UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





|                                                               |                                                                             
|-------------------------------------------------------------- | ----------------------------------------------------------------------------
|ü                                                              | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
|                                                               | ACT OF 1934                                                                 
|For the quarterly period ended: September 30, 2008            
|or                                                            
|                                                               |                                                                             
|                                                               | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
|                                                               | ACT OF 1934                                                                 
|For the transition period from: _____________ to _____________



ECOSPHERE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)





|                             |              |                    
|---------------------------- | ------------ | -------------------
|Delaware                     | 000-25663    | 20-3502861         
|(State or Other Jurisdiction | (Commission  | (I.R.S. Employer   
|of Incorporation)            | File Number) | Identification No.)



3515 S.E. Lionel Terrace, Stuart, FL 34997

(Address of Principal Executive Office) (Zip Code)

(772) 287-4846

(Registrants telephone number, 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.                                                                                                                                    | ü | Yes                        |   | No                       
|                                                                                                                                                                                                                                             
|Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.                                                                                   
|                                                                                                                                                                                                                                              |  
|Large accelerated filer                                                                                                                                                                                                                       |   |                            |   | Accelerated filer         |   | 
|Non-accelerated filer                                                                                                                                                                                                                         |   | (Do not check if a smaller |   | Smaller reporting company | ü | 
|                                                                                                                                                                                                                                              |   | reporting company)         |   |                           |   | 
|                                                                                                                                                                                                                                              |  
|Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                             
|                                                                                                                                                                                                                                              |   | Yes                        | ü | No                       
|                                                                                                                                                                                                                                              |  
|Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
The number of outstanding shares of the issuers common stock as of November 8, 2008, was 83,816,918           













---

ECOSPHERE TECHNOLOGIES, INC.

FORM 10-Q

TABLE OF CONTENTS

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|PART I  FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Page
|Item 1.
Condensed Consolidated Financial Statements.
1
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Supplemental Cash Flow Information
Notes to Condensed Consolidated  Financial Statements
5
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operation
21
Item 3.
Qualitative and Quantitative Disclosures about Market Risk
25
Item 4.
Controls and Procedures
25
Item 4T.
Controls and Procedures
25
PART II  OTHER INFORMATION
Item 1.
Legal Proceedings.
26
Item 1A.
Risk Factors.
26
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
26
Item 3.
Defaults Upon Senior Securities.
27
Item 4.
Submission of Matters to a Vote of Security Holders.
27
Item 5.
Other Information.
27
Item 6.
Exhibits.
27
SIGNATURES
28















---





PART I - FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements.

ECOSPHERE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                |               |   |              |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | - | ------------ | - |  | - | ----------- | -
|                                                                                                                                                                                | September 30, |   | December 31, |  
|                                                                                                                                                                                | 2008          |   | 2007         |  
|                                                                                                                                                                                | (Unaudited)   |   |              |  
|Current Assets                                                                                                                                                                  |               |   |              |   |  |  
|Cash and equivalents                                                                                                                                                            |               | $ | 386,930      |   |  | $ | 329,848     |  
|Accounts receivable                                                                                                                                                             |               |   | 123,474      |   |  |   | 3,800       |  
|Inventories                                                                                                                                                                     |               |   | 32,426       |   |  |   | 162,601     |  
|Prepaid expenses and other current assets                                                                                                                                       |               |   | 69,024       |   |  |   | 117,685     |  
|Total current assets                                                                                                                                                            |               |   | 611,854      |   |  |   | 613,934     |  
|Property and equipment, net                                                                                                                                                     |               |   | 1,291,512    |   |  |   | 548,118     |  
|Construction in progress                                                                                                                                                        |               |   | 426,416      |   |  |   |           |  
|Patents, net                                                                                                                                                                    |               |   | 21,715       |   |  |   | 23,290      |  
|Debt issue costs, net                                                                                                                                                           |               |   | 343,910      |   |  |   |            |  
|Deposits                                                                                                                                                                        |               |   | 55,998       |   |  |   |            |  
|Investment                                                                                                                                                                      |               |   |             |   |  |   | 250,000     |  
|Total assets                                                                                                                                                                    |               | $ | 2,751,405    |   |  | $ | 1,435,342   |  
|Liabilities, Redeemable Convertible Cumulative Preferred Stock and Stockholders Deficit                                                                                        |               |   |              |   |  |   |             |  
|                                                                                                                                                                                |               |   |              |   |  |   |             |  
|Current Liabilities                                                                                                                                                             |               |   |              |   |  |   |             |  
|Accounts payable                                                                                                                                                                |               | $ | 947,951      |   |  | $ | 956,815     |  
|Accounts payable - related parties                                                                                                                                              |               |   | 87,214       |   |  |   | 32,994      |  
|Accrued liabilities                                                                                                                                                             |               |   | 1,120,035    |   |  |   | 1,182,798   |  
|Capital lease obligations                                                                                                                                                       |               |   | 43,464       |   |  |   | 34,238      |  
|Due to affiliate                                                                                                                                                                |               |   | 2,000        |   |  |   | 2,000       |  
|Deferred revenue - related party                                                                                                                                                |               |   |             |   |  |   | 156,000     |  
|Deposit                                                                                                                                                                         |               |   | 250,000      |   |  |   |            |  
|Notes payable  related parties (net of discount)  current portion                                                                                                             |               |   | 1,173,290    |   |  |   | 476,000     |  
|Notes payable  third parties (net of discount)  current portion                                                                                                               |               |   | 2,637,543    |   |  |   | 1,842,555   |  
|Total current liabilities                                                                                                                                                       |               |   | 6,261,497    |   |  |   | 4,683,400   |  
|Capital lease obligations  less current portion                                                                                                                                |               |   | 17,073       |   |  |   | 51,970      |  
|Deferred rent                                                                                                                                                                   |               |   | 1,031        |   |  |   |            |  
|Notes payable - related parties - less current portion                                                                                                                          |               |   | 149,447      |   |  |   |            |  
|Notes payable to third parties (net of discount)  less current portion                                                                                                         |               |   | 555,681      |   |  |   | 285,983     |  
|Total Liabilities                                                                                                                                                               |               |   | 6,984,729    |   |  |   | 5,021,353   |  
|Redeemable convertible cumulative preferred stock series A                                                                                                                      |               |   | 1,154,744    |   |  |   | 1,129,431   |  
|11 shares authorized; 9 and 9 shares issued and outstanding, respectively, $25,000 per share
redemption amount plus dividends in arrears ($1,154,744 at September 30, 2008)     |              
|Redeemable convertible cumulative preferred stock series B                                                                                                                      |               |   | 2,776,065    |   |  |   | 2,728,364   |  
|484 shares authorized; 424 and 429 shares issued and outstanding, respectively, $2,500 per share
Redemption amount plus dividends in arrears ($2,776,065 at September 30, 2008) |              
|Commitments and Contingencies  (Note 12)                                                                                                                                        |               |   |              |   |  |   |             |  
|Stockholders Deficit                                                                                                                                                           |               |   |              |   |  |   |             |  
|Common stock, $0.01 par value; 150,000,000 shares authorized; 82,022,207 and 63,927,180 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively |               |   | 822,022      |   |  |   | 639,266     |  
|Common stock issuable, $0.01 par value, 250,000 and 297,763 issuable at September 30, 2008 and
December 31, 2007, respectively                                                  |               |   | 2,500        |   |  |   | 2,978       |  
|Additional paid-in capital                                                                                                                                                      |               |   | 52,842,359   |   |  |   | 45,214,073  |  
|Accumulated deficit                                                                                                                                                             |               |   | (61,831,014  | ) |  |   | (53,300,123 | )
|Total stockholders deficit                                                                                                                                                     |               |   | (8,164,133   | ) |  |   | (7,443,806  | )
|Total liabilities, redeemable convertible cumulative preferred stock, and stockholders deficit                                                                                 |               | $ | 2,751,405    |   |  | $ | 1,435,342   |  



The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.





1



---





ECOSPHERE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

|                                                                         |                            |      |            |                           |      |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------ | -------------------------- | ---- | ---------- | ------------------------- | ---- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                         | For The Three Months Ended |      |            | For The Nine Months Ended |     
|                                                                         | September 30,              |      |            | September 30,             |     
|                                                                         |                            | 2008 |            |                           | 2007 |   |            | 2008 |  |   | 2007       |  
|Revenues                                                                 |                            | $    | 122,454    |                           |      | $ | 6,789      |      |  | $ | 123,474    |   |  | $ | 668,588    |  
|Cost of revenues                                                         |                            |      | 27,276     |                           |      |   | 33,805     |      |  |   | 27,276     |   |  |   | 888,645    |  
|Gross profit  (loss)                                                     |                            |      | 95,178     |                           |      |   | (27,016    | )    |  |   | 96,198     |   |  |   | (220,057   | )
|Operating expenses                                                       |                            |      |            |                           |      |   |            |      |  |   |            |   |  |   |            |  
|Selling, general and administrative                                      |                            |      | 1,914,178  |                           |      |   | 940,761    |      |  |   | 4,249,788  |   |  |   | 3,510,898  |  
|Total operating expenses                                                 |                            |      | 1,914,178  |                           |      |   | 940,761    |      |  |   | 4,249,788  |   |  |   | 3,510,898  |  
|Loss from operations                                                     |                            |      | (1,819,000 | )                         |      |   | (967,777   | )    |  |   | (4,153,590 | ) |  |   | (3,730,955 | )
|Other income (expense):                                                  |                            |      |            |                           |      |   |            |      |  |   |            |   |  |   |            |  
|Other income (loss)                                                      |                            |      | 769        |                           |      |   | 2          |      |  |   | (12,652    | ) |  |   | 11,663     |  
|Loss on conversion                                                       |                            |      | (209,823   | )                         |      |   | (44,245    | )    |  |   | (256,271   | ) |  |   | (44,245    | )
|Interest expense                                                         |                            |      | (1,740,534 | )                         |      |   | (1,071,070 | )    |  |   | (4,108,378 | ) |  |   | (2,474,988 | )
|Total other income (expense)                                             |                            |      | (1,949,588 | )                         |      |   | (1,115,313 | )    |  |   | (4,377,301 | ) |  |   | (2,507,570 | )
|Net loss                                                                 |                            |      | (3,768,588 | )                         |      |   | (2,083,090 | )    |  |   | (8,530,891 | ) |  |   | (6,238,525 | )
|Preferred stock dividends                                                |                            |      | (34,937    | )                         |      |   | (34,661    | )    |  |   | (105,188   | ) |  |   | (106,553   | )
|Net loss applicable to common stock                                      |                            | $    | (3,803,525 | )                         |      | $ | (2,117,751 | )    |  | $ | (8,636,079 | ) |  | $ | (6,345,078 | )
|Net loss per common share applicable to
common stock (basic and diluted) |                            |      |            |                           |      |   |            |      | 
|                                                                         |                            | $    | (0.05      | )                         |      | $ | (0.04      | )    |  | $ | (0.12      | ) |  | $ | (0.11      | )
|Weighted average number of common shares outstanding                     |                            |      | 74,858,556 |                           |      |   | 61,099,834 |      |  |   | 69,605,413 |   |  |   | 59,378,161 |  



The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.





2



---





ECOSPHERE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

|                                                                           |  |                                         |            |   |      |   |            |  
|-------------------------------------------------------------------------- |  | --------------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                           |  | For the Nine Months Ended September 30, |           
|                                                                           |  | 2008                                    |            |   | 2007 |  
|OPERATING ACTIVITIES:                                                      |  |                                         |            |   |      |  
|Net loss                                                                   |  | $                                       | (8,530,891 | ) |      | $ | (6,238,525 | )
|Adjustments to reconcile net loss to net cash used in operating activities |  |                                         |            |   |      |   | .          |  
|Depreciation and amortization                                              |  |                                         | 142,150    |   |      |   | 191,955    |  
|Amortization of debt issue costs                                           |  |                                         | 327,508    |   |      |   | 42,149     |  
|Amortization of prepaid expenses                                           |  |                                         | 128,146    |   |      |   | 149,155    |  
|Accretion of discount on notes payable                                     |  |                                         | 3,308,099  |   |      |   | 2,138,564  |  
|Loss on conversion of accrued interest and accounts payable to stock       |  |                                         | 292,338    |   |      |   |          |  
|Amortization of patents                                                    |  |                                         | 1,575      |   |      |   | 5,121      |  
|Non-cash compensation expense                                              |  |                                         | 1,097,462  |   |      |   | 346,254    |  
|Warrants  issued for services                                              |  |                                         | 7,161      |   |      |   |          |  
|Impairment of inventory                                                    |  |                                         | 6,601      |   |      |   |          |  
|Common stock issued for settlement                                         |  |                                         | 12,500     |   |      |   | 98,906     |  
|Option/warrant exchange program expense                                    |  |                                         | 15,679     |   |      |   |          |  
|Options issued for services                                                |  |                                         | 10,808     |   |      |   |          |  
|Changes in operating assets and liabilities                                |  |                                         | -          |   |      |   |            |  
|Decrease (increase) in accounts receivable                                 |  |                                         | (119,674   | ) |      |   | 13,765     |  
|(Increase) decrease in inventories                                         |  |                                         | (32,426    | ) |      |   | 22,020     |  
|Decrease in prepaid expenses and other current assets                      |  |                                         | 2,678      |   |      |   | 52,850     |  
|(Increase) in debt issue costs and other non-current assets                |  |                                         | (147,501   | ) |      |   |          |  
|Increase accounts payable                                                  |  |                                         | 86,476     |   |      |   | 619,433    |  
|Increase in deferred rent                                                  |  |                                         | 1,031      |   |      |   | 17,141     |  
|Increase in deposit                                                        |  |                                         | 250,000    |   |      |   |          |  
|Increase in accrued expenses                                               |  |                                         | 216,245    |   |      |   | 835,511    |  
|Net cash used in operating activities                                      |  |                                         | (2,924,035 | ) |      |   | (1,705,701 | )
|INVESTING ACTIVITIES:                                                      |  |                                         |            |   |      |   |            |  
|Proceeds from sale of investment                                           |  |                                         | 250,000    |   |      |   |          |  
|Construction in process purchases                                          |  |                                         | (426,416   | ) |      |   |          |  
|Proceeds from sale of equipment                                            |  |                                         |          |   |      |   |          |  
|Purchase of property and equipment                                         |  |                                         | (885,544   | ) |      |   | (393,646   | )
|Net cash (used in) provided by investing activities                        |  |                                         | (1,061,960 | ) |      |   | (393,646   | )
|FINANCING ACTIVITIES:                                                      |  |                                         |            |   |      |   |            |  
|Proceeds from issuance of notes payable and warrants                       |  |                                         | 3,294,790  |   |      |   |          |  
|Proceeds from issuance of notes payable and warrants to related parties    |  |                                         | 980,000    |   |      |   | 350,000    |  
|Proceeds from issuance of notes payable to related parties                 |  |                                         | 41,856     |   |      |   | 130,000    |  
|Proceeds from exercise of warrants for cash                                |  |                                         | 166,800    |   |      |   |          |  
|Repayments of notes payable                                                |  |                                         | (173,618   | ) |      |   | (126,233   | )
|Repayments of notes payable to related parties                             |  |                                         | (241,080   | ) |      |   | (14,000    | )
|Principal payments on capital leases                                       |  |                                         | (25,671    | ) |      |   | (210,000   | )
|Net cash provided by (used in) financing activities                        |  |                                         | 4,043,077  |   |      |   | 129,767    |  
|Net increase (decrease) in cash                                            |  |                                         | 57,082     |   |      |   | (1,969,580 | )
|Cash, beginning of period                                                  |  |                                         | 329,848    |   |      |   | 1,989,758  |  
|Cash, end of period                                                        |  | $                                       | 386,930    |   |      | $ | 20,178     |  



The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.





3



---





ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

SUPPLEMENTAL CASH FLOW INFORMATION

|                                                                                      |  |                                         |           |  |      |   |           | 
|------------------------------------------------------------------------------------- |  | --------------------------------------- | --------- |  | ---- | - | --------- | 
|                                                                                      |  | For the Nine Months Ended September 30, |          
|                                                                                      |  | 2008                                    |           |  | 2007 |  
|                                                                                      |  |                                         |           |  |      |  
|Cash paid for interest                                                                |  | $                                       | 176,051   |  |      | $ | 144,746   | 
|Cash paid for income taxes                                                            |  | $                                       |         |  |      | $ |         | 
|                                                                                      |  |                                         |           |  |      |   |           | 
|Non-cash investing and financing activities:                                          |  |                                         |           |  |      |   |           | 
|Accrued preferred stock dividends                                                     |  | $                                       | 105,188   |  |      | $ | 106,553   | 
|Beneficial conversion features of covertible notes and debentures                     |  | $                                       | 1,638,005 |  |      | $ |          | 
|Warrants issued in connection with financing                                          |  |                                         |          |  |      |   | 705,368   | 
|Common stock issued for services                                                      |  | $                                       | 343,161   |  |      | $ |          | 
|Common stock issued for debt issue costs                                              |  | $                                       | 523,017   |  |      | $ |          | 
|Comon stock issued to repay debt                                                      |  | $                                       |          |  |      | $ | 525,000   | 
|Conversion of convertible notes and debentures payable to common stock                |  | $                                       | 1,752,200 |  |      | $ |          | 
|Common stock issued as payment of accrued interest                                    |  | $                                       | 79,775    |  |      | $ | 318,412   | 
|Common stock issued in payment of services or accounts payable                        |  | $                                       | 15,000    |  |      | $ |          | 
|Series A Redeemable Convertible Cumulative Preferred Stock converted to common  stock |  | $                                       |          |  |      | $ |          | 
|Series B Redeemable Convertible Cumulative Preferred Stock converted to common stock  |  | $                                       | 32,174    |  |      | $ | 87,500    | 
|Purchase of equipment financed with capital lease and common stock                    |  | $                                       |          |  |      | $ | 1,890,000 | 
|Conversion of accrued interest to notes payable                                       |  | $                                       | 184,214   |  |      | $ |          | 



The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.





4



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

1.

NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

We were incorporated under the name UltraStrip Systems, Inc. in April 1998 in Florida. We reincorporated on September 8, 2006 in Delaware under the name Ecosphere Technologies, Inc. (Ecosphere or the Company). Ecospheres mission is to become a globally branded company known for developing and introducing patented innovative clean technologies to the world marketplace. We invent, patent, develop and expect to license and/or sell clean technologies with the potential for practical, economical and sustainable applications across industries throughout the world. In addition, if we obtain sufficient capital, we may acquire other patents which are not being exploited, develop the products and/or services, initiate the commercialization and then seek to license and/or sell the patents to large companies.

The accompanying unaudited condensed consolidated financial statements include the accounts of Ecosphere, its 90%-owned subsidiary, Ecosphere Systems, Inc. (ESI), and its wholly-owned subsidiaries Ecosphere Envirobotic Solutions, Inc. (UES), Ecosphere Energy Solutions, Inc. (EES) and Ecosphere Renewable Energy Corp. (EREC). ESI was formed during the first quarter of 2005 and markets the Companys mobile water filtration technologies for disaster relief, homeland security and military applications. UES was formed in October 2005 to pursue the sale of UHP robotic coating removal equipment, technology and to perform contract services in the maritime coating removal industry that demonstrated the capabilities of the underlying technology. EES was organized in November 2006. It develops and markets water filtration systems to the oil and gas exploration industry using the Companys patent pending OzonixTM Process.  EREC was formed in July 2008 to develop and market the Companys Ecos Lifelink and Power Cube technologies.

The Company continually monitors its positions with, and the credit quality of, the financial institutions it invests with. Periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits.

In connection with the sale of certain intellectual property and assets of UES in October 2007, the Company obtained a 5% interest in Chariot Robotics, Inc. This interest had been recorded as an investment at December 31, 2007 in the amount of $250,000. In January 2008, the Company sold its 5% interest in Chariot Robotics, Inc. for $250,000.

At September 30, 2008, inventory consists of the cost of a trailer which will be incorporated into a future recycling unit. During the three months ended September 30, 2008, the Company wrote off the cost of the original OzonixTM unit, $162,601, which was built for testing in the Barnett Shale of Texas, when it was determined the value of the unit was impaired. In connection with the write-off, the Company also reduced deferred revenue related to the unit in the amount of $156,000, resulting in a loss on impairment of $6,601.  This unit is not the unit deployed in the Barnett Shale under the recently completed 90-day pilot program.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the rules and regulations of the U.S Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods shown. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. Certain prior period amounts have been reclassified to conform to the current period presentation. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Managements Discussion and Analysis and Plan of Operation contained in this report and the audited consolidated financial statements and accompanying notes included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2007 and the Form 10-KSB/A No. 1 filed on November 6, 2008.





5



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying unaudited condensed consolidated financial statements include the valuation on depreciable lives, valuation of discounts on debt, valuation of beneficial conversion features in convertible debt, valuation of equity based instruments issued for other than cash and the valuation allowance on deferred tax assets.

2.

GOING CONCERN

The accompanying unaudited condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the realization of assets and the satisfaction of liabilities in the normal course of operations. During the nine months ended September 30, 2008, the Company incurred net losses applicable to common stock of approximately $8.64 million, and used cash in operations of approximately $2.9 million.  At September 30, 2008, the Company had a working capital deficiency of approximately $5.65 million, a stockholders deficit of approximately $8.2 million and had outstanding convertible preferred stock that is redeemable under limited circumstances for approximately $3.9 million (including accrued dividends). The Company has not attained a level of revenues sufficient to support recurring expenses, and the Company does not presently have the resources to settle previously incurred obligations. These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern.

The Companys continued existence is dependent upon its ability to resolve its liquidity problems. The Company has arranged the availability of limited short-term debt funding to provide immediate liquidity. In addition, the Company has entered into an Agreement to sell a 49% interest in its LifeLink and Ecos PowerCube technologies and received a $250,000 deposit (See Note 13). In addition, the Company received $1,215,000 of new financing during the three months ended September 30, 2008 and anticipates receiving an additional $125,000 in the near future. Further, on November 12, Bledsoe Capital Group notified the Company that it intended to immediately fund $500,000  and the Company expects to receive an additional $1.5 million under a secured line of credit agreement with Bledsoe Capital Group. (See Note 14) As a result of the recent limited liquidity, the Companys management has temporarily deferred some of its compensation and only critical vendor payments are being made to conserve cash resources. The continued support and forbearance of its creditors and preferred shareholders will be required, although this is not assured.

The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern. There are no assurances that the Company will be successful in achieving the above plans, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue as a going concern.

3.

PROPERTY AND EQUIPMENT

During the three months ended September 30, 2008, the Company completed the manufacture and assembly of the Devon pilot project OzonixTM recycling unit and delivered the equipment to the site of the pilot program, Cleburne,Texas. In connection with the delivery of the Devon recycling unit, the Company reclassified the cost of manufacturing the equipment, $818,291 from construction in progress to property and equipment and began depreciating the unit. Depreciation for the three months ended September 30, 2008 relating to this unit was $27, 276.

4.

NOTES PAYABLE

During the three months ended March 31, 2008, the Company borrowed an additional $255,000 of convertible debt under a secured convertible line of credit facility with a group of investors. The notes bear interest of 12% and are convertible into common stock of the Company at $0.15 per share. In addition, note holders received two warrants to purchase shares of common stock of the Company for every one dollar of note principal. The warrants are exercisable for five years at $0.15 per share. The warrants were valued using the Black-Scholes method using a volatility of between 92.5% and 118%, an expected term of five years and a discount rate of between 2.23% and 3.45%.  The Company recorded a debt discount in the amount of $43,857 related to the value of the warrants. In addition, the Company recorded a debt discount related to the embedded conversion feature in the amount of $18,826.





6



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

During the three months ended March 31, 2008, convertible notes with an aggregate principal balance of $136,147 were converted into 973,116 shares of the Companys common stock. As a result the Company recognized additional interest expense of $110,934 representing the unamortized debt discount on the dates of conversion.

Notes of $481,986 and accrued interest of $44,831 were renewed through the issuance of $526,817 of new convertible notes bearing 10% interest and a conversion rate of $0.15 per share during the three months ended March 31, 2008. In addition, note holders received one share of common stock for every one dollar of principal of the new convertible notes. As such, the Company issued 526,817 shares of common stock. The Company recorded a debt discount in the amount of $98,563 related to the relative fair market value of the common stock, valued at the market price on the date of renewal. In addition the Company recorded a debt discount in the amount of $380,817 related to the embedded conversion feature of the new convertible notes.

During the three months ended June 30, 2008, the Company borrowed an additional $1,805,000 of convertible debt under a secured convertible line of credit facility with a group of investors. The notes bear interest of 12% and are convertible into common stock of the Company at a conversion rate of $0.15 per share. In addition, note holders received two warrants to purchase shares of common stock of the Company for every one dollar of note principal. The warrants are exercisable for five years, one-half at $0.15 per share and the other half at $0.20 per share. The warrants were valued using the Black-Scholes method using a volatility of between 113.5% and 139.4% based on historical volatility, an expected term of five years based on the contracted term for non-employees and a discount rate of between 2.75% and 3.73%.  The Company recorded a debt discount in the amount of $601,127 related to the value of the warrants. In addition, the Company recorded a debt discount related to the embedded conversion feature in the amount of $1,122,734.

In addition, in June 2008 the Company borrowed $1,000,000 from Bledsoe Capital Group, LLC under a one-year line of credit agreement. The note bears interest of 10% and is secured by the Texas pilot project frac-flowback unit. The Company issued the lender warrants to purchase 1,000,000 shares of the Companys common stock for $0.15 per share. The warrants are exercisable for five years.  The warrants were valued using the Black-Scholes method using a volatility of 133.6% based on historical volatility, an expected term of three years and a discount rate of 2.71%. The Company recorded a debt discount in the amount of $182,567 related to the value of the warrants.

During the three months ended June 30, 2008, convertible notes with an aggregate principal balance of $252,503 were converted into 1,683,353 shares of the Companys common stock. As a result the Company recognized additional interest expense of $154,975 representing the unamortized debt discount on the dates of conversion.  Further, $192,500 of convertible debentures were converted into 1,283,333 shares of the Companys common stock during the three months ended June 30, 2008.  As a result the Company recognized additional interest expense of $133,269 representing the unamortized debt discount on the dates of conversion.

During the three months ended June 30, 2008, the Company repaid $100,000 of notes to related parties. The Company signed a new note agreement for $374,423 with a related party which replaces a note which was in default for nonpayment. Under the terms of the new note, all amounts due under the prior note including accrued interest will be repaid in quarterly installments of $50,000 over two years. The note bears interest of 7%. In connection with the signing of the new note, the Company made a payment $31,080.  See Note 11 for further information on the above transactions.

In July 2008, the Company negotiated a one year extension of a note payable that was due in July 2008.  Under the terms of the modification and extension of the note, the Company repaid $100,000 of principal, and $15,510 of accrued interest. In addition, the Company paid an extension fee of $25,000, $12,500 of which was paid in cash and $12,500 of which was paid through the issuance of 26,042 shares of the Companys common stock. The Company also paid attorney fees of the borrower in the amount of $2,500.

In July 2008, a promissory note, which was in default for nonpayment of principal and interest in the amount of $25,000 and $6,000, respectively, was converted by the holder into a $31,000 convertible, one year note bearing annual interest of 10% and convertible at $0.15 per share.  The note holder was issued 31,000 shares of common stock as inducement to extend the note. The Company recorded a debt discount of $9,912 related to the relative fair value of the common stock issued and $21,088 related to the beneficial conversion feature. In August 2008, the note holder converted the note into 206,667 shares of common stock.

During the three months ended September 30, 2008, convertible notes with an aggregate principal balance of $1,062,739 were converted into 7,084,928 shares of the Companys common stock. As a result the Company recognized additional interest expense of $348,482 representing the unamortized debt discount on the dates of conversion.  Further, $236,157 of convertible debentures were converted into 1,574,380 shares of the Companys common stock during the three months ended September 30, 2008.





7



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

As a result the Company recognized additional interest expense of $154,888 representing the unamortized debt discount on the dates of conversion.

During the three months ended September 30, 2008, the Company received $1,215,000 in exchange for original issue discount, convertible, one year notes with an aggregate principal balance of $1,350,000. The notes are convertible at $0.36 per share. The Company recorded an original issue discount of $135,000 representing the difference between the principal amounts and the amounts received and recorded a loan discount related to the beneficial conversion feature of $1,076,724. As of September 30, 2008, the unamortized discount was $1,140,942 related to these notes. The Companys Co-CEO and Executive Vice President of Business Development each loaned the Company $100,000 in connection with these notes. In addition, a director loaned the Company $180,000 in connection with these notes.

As of September 30, 2008, a note to a Company owned by our Founder and Co-CEO in the amount of $26,000 is in default for failure to make payment within terms. As of September 30, 2008, $100,000 of other notes payable are in default for failure to make payments within terms. The Company intends to repay these notes either through future cash flows from operations, upon the sale of intellectual property held by the Company, or with proceeds from possible future debt or equity offerings. All notes in default have been treated as demand instruments and are reflected as current liabilities.

A summary of total loans and total discounts as of September 30, 2008 is as follows:

|                                                                    |  |           |           |  |                      |   |            |                       |  |   |           | 
|------------------------------------------------------------------- |  | --------- | --------- |  | -------------------- | - | ---------- | --------------------- |  | - | --------- | 
|                                                                    |  | Principal |           |  | Unamortized Discount |   |            | Debt, Net of Discount | 
|Unrelated parties                                                   |  |           |           |  |                      |   |            |                       | 
|Convertible & non-convertible notes payable                         |  | $         | 5,475,738 |  |                      | $ | (2,282,514 | )                     |  | $ | 3,193,224 | 
|Less current portion                                                |  |           | 4,290,488 |  |                      |   | (1,652,945 | )                     |  |   | 2,637,543 | 
|Convertible & non-convertible notes payable, net of current portion |  | $         | 1,185,250 |  |                      | $ | (629,569   | )                     |  | $ | 555,681   | 
|                                                                    |  |           |           |  |                      |   |            |                       |  |   |           | 
|Related parties                                                     |  |           |           |  |                      |   |            |                       |  |   |           | 
|Convertible & non-convertible notes payable                         |  | $         | 1,814,302 |  |                      | $ | (491,565   | )                     |  | $ | 1,322,737 | 
|Less current portion                                                |  |           | 1,664,855 |  |                      |   | (491,565   | )                     |  |   | 1,173,290 | 
|Convertible & non-convertible notes payable, net of current portion |  | $         | 149,447   |  |                      | $ |          |                       |  | $ | 149,447   | 

5.

REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK

Series A

As of September 30, 2008 and December 31, 2007, there were nine shares of Series A Redeemable Convertible Cumulative Preferred Stock outstanding. The shares are redeemable at the option of the Company at $27,500 per share plus accrued dividends, and the shares became redeemable at the option of the holder in September 2002 at $25,000 per share plus accrued dividends. The shares may be redeemed at the option of the holder upon the occurrence of a change in control of the Company, by the transfer of greater than 50% of the Companys common stock. The shares are convertible each into 6,000 common shares. Accrued dividends totaled $929,744 and $904,431 at September 30, 2008 and December 31, 2007, respectively. During the three months ended September 30, 2008, no holders converted any shares of Series A preferred stock into common stock. See Note 14 for conversions of Series A Redeemable Convertible Cumulative Preferred Stock subsequent to September 30, 2008.

Series B

As of September 30, 2008 and December 31, 2007, there were 424 and 429 shares of Series B Redeemable Convertible Cumulative Preferred Stock outstanding, respectively. The shares are redeemable at the option of the Company at $3,000 per share plus accrued dividends, and the shares became redeemable at the option of the holder in September 2002 at $2,500 per share plus accrued dividends. The shares may be redeemed at the option of the holder upon the occurrence of a change in control of the Company, by the transfer of greater than 50% of the Companys common stock. The shares are convertible each into 835 common shares. Accrued dividends totaled $1,716,065 and $1,655,864 on September 30, 2008 and December 31, 2007, respectively. During the three months ended September 30, 2008, no holders converted shares of Series B preferred stock into common stock.





8



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

6.

COMMON STOCK

The Company is authorized to issue up to 150,000,000 shares of its $0.01 par value common stock as of September 30, 2008.

Shares issued

Issuances of the Companys common stock during the three months ended March 31, 2008 included the following:

Shares Issued for Services

a)

200,000 shares of common stock with a value of $48,000, based upon the quoted trading price of $0.24 per share, were issued in exchange for services. The services were valued at $48,000.

Shares Issued for Accrued Interest

b)

248,216 shares of common stock with a value of $69,500, based upon the quoted trading price of $0.28 per share, were issued in payment of $45,886 of accrued interest on debentures resulting in a loss on conversion of $23,610.

Shares Issued in Exchange for Accounts Payable

c)

100,000 shares of common stock valued at $23,000 based upon the quoted trading price of $0.23 on the settlement date were issued for $15,000 of accounts payable resulting in a loss on conversion of $8,000.

Shares Issued as Inducement to Renew Promissory Notes

d)

526,817 shares of common stock with a relative fair market value of $96,693 were issued as inducement for note holders to sign new convertible note agreements.

Shares Issued Upon Conversion of Convertible Notes

e)

973,116 shares of common stock were issued to convert $136,147 of convertible notes payable.

Share Issued Upon Conversion of Convertible Preferred Stock

f)

3,336 shares of common stock were issued upon the conversion of 4 shares of Series B Preferred Stock.

Issuances of the Companys common stock during the three months ended June 30, 2008 included the following:

Shares Issued for Accrued Interest

a)

163,757 shares of common stock with a value of $36,561, based upon the quoted trading prices of between $0.17 and $0.44 per share, were issued in payment of $21,583 of accrued interest on debentures resulting in a loss on conversion of $14,838.

Shares Issued Upon Conversion of Convertible Notes and Debentures

b)

1,683,353 shares of common stock were issued to convert $252,503 of convertible notes payable at a conversion rate of $0.15 per share.

c)

1,283,333 shares of common stock were issued to convert $192,500 of convertible debentures at a conversion rate of $0.15 per share.

Shares Issued Upon Conversion of Convertible Preferred Stock

d)

834 shares of common stock were issued upon the conversion of 1 share of Series B Preferred Stock.

Shares Issued upon Exercise of Warrants

e)

756,146 shares of common stock were issued upon the cashless exercise of warrants to purchase 1,209,833 shares of common stock with an exercise price of $0.15 per share. The fair market value of the stock on the date of exercise was $0.40.

f)

6,000 shares of common stock were issued upon the exercise of warrants with an exercise price of $0.00 per share.





9



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

Issuances of the Companys common stock during the three months ended September 30, 2008 included the following:

Shares Issued for Accrued Interest

a)

19,875 shares of common stock with a value of $12,304, based upon the quoted trading prices of between $0.46 and $0.71 per share, were issued in payment of $2,982 of accrued interest on debentures resulting in a loss on conversion of $9,323.

Shares Issued Upon Conversion of Convertible Notes and Debentures

b)

7,084,928 shares of common stock were issued to convert $1,062,739 of convertible notes payable at a conversion rate of $0.15 per share.

c)

1,574,380 shares of common stock were issued to convert $236,157 of convertible debentures at a conversion rate of $0.15 per share.

Shares Issued upon Exercise of Warrants

d)

1,000,000 shares of common stock were issued in exchange for receipt of $150,000 upon the exercise of warrants with an exercise price of $0.15 per share.

e)

60,000 shares of common stock were issued in exchange for $16,800 upon the exercise of warrants with an exercise price of $0.28 per share.

f)

703,557 shares of common stock were issued upon the cashless exercise of warrants to purchase 1,000,000 shares of common stock with an exercise price of $0.15 per share. Per the warrant agreement, the number of shares was calculated based upon the average closing price of the Companys common stock for the ten trading days preceding the exercise which was $0.506 per share.

Shares Issued as Inducement to Renew Promissory Notes

g)

31,000 shares of common stock with a relative fair market value of $9,912 were issued as inducement for a note holder to sign a new convertible note agreement.

h)

26,041 shares of common stock with a fair market value of $12,500 were issued as inducement for a one year extension for repayment of a note payable.

Shares Issued for Convertible Note Finders Fee

i)

450,000 sharesof common stock with a fair market value of $288,000 were issued to the Companys Co-CEO in repayment of liability of 87,500 due the Co-CEO as a finders fee, resulting in a loss on conversion of $200,500.

Shares Issued for Consulting and Advisory Board Fees

j)

59,524 shares of common stock with a fair market value of $25,000 were issued to an Advisory Board member for a four month consulting arrangement. In addition, the Company issued 16,000 shares of common stock to this advisory board member representing the vested shares from the restricted stock granted to the Advisory Board member upon his appointment to the Advisory Board.

The Company recognized share-based compensation expense related to restricted stock grants, issued per the terms of the 2006 Equity Incentive Plan of $191,746 for the nine months ended September 30, 2008. The following table summarizes non-vested restricted stock and the related activity as of September 30, 2008:

|                               |  |        |            |                                        |   |     
|------------------------------ |  | ------ | ---------- | -------------------------------------- | - | ----
|                               |  | Shares |            | Weighted
Average
Grant-Date
Fair-Value
|Non-vested at January 1, 2008  |  |        | 441,960    |                                        | $ | 0.44
|Granted                        |  |        | 881,333    |                                        | $ | 0.18
|Vested                         |  |        | (1,219,435 | )                                      | $ | 0.24
|Forfeited                      |  |        | (10,163    | )                                      | $ | 0.82
|Unvested at September 30, 2008 |  |        | 93,695     |                                        | $ | 0.63





10



---









| |  |  |  |  |  | 
| |  |  |  |  |  | 

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)



Total unrecognized share-based compensation expense from unvested restricted stock as of September 30, 2008 was $58,590 which is expected to be recognized over a weighted average period of approximately 1.9 years.

7.

NET LOSS PER SHARE

Basic net loss per common share applicable to common stockholders is computed on the basis of the weighted average number of common shares outstanding during each period presented. Diluted net loss per common share applicable to common stockholders is computed on the basis of the weighted average number of common shares and dilutive securities outstanding. Dilutive securities having an anti-dilutive effect on diluted net loss per common share are excluded from the calculation.

The Companys outstanding options and warrants to acquire common stock and shares of common stock which may be issued upon conversion of outstanding redeemable convertible cumulative preferred stock and convertible debt (all aggregating 111,680,385 shares of common stock at September 30, 2008) are not included in the computation of net loss per common share because the effects of inclusion would be anti-dilutive. These shares may dilute future earnings per share. Currently, there are lockout agreements in place for options, warrants and convertible debt relating to approximately 45,484,896 common stock equivalents. Under the agreements, the holders of these common stock equivalents have waived their right to exercise or convert these common stock equivalents into shares of common stock until such time as the authorized shares of the Company are increased.

8.

STOCK OPTIONS AND WARRANTS

On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards 123(Revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued under the Companys Stock Option Plans. SFAS 123R provides for, and the Company has elected to adopt the modified prospective application under which compensation cost is recognized on or after the required effective date for the fair value of all future share based award grants and the portion of outstanding awards at the date of adoption of this statement for which the requisite service has not been rendered, based on the grant-date fair value of those awards calculated under Statement 123R pro forma disclosures.

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the underlying common stock. We used the following assumptions for options and warrants issued in the following periods:



|                        |  |                                         |                |      |  |       
|----------------------- |  | --------------------------------------- | -------------- | ---- |  | ------
|                        |  | For the Nine Months Ended
September 30,
|                        |  | 2008                                    |                | 2007
|Expected volatility     |  |                                         | 92.5% - 139.4% |      |  | 144%  
|Expected lives          |  |                                         | 2.50           |      |  | 5 yrs.
|Risk-free interest rate |  |                                         | 2.23% - 3.33%  |      |  | 4.62% 
|Expected dividend yield |  |                                         | None           |      |  | None  



The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Companys stock options and warrants have characteristics different from those of its traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The risk free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based upon the Companys history of having never issued a dividend and managements current expectation of future action surrounding dividends. Expected volatility in 2008 and 2007 is based on historical volatility for the expected term or such shorter period as the stock has been traded, as it is a reasonable estimate of expected future volatility. Implied volatility was not considered as the Company does not have any traded options or warrants.





11



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

Employee Fixed Plan Options

|                                            |  |                                              |            |   |                                              |   |           |        |  |  |                                 |   |  |   |      | 
|------------------------------------------- |  | -------------------------------------------- | ---------- | - | -------------------------------------------- | - | --------- | ------ |  |  | ------------------------------- | - |  | - | ---- | 
|                                            |  | For the Nine Months Ended September 30, 2008 |            |   | For the Nine Months Ended September 30, 2007 |  
|                                            |  | Shares                                       |            |   | Weighted Average Exercise Price              |   |           | Shares |  |  | Weighted Average Exercise Price |  
|Outstanding at beginning of year            |  |                                              | 7,565,625  |   |                                              | $ | 0.93      |        |  |  | 8,268,830                       |   |  | $ | 1.00 | 
|Granted                                     |  |                                              | 2,380,918  |   |                                              | $ | 0.39      |        |  |  | 400,000                         |   |  | $ | 0.50 | 
|Exercised                                   |  |                                              |          |   |                                              | $ |         |        |  |  |                               |   |  | $ |    | 
|Forfeited                                   |  |                                              | (2,986,999 | ) |                                              | $ | 1.11      |        |  |  | (240,500                        | ) |  | $ | 0.83 | 
|Expired                                     |  |                                              |          |   |                                              | $ |         |        |  |  |                               |   |  | $ |    | 
|Outstanding at end of period                |  |                                              | 6,959,544  |   |                                              | $ | 0.81      |        |  |  | 8,428,330                       |   |  | $ | 0.97 | 
|Exercisable at end of period                |  |                                              | 5,199,126  |   |                                              | $ | 0.89      |        |  |  | 5,097,597                       |   |  | $ | 1.05 | 
|Outstanding                                 |  |                                              |            |   |                                              |   |           |        |  |  |                                 |   |  |   |      | 
|Weighted average remaining contractual term |  |                                              |            |   |                                              |   | 4.6       |        |  |  |                                 |   |  |   | 5.5  | 
|Aggregate intrinsic value                   |  |                                              |            |   |                                              | $ | 1,324,008 |        |  |  |                                 |   |  | $ |    | 
|Weighted average grant date fair value      |  |                                              |            |   |                                              | $ | 0.21      |        |  |  |                                 |   |  | $ | 0.20 | 
|Exercisable                                 |  |                                              |            |   |                                              |   |           |        |  |  |                                 |   |  |   |      | 
|Weighted average remaining contractual term |  |                                              |            |   |                                              |   | 4.7       |        |  |  |                                 |   |  |   | 6.1  | 
|Aggregate intrinsic value                   |  |                                              |            |   |                                              | $ | 1,138,800 |        |  |  |                                 |   |  | $ |    | 



Employee Fixed Non-Plan Options

|                                            |  |        |            |   |                                 |   |           |        |  |  |                                 |  |  |   |      | 
|------------------------------------------- |  | ------ | ---------- | - | ------------------------------- | - | --------- | ------ |  |  | ------------------------------- |  |  | - | ---- | 
|                                            |  | Shares |            |   | Weighted Average Exercise Price |   |           | Shares |  |  | Weighted Average Exercise Price | 
|Outstanding at beginning of year            |  |        | 11,316,667 |   |                                 | $ | 0.52      |        |  |  | 8,760,003                       |  |  | $ | 1.70 | 
|Granted                                     |  |        | 23,700,000 |   |                                 | $ | 0.45      |        |  |  |                               |  |  |   |    | 
|Exercised                                   |  |        |          |   |                                 |   |         |        |  |  |                               |  |  |   |    | 
|Forfeited                                   |  |        | (2,300,000 | ) |                                 | $ | 1.12      |        |  |  |                                |  |  |   |     | 
|Expired                                     |  |        |           |   |                                 |   |          |        |  |  |                                |  |  |   |     | 
|Outstanding at end of period                |  |        | 32,716,667 |   |                                 | $ | 0.47      |        |  |  | 8,760,003                       |  |  | $ | 1.70 | 
|Exercisable at end of period                |  |        | 12,836,667 |   |                                 | $ | 0.48      |        |  |  | 8,760,003                       |  |  | $ | 1.70 | 
|Outstanding                                 |  |        |            |   |                                 |   |           |        |  |  |                                 |  |  |   |      | 
|Weighted average remaining contractual term |  |        |            |   |                                 |   | 4.8       |        |  |  |                                 |  |  |   | 5.0  | 
|Aggregate intrinsic value                   |  |        |            |   |                                 | $ | 3,205,633 |        |  |  |                                 |  |  | $ |     | 
|Weighted average grant date fair value      |  |        |            |   |                                 | $ | 0.21      |        |  |  |                                 |  |  | $ |     | 
|Exercisable                                 |  |        |            |   |                                 |   |           |        |  |  |                                 |  |  |   |      | 
|Weighted average remaining contractual term |  |        |            |   |                                 |   | 4.9       |        |  |  |                                 |  |  |   | 5.0  | 
|Aggregate intrinsic value                   |  |        |            |   |                                 | $ | 2,239,633 |        |  |  |                                 |  |  | $ |     | 







12



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

Non-Employee Fixed Non-Plan Options

|                                            |  |                                              |            |   |                                              |   |         |        |  |  |                                 |  |  |   |      | 
|------------------------------------------- |  | -------------------------------------------- | ---------- | - | -------------------------------------------- | - | ------- | ------ |  |  | ------------------------------- |  |  | - | ---- | 
|                                            |  | For the Nine Months Ended September 30, 2008 |            |   | For the Nine Months Ended September 30, 2007 |  
|                                            |  | Shares                                       |            |   | Weighted Average Exercise Price              |   |         | Shares |  |  | Weighted Average Exercise Price | 
|Outstanding at beginning of year            |  |                                              | 5,495,000  |   |                                              | $ | 1.20    |        |  |  | 5,495,000                       |  |  | $ | 1.20 | 
|Granted                                     |  |                                              | 1,618,000  |   |                                              | $ | 0.28    |        |  |  |                                |  |  |   |     | 
|Exercised                                   |  |                                              |           |   |                                              |   |        |        |  |  |                                |  |  |   |     | 
|Forfeited                                   |  |                                              | (4,045,000 | ) |                                              | $ | 1.23    |        |  |  |                                |  |  |   |     | 
|Expired                                     |  |                                              |           |   |                                              |   |        |        |  |  |                                |  |  |   |     | 
|Outstanding at end of period                |  |                                              | 3,068,000  |   |                                              | $ | 0.63    |        |  |  | 5,495,000                       |  |  | $ | 1.20 | 
|Exercisable at end of period                |  |                                              | 3,068,000  |   |                                              | $ | 0.63    |        |  |  | 5,495,000                       |  |  | $ | 1.20 | 
|Outstanding                                 |  |                                              |            |   |                                              |   |         |        |  |  |                                 |  |  |   |      | 
|Weighted average remaining contractual term |  |                                              |            |   |                                              |   | 3.1     |        |  |  |                                 |  |  |   | 4.9  | 
|Aggregate intrinsic value                   |  |                                              |            |   |                                              | $ | 453,040 |        |  |  |                                 |  |  | $ |     | 
|Weighted average grant date fair value      |  |                                              |            |   |                                              | $ |        |        |  |  |                                 |  |  | $ |     | 
|Exercisable                                 |  |                                              |            |   |                                              |   |         |        |  |  |                                 |  |  |   |      | 
|Weighted average remaining contractual term |  |                                              |            |   |                                              |   | 3.1     |        |  |  |                                 |  |  |   | 4.9  | 
|Aggregate intrinsic value                   |  |                                              |            |   |                                              | $ | 453,040 |        |  |  |                                 |  |  | $ |     | 



Options

For the Three Months Ended March 31, 2008

In connection with theCompanys warrant and option exchange program, the Company issued new three year options to purchase 2,491,200 shares of common stock, exercisable at $0.28 per share in exchange for the forfeiture of 6,228,001 warrants to purchase shares of common stock. The weighted average exercise price of the warrants forfeited was $0.96 and the weighted average remaining life of those warrants was 2.02 years. The fair market value of the new warrants calculated with the Black-Scholes method using a volatility of 124%, an expected life of 3 years and a discount rate of 2.27% resulted in an aggregate fair market value of $15,679 for those warrants/options where the new option value exceeded the old value. Company recorded $15,679 in non-cash option expense during the three months ended March 31, 2008.

For the Three Months Ended June 30, 2008

During the three months ended June 30, 2008 the Board of Directors granted options to purchase shares of the Companys common stock to its Founder and Co-Chief Executive Officer (Co-CEO). Options were granted to purchase 7,000,000 shares at an exercise price of $0.30 per share, the fair market value on the date of the grant, over a five year term. Of the options granted, 2,000,000 vested immediately, 2,000,000 will vest over a three year period subject to continued employment on the applicable vesting date and 3,000,000 will vest over a three year term, subject to meeting specified milestones.

Additionally, the Board of Directors issued the Founder and Co-CEO options to purchase 3,300,000 shares of common stock at an exercise price of $0.50, the fair market value on the date of the grant, over a five year period. The options vest subject to meeting a specific milestone and also vest over a three year period also subject to continued employment on each applicable vesting date. The options were granted in tandem with cash settled stock appreciation rights (SARS). The exercise of either the options or the SARS cancels the same number of the other security.

During the three months ended June 30, 2008, the Board of Directors also issued options to purchase 8,250,000 shares of common stock and cash settled SARS to the Companys other Co-CEO exercisable at $0.50 per share, the fair market value on the date of the grant, over a five year term.  Of the options and SARS, 2/3 will vest over a three year period subject to continued employment on the applicable vesting date, and the balance vest over a three year period upon meeting a specified milestone approved by the Board of Directors. The options will vest 2/3 over a three year period and 1/3 will begin vesting over a three year term upon the signing of a long term agreement with a major energy company or another significant milestone approved by the Board of Directors. The exercise of either the options or the SARS cancels the same number of the other security.





13



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

The Company granted options to purchase 1,000,000 shares of common stock to its Senior Vice President of Engineering. These options are exercisable for five years at an exercise price of $0.30 per share, the fair market value on the date of the grant. The options vested 50% on date of grant and 50% will vest upon meeting a specified milestone. The Company also issued the Senior Vice President of Engineering options to purchase 330,000 shares of common stock and cash settled SARS exercisable at $0.50 per share, the fair market value on the date of the grant, and with a five year term. These options vest over three year period subject to continued employment on each applicable vesting date. The exercise of either the options or the SARS cancels the same number of the other security.

During the three months ended June 30, 2008, the Company issued its Chief Operating Officer and Senior Vice President of Administration options to purchase 500,000 and 300,000 shares of common stock and cash settled SARS, respectively, exercisable at $0.47 per share, the fair market value on the date of the grant, over a five year term. Of these options and SARS, 200,000 and 100,000, respectively, vest immediately, with the remainder vesting in equal installments over two years, subject to continued employment on each applicable vesting date.

The fair market values of the optionsgranted during the three months ended June 30, 2008 were calculated with the Black-Scholes method using volatility of 133.6% to 135.6%, an expected term of 2.5 years and discount rates of 2.5% to 3.1%. The Company recognized non-cash option expense related to employee options of $572,426 for the three months ended June 30, 2008. Unrecognized non-cash option expense related to unvested options, not subject to conditional vesting, were approximately $2.86 million as of June 30, 2008 and will be recognized over the next 2 -3 years.

For the Three Months Ended September 30, 2008

In July 2008, the Company issued an employee options to purchase 300,000 shares of common stock and cash settled SARS, respectively, exercisable at $0.47 per share, the fair market value on the date of the grant, over a five year term. Of these options and SARS, 100,000 vested immediately, with the remainder vesting in equal installments over two years, subject to continued employment on each applicable vesting date.

In August 2008, the Companys Executive Vice President of Business Development was granted options to purchase 1,500,000 shares of the Companys common stock. The options vest over three years, subject to continued employment and are exercisable 500,000 at $0.42 per share, 500,000 at $0.85 per share and 500,000 at $1.10. The options expire in five years. The fair market value of the Companys stock on the date of grant was $0.42 per share.



In September 2008 in conjunction with the appointment of three new directors, the Board of Directors issued 854,168 options and cash settled SARS, exercisable at $0.48 per share, the fair value on the date of the grant, and vesting over a three year period, subject to continued service on the board. In addition the Board granted existing members 312,500 options and cash settled SARS, and granted Advisory Board members 156,250 options and cash settled SARS, all exercisable at $0.48 and vesting on June 30, 2009, subject to continued service. All the options and cash settled SARS expire in five years.



The fair market values of the optionsgranted during the three months ended September 30, 2008 were calculated with the Black-Scholes method using volatility of 123% to 137.86%, an expected term of 2.5 years and discount rates of 2.37 to 3.33. The Company recognized non-cash option expense related to employee options of $355,452 for the three months ended September 30, 2008. Unrecognized non-cash option expense related to unvested options, not subject to conditional vesting, were approximately $3.35 million as of September 30, 2008 and will be recognized over the next 2 -3 years.

Warrants

For the Three Months Ended March 31, 2008

Warrants to purchase 510,000 shares of common stock with an exercise price of $0.15 per share and a five year term were issued in connection with new convertible notes. The fair market value of these new warrants was calculated with the Black-Scholes method using a volatility of 92.5% to 94.9% , an expected term of 5 years and a discount rate of 2.23% to 2.49% resulting in a debt discount of $28,665.

In addition, the exercise price of 365,000 warrants, issued in connection with a previous financing, were modified from $0.20 per share to $0.15 per share. The fair market value of the modified warrants was calculated with the Black-Scholes method using a volatility of 117.5%, an expected term of 5 years and a discount rate of 3.75% resulting in an additional debt discount of $979.





14



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

Warrants to purchase 100,000 shares of common stock with an exercise price of $0.25 per share and a five year term were issued to a consultant. The warrants are exercisable 50% immediately and the remainder are exercisable on July 31, 2008. The fair market value of the warrants was calculated with the Black-Scholes method using a volatility of 98.3%, an expected term of 5 years and a discount rate of 2.69%. The fair market value, $7,161 was recorded as a prepaid expense and expensed in Q1 2008.

Warrants to purchase 610,000 shares of common stock with an exercise price of $0.15 per share and a five year term were issued to an individual as a finders fee in connection with the $355,000 convertible notes issued in 2007 and the $255,000 of convertible notes issued during the three months ended March 31, 2008. The fair market value of the warrants was calculated with the Black-Scholes method using a volatility of 94.9%, an expected term of 5 years and a discount rate of 2.365. The fair market value, $50,946 was recorded as debt issuance cost and will be amortized to interest expense over the life of the convertible notes.

For the Three Months Ended June 30, 2008

Warrants to purchase 110,000 shares of common stock with an exercise price of $0.15 per share and a five year term were issued in connection with $55,000 of new convertible notes. In addition, warrants to purchase 1,750,000 shares of common stock with an exercise price of $0.15 per share and a five year term, plus warrants to purchase 1,750,000 shares of common stock with an exercise price of $0.20 per share and a five year term were issued in connection with the issuance of $1,750,000 of new convertible notes. The fair market value of the warrants was calculated with the Black-Scholes method using a volatility of 113.59% to 139.42%, an expected term of 5 years and a discount rate of 2.75% to 3.73%. The relative fair market value of the warrants, $601,127 was recorded as additional debt discount and will be amortized over the life of the convertible notes.

During the three months ended June 30, 2008, the Company issued an additional 1,805,000 warrants to an individual as a finders fee in connection with the additional $1,805,000 received from these investors. The fair market value of these warrants was calculated with the Black-Scholes method using volatility of 113.59% to 139.42%, an expected term of 5 years and a discount rate of 2.75% to 3.73%. The fair market value of these additional warrants, $472,971 was recorded as debt issuance cost and will be amortized to interest expense over the life of the convertible notes.

Warrants to purchase 1,000,000 shares of common stock with an exercise price of $0.15 per share and a three year term were issued in connection with a new $1,000,000 note. The relative fair market value of these warrants was calculated with the Black-Scholes method using a volatility of 133.63% , an expected term of 3 years and a discount rate of 2.71% resulting in a debt discount of $182,576 which will be amortized to interest expense over the life of the note.

For the Three Months Ended September 30, 2008

In July 2008, the Board granted the consulting company that provides CFO services to the Company, 650,000 warrants and cash settled SARS, exercisable at $0.45 per share and vesting over a three year period. All of the warrants vest each June 30 and December 31, subject to the Consulting Agreement remaining in effect on each applicable vesting date. Additionally, one-half of the options and SARS are subject to further vesting based upon the Company meeting a specified milestone.

A summary of the outstanding warrants previously issued for cash, financing, services and settlement as of September 30, 2008 is presented below:



|                                         |  |        |            | 
|---------------------------------------- |  | ------ | ---------- | 
|                                         |  | Shares |           
|Warrants issued for cash                 |  |        | 504,500    | 
|Warrants issued for financing            |  |        | 36,431,030 | 
|Warrants issued for services             |  |        | 3,665,000  | 
|Warrants issued in settlement of lawsuit |  |        | 90,000     | 
|Outstanding at September 30, 2008        |  |        | 40,960,530 | 



9.

INCOME TAXES

The Company and one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2002. None of the tax years subject to examination are currently under examination by a tax authority and the Company has not received notice of the intent by any tax authority to commence an examination.





15



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

The Company adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, the Company did not recognize any liability for unrecognized tax benefits, since the Company has concluded that all of its tax positions are highly certain of being upheld upon examination by federal or state tax authorities.

10.

OPERATING SEGMENTS

Pursuant to FAS 131, the Company defines an operating segment as:

·

A business activity from which the Company may earn revenue and incur expenses;

·

Whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and

·

For which discrete financial information is available.

In 2005, the Company expanded its business offerings to include the water filtration technology business. Recognizing that each business offering applied to different markets, the Company established three operating entities or segments, which are defined as each business line that it operates. This however, excludes corporate headquarters, which does not generate revenue.

Our operating entities are defined as follows:

·

Ecosphere Systems, Inc. (ESI) which we organized in April 2005 to operate our water filtration system business;

·

Ecosphere Envirobotic Solutions, Inc. (EESI), formerly UltraStrip Envirobotic Solutions, Inc., which we organized in October 2005 to operate our coating removal business; and,

·

Ecosphere Energy Solutions, Inc. (EES) which we organized in November 2006. EES owns our OzonixTM technology.

The table below presents certain financial information by business segment for the nine months ended September 30, 2008.

|                                                   |  |   |                         |   |  |   |                                        |   |  |   |                                  |   |  |   |                |   |  |   |            |   |  |   |                     |  
|-------------------------------------------------- |  | - | ----------------------- | - |  | - | -------------------------------------- | - |  | - | -------------------------------- | - |  | - | -------------- | - |  | - | ---------- | - |  | - | ------------------- | -
|                                                   |  |   | Ecosphere
Systems,
Inc. |   |  |   | Ecosphere
Envirobotic
Solutions,  Inc. |   |  |   | Ecosphere
Energy
Solutions, Inc. |   |  |   | Segment
Totals |   |  |   | Corporate  |   |  |   | Consolidated
Totals |  
|Revenue from external customers                    |  | $ |                        |   |  | $ |                                       |   |  | $ | 123,474                          |   |  | $ | 123,474        |   |  | $ |           |   |  | $ | 123,474             |  
|Interest expense and amortization of debt discount |  | $ |                        |   |  | $ |                                       |   |  | $ | (128                             | ) |  | $ | (128           | ) |  | $ | (4,108,250 | ) |  | $ | (4,108,378          | )
|Depreciation and amortization                      |  | $ | (85,692                 | ) |  | $ | (2,785                                 | ) |  | $ | (28,985                          | ) |  | $ | (117,462       | ) |  | $ | (24,688    | ) |  | $ | (142,150            | )
|Income Tax Expense                                 |  | $ |                        |   |  | $ |                                       |   |  | $ |                                 |   |  | $ |               |   |  | $ |           |   |  | $ |                    |  
|Net Income (loss)                                  |  | $ | (85,692                 | ) |  | $ | (2,785                                 | ) |  | $ | (257,021                         | ) |  | $ | (345,498       | ) |  | $ | (8,185,393 | ) |  | $ | (8,530,891          | )
|Segment fixed assets & construction in process     |  | $ | 865,487                 |   |  | $ | 25,824                                 |   |  | $ | 1,260,090                        |   |  | $ | 1,578,312      |   |  | $ | 976,103    |   |  | $ | 2,554,415           |  
|Fixed asset additions (disposals) (net)            |  | $ |                        |   |  | $ | 4,899                                  |   |  | $ | 1,260,090                        |   |  | $ | 1,264,989      |   |  | $ | 44,825     |   |  | $ | 1,309,814           |  
|Total Assets                                       |  | $ | 335,708                 |   |  | $ | 4,818                                  |   |  | $ | 1,415,090                        |   |  | $ | 1,755,616      |   |  | $ | 995,789    |   |  | $ | 2,751,405           |  



The table below presents certain financial information by business segment for the nine months ended September 30, 2007:



|                                |  |                         |         |   |                                       |   |           |                                  |  |   |                |  |  |           |           |   |                     |   |            |   |  |   |            |  
|------------------------------- |  | ----------------------- | ------- | - | ------------------------------------- | - | --------- | -------------------------------- |  | - | -------------- |  |  | --------- | --------- | - | ------------------- | - | ---------- | - |  | - | ---------- | -
|                                |  | Ecosphere
Systems,
Inc. |         |   | Ecosphere
Envirobotic
Solutions,
Inc. |   |           | Ecosphere
Energy
Solutions,
Inc. |  |   | Segment
Totals |  |  | Corporate |           |   | Consolidated
Totals |  
|Revenue from external customers |  | $                       |        |   |                                       | $ | 668,588   |                                  |  | $ |               |  |  | $         | 668,588   |   |                     | $ |           |   |  | $ | 668,588    |  
|Interest expense                |  | $                       |        |   |                                       | $ |          |                                  |  | $ |               |  |  | $         |          |   |                     | $ | (2,474,988 | ) |  | $ | (2,474,988 | )
|Depreciation and amortization   |  | $                       | (77,582 | ) |                                       | $ | (167,511  | )                                |  | $ |               |  |  | $         | (245,093  | ) |                     | $ | (21,547    | ) |  | $ | (266,640   | )
|Non-cash compensation expense   |  | $                       |        |   |                                       | $ |          |                                  |  | $ |               |  |  | $         |          |   |                     | $ | (284,254   | ) |  | $ | (284,254   | )
|Segment assets                  |  | $                       | 517,220 |   |                                       | $ | 3,024,236 |                                  |  | $ |               |  |  | $         | 3,541,456 |   |                     | $ | 931,278    |   |  | $ | 4,472,733  |  
|Fixed asset additions           |  | $                       |        |   |                                       | $ | 1,849,020 |                                  |  | $ |               |  |  | $         | 1,849,020 |   |                     | $ | (120,963   | ) |  | $ | 1,728,057  |  









16



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

The table below presents certain financial information by business segment for the three months ended September 30, 2008:



|                                                   |  |                         |         |   |                                       |   |        |                                  |  |   |                |   |  |           |           |   |                     |   |            |   |  |   |            |  
|-------------------------------------------------- |  | ----------------------- | ------- | - | ------------------------------------- | - | ------ | -------------------------------- |  | - | -------------- | - |  | --------- | --------- | - | ------------------- | - | ---------- | - |  | - | ---------- | -
|                                                   |  | Ecosphere
Systems,
Inc. |         |   | Ecosphere
Envirobotic
Solutions,
Inc. |   |        | Ecosphere
Energy
Solutions,
Inc. |  |   | Segment
Totals |   |  | Corporate |           |   | Consolidated
Totals |  
|Revenue from external customers                    |  | $                       |        |   |                                       | $ | (1,020 | )                                |  | $ | 123,474        |   |  | $         | 122,454   |   |                     | $ |           |   |  | $ | 122,454    |  
|Interest expense and amortization of debt discount |  | $                       |        |   |                                       | $ |       |                                  |  | $ | (106           | ) |  | $         | (106      | ) |                     | $ | (1,740,428 | ) |  | $ | (1,740,534 | )
|Depreciation and amortization                      |  | $                       | (28,564 | ) |                                       | $ | (1,320 | )                                |  | $ | (28,558        | ) |  | $         | (58,442   | ) |                     | $ | (7,274     | ) |  | $ | (65,716    | )
|Income Tax Expense                                 |  | $                       |        |   |                                       | $ |       |                                  |  | $ |               |   |  | $         |          |   |                     | $ |           |   |  | $ |           |  
|Net Income (loss)                                  |  | $                       | (29,719 | ) |                                       | $ | (979   | )                                |  | $ | (28,541        | ) |  | $         | (59,239   | ) |                     | $ | (3,709,349 | ) |  | $ | (3,768,588 | )
|Segment fixed assets                               |  | $                       | 865,487 |   |                                       | $ | 25,824 |                                  |  | $ | 1,260,090      |   |  | $         | 1,578,312 |   |                     | $ | 976,103    |   |  | $ | 2,554,415  |  
|Fixed asset additions (disposals) (net)            |  | $                       |        |   |                                       | $ | 4,688  |                                  |  | $ | 571,420        |   |  | $         | 576,108   |   |                     | $ | 44,825     |   |  | $ | 620,933    |  
|Total Assets                                       |  | $                       | 335,708 |   |                                       | $ | 4,818  |                                  |  | $ | 1,415,090      |   |  | $         | 1,755,616 |   |                     | $ | 995,789    |   |  | $ | 2,751,405  |  

The table below presents certain financial information by business segment for the three months ended September 30, 2007:

|                                |  |                         |         |   |                                       |   |           |                                  |  |   |                |  |  |           |           |   |                     |   |            |   |  |   |            |  
|------------------------------- |  | ----------------------- | ------- | - | ------------------------------------- | - | --------- | -------------------------------- |  | - | -------------- |  |  | --------- | --------- | - | ------------------- | - | ---------- | - |  | - | ---------- | -
|                                |  | Ecosphere
Systems,
Inc. |         |   | Ecosphere
Envirobotic
Solutions,
Inc. |   |           | Ecosphere
Energy
Solutions,
Inc. |  |   | Segment
Totals |  |  | Corporate |           |   | Consolidated
Totals |  
|Revenue from external customers |  | $                       |        |   |                                       | $ | 6,789     |                                  |  | $ |               |  |  | $         | 6,789     |   |                     | $ |           |   |  | $ | 6,789      |  
|Interest expense                |  | $                       |        |   |                                       | $ |          |                                  |  | $ |               |  |  | $         |          |   |                     | $ | (1,071,070 | ) |  | $ | (1,071,070 | )
|Depreciation and amortization   |  | $                       | (20,452 | ) |                                       | $ | (56,525   | )                                |  | $ |               |  |  | $         | (76,977   | ) |                     | $ | (4,688     | ) |  | $ | (81,665    | )
|Non-cash compensation expense   |  | $                       |        |   |                                       | $ |          |                                  |  | $ |               |  |  | $         |          |   |                     | $ | (40,677    | ) |  | $ | (40,677    | )
|Segment assets                  |  | $                       | 517,220 |   |                                       | $ | 3,024,236 |                                  |  | $ |               |  |  | $         | 3,541,456 |   |                     | $ | 931,278    |   |  | $ | 4,472,733  |  
|Fixed asset additions           |  | $                       |        |   |                                       | $ | 301,037   |                                  |  | $ |               |  |  | $         | 301,037   |   |                     | $ | (265,992   | ) |  | $ | 35,045     |  



11.

RELATED PARTY TRANSACTIONS



In connection with our organization in 1998, a corporation controlled by our Co-Chief Executive Officer and Senior Vice President of Administration was owed $40,000. During the year ended December 31, 2007, we paid $14,000 of principal on this note payable. The note bears interest of Prime +2% (7.0% as of September 30, 2008) and as of September 30, 2008, unpaid principal and interest of $26,000 and $18,750, respectively, is due under the note. See Note 4.

As of December 31, 2007, the Company had issued convertible notes due to the Co-Chief Executive Officer and the Senior Vice President of Administration in the amount of $210,000. During the six months ended June 30, 2008, the Company repaid $210,000. See Note 4.

An unsecured note payable to a director, bearing interest at prime plus 2%, was modified during the three months ended June 30, 2008. Under the new agreement, the Company agreed to repay the principal balance of $374,423, plus annual interest of 7%, by making quarterly payments of $50,000. In connection with the agreement, the Company paid the director $31,080. No payments have been made on this note during the three months ended September 30, 2008.See Note 4.

Since December 2007, an investor has advanced the Company $650,000 in exchange for one year, convertible secured notes, all with a conversion rate of $0.15 per share. In connection with the financings, the investor was issued five year warrants to purchase 980,000 and 320,000 shares of the Companys common stock at exercise prices of $0.15 and $0.20, respectively.  On June 17, 2008, after the investments had been made, the investor was appointed Chairman of the Board of Directors and Co-CEO. Additionally, the investor is entitled to a finders fee in the amount of $87,500 related to the additional $1,750,000 of convertible secured notes funded during the three months ended June 30, 2008, which he has advised the Company he intends to take in common stock, once the Company has authorized capital and donate the shares to charity. In September 2008, the Company issued the Co-CEO 450,000 shares of common stock, valued at $288,000, in repayment of the finders fees resulting in a loss on conversion of $200,500. At the time of the original investments of $665,000, which the investor spearheaded beginning in December 2007, the Company agreed to reimburse the investor for legal fees of approximately $40,000, which remain unpaid. The investor/Co-CEO intends to have the Company reimburse him with common stock, once the Company has authorized capital.





17



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

In June 2008, the Board of Directors approved the terms of new employment agreements with its Co-Chief Executive Officers, Chief Operating Officer and Senior Vice President of Administration. The Board of Directors approved a compensation package for Chairman of the Board and Co-CEO consisting of an annual base salary of $250,000, increasing to $450,000 upon achievement of a significant milestone. This salary will either accrue or be payable in common stock until the Company has sufficient cash resources. He is also eligible to receive a performance bonus upon meeting an additional milestone. The Board also approved a new compensation package for the Founder and Co-CEO since his prior agreement had expired.  The new agreement provides for a base annual salary of $325,000, increasing to $400,000 on January 1, 2009 and includes performance bonuses based upon meeting a number of milestones.  The Board of Directors also approved a new compensation package for the Chief Operating Officer which provides for an annual bas salary of $125,000.

In August 2008, an investor who previously loaned the Company $250,000 in exchange for one year secured convertible notes and 500,000 warrants was appointed as Executive Vice President of Business Development. Subsequent to his appointment, the investor employee loaned the company an additional $100,000 in exchange for a one year original issue discount convertible note bearing interest of 11.1% and convertible in to common stock at the rate of $0.36 per share. In connection with his appointment, the investor employee was granted options to purchase 1,500,000 shares of the Companys common stock. (See Note 8)



In September 2008, an investor who previously loaned the Company $50,000 in exchange for one year secured convertible notes and 100,000 warrants was appointed to the Board of Directors. Subsequent to his appointment, the investor director loaned the company an additional $180,000 in exchange for a one year original issue discount convertible note bearing interest of 11.1% and convertible into common stock at the rate of $0.36 per share. In connection with his appointment, the investor director was granted options to purchase 229,167 shares of the Companys common stock at an exercise price of $0.48 per share. (See Note 8)

On July 3, 2008, the Company amended a Consulting Agreement with a consulting company in which the Companys Chief Financial Officer is president and 50% owner. Under the new Agreement, the Chief Financial Officer is devoting substantially all of his time and his company is also supplying the Company with its accounting service. The consulting fee was increased to $19,500 per month. Additionally, the Board granted the consulting company 650,000 options and cash settled SARS, exercisable a $0.45 per share over a three year period. All of the options vest each June 30 and December 31, subject to the Consulting Agreement remaining in effect on each applicable vesting date. Additionally, one-half of the options and SARS are subject to further vesting based upon the Company meeting a specified milestone.

12.

COMMITMENT AND CONTINGENCIES

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. To our knowledge, except as described below, no legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

The Company had a long term relationship with Kamimura International Associates (KIA), a Washington D.C. based organization, whereby the principals at KIA agreed to assist the Company in developing the coating removal market in the Far East. The relationship resulted in the establishment of UltraStrip Japan, Ltd. (USJ), a company whose purpose was to market and deliver ship stripping services in Japan. The agreement with KIA was never formalized. In February 2007, KIA filed a lawsuit against the Company. In March 2007, the Company filed a Motion to Dismiss, Motion to Strike, and Motion for More Definite Statement. The Company intends to vigorously defend itself in this litigation; the Company believes that the plaintiff will not prevail. The Company has expensed and accrued an amount it reasonably estimates may be required to resolve any outstanding issues between the Company and KIA.

On August 3, 2007, Mr. Gordon Goodman, then President of ESI, the Companys 90%-owned subsidiary, terminated his employment agreement for good reason. Under this agreement, he was to receive an annual salary of $165,000 per year. The agreement was entered into in May 2007 and was for a two-year term. After investigation of the circumstances, including the exchange of documents and Mr. Goodmans deposition, the company determined that Mr. Goodman did not materially breach his employment agreement and the matter was amicably resolved. In July 2008, the Company entered into an arbitrated settlement agreement with Mr. Goodman resulting in a payment by the Company of $157,500.







18



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

13.

SIGNIFICANT EVENTS

·

On June 3, 2008, the Company entered into an agreement for a 90 day Pilot Program to recycle frac flowback water at the well site for Newfield Exploration Co., a large energy company operating in the Woodford and Arkoma basins in Oklahoma and Colorado. The Company has begun building the initial OzonixTMwater filtration technology based recycling unit which will process 3,500 barrels per day. As of September 30, 2008 the Company has included the costs incurred to date to build the unit for this pilot program, $381,215, in Construction in Progress. During the Pilot Program, the Company will be paid a fee for each barrel of water recycled.

·

On July 30, 2008, the Company entered into a definitive agreement with Bledsoe Capital Group (BCG) relating to the Companys LifeLink and Ecos Power Cube technologies. Under the agreement, Bledsoe Capital was to purchase a 49% share of Ecosphere Renewable Energy Corp. (EREC), a newly formed subsidiary of the Company, in exchange for $1,715,000. The Company received $250,000 upon the signing of the agreement. On October 31, 2008, BCG informed the Company that it did not intend to consummate this transaction. The deposit received from BCG will be credited toward the $40 million of working capital to be contributed by BCG should BCG exercise its option to acquire 50% of the OzonixTM technology for the energy business or will be refunded by the end of 2009 in either cash or common stock of the Company.

·

In August 2008, the Company completed building and delivered the first OzonixTM unit for use in its 90 day Pilot Program with an oil and gas drilling company in the Barnett Shale area of Texas.  The Company began operating this unit to provide water recycling services under the Pilot Program on August 7, 2008. During the Pilot Program, the Company earned $123,272 for recycling frac flowback and produced water. The Ozonix unit operated as anticipated by the Company.

·

On September 3, 2008, the Company entered into a new agreement for a 90 day Pilot Program to recycle frac flowback water at the well site for Williams Companies, Inc., another large energy company operating in the Barnett Shale region of Texas. The Company has begun building the OzonixTMwater filtration technology based recycling unit for this project which will process approximately 3,500 barrels per day. As of September 30, 2008 the Company has included the costs incurred to date to build the unit for this Pilot Program, $45,201, in Construction in Progress. During the Pilot Program, the Company will be paid a fee for each barrel of water recycled.

14.

SUBSEQUENT EVENTS

·

On October 3, 2008, the holder of warrants to purchase 2,000,000 shares of the Companys common stock at an exercise price of $0.15 exercised the non-cash exercise provisions of their warrant agreement and were issued 1,552,710 shares of the Companys common stock based on the average closing price of the stock for the ten trading days preceding the exercise date.

·

In October 2008, holders of Series A preferred stock converted 2 shares into 12,000 shares of the Companys common stock.

·

On November 5, 2008, the Company delivered the initial Ozonix mobile water recycling system unit for the Newfield Pilot Program to a well site operated by Newfield in Coalgate, Oklahoma.

·

On November 6, 2008, BCG agreed to advance $2 million to the Company to support the progress and implementation of the Ecosphere Ozonix technology in the energy industry. On November 12, 2008 BCG notified the Company of its intent to immediately fund the first $500,000 with subsequent advances due by November 30, 2008, conditioned upon the results of laboratory testing at the Newfield Exploration Co. Pilot Project site. The advances will be secured by Ozonix units deployed by the Company under agreements with Newfield Exploration Co. and The Williams Companies. The loan will be due three years following the initial advance.





19



---







ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

(UNAUDITED)

If the Company enters into a long-term agreement with Newfield and/or Williams to recycle frac flowback water and BCG does not exercise its option to acquire 50% of the Ozonix technology for the energy business, BCG will have the option to convert the loan by purchasing the units and leasing them back to the Company in exchange for a fixed monthly lease payment and a per barrel of water recycled fee. If BCG does exercise its option, the principal and any accrued interest will be credited toward the $40 million of working capital to be contributed by BCG to support the Ozonix technology and the business, which will be 50% owned by each of the Company and BCG.

As additional consideration for the loan, Ecosphere will issue to BCG three-year warrants to purchase one share of common stock for every three dollars advanced, exercisable at $0.25 per share.

·

Since September 30, 2008, the Company has received an additional $235,000 in funding in exchange for original issue discount convertible, one year notes, convertible at $0.35 per share and bearing annual interest of 11.11%. In November 2008, the Board of Directors authorized an additional $245,000 of such financing.





20



---





ECOSPHERE TECHNOLOGIES, INC.

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operation

Overview

The Company creates engineered and patented clean technology solutions. It invents, patents, and develops clean technology products and services. As it commercializes this intellectual property, it, simultaneously seeks to license and/or sell the intellectual property to companies with the necessary financial and marketing resources, and the necessary infrastructure or alternatively seeks to license and/or sell the patents and other assets to investment entities. The Company has an intellectual property portfolio of registered and pending patents and related assets, trade secrets, trademarks, and copyrights for technologies that address pressing global commercial, environmental and humanitarian issues.

We are an independent water engineering and services company that  is currently primarily focused on servicing natural gas and oil exploration companies to treat their industrial waste waters for reuse. Our onshore domestic areas of operations will include the major developing shale plays that include but are not limited to The Barnett Shale, the Fayetteville Shale, the Haynesville Shale, the Anadarko and Arkoma Basins of the Mid-Continent, the Rocky Mountains, the Marcellus Shale and the Canadian provinces. In the future, we may also  offer our services to the offshore exploration markets of the Continental United States.

As a diversified water-centric technology company, Ecosphere has a variety of water-based technological products and services. At present, the Company is primarily focused on applying its innovative patent pending OzonixTM process, initially to recycle frac flowback water used in the oil and gas industry. Ecosphere is also investigating the application of this technology within the maritime and other industries.

The Ecosphere OzonixTM process is an advanced oxidation process that we have developed to treat industrial wastewater. Since late 2007, we have tested our Ecosphere OzonixTM process on a variety of industrial wastewaters. We feel one of the most promising applications for our technology is in the natural gas exploration business to help the energy companies recycle frac flowback and produced waters.

Ecosphere developed the OzonixTM process in the second half of 2007 and began testing it in late 2007 and early 2008 in the Barnett Shale area of North Texas. From the testing, the Company learned that the OzonixTM process is able to efficiently and in a cost effective manner remove hydrocarbons and metals from frac flowback water and can, as part of a pre or post treatment process, provide a solution to the disposal of this wastewater by cleaning it and permitting it to be reused in the drilling process.

Presently, Ecosphere owns several technologies that are completed and available for global marketing. We are focusing on the introduction of the OzonixTM units into the Barnett Shale area of North Texas and the Woodford and Arkoma basin areas of Oklahoma and Colorado. Ecosphere’s business model is to build mobile water treatment units and treat the frac flowback water near the drilling sites; where warranted, the units can also be sold to energy companies.

Ecosphere completed a significant technology transfer event on October 9, 2007 resulting in the first major sale of an Ecosphere developed technology. Ecosphere sold the intellectual property and the related fixed assets and inventory of its robotic coating removal technology with applications for the marine industry and above ground storage tanks, to a private equity fund. The UES asset sale resulted in a reduction of Ecospheres overhead. Additionally, Ecosphere achieved debt restructuring and reduction of its debt. The robotic coating removal technology sale is Ecospheres first major sale of technology. The additional fully-developed technologies, as well as those that require additional development, are the result of research and development expenditures by Ecosphere over approximately eight years. Those expenditures are required to be reflected as operating expenses on the Companys consolidated financial statements. Our patents and other proprietary technology described above are the result of the over $58 million expended since our inception.

The following is a list of the Companys existing intellectual property estate:

·

U.S. Patent 6,287,389 - Method of robotic automobile paint stripping  dated September 11, 2001.

·

U.S. Patent 6,745,108 - Expansion of 3D robotic auto paint stripping patent to include any object  dated June 1, 2004.

·

U .S. Patent 7,100,844  High Impact Waterjet Nozzle is constructed to infuse fluid into a high velocity stream of liquid passing through a nozzle to create a bubble rich waterjet that causes the bubbles to implode when the waterjet strikes the surface amplifying the impact of the water  dated September 5, 2006.

·

U.S. Patent Pending - Mobile Emergency Water Filtration System for Homeland Security and other applications.

·

U.S. Patent Pending - Business Model to provide response and training to public and private suppliers of water resources in the event of an act of terrorism or a natural disaster that contaminates a water supply.

·

U.S. Provisional Patent filed - The Ecosphere OzonixTM Process for enhanced water treatment for reclamation of waste fluids.





21



---





ECOSPHERE TECHNOLOGIES, INC.

RESULTS OF OPERATIONS

Comparison of the Quarter Ended September 30, 2008 to the Quarter Ended September 30, 2007

The Companys net loss increased $1,685,498 during the three months ended September 30, 2008 when compared to the three months ended September 30, 2007. The primary reasons for this increase was higher interest expense and non-cash equity based compensation which were partially offset by lower general and administrative cost resulting from reduced staffing due to the sale of the Companys robotic ship stripping technology, assets and inventory in October 2007 and cost reduction measures, primarily in the areas of professional fees, taken by the Company in the first quarter of 2008.

Revenues

Revenues for the three months ended September 30, 2008 increased $115,665 or 1700% over the three months ended September 30, 2007, primarily from the Devon Energy pilot program. The Company had limited operating activity during the three months ended September 30, 2007.

Operating Expenses

Operating expenses for the three months ended September 30, 2008 were $1,914,178 compared to $940,761 for the three months ended September 30, 2007. This increase resulted from an increase in non-cash compensation expense of $318,000 associated with restricted stock and options vesting during the period. In addition, professional fees increased $276,000 due to additional services related to SEC filings and a matter which went to arbitration. Further, expenses associated with building equipment for pilot and for operating the equipment in the field amounted to $313,000 for the three months ended September 30, 2008. No such costs were incurred in 2007. Finally, consulting fees increased $44,215 and insurance costs increased $51,000, all related to the increased manufacturing and operating activity in the three months ended September 30, 2008.

Loss From Operations

Loss from operations for the three months ended September 30, 2008 was $1,819,000 compared to a loss of $967,777 for the three months ended September 30, 2007. The increase in the loss from operations in 2008 versus 2007 was due to the operating expense increase identified above which was partially offset by the 2008 revenue increase.

Interest Expense

Interest expense was $1,740,534 and $1,071,010 for the three months ended September 30, 2008 and 2007, respectively. Of the 2008 amounts, approximately $1,509,829 related to the accretion of the discounts related to the Companys notes payable (non-cash) and $217,732 actual and accrued interest associated with the notes payable. Of the 2007 amounts, approximately $492,000 related to the accretion of the discounts related to the Companys notes payable (non-cash), $113,000 actual and accrued interest associated with the notes payable.

Preferred Stock Dividends

Preferred stock dividends were $34,937 for the three months ended September 30, 2008 and $34,661for the three months ended September 30, 2007. The dividends reflect Company obligations to preferred shareholders that have not been paid and decreased from 2007 because a significant number of holders chose to convert their preferred stock into common stock.

Net Loss Applicable to Common Stock

Net loss applicable to common stock was $3,803,525 for the three months ended September 30, 2008, compared to a net loss applicable to common stock of $2,117,751 for the three months ended September 30, 2007. Net loss per common share was $0.05 for the three months ended September 30, 2008 as compared to a net loss per common share of $0.04 for the three months ended September 30, 2007. The primary cause of the decrease in net loss applicable to common stock was the increase in operating expenses and interest expense in 2008.

Comparison of the Nine Months Ended September 30, 2008 to the Nine Months Ended September 30, 2007

The Companys net loss increased $2,291,000 during the nine months ended September 30, 2008 when compared to the nine months ended September 30, 2007. The primary reasons for this decrease was higher interest expense and higher selling, general and administrative costs resulting from the additional manufacturing and operating activity of the Company during 2008.

Revenues

Revenues were $123,474 for the nine months ended September 30, 2008 as compared to $668,588 for the nine months ended September 30, 2007. The decrease resulted from the sale of the Companys robotic ship stripping technology, and related assets  in October 2007 and the Companys focus on the production of the initial water filtration unit utilizing the OzonixTMwater filtration technology which was completed in August 2008.





22



---





ECOSPHERE TECHNOLOGIES, INC.

Operating Expenses

Operating expenses for the nine months ended September 30, 2008 were $4,249,788 compared to $3,510,898 for the nine months ended September 30, 2007. This increase resulted from a increases in non-cash compensation of $813,000, added operating expenses related to the pilot project equipment builds and operation of $313,000, professional fees of $184,000 and a one time settlement of a dispute with a former employee of $129,000. These increases were partially offset by decreases in consulting fees of $188,000, salaries and wages of $260,000 and research and development costs of $173,000.

Loss From Operations

Loss from operations for the nine months ended September 30, 2008 was $4,153,590 compared to a loss of $3,730,955 for the nine months ended September 30, 2007. The increase in loss from operations in 2008 versus 2007 was due to the increase in operating expenses.

Interest Expense

Interest expense was $4,108,378 and $2,474,988 for the nine months ended September 30, 2008 and 2007, respectively. Of the 2008 amounts, approximately $3,525,716 related to the accretion of the discounts associated with warrants granted and conversion features included in the Companys notes payable (non-cash) and $569,000 actual and accrued interest associated with the notes payable. Of the 2007 amounts, approximately $688,000 related to the accretion of the discounts associated with the Companys notes payable (non-cash), $1,343,000 actual and accrued interest associated with the notes payable and $50,000 for a one time loan renewal fee.

Preferred Stock Dividends

Preferred stock dividends were $105,188 for the nine months ended September 30, 2008 and $106,553 for the nine months ended September 30, 2007. The dividends reflect Company obligations to preferred shareholders that have not been paid and decreased from 2007 because a significant number of holders chose to convert their preferred stock into common stock.

Net Loss Applicable to Common Stock

Net loss applicable to common stock was $8,636,079 for the nine months ended September 30, 2008, compared to a net loss of $6,345,078 for the nine months ended September 30, 2007. Net loss per common share was $0.12 for the nine months ended September 30, 2008 as compared to a net loss per common share of $0.11 for the nine months ended September 30, 2007. The primary cause of the increase in net loss applicable to common stock is the increase in interest expense and by an increase in operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $2,924,035 for the nine months ended September 30, 2008, compared to $1,705,701 for the nine months ended September 30, 2007. This decrease in cash used relates to the reduction of operating expenses as previously described.

The Company's net cash used by investing activities was $1,061,960 for the nine months ended September 30, 2008 compared to net cash used by investing activities of $393,646 for the nine months ended September 30, 2007. The Company invested $1,311,960 in equipment components associated with the OzonixTM units which are being constructed for the two pilot programs. These expenditures were partially offset by proceeds of $250,000 from the Company’s sale of its 5% investment in Chariot Robotics, LLC in January 2008.

The Company’s net cash provided by financing activities was $4,043,077 for the nine months ended September 30, 2008 compared to net cash provided by financing activities of $129,767 for the nine months ended September 30, 2007. The increase was the result of proceeds from new convertible notes of $4,233,134 which was partially offset by repayments of notes due to related parties of $241,080 and $173,618 paid to third party note holders.

As of the date of this Report, the Company has approximately $165,340 in cash. It has met its working capital needs primarily through secured line of credit loans.

In August 2008, the Company completed building and delivered the first OzonixTM unit for use in its 90 day Pilot Program with an oil and gas drilling company in the Barnett Shale area of Texas. This unit has a projected processing capacity of 7,000 barrels per day. The Company began operating this unit to provide water recycling services under the Pilot Program on August 7, 2008. During the Pilot Program, the Company earned $123,272 for recycling frac flowback and produced water .





23



---





ECOSPHERE TECHNOLOGIES, INC.

On June 3, 2008, the Company signed an agreement for a 90-day Pilot Program to provide water recycling of frac flowback water the well site for Newfield Exploration Co., a large energy company operating in the Woodford and Arkoma basins in Oklahoma and Colorado. The Company manufactured and delivered the initial OzonixTM unit for this Pilot Program and it commenced operating on November 5, 2008. This unit has a projected processing capacity of approximately 3,500 barrels per day.  The Company will receive a prescribed fee for each barrel of water recycled.

On September 3, 2008, the Company entered into a new agreement for a 90 day pilot program to recycle frac flowback water at the well site for Williams Companies, Inc., another large energy company operating in the Barnett Shale region of Texas. The Company has begun building the OzonixTMwater filtration technology based recycling unit for this project which will process approximately 3,500 barrels per day. The Company will receive a prescribed fee for each barrel of water recycled.

On November 6, 2008, Bledsoe Capital Group, LLC (BCG) agreed to advance $2 million to the Company to support the progress and implementation of the Ecosphere Ozonix technology in the energy industry. On November 12, 2008, BCG notified the Company of its intent to immediately fund the first $500,000 with subsequent advances due by November 30, 2008 conditioned upon the results of laboratory testing at the Newfield pilot project site. The advances will be secured by Ozonix units deployed by the Company under the agreements with Newfield Exploration Co. and The Williams Companies. The loan will be due three years following the initial advance.

The funds from these operating and financing activities will help with short-term liquidity concerns, but the Company anticipates it needs to raise up to an additional $10 million over the next 12 months to meet its working capital and debt obligations. The Company's other short-term and long-term liquidity requirements are expected to result from working capital needs to build and deploy the Companys OzonixTM water filtration units, retire existing trade liabilities and to pay other operating expenses. Of the obligations due in the next twelve months, $2,415,000 consists of secured notes convertible at $0.15 per share and $1,611,111 of original issue discount notes convertible at $0.36 per share. In addition, the Company must pay $1,151,876 of the remaining principal of its senior convertible debentures in December 2009, unless they are converted at $0.15 per share.  If the Company enters into a long-term agreement with a major energy company, it anticipates that it will be able to finance its capital requirements. Otherwise, the Company will need to refinance its existing indebtedness and / or raise additional capital.

Obligations are being met on a month-to-month basis as cash becomes available. There can be no assurances that the Companys present flow of cash will be sufficient to meet current and future obligations. The Company has incurred losses since its inception, and continues to require additional capital to fund operations and development. As such, the Companys ability to pay its already incurred obligations is mostly dependent on the Company achieving its revenue goals or raising additional capital in the form of equity or debt. The Company is currently focused on the frac flowback water recycling opportunities in the Barnett Shale area of Texas and the Woodford and Arkoma basins of Oklahoma and Colorado.

RELATED PERSON TRANSACTIONS



For information on related party transactions and their financial impact, see Note 11 to the Condensed Consolidated Financial Statements (Unaudited).

Principal Accounting Estimates

In response to the SECs financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has selected its most subjective accounting estimation process for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Companys financial condition. The accounting estimate is discussed below. This estimate involves certain assumptions that if incorrect could create a material adverse impact on the Companys results of operations and financial condition.

Stock-Based Compensation

Under Statement of Financial Accounting Standards No. 123, Share-Based Payment (revised 2004) or Statement 123(R), which was effective as of January 1, 2006, we recognize an expense for the fair value of our outstanding stock options as they vest, whether held by employees or others.

We estimate the fair value of each stock option and warrant at the grant date using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 7 to the unaudited condensed consolidated financial statements contained in this Report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our managements opinion, the existing models may not necessarily provide a reliable single measure of the fair value of such stock options.





24



---





ECOSPHERE TECHNOLOGIES, INC.

FORWARD-LOOKING STATEMENTS

The statements in this Report relating to our future liquidity and successful completion of the Pilot Program are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally, words such as expects, anticipates, intends, believes, will and similar words are used to identify forward-looking statements.

Some or all of the results anticipated by these forward-looking statements may not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include, but are not limited to, operation of the Companys Ozonix unit in the field, internal issues relating to Newfield and Williams including their acceptance of the performance of the units and the condition of the capital and financial markets. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors contained in our Form 10-KSB for the year ended December 31, 2007.

Item 3.

Qualitative and Quantitative Disclosures about Market Risk

Not applicable to smaller reporting companies

Item 4.

Controls and Procedures

Not applicable to smaller reporting companies

Item 4T.

Controls and Procedures

Disclosure Controls

We carried out an evaluation required by Rule 13a-15(b) of the Securities Exchange Act of 1934 or the Exchange Act under the supervision and with the participation of our management, including our Principal Executive Officers and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in an issuer's reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) information is accumulated and communicated to management, including our Principal Executive Officers and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The evaluation of our disclosure controls and procedures included a review of our objectives and processes and effect on the information generated for use in this Report. This type of evaluation is done quarterly so that the conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. We intend to maintain these controls as processes that may be appropriately modified as circumstances warrant.

Based on their evaluation, our Principal Executive Officers and Principal Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information which is required to be included in our periodic reports filed with the SEC as of the filing of this Report.

Changes in Internal Controls Over Financial Reporting

During the three months ended September 30, 2008, the Company made no changes in the control procedures related to financial reporting.





25



---





ECOSPHERE TECHNOLOGIES, INC.

PART II  OTHER INFORMATION

Item 1.

Legal Proceedings.

None.

Item 1A.

Risk Factors.

Not applicable to smaller reporting companies.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

During the quarter, we have sold securities without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(2) and Rule 506 thereunder as described below. Unless stated, all securities are shares of common stock.

|                                  |                                                |                                                                                                                                                                                                                                       |                                                                                 
|--------------------------------- | ---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------
|Name or Class of Investor         | Date Sold                                      | No. of Securities                                                                                                                                                                                                                     | Reason for Issuance                                                             
|Secured Line of Credit Investors  | August 27, 2008 through October 3, 2008        | $1,361,111 of convertible notes exercisable at $0.36 per share                                                                                                                                                                        | Providing financing                                                             
|Ecosphere Noteholders             | August 28, 2008 and September 11, 12 &18, 2008 | 6,516,435                                                                                                                                                                                                                             | Shares issued to noteholders at $0.15 per share upon conversion of notes payable
|Executive Officer                 | September 3, 2008                              | 450,000                                                                                                                                                                                                                               | Finders fee                                                                    
|Advisory Board Members            | September 3, 2008                              | 156,250 stock options and stock appreciation rights granted in tandem exercisable at $0.48 per share                                                                                                                                  | For service as an advisory board member                                         
|Executive Officer                 | September 3, 2008                              | 1,500,000 stock options and stock appreciation rights granted in tandem of which (i) 500,000 are exercisable at $0.42 per share, (ii) 500,000 are exercisable at $0.85 per share and (iii) 500,000 are exercisable at $1.10 per share | Employment as an executive officer                                              
|Consultant                        | September 5, 2008                              | 59,524                                                                                                                                                                                                                                | Consulting services                                                             
|Holder of Convertible Debentures  | September 5, 8,12 & 23, 2008                   | 1,324,380                                                                                                                                                                                                                             | Partial conversion of convertible debentures                                    
|Holders of Convertible Debentures | September 5, 8 & 23, 2008                      | 14,125                                                                                                                                                                                                                                | Shares issued in lieu of paying cash interest on senior convertible debentures  
|Warrantholder                     | September 12, 2008                             | 703,557                                                                                                                                                                                                                               | Exercise of warrants                                                            
|Holder of Stock Options           | September 16, 2008                             | 60,000                                                                                                                                                                                                                                | Exercise of stock options                                                       
|Warrantholder                     | October 6, 2008                                | 1,532,710                                                                                                                                                                                                                             | Exercise of warrants                                                            
|Holders of Preferred Stock        | October 23 & 28, 2008                          | 12,000                                                                                                                                                                                                                                | Conversion of preferred stock                                                   





26



---





ECOSPHERE TECHNOLOGIES, INC.

Item 3.

Defaults Upon Senior Securities.

Not applicable

Item 4.

Submission of Matters to a Vote of Security Holders.

Not applicable

Item 5.

Other Information.

Not applicable

Item 6.

Exhibits.

(a) Exhibits



|               |  |                                                                                                                            
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|               |  |                                                                                                                            
|Exhibit
Number |  | Description                                                                                                                
|3.1            |  | Certificate of Incorporation (1)                                                                                           
|3.2            |  | Bylaws (1)                                                                                                                 
|3.3            |  | Amendment to Bylaws (adopted June 17, 2008)                                                                                
|10.1           |  | Secured Line of Credit Agreement dated May 12, 2008                                                                        
|10.2           |  | Secured Line of Credit Agreement dated August 28, 2008                                                                     
|10.3           |  | Form of Stock Option Agreement in Warrant/Option Exchange Offer (2)                                                        
|10.4           |  | Summary of Patrick Haskell Compensation Arrangement (3)                                                                    
|10.5           |  | Summary of Dennis McGuire Compensation Arrangement (3)                                                                     
|10.6           |  | Summary of Adrian Goldfarb Compensation Arrangement (3)                                                                    
|10.7           |  | Summary of Michael R. Donn, Sr. Compensation Arrangement (3)                                                               
|10.8           |  | Summary of Robert Barratta Note Extension Agreement (3)                                                                    
|10.9           |  | First Amendment to the 2006 Equity Incentive Plan                                                                          
|10.10          |  | Second Amendment to the 2006 Equity Incentive Plan                                                                         
|10.11          |  | Gordon Goodman Settlement Agreement (3)                                                                                    
|10.12          |  | Bledsoe Capital Group, LLC Exclusive Option Agreement                                                                      
|10.13          |  | Bledsoe Capital Group, LLC Credit Agreement                                                                                
|31.1
31.2      |  | Certification of co-Principal Executive Officer (Section 302)
Certification of co-Principal Executive Officer (Section 302)
|31.3           |  | Certification of Principal Financial Officer (Section 302)                                                                 
|32.1
32.2      |  | Certification of co-Principal Executive Officer (Section 906)
Certification of co-Principal Executive Officer (Section 906)
|32.3           |  | Certification of Principal Financial Officer (Section 906)                                                                 



(1)

Contained in Form 10-QSB filed on December 11, 2006.

(2)

Contained in Form 10-KSB filed on April 15, 2008.

(3)

Contained in Form 10-Q filed on August 14, 2008.







27



---





ECOSPHERE TECHNOLOGIES, INC.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|                  |  |                                                                          
|----------------- |  | -------------------------------------------------------------------------
|                  |  |                                                                          
|                  |  | ECOSPHERE TECHNOLOGIES, INC.                                             
|                  |  |                                                                          
|                  |  |                                                                          
|November 12, 2008 |  | /s/ Dennis McGuire                                                       
|                  |  | Dennis McGuire                                                           
|                  |  | President and Co-Chief Executive Officer
(Co-Principal Executive Officer)
|                  |  |                                                                          
|                  |  |                                                                          
|November 12, 2008 |  | /s/ Patrick Haskell                                                      
|                  |  | Patrick Haskell                                                          
|                  |  | Chairman and Co-Chief Executive Officer
(Co-Principal Executive Officer) 
|                  |  |                                                                          
|                  |  |                                                                          
|November 12, 2008 |  | /s/ Adrian Goldfarb                                                      
|                  |  | Adrian Goldfarb                                                          
|                  |  | Chief Financial Officer
(Principal Financial Officer)                    















28