Participant received common stock purchase warrants to purchase 4,502,000 shares
      of Company common stock with an exercise price of $0.06 per share that expires
      in April 2015. The shares underlying the warrants are subject to piggy back
      registration rights. The exercise price of the warrants is subject to
      anti-dilution downward adjustments in the event the Company sells common stock
      at a price below the exercise price. Additionally, the Company has received
      commitments from the Loan Participants for additional Loans of
      $750,500.





In
      July
      2007, Subordinated Notes in the amount of $202,000, together with accrued
      interest of approximately $18,000, were converted into 2,254,803 shares of
      common stock, and in connection therewith, the holder of converted notes
      received warrants to purchase approximately 1.2 million shares of Company common
      stock at an exercise price of $0.12 per share with a term expiring in April
      2015.





In
      July
      2007, pursuant to receipt of notices of cashless exercises of 2,920,000 shares
      of Company common stock, comprised of 300,000 with an exercise price of $0.06
      per share and 2,620,000 with an exercise price of $0.12 per share, the Company
      issued 1,179,685 shares of its common stock.





16





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





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


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





*This
      Item 2 and the June 30, 2007 Quarterly Report on Form 10-QSB may contain
“forward-looking statements.” In some cases, you can identify forward-looking
      statements by terminology such as “may,” “will,” “should,” “could,” “expects,”
“plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of such terms and other comparable
      terminology. These forward-looking statements include, without limitation,
      statements about our market opportunity, our strategies, competition, expected
      activities and expenditures as we pursue our business plan, and the adequacy
      of
      our available cash resources. Although we believe that the expectations
      reflected in any forward-looking statements are reasonable, we cannot guarantee
      future results, levels of activity, performance or achievements. Actual results
      may differ materially from the predictions discussed in these forward-looking
      statements. Changes in the circumstances upon which we base our predictions
      and/or forward-looking statements could materially affect our actual results.
      Additional factors that could materially affect these forward-looking statements
      and/or predictions include, among other things: (1) our limited operating
      history; (2) our ability to pay down existing debt; (3) our ability to retain
      the professional advisors necessary to guide us through our corporate
      restructuring; (4) the risks inherent in the investigation, involvement and
      acquisition of a new business opportunity; (5) unforeseen costs and expenses;
      (6) potential litigation with our shareholders, creditors and/or former or
      current investors; (7) the Company's ability to comply with federal, state
      and
      local government regulations; and (8) other factors over which we have little
      or
      no control.*





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





**Business** **-** ECO 2 Plastics,
      Inc. (f.k.a. Itec Environmental Group, Inc.) was incorporated under the laws
      of
      the State of Delaware in 2000, and formed for the purpose of acquiring certain
      patented technology and the development of a worldwide market for its usage. In
      March
      2007, the Company changed its name to ECO 2 Plastics,
      Inc.





ECO 2 has
      developed a unique and revolutionary patented process and system, referred
      to as
      the ECO 2 Environmental
      System (the “ECO 2 Environmental
      System”). The ECO 2 Environmental
      System cleans post-consumer plastics, without the use of water, at a substantial
      cost savings versus traditional methods (the “Process”). This Process is
      licensed from Honeywell FM&T (“Honeywell”) and the Department of Energy
      (“DOE”) on an exclusive basis for the life of the patent. Since its inception,
      ECO 2 has
      invested in the development of the technology and equipment comprising the
      ECO 2 Environmental
      System, which includes the “Process Patent” issued on August 7, 2007. This
      included building several scaled up versions of the Prototype ECO 2 Environmental
      System (the “Prototype”), testing of the Prototypes, building a pilot plant,
      evaluating the product produced by the Prototype and real-time testing. The
      Company’s first full scale production facility was constructed in Riverbank,
      California and is now producing saleable product and ramping up to full scale
      operations. ECO 2 ’s
      goal
      is to build and operate plastic recycling plants (the “ECO 2 Plants”)
      in the USA that utilize the ECO 2 Environmental
      System and to expand the ECO 2 Environmental
      System worldwide. ECO 2 ’s
      growth
      strategy includes organic growth, strategic acquisitions and licensing or
      partnership agreements, where appropriate.





ECO 2 intends
      to locate its second plant in the greater Los Angeles basin, which is home
      to
      over 18.5 million residents. The Company’s research indicates that the
      greater Los Angeles basin generates an enormous amount of plastic containers.
      The Company has engaged a team of engineers to conduct the preliminary design
      efforts and has engaged a team of location and logistics specialists to support
      the Company in the site selection process currently underway.





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





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





Going
      concern presentation -
      The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States, which
      contemplate continuation of the Company as a going concern. The Company has
      incurred recurring losses from operations and has a net working capital
      deficiency and net capital deficiency that raises substantial doubt about its
      ability to continue as a going concern. The Report of Independent Registered
      Public Accounting Firm included in the Company’s December 31, 2006 Annual Report
      on Form 10-KSB stated that these conditions, among others, raise substantial
      doubt about the Company’s ability to continue as a going concern. Company
      management intends to raise additional debt and equity financing to fund future
      operations and to provide additional working capital. However, there is no
      assurance that such financing will be obtained in sufficient amounts necessary
      to meet the Company’s needs. The accompanying consolidated financial statements
      do not include any adjustments to reflect the possible future effects on the
      recoverability and classification of assets or the amounts and classifications
      of liabilities that may result from the outcome of this uncertainty.




17




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





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





Stock-based
      compensation -
      The
      Company 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**  -
      Revenues were $418,000 and $517,000 during the three and six months ended June
      30, 2007 as compared to $14,000 and $50,000 in the three and six months ended
      June 30, 2006. Revenues are expected to continue to increase in future periods.
      Cost of goods sold were $430,000 and $604,000 during the three and six months
      ended June 30, 2007 as compared to $19,000 and $45,000 in the three and six
      months ended June 30, 2006. Gross profit (deficit) was ($12,000) and ($87,000)
      for the three and six months ended June 30, 2007 as compared to ($5,000) and
      $5,000 for the three and six months ended June 30, 2006. The plant has begun
      ramping towards full-scale operation and as a result, significant volumes of
      inventory are consumed for quality testing during this period. Most of the
      tested material is shipped out of the plant at prices significantly lower than
      market standard, which has resulted in a negative gross profit in 2007. Gross
      profit is expected to increase in future periods.





Plant
      operations and technology development expenses increased to $1.5 million and
      $2.6 million for the three and six months ended June 30, 2007 as compared to
      $423,000 and $708,000 for the three and six months ended June 30, 2006. As
      the
      Company ramps up the Riverbank Plant, our operating expenses are increasing
      commensurate with the increase in operating activity, comprised primarily of
      payroll and related, utilities, occupancy, supplies, and repairs and maintenance
      expenses. These expenses are expected to continue to increase in future periods.
      As production increases to closer to capacity volumes, certain plant operations
      expenses will be included in cost of goods sold.





Consulting
      and legal fees decreased to $169,000 and $482,000 for the three and six months
      ended June 30, 2007 as compared to $1.2 million and $2.2 million for the three
      and six months ended June 30, 2006. Decreases were primarily due to there being
      fewer stock-based based awards to consultants during 2007 as compared to 2006.





General
      and administrative expenses increased to $2.2 million and $4.2 million for
      the
      three and six months ended June 30, 2007 as compared to $239,000 and $538,000
      for the three and six months ended June 30, 2006. Increases were primarily
      due
      to non-cash stock-based compensation relating to equity awards issued and
      issuable in connection with employment agreements entered into with certain
      executive officers and related recruiter fees payable in equity securities,
      as
      well as continuing to build our sales and management team.





During
      the three months ended June 30, 2007, the Company recorded an
      estimated provision of $740,000 for an anticipated settlement in connection
      with arbitration with a former investment advisor.





The
      Company recorded interest expense of approximately $3.7 million and $7.1 million
      in the three and six months ended June 30, 2007 as compared to $729,000 and
      $843,000 in the three and six months ended June 30, 2006. Interest expense
      includes amortization of debt issue costs and debt discount of approximately
      $3.3 million and $6.4 million for the three and six months ended June 30, 2007
      and $474,000 and $526,000 for the three and six months ended June 30, 2006,
      respectively. The increase in interest expense for 2007 as compared to the
      prior
      year is due to increased average borrowings during the last half of 2006 and
      in
      2007.





The
      Company’s net loss increased approximately $4.8 million to $8.4 million for the
      three months ended June 30, 2007 from $3.6 million for the three months ended
      June 30, 2006 and increased approximately $8.9 million to $15.2 million for
      the
      six months ended June 30, 2007 from $6.3 million during the comparative prior
      year period due primarily to the increase in loss from operations resulting
      from
      increases in plant operations and technology development, general and
      administrative costs and settlement provision, offset by a decrease in
      consulting expenses, and to the increase in interest expense.





The
      Company has approximately $21 million of net operating loss carry-forwards
      at
      December 31, 2006 potentially available to offset future income taxes which
      expire through 2026.  Realization is dependent on generating sufficient
      taxable income prior to expiration of the loss carry-forwards.  A change of
      greater than 50% of the Company ownership could significantly limit the
      utilization of these loss carryforwards.  The Company continues to provide
      a full valuation allowance to reduce its net deferred tax asset to zero,
      inasmuch as Company management has not determined that realization of deferred
      tax assets is more likely than not.




18




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





At
      June
      30, 2007, we had a working capital deficit of approximately $12.2 million,
      compared to a working capital deficit of $3.2 million at December 31, 2006.
       At June 30, 2007, we had total assets of approximately $9.7 million and a
      total stockholders’ deficit of $5.3 million compared with total assets of
      approximately $10.3 million and total stockholder's equity of approximately
      $2.7
      million at December 31, 2006.





During
      the six months ended June 30, 2007 cash used by operating activities increased
      to approximately $3.5 million from $1.5 million during the comparative prior
      year period, due primarily to an increase in net loss as described under
      operating results above.





During
      the six months ended June 30, 2007, cash used by investing activities increased
      to approximately $2.2 million relating to capital expenditures on the recycling
      plant as compared to $656,000 during the comparative prior year period.





During
      the six months ended June 30, 2007, cash provided by financing activities
      increased to approximately $5.5 million from $2.2 million during the comparative
      prior year period. During 2007, the Company received proceeds of approximately
      $5.2 million (including approximately $1.2 million receivable for cash in escrow
      for securities sold in 2006) from sales of private placement units comprised
      of
      convertible promissory notes and warrants and subordinated notes and
      warrants.





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





**Recent
      accounting pronouncements** **-** In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN  48”),
      which prescribes a recognition threshold and measurement process for recording
      in the financial statements uncertain tax positions taken or expected to be
      taken in a tax return. Additionally, FIN No. 48 provides guidance on
      the recognition, classification, accounting in interim periods and disclosure
      requirements for uncertain tax positions. FIN 48 is effective for the
      Company beginning January 1, 2007, and the adoption of FIN 48 did not have
      a significant impact on the Company’s consolidated results of operations or
      financial position.





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





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





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





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





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




(a)
      Disclosure controls and procedures.





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




19




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




(b)
      Changes in internal control over financial reporting.





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




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





20




PART
      II -
      OTHER INFORMATION





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





On
      or
      about November 3, 2006, Brean Murray Carret & Co., LLC (“BMC”) filed a claim
      for arbitration against ECO2and it’s
      Chairman and CTO, Gary De Laurentiis, with the National Association of
      Securities Dealers. BMC is alleging that their service agreement with
      ECO2,
      dated
      May 9, 2005, was breached and that they are due fees and expenses in excess
      of
      $1 million. On or about January 30, 2007, ECO2filed
      its
      answer, affirmative defenses and counterclaims in response to BMC’s claim.
      ECO2’s
      counterclaim against BMC alleges, among other things, that BMC breached their
      service agreement with ECO2,
      unjust
      enrichment, fraud, misrepresentation and unlawful contract. The relief sought
      by
      ECO2estimates
      damages of $36 million and requests attorney fees and other miscellaneous costs
      and the cancellation of BMC’s common stock certificates and common stock
      purchase warrant.During
      the three months ended June 30, 2007, the Company recorded a $740,000 estimated
      provision for an anticipated settlement in connection with this
      matter.





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





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





As
      of May
      15, 2007 ECO 2 received
      subscriptions pursuant to a $3 million financing on the same terms as the
      Company’s previous private placement offering with KW Securities Corp. (the “KW
      PPM”) that closed on February 1, 2007 (the “Financing”). The
      Financing offered the subscribers their pro-rata share of a minimum of 20 Units
      for $25,000 per unit. The offering was made to “accredited
      investors” as defined in Rule 501(a) under the Securities Act of 1933 and
      pursuant to Section 506 under the Securities Act. Each
      Unit
      consists of a $25,000 junior secured subordinated convertible debenture (the
      “Private Placement Notes”), bearing interest at 10% with principal and accrued
      interest due 18 months from issuance (“maturity date”), convertible into shares
      of the Company’s common stock at a price of $0.0975 per share, and a warrant,
      with a cashless exercise provision, to purchase 75,000 shares of restricted
      common stock of the Company, exercisable for approximately 10 years (expires
      April 15, 2015) at an exercise price of $0.06 per share (the “Private Placement
      Warrants”).





Each
      KW
      PPM subscriber was offered the opportunity to participate in the Financing
      on a
      pro-rata basis to enable these subscribers to maintain their prospective
      ownership interests in the Company. In the event that the existing subscribers
      did not subscribe to their pro-rata allocation, the Company obtained additional
      investments from existing subscribers that desired to invest over their pro-rata
      limit. There was no underwriter for the Financing and no fees were paid in
      connection with this Financing. A total of $2,010,000 was received as of June
      30, 2007 and the remaining $990,000 was received on July 2, 2007.  On
      July
      2, 2007, the Financing closed with a total of $3 million raised. A total of
      $3
      million Financing notes and a total of 9 million Financing warrants were
      issued.




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





Not
      applicable.




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





Not
      applicable.




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





Not
      applicable.





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





[See
      Exhibit Index below after signatures]





21




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.




ECO2PLASTICS, INC./s/ Rodney
              S. RougelotRodney
                S. RougelotDirector,
                Chief Executive Officer and Interim Chief Financial
                OfficerDATE
                August 14, 2007




22


EXHIBIT
      INDEX





Exhibit
                No.
            
            
            Description
            
            
            Location3.1(i)
            
            
            Amendment
                to Restated Certificate of Incorporation
            
            
            Incorporated
                by reference to Exhibit A to the DEFR14C filed by the Company on
                November
                30, 20053.2(i)
            
            
            Restated
                Certificate of Incorporation
            
            
            Incorporated
                by reference to Exhibit B to the DEF-14C filed by the Company on
                September
                9, 20023.3(i)
            
            
            Certificate
                of Incorporation
            
            
            Incorporated
                by reference to the Form S-18 Registration Statement filed by the
                Company
                File No. 33-31-673.4(i)
            
            
            Restated
                Certificate of Incorporation
            
            
            Incorporated
                by reference to the DEF-14C filed by the Company on February 22,
                2007.3.5(ii)
            
            
            Bylaws
            
            
            Incorporated
                by reference to Exhibit B to the DEF-14C filed by the Company on
                September
                9, 2002.31.1
            
            
            Certification
                of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
            
            
            Attached.31.2
            
            
            Certification
                of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
            
            
            Attached.32.1
            
            
            Certification
                of CEO pursuant to Section 906 of the Sarbanes-Oxley Act
            
            
            Attached.32.2
            
            
            Certification
                of CFO pursuant to Section 906 of the Sarbanes-Oxley Act
            
            
            Attached.