UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





Form
      10-KSB





x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(D) OF THE


SECURITIES
      EXCHANGE ACT OF 1934


For
      Fiscal Year Ended


December
      31, 2006





Commission
      File # 033-31067





ECO 2 PLASTICS, INC.


(Exact
      name of registrant as specified in its charter)





Delaware


(State
      or
      other jurisdiction of incorporation or organization)





31-1705310


(IRS
      Employer Identification Number)





5300
      Claus Rd.


Riverbank,
      CA 95367


(Address
      of principal executive offices)(Zip Code)





209-848-3900


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





Itec
      Environmental Group, Inc.


(Former
      name, former address and former fiscal year, if changed since last
      report)





Securities
      registered pursuant to Section 12(b) of the Act: None


Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par
      Value




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B not contained in this form, and no disclosure will be contained,
      to the best of the registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. Yes x





Revenues
      for year ended December 31, 2006 were $61,000.





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one): Non-accelerated filer x





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


Yes
o No x





The
      aggregate market value of the voting common stock held by non-affiliates of
      the Company as of December 31, 2006 was approximately $10,402,131 based upon
      69,347,539  shares
      held by such persons and the closing price of $0.15 per share on that
      date.  Shares of common stock held by each officer and director and by each
      person who owns 10% or more of the outstanding common stock have been excluded
      because these perople may be deemed to be affiliates.  The determination of
      affiliate status is not necessarily a conclusive determination for any other
      purpose.





The
      registrant does not have any non-voting stock outstanding.





Number
      of
      shares of the registrant's common stock outstanding as of March 28, 2007 was
      145,415,537.




1




**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**





**Business
      Description**





Founded
      in 1999 and based in Riverbank, California, ECO 2 Plastics, Inc., a Delaware corporation (“ECO 2 ”
or
      the
“Company”), is a publicly-traded company (OTCBB: ECOO), that has developed a
      unique and revolutionary patent pending process and system, referred to as
      the
      ECO 2 Environmental System (the “ECO 2 Environmental System”). The ECO 2 Environmental
      System cleans post-consumer plastics, without the use of water, at a substantial
      cost savings versus traditional methods (the “Process”). This Process is
      licensed from Honeywell FM&T (“Honeywell”) and the Department of Energy
      (“DOE”) on an exclusive basis for the life of the patent. Since inception,
      ECO 2 has
      invested in the development of the technology and equipment comprising the
      Eco 2 Environmental System, which includes the filing of a new “Process Patent” in May
      2005. This also included building several scaled up versions of the Prototype
      ECO 2 Environmental System (the “Prototype”), testing of the Prototypes, building a
      pilot plant, evaluating the product produced by the Prototype and real-time
      testing. The Company’s first full scale production facility was constructed in
      Riverbank, California and is now mechanically complete, producing saleable
      product and ramping up to full scale operations. ECO 2 ’s
      goal
      is to build and operate plastic recycling plants (the “ECO 2 Plants”)
      in the USA that utilize the ECO 2 Environmental System and to expand the ECO 2 Environmental System worldwide. ECO 2 ’s
      growth
      strategy includes organic growth, strategic acquisitions and licensing or
      partnership agreements, where appropriate.





In
      August
      2004, the State of California Integrated Waste Management Board (“CIWMB”),
      through the Recycle Market Development Zone Loan (“RMDZ”) Program, approved a $2
      million “matching funds loan” to assist ECO 2 in
      building a plant in California. In order to qualify for the loan the Company
      leased a 58,000 square foot building in Riverbank, California with a 5 year
      lease, which includes a 5 year option. The matching funds loan was allowed
      to be
      released from an escrow account in draws based on certain criteria including
      the
      presentation of invoices for equipment and when ECO 2 deposited
      $600,000 into the escrow account. The matching funds loan was used to complete
      Stage 1 and Stage 2 of the plant in Riverbank, California (the 
“Plant”).





The
      Plant
      is strategically located between the San Francisco bay area and the greater
      Sacramento metropolitan area. The Company believes that this strategic location
      will allow ECO 2 to
      provide convenient access for the generators of the feedstock (bales of plastic
      bottles) from approximately 10 million residential customers.





ECO 2 intends
      to locate its second plant in the greater Los Angeles basin, which is home
      to
      approximately 18.5 million residential customers. ECO 2 ’s
      research indicates that the greater Los Angeles basin generates an enormous
      amount of plastic containers. The Company has engaged a team of engineers to
      conduct the preliminary design efforts and has engaged a team of location and
      logistics specialists to support the Company in the site selection process
      currently underway. In addition, a strong case can be made for a third
      ECO 2 facility
      in San Diego County, which has both a significant population, strong continued
      growth and an ample supply of feedstock from Mexico. The Company buys its
      feedstock for an average of $0.23 per pound and sells the finished clean flake
      for an average of $0.50 per pound. Each plant the Company builds has a potential
      revenue stream of approximately $30 million per year.





Construction
      of the Plant is mechanically complete and has begun ramping up to full scale
      operations. Based on the current production runs, the company believes that
      the
      Plant will produce approximately 60 million pounds of clean, clear flake at
      optimal throughput.




ECO 2 has
      secured a supply of raw material from the major collectors of the post consumer
      used beverage containers in California, as well as from several independent
      sources. Approximately 400 million pounds of material is shipped annually from
      the western United States through ports in California to Asian buyers.





ECO 2 believes
      it can utilize extensive contacts within the USA plastic container collection
      and processing industries to its benefit. Through these contacts,
      ECO 2 and
      its
      strategic alliance partners, as specifically identified below, conservatively
      have access to over 60% of the domestically available Polyethylene Terephthalate
      (“PET”) and High Density Polyethylene (“HDPE”) post-consumer container streams.
      For example, ECO 2 and
      its
      team have established high level contacts at the following companies: Waste
      Management (“WM”), Recycle America Alliance (a division of WM), Allied Waste
      Industries, Republic Services, Waste Connections (all of which are publicly
      traded companies on the New York Stock Exchange) and Smurfit Stone Container
      (which is publicly traded on NASDAQ). These companies generate more plastic
      flake than ten ECO 2 plants
      would be capable of processing. ECO 2 believes
      it can secure feedstock agreements with these companies on a regional
      basis.





ECO 2 also
      intends to use its contacts with large regional waste haulers and recyclers.
      These companies cover vast regions of the USA (i.e., Northeast, Midwest,
      Southwest and West Coast), and include: Norcal Waste Systems, Rumpke
      Consolidated Companies, Allan Company, Casella Waste Systems (which is publicly
      traded on NASDAQ), EDCO Disposal Corporation, Burtech Waste Industries, Waste
      Industries (which is publicly traded on NASDAQ) and IESI. These companies are
      an
      enormous source of PET and HDPE containers. ECO 2 can
      utilize its relationships and technology to secure feedstock from these
      companies on an “as needed” basis.




2




Additional
      feedstock sources include public and private waste haulers (municipalities
      and
      counties) and recyclers who conduct the most plastic container collection and
      processing throughout the USA. Selected cities and counties such as Santa Monica
      (CA), Houston (TX) and Lufkin (TX) still provide theses services to their
      communities. ECO 2 and
      its
      Strategic Alliance Partners have contacts within these government agencies,
      as
      well as other communities that provide these services.





Approximately
      one year ago, a representative approached ECO 2 from the
      Vehicle Recycling Program (the “URP”) of USCAR, a research consortium formed by
      General Motors, Ford and Chrysler. ECO 2 was
      asked to develop a solution for the removal of PCB residue on plastic generated
      as a by-product of auto shredder operations (“Auto Shredder Fluff”).
      Approximately 2.5% of a car’s weight is comprised of various forms of plastic.
      This plastic ends up in the Auto Shredder Fluff with the resultant plastic
      often
      contaminated with harmful PCB’s. Obviously this is a significant problem for
      auto manufacturers, both economically and from a public relations and liability
      standpoint. ECO 2 has
      tested contaminated samples submitted by the representative and has successfully
      cleaned the plastic to acceptable environmentally safe levels. ECO 2 is
      confident that these additional tests will result in further proof that its
      technology for the removal of PCB residue is state of the art. The VRP has
      granted the Company approximately $100,000 to further study the possibility
      of
      using the ECO 2 Environmental System to mitigate PCB contamination in Auto Shredder Fluff.
      Should the results of the study prove to be positive, the VRP would then engage
      the Company to build a plant in Detroit to produce 4,000 pounds of flake per
      hour. Once successful, the VRP has suggested the possibility to build additional
      ECO 2 plants
      to
      clean and consume the plastic domestically.




Further,
      ECO 2 believes
      that the international market for ECO 2 ’s
      products and services is substantial and has received multiple inquiries
      regarding the potential for construction of ECO 2 plants
      around the world. In most cases internationally, ECO 2 will
      be
      able to secure the plant feedstock for lower cost (versus $0.23 per pound in
      the
      USA), which should increase ECO 2 ’s
      operating profit margins.




In
      February 2005, ECO 2 entered
      into a three year “Agency Agreement” with H. Muehlstein & Co., Inc.
      (“Muehlstein”), pursuant to which Muehlstein will act as ECO 2 ’s
      exclusive agent for the annual sale of up to 60 million pounds of
      ECO 2 ’s
      PET
      flake and post-consumer HDPE natural flake and pellets in the USA and Canada.
      Muehlstein is willing to expand that number as ECO 2 builds
      additional plants throughout the USA.





In
      2006,
      ECO 2 spent
      approximately $2 million on research and development and approximately $303,000
      in 2005.





As
      of
      March 15, 2007, ECO 2 had
      approximately 59 full time employees and 2 part-time employees.





Competition





Currently,
      70% of the materials collected west of the Mississippi are exported to China
      in
      the form of bales of crushed plastic bottles and containers. The Plastics
      Recycling Container Corporation (“PRCC”) is responsible for the collection of
      over 100 million pounds of plastic beverage containers annually.





Despite
      growing demand in California for ECO 2 ,
      there
      is currently no significant competition in the PET or HDPE segments of the
      market west of the Mississippi. Wellman, which is publicly traded on the New
      York Stock Exchange and is ECO 2 ’s
      largest competitor, is located in the eastern USA, and they use the higher
      cost,
      less effective water-wash recycling system. There are several small companies
      in
      North Carolina that wash PET, but they are also handicapped by their dependence
      on the water-wash systems for processing. ECO 2 is
      the
      only company that washes PET using the Eco 2 Environmental System, and as an end result, offers substantial operating
      efficiency advantages, and significant positive environmental
      benefits.





**ITEM
      2. DESCRIPTION OF PROPERTY**





The
      Company does not own any real property. ECO 2 has
      entered into a 5 year lease agreement with a 5 year option on a 58,000 sq.
      ft.
      steel frame building in the heavy industrial complex in Riverbank, California.
      The agreement includes a 3,500 sq. ft. of office space.





**ITEM
      3. LEGAL PROCEEDINGS**





On
      or
      about November 3, 2006, Brean Murray Carret & Co., LLC (“BMC”) filed a claim
      for arbitration against ECO 2 and it’s
      Chairman and CTO, Gary De Laurentiis, with the National Association of
      Securities Dealers. BMC is alleging that their service agreement with
      ECO 2 ,
      dated
      May 9, 2005, was breached and that they are due fees and expenses in excess
      of
      $1 million. On or about January 30, 2007, ECO 2 filed
      its
      answer, affirmative defenses and counterclaims in response to BMC’s claim.
      ECO 2 ’s
      counterclaim against BMC alleges, among other things, that BMC breached their
      service agreement with ECO 2 ,
      unjust
      enrichment, fraud, misrepresentation and unlawful contract. The relief sought
      by
      ECO 2 estimates
      damages of $36 million and requests attorney fees and other miscellaneous costs
      and the cancellation of BMC’s common stock certificates and common stock
      purchase warrant.





The
      Company is unaware of any other threatened or pending litigation against it
      not
      in the ordinary course of business.




3




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





Not
      applicable.




4




**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





As
      of
      March 28, 2007, ECO 2 Plastics,
      Inc. had 145,415,537 shares of common stock issued and outstanding and had
      approximately 893 stockholders of record. There are 0 shares of preferred stock
      issued and outstanding.





ECO 2 ’s
      common
      stock is not traded on a registered securities exchange, or the NASDAQ.
      ECO 2 ’s
      common
      stock is quoted on the National Association of Securities Dealers OTC Bulletin
      Board. The following table sets forth the range of high and low bid quotations
      for each fiscal quarter for the past two (2) years. These quotations reflect
      inter-dealer prices without retail mark-up, mark-down, or commissions, and
      may
      not necessarily represent actual transactions.





FISCAL
                QUARTER ENDING
            
            
            HIGH
                BID
            
            
            LOW
                BIDDecember
                31, 2006
            
            $
            .16
            
            $
            .11September
                30, 2006
            
            $
            .15
            
            $
            .10June
                30, 2006
            
            $
            .16
            
            $
            .11March
                31, 2006
            
            $
            .14
            
            $
            .10December
                31, 2005
            
            $
            .18
            
            $
            .11September
                30, 2005
            
            $
            .28
            
            $
            .05June
                30, 2005
            
            $
            .15
            
            $
            .06March
                31, 2005
            
            $
            .31
            
            $
            .06





On
      March
      28, 2007, the closing price was $0.20 per share.




We
      have
      never declared or paid cash dividends to our stockholders. We currently intend
      to retain all available funds and any future earnings for use in the operation
      of our business and we do not anticipate declaring or paying cash dividends
      for
      the foreseeable future.





Securities
      authorized for issuance under equity compensation plans as of December 31,
      2006:




**Equity
                  Compensation Plan
                  Information**
 Plan
                  Category
              
              
              Number
                  of securities tobe
                  issued upon exerciseof
                  outstanding options,warrants
                  and rights (a)
              
              
              Weighted-averageexercise
                  price ofoutstanding
                  options,warrants
                  and rights (b)
              
              
              Number
                  of securitiesremaining
                  available forfuture
                  issuance underequity
                  compensation
                plans
                  (excludingsecurities
                  reflected incolumne
                  (a))
 Equity
                compensationplans
                approved bysecurity
                holders
              
              
              N/A
              
              
              N/A
              
              
              N/AEquity
                compensationplans
                not approved bysecurity
                holders
              
              
              4,457,370
              (1)
              $
              .06
              
              
              N/A15,000,000
              (2)
              
              Price
                  as listed on theOTCBB
                  at the time ofissuance.
              
              
              5,150,00019,500,000
              (3)
              $
              .06
              
              
              N/A1,500,000
              (4)
              $
              .06
              
              
              N/A750,000
              (5)
              $
              .06
              
              
              N/A500,000
              (6)
              $
              .06
              
              
              N/A1,000,000
              (7)
              $
              .06
              
              
              N/A12,000,000
              (8)
              $
              0.0975
              
              
              12,000,000
 (1)
                Consists
                    of a warrant issued by the Company to Gary De Laurentiis, its
                    Chairman and
                    CTO, pursuant to which Mr. De Laurentiis may purchase up to 2,457,370
                    shares of common stock of the Company, exercise price of $.06
                    per share
                    and a Warrant issued by the Company pursuant to which Mr. De
                    Laurentiis
                    may purchase up to 2,000,000 shares of common stock of the Company
                    at a
                    price of $.06 per share. These warrants were fully assigned and
                    cancelled
                    on August 11, 2005.
 5




(2)
            2005
                Stock Plan of the Company adopted by the Board of Directors on January
                28,
                2005. The 2005 Stock Plan (the “Plan”) was adopted by the Board of
                Directors as a method to compensate company employees, directors
                and
                non-employee independent contractors that provide services to the
                Company.
                The Plan is administered by the two non-employee directors of the
                Company
                based upon recommendations for issuances by the Company’s
                CTO.





(3)
            Consists
                of a warrant issued by the Company to Gary De Laurentiis, its Chairman
                and
                CTO, pursuant to which Mr. De Laurentiis may purchase up to 20,000,000
                shares of common stock of the Company, exercise price of $.06 per
                share.
                While the Company authorized the warrant in the amount of 20,000,000
                shares, simultaneous with the issuance of the warrant Mr. De Laurentiis
                transferred the rights represented by the warrant in the right to
                buy
                500,000 shares of common stock of the company to another. Accordingly,
                the
                presentation of the warrant in this report has been limited to the
                19,500,000 shares the right to purchase Mr. De Laurentiis actually
                received. In connection with various assignments made from this warrant
                to
                other related and unrelated parties, Mr. De Laurentiis can purchase
                up to
                11,636,111 shares of common stock of the Company in accordance with
                this
                warrant.





(4)
            Consists
                of a warrant issued by the Company to David M. Otto, corporate counsel
                to
                the Company, pursuant to which Mr. Otto may purchase up to 1,000,000
                shares of common stock of the Company, exercise price of $.06 per
                share
                and a warrant issued by the Company to Mr. Otto pursuant to which
                he may
                purchase up to 500,000 shares of common stock of the Company, exercise
                price of $.06 per share.




(5)
            Consists
                of a warrant issued by the Company to Frederick W. Smith, Jr., its
                former
                Chief Financial Officer, pursuant to which Mr. Smith may purchase
                up to
                500,000 shares of common stock of the Company, exercise price of
                $.06 per
                share and a warrant issued by the Company pursuant to which Mr. Smith
                may
                purchase up to 250,000 shares of common stock of the Company at an
                exercise price of $.06 per share.




(6)
            Consists
                of a warrant issued by the Company to George Kanakis, a former Director,
                pursuant to which Mr. Kanakis may purchase up to 500,000 shares of
                common
                stock of the Company, exercise price of $.06 per
                share.




(7)
            Consists
                of a warrant issued by the Company to Jeffrey Chartier, a former
                Director,
                pursuant to which Mr. Chartier may purchase up to 1,000,000 shares
                of
                common stock of the Company, exercise price of $.06 per
                share.





(8)
            Consists
                of a warrant issued by the Company to Mario Sandoval, its Chief Operating
                Officer, pursuant to which Mr. Sandoval may purchase up to 12,000,000
                shares of common stock of the Company, exercise price of $0.0975
                per
                shares. This warrant was issued in accordance with Mr. Sandoval’s
                employment agreement, dated October 20, 2006. Under this agreement,
                Mr.
                Sandoval is to receive a total of 24,000,000 warrant shares, of which
                12,000,000 have vested.





**Recent
      Sales of Unregistered Securities**





During
      the period covered by this 10-KSB, the Company sold the following securities
      which were not registered under the Securities Act of 1933 (the “Act”) and not
      reported on any other form:





As
      of
      December 31, 2006, ECO 2  received
      subscriptions and related funds into escrow pursuant to a private placement
      memorandum (the “PPM”) of up to $9 million, through the offering of a minimum of
      20 Units for $25,000 per unit. The offering was made to “accredited
      investors” as defined in Rule 501(a) under the Securities Act of 1933 and
      pursuant to Section 506 under the Securities Act. Each
      Unit
      consists of a $25,000 junior secured subordinated convertible debenture (the
      “Private Placement Notes”), bearing interest at 10% with principal and accrued
      interest due 18 months from issuance (“maturity date”), convertible into shares
      of the Company’s common stock at a price of $0.0975 per share, and a warrant,
      with a cashless exercise provision, to purchase 75,000 shares of restricted
      common stock of the Company, exercisable for approximately 10 years (expires
      April 15, 2015) at an exercise price of $0.06 per share (the “Private Placement
      Warrants”). KW
      Securities Corporation, a California corporation, (“KW”) served as the
      underwriter for the PPM. KW received, as a fee for services rendered, a common
      stock purchase warrant to purchase 14,625,000 shares of the Company’s common
      stock with a $0.06 per share strike price/cashless. As of
      December 31, 2006, the offering had not closed and the debentures and warrants
      not been issued. On February 1, 2007, the offering closed with a total of $8
      million raised. Subsequent to the close of the PPM, a total of $8 million
      Private Placement Notes were issued and a total of 24 million Private Placement
      Warrants were issued.





6





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





FORWARD
      LOOKING STATEMENTS CAUTIONARY





*This
      Item 6 and the December 31, 2006 Annual Report on Form 10-KSB may contain
“forward-looking
      statements.”
      In some cases, you can identify forward-looking statements by terminology such
      as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or
      the negative of such terms and other comparable terminology. These
      forward-looking statements include, without limitation, statements about our
      market opportunity, our strategies, competition, expected activities and
      expenditures as we pursue our business plan, and the adequacy of our available
      cash resources. Although we believe that the expectations reflected in any
      forward-looking statements are reasonable, we cannot guarantee future results,
      levels of activity, performance or achievements. Actual results may differ
      materially from the predictions discussed in these forward-looking statements.
      Changes in the circumstances upon which we base our predictions and/or
      forward-looking statements could materially affect our actual results.
      Additional factors that could materially affect these forward-looking statements
      and/or predictions include, among other things: (1) our limited operating
      history; (2) our ability to pay down existing debt; (3) our ability to retain
      the professional advisors necessary to guide us through our corporate
      restructuring; (4) the risks inherent in the investigation, involvement and
      acquisition of a new business opportunity; (5) unforeseen costs and expenses;
      (6) potential litigation with our shareholders, creditors and/or former or
      current investors; (7) the Company's ability to comply with federal, state
      and
      local government regulations; and (8) other factors over which we have little
      or
      no control.*





**Business** **–**  ECO 2 Plastics, Inc. (f.k.a. Itec Environmental Group, Inc.) and its wholly-owned
      subsidiary , ECO 2 Environmental Systems, Inc.,  were
      incorporated under the laws of the State of Delaware in 2000, and formed for
      the
      purpose of acquiring certain patented technology and the development of a
      worldwide market for its usage. Unless the context indicates otherwise, all
      references herein to “ECO 2 ”
or
      the
“Company” include ECO 2 Plastics, Inc and its
      wholly-owned inactive subsidiary. In March 2007, the Company changed its name
      to ECO 2 Plastics, Inc.





In
      August
      2004, the State of California Integrated Waste Management Board (“CIWMB”),
      through the Recycle Market Development Zone Loan Program, approved a $2,000,000
      “matching funds loan” to assist ECO 2 in
      building a plant in California. In order to qualify for the loan the Company
      leased a 58,000 square foot building with a 5 year lease, which includes a
      5
      year option. The matching funds loan was allowed to be released from an escrow
      account in draws based on certain criteria including the presentation of
      invoices for equipment and when ECO 2 deposited
      $600,000 into the escrow account. The matching funds loan was used to complete
      Stage 1 and Stage 2 of the plant.





Based
      in
      Riverbank, California, ECO 2 has
      developed a unique and revolutionary patent pending process and system, referred
      to as the ECO 2 Environmental
      System (the “ECO 2 Environmental System”). The Eco 2 Environmental System cleans post-consumer plastics, without the use of water,
      at
      a substantial cost savings versus traditional methods (the “Process”). This
      Process is licensed from Honeywell FM&T (“Honeywell”) and the Department of
      Energy (“DOE”) on an exclusive basis for the life of the patent. Since its
      inception, ECO 2 has
      invested in the development of the technology and equipment comprising the
      Eco 2 Environmental System, which includes the filing of a new “Process Patent” in May
      2005. This included building several scaled up versions of the Prototype
      ECO 2 Environmental System (the “Prototype”), testing of the Prototypes, building a
      pilot plant, evaluating the product produced by the Prototype and real-time
      testing. The Company’s first full scale production facility was constructed in
      Riverbank, California and is now mechanically complete, producing saleable
      product and ramping up to full scale operations. ECO 2 ’s
      goal
      is to build and operate plastic recycling plants (the “ECO 2 Plants”)
      in the USA that utilize the Eco 2 Environmental System and to expand the Eco 2 Environmental System worldwide. ECO 2 ’s
      growth
      strategy includes organic growth, strategic acquisitions and licensing or
      partnership agreements, where appropriate.





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




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





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




7




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





Accounting
      for Derivatives –
      The Company
      evaluates its convertible debt, options, warrants or other contracts to
      determine if those contracts or embedded components of those contracts qualify
      as derivatives to be separately accounted for under Statement of Financial
      Accounting Standards 133 “Accounting for Derivative Instruments and Hedging
      Activities” and related interpretations including EITF 00-19 “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company’s Own Stock”. Under certain circumstances, the result of this accounting
      treatment is that the fair value of the derivative is marked-to-market each
      balance sheet date and recorded as a liability. In the event that the fair
      value
      is recorded as a liability, the change in fair value is recorded in the
      consolidated statement of operations as other income or expense. Upon conversion
      or exercise of a derivative instrument, the instrument is marked to fair value
      at the conversion date and then that fair value is reclassified to equity.
      Equity instruments that are initially classified as equity that become subject
      to reclassification under SFAS 133 are reclassified to liability at the fair
      value of the instrument on the reclassification date.





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




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




Stock-based
      compensation –
      The Company did
      not issue options or warrants to employees prior to 2005. Effective January
      1,
      2005, the Company accounts for all options and warrant grants to employees
      and
      consultants in accordance with SFAS 123R, which requires recording an expense
      over the requisite service period for the fair value of all options or warrants
      granted employees and consultants.





Results
      of Operations -
      R evenues
      were $61,000 during 2006 as compared to $0 in 2005. Revenues in 2006 are the
      result of commencing recycling operations and initial sales of recycled product.
      Production was temporarily stopped during the year in order to upgrade, expand
      and retool the production line. Revenues are expected to continue to increase
      in
      future periods. The absence of revenues in 2005 was the result of a change
      in
      business strategy from the marketing of equipment and licensing of the System
      technology, to building our own plant for the recycling of plastic.




Total
      operating expenses for 2006 approximated $14.9 million compared with $10.5
      million in 2005. Operating expenses increased during 2006 due to increases
      in
      general and administrative expenses, due primarily to non-cash stock-based
      compensation of approximately $7.6 million relating to equity awards issuable
      in
      connection with employment agreements entered into with the Company’s Chief
      Executive Officer, Chief Technical Officer and Chief Operating Officer and
      related recruiter fees payable in equity securities, and increases in technology
      development expenses, offset by decreases in consulting and legal expenses
      due
      to fewer equity based awards to consultants during 2006 as compared to 2005.




The
      Company recorded interest expense of approximately $4.7 million in 2006 as
      compared to $4.5 million in 2005. Interest expense in 2006 and 2005 includes
      amortization of debt issue costs and debt discount of approximately $4.6 million
      and $1.9 million, respectively. The increase in interest expense for 2006 as
      compared to the prior year is due to increased average borrowings during 2006.




During
      2006, the Company recorded other expense of approximately $1.2 million relating
      to the change in fair value liability of warrants and derivatives and compared
      to other expense of $2.2 million in 2005. The primary reason for the decrease
      in
      expense as compared to the prior year is due to a decrease in stock
      price.




8




The
      Company’s net loss increased $5.5 million to approximately $20.8 million for
      2006 from $15.3 million for 2005 due primarily to the increase in loss from
      operations of approximately $4.4 million, due primarily to increased non-cash
      stock based compensation in 2006.





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





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




At
      December 31, 2006, we had a working capital deficit of approximately $3.2
      million, compared to a working capital deficit of $7.4 million at December
      31,
      2005 (which included $3.6 million of fair value liabilities for warrants and
      embedded derivatives, or $3.8 million excluding fair value liabilities).
 At December 31, 2006, we had total assets of approximately $10.3 million
      and a total stockholders’ equity of approximately $2.7 million compared with
      total assets of approximately $3.1 million and total stockholder's deficit
      of
      approximately $6.5 million at December 31, 2005.




During
      2006 cash used by operating activities increased to approximately $4.1 million
      from $1.4 million during 2005, due primarily to an increase in net loss.





During
      2006, cash used by investing activities increased to approximately $3.6 million
      relating to capital expenditures on the recycling plant as compared to $2.7
      during 2005.





During
      2006, cash provided by financing activities increased to approximately $7.8
      million from $4.1 million during 2005. During 2006, the Company received
      proceeds of approximately $9.7 million (excluding approximately $1.2 million
      receivable for cash in escrow for securities sold) from sales of private
      placement units comprised of convertible promissory notes and warrants and
      subordinated notes and warrants. Also during 2006, the Company repaid $1.2
      million of notes payable.




At
      December 31, 2006, the Company does not have sufficient cash to meet its needs
      for the next twelve months. However, the Company continues to be in the process
      of raising funds, and Company management anticipates being able to raise
      sufficient cash to meet the Company’s needs in 2007. There is no guarantee,
      however, that our efforts will result in raising cash in amounts sufficient
      to
      meet the Company’s needs.




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





Recent
      accounting pronouncements - In May 2005, the FASB issued Statement of Financial
      Accounting Standards No. 154, “ *Accounting
      Changes and Error Corrections,* ”
(“SFAS
      154”). SFAS 154 replaces APB Opinion No. 20, “ *Accounting
      Changes* ,”
and
      SFAS No. 3, “ *Reporting
      Accounting Changes in Interim Financial Statements* ,”
and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. The Company adopted SFAS 154 in 2006. The Company’s
      consolidated results of operations and financial condition will only be impacted
      by SFAS 154 if the Company implements changes in accounting principles that
      are
      addressed by the standard or corrects accounting errors in future
      periods.





In
      November 2005, the FASB issued FASB Staff Position No. 123R-3,
“ *Transition
      Election Related to Accounting for the Tax Effects of Share-Based Payment
      Awards.* ”
The
      FSP
      provides an alternative method of calculating excess tax benefits (the APIC
      pool) from the method defined in SFAS123R for stock-based payments. A one-time
      election to adopt the alternate method in this FSP is available to those
      entities adopting SFAS 123R using either the modified retrospective or modified
      prospective method. The Company elected not to use this alternate method to
      calculate its APIC pool at adoption of SFAS 123R.





In
      February 2006, the FASB issued FASB Staff Position SFAS No. 123R-4
“ *Classification
      of Options and Similar Instruments Issued as Employee Compensation That Allow
      for Cash Settlement upon the Occurrence of a Contingent Event* .”
The
      FSP amends SFAS 123R for awards with contingent events that are not probable
      and
      outside the control of the employee that are settled in cash to classify such
      awards as an equity award. If the contingent event later becomes probable and
      the award had been reported as an equity award, the change in classification
      would be accounted for as a modification. This FSP did not have an impact on
      our
      consolidated financial statements or results of operations since we do not
      have
      such awards.





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




9




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, “ *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* ”
(“SAB
      108’).  SAB 108 provides interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement.  The SEC staff believes that
      registrants should quantify errors using both a balance sheet and income
      statement approach and evaluate whether either approach results in quantifying
      a
      misstatement that, when all relevant quantitative and qualitative factors
      considered, is material.  SAB 108 is effective for fiscal years ending on
      or after November 15, 2006, with early application encouraged.  Application
      of SAB 108 did not have a significant impact on the Company’s consolidated
      results of operations or financial position.





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ,”
which
      establishes guidelines for measuring fair value and expands disclosures
      regarding fair value measurements. SFAS No. 157 does not require any new fair
      value measurements, but rather it eliminates inconsistencies in the guidance
      found in various prior accounting pronouncements. SFAS No. 157 is effective
      for
      fiscal years beginning after November 15, 2007. Earlier adoption is encouraged
      provided financial statements, including for interim periods, for that fiscal
      year have not been issued. Although Company management is still evaluating
      the
      potential effects of SFAS No. 157, the adoption is not expected to have a
      material impact on the Company’s financial position, results of operations, or
      cash flows.





In
      October 2006, the FASB issued FASB Staff Position No. 123(R)-6 “ *Technical
      Corrections of FASB No. 123R* ”
(“FSP
      123(R)-6”). FSP 123(R)-6 amends certain provisions of SFAS 123(R) relating to,
      among other things, the definition of short-term inducement. The provisions
      of
      this FSP are to be applied in the first reporting period beginning after the
      FSP
      is posted to the FASB website. The application of the provisions of FSP 123(R)-6
      did not have a significant impact on the Company’s financial position, results
      of operations, or cash flows.





In
      October 2006, the FASB issued FASB Staff Position No. 123R-5, “ *Amendment
      of FASB Staff Position FAS 123(R)-1* ”
(“FSP
      123R-5”), which amends FSP 123R-1 for equity instruments that were originally
      issued as employee compensation and then modified, with such modification made
      to the terms of the instrument solely to reflect an equity restructuring that
      occurs when the holders are no longer employees. In such circumstances, no
      change in the recognition or the measurement date of those instruments will
      result if both of the following conditions are met: (i) there is no increase
      in
      fair value of the award (or the ratio of intrinsic value to the exercise price
      of the award is preserved, that is, the holder is made whole), or the
      antidilution provision is not added to the terms of the award in contemplation
      of an equity restructuring; and (ii) all holders of the same class of equity
      instruments (for example, stock options) are treated in the same manner. FSP
      123R-5 is not expected to have a significant impact on the Company’s
      consolidated results of operations or financial position.





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




10


**ITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**





**Executive
      Officers and Directors**




NAME
            
            
            AGE
            
            
            POSITIONRodney
                S. Rougelot
            
            
            43
            
            
            Director
                and Chief Executive Officer and Interim Chief Financial
                OfficerGary
                M. De Laurentiis
            
            
            61
            
            
            Director
                and Chief Technology OfficerDavid
                M. Otto
            
            
            48
            
            
            DirectorLawrence
                A. Krause
            
            
            66
            
            
            DirectorRonald
                Domingue
            
            
            44
            
            
            DirectorWilliam
                Whittaker
            
            
            57
            
            
            DirectorMario
                Sandoval
            
            
            43
            
            
            Chief
                Operating OfficerFrederick
                W. Smith, Jr.
            
            
            51
            
            
            Chief
                Financial Officer





Rodney
      S.
      Rougelot


Director,
      Chief Executive Officer and Interim Chief Financial Officer





Mr.
      Rougelot brings to ECO 2 over
      20
      years of extensive experience in recycling, operations, finance, and mergers
      and
      acquisitions. Upon graduating from Harvard Business School, Mr. Rougelot founded
      Recycling Resource, LLC (“Recycling Resource”) in 1991, which rapidly became one
      of the leading recycling companies in California. After Recycling Resource
      was
      acquired by Tomra Pacific, Inc. (“Tomra Pacific”) in 1998, Mr. Rougelot served
      as President of the commercial division, building Tomra Pacific into one of
      the
      largest beverage container recyclers in the United States. Most recently in
      2006, Mr. Rougelot was engaged through Stone Yamashita Partners as a strategic
      consultant with The Coca Cola Company. Mr. Rougelot has served as Director
      and
      Chief Executive Officer since July 2006 and was appointed interim Chief
      Financial Officer in February 2007.





Mr.
      Rougelot is not a director of any other public company, nor is he related to
      any
      officer, director or affiliate of the Company. Mr. Rougelot is not a party
      to
      any pending legal proceeding, nor has he been subject to a bankruptcy petition
      filed against him, nor been convicted in, or subject to, any criminal
      proceeding.





Gary
      M.
      De Laurentiis


Chairman
      and Chief Technology Officer





Mr.
      De
      Laurentiis has previously served as the Chairman, President and CEO since
      founding the Company in 1999. Mr. De Laurentiis was appointed Chief Technology
      Officer in July 2006. Mr. De Laurentiis has been active in the plastics
      recycling business for nearly twenty (20) years. In partnership with the Chinese
      Government, he designed and built his first plastics recycling plant in 1987.
      In
      the years since, he has designed, remodeled, built and operated plants in
      Mexico, North Carolina, Ohio, Florida, California and Canada for both local
      governments and private industries. From 1992 to 1995, Mr. De Laurentiis worked
      directly with the State Government in Campeche Mexico, living on-site for
      eighteen (18) months while directing the entire project. In 1996, an Ohio based
      group recruited Mr. De Laurentiis to open a shuttered recycling plant. Mr.
      De
      Laurentiis left the company in 1999 to start ECO 2 .
      From
      collecting, brokering, recycling and remanufacturing, to lobbying on behalf
      of
      the industry, Mr. De Laurentiis is intimately familiar with all levels of
      plastics recycling. The depth of Mr. De Laurentiis’ knowledge and his continuing
      search for newer, safer and more efficient ways to recycle waste has earned
      him
      the respect of his peers and the many regulatory agencies charged with
      protecting the environment that regularly call upon him for advice.





Mr.
      De
      Laurentiis is not a director of any other public company, nor is he related
      to
      any officer, director or affiliate of the Company. Mr. De Laurentiis is not
      a
      party to any pending legal proceeding, nor has he been subject to a bankruptcy
      petition filed against him, nor been convicted in, or subject to, any criminal
      proceeding.





David
      M.
      Otto


Director





Mr.
      Otto
      is a Seattle-based attorney and the President of The Otto Law Group, PLLC.
      Mr.
      Otto’s practice is focused on corporate finance, securities, mergers &
acquisitions, corporate law and governance. Mr. Otto began his practice on
      Wall
      Street in New York City in 1987 with the Hughes, Hubbard and Reed law firm,
      where he concentrated on significant corporate leveraged buyout and takeover
      transactions and equity and debt offerings for investment banks, venture capital
      firms and Fortune 1000 companies. In 1991, Mr. Otto moved to Seattle in order
      to
      dedicate his extensive experience to entrepreneurs, technology innovators,
      start-up and emerging growth businesses. In July 1999, Mr. Otto founded the
      Otto
      Law Group, PLLC in Seattle. Mr. Otto is a Director of Vocalscape Networks,
      Inc.,
      SinoFresh Healthcare, Inc., TechAlt, Inc. and Avisere, Inc. He is a member
      of
      the American Bar Association Committee on the Federal Regulation of Securities,
      Subcommittee on the 1933 Act and Chairman of the Legislation Subcommittee of
      the
      ABA’s Venture Capital and Private Equity Committee. Mr. Otto is admitted to
      practice law in New York and Washington. Mr. Otto earned an AB from Harvard
      University and a JD from Fordham University School of Law. Mr. Otto has served
      as a Director since February 2006.




11


Mr.
      Otto
      is not related to any officer, director or affiliate of the Company. Mr. Otto
      is
      not a party to any pending legal proceeding, nor has he been subject to a
      bankruptcy petition filed against him, nor been convicted in, or subject to,
      any
      criminal proceeding.





Lawrence
      A. Krause


Director





Mr.
      Krause has over 30 years experience in the financial industry and is president
      of Lawrence A. Krause & Associates, Inc. Lawrence A. Krause &
Associates, Inc. is a registered investment firm and is composed of certified
      financial planners. Their and his experiences encompass securities, investment
      banking, real estate, business consulting, estate planning, education planning,
      retirement planning and tax planning. Mr. Krause is recognized as a leader
      in
      the field of financial and investment planning and has been named “Financial
      Planner of the Year” by his peers in San Francisco and on several occasions has
      been called “one of the nation’s leading financial planners” by the New
      York Times .
      Mr.
      Krause founded one of the first comprehensive financial planning departments
      in
      the United States for a major brokerage firm. Mr. Krause has extensive
      experience as a partner of limited partnership and managing member of limited
      liability corporate investment funds. Mr. Krause has been and currently remains
      as a general partner in limited partnerships and a managing member in limited
      liability companies which have invested in opportunities such as oil and gas,
      venture capital, equipment leasing, real estate and proprietary manufacturing.
      Mr. Krause received his B.A. from State University of Iowa, and has also
      received a CFP (Certified Financial Planner) and CSA (Certified Senior Advisor).
      Mr. Krause has served as a Director since February 2006.





Mr.
      Krause is not a director of any other public company, nor is he related to
      any
      officer, director or affiliate of the Company. Mr. Krause is not a party to
      any
      pending legal proceeding, nor has he been subject to a bankruptcy petition
      filed
      against him, nor been convicted in, or subject to, any criminal
      proceeding.





Ronald
      Domingue


Director





Mr.
      Domingue brings extensive financial, logistics and engineering experience to
      ECO 2 .
      He is a
      managing partner at Arbor Malone, LLC and was a co-founder of SupplyBase, Inc.
      (“SupplyBase”), a supply-chain software company that was acquired by i2
      Technologies, Inc.  Prior to SupplyBase, Mr. Domingue held positions in
      product management, engineering and field marketing at GE Plastics, a subsidiary
      of General Electric Company (“General Electric”), over a 13 year career. Mr.
      Domingue holds a Bachelor of Science in Mechanical Engineering, Cum Laude,
      from
      the University of Vermont, a Masters of Science in Mechanical Engineering from
      Rensselaer Polytechnic Institute, and he is a graduate of General Electric’s
      Edison Engineering Program. Mr. Domingue has served as a Director since December
      2006.





Mr.
      Domingue is not a director of any other public company, nor is he related to
      any
      officer, director or affiliate of the Company. Mr. Domingue is not a party
      to
      any pending legal proceeding, nor has he been subject to a bankruptcy petition
      filed against him, nor been convicted in, or subject to, any criminal
      proceeding.





William
      Whittaker


Director





Mr.
      Whittaker brings extensive asset management experience, both in real estate
      and
      investment management, to ECO 2 .
      Mr.
      Whittaker currently manages assets worth approximately $125 million through
      Whittaker Asset Management, Inc., a company of which he has been the Chairman
      and CEO of since 1987. Mr. Whittaker is also the controlling principal of more
      than 40 privately held companies and/or partnerships that either own commercial
      income properties or invest in operating businesses. Mr. Whittaker graduated
      from Stanford University in 1971 with an Economics degree and from the
      University of Santa Clara School of Law, *cum
      laude* ,
      in
      1976. He was admitted to the California State Bar in 1976 (inactive 1996) and
      the United States Tax Court in 1979.  Mr. Whittaker was appointed as a
      Director in February 2007.





Mr.
      Whittaker is not a director of any other public company, nor is he related
      to
      any officer, director or affiliate of the Company. Mr. Whittaker is not a party
      to any pending legal proceeding, nor has he been subject to a bankruptcy
      petition filed against him, nor been convicted in, or subject to, any criminal
      proceeding.





Mario
      Sandoval


Chief
      Operating Officer





Mr.
      Sandoval was
      previously the Senior Process Leader with Johns Manville in the BPS initiative,
      headquartered in Denver, Colorado. He was responsible for all aspects of the
      Plan to Make implementation. Prior to joining BPS, Mr. Sandoval was the Director
      of Strategic Engineering Programs and the Director of Operations for performance
      materials. Prior to joining Johns Manville in July of 2004, Mr. Sandoval was
      the
      Vice President and Supply Chain Leader for General Electric Polymershapes
      (“GE”). Previous positions Mr. Sandoval has held with GE include Global
      Manufacturing Leader for Crystalline Plastics, Master Black Belt and various
      operational leadership, quality and automation engineering roles. He started
      his
      career with GE on the Chemical/Metallurgical Management Training program. Mr.
      Sandoval has a Bachelor of Science degree in chemical engineering and computer
      science from New Mexico State University. Mr. Sandoval has served as Chief
      Operating Officer since October 2006.




12




Mr.
      Sandoval is not a director of any other public company, nor is he related to
      any
      officer, director or affiliate of the Company. Mr. Sandoval is not a party
      to
      any pending legal proceeding, nor has he been subject to a bankruptcy petition
      filed against him, nor been convicted in, or subject to, any criminal
      proceeding.





Frederick
      Smith, Jr.


Chief
      Financial Officer





Mr.
      Smith
      was our Chief Financial Officer from May 2004 until January 2007. Mr. Smith
      is a
      licensed California attorney at law and former accountant. Mr. Smith has been
      practicing law in California since 1982, in addition to being our Chief
      Financial Officer, during the past twelve (12) months. Mr. Smith has twenty
      eight (28) years of experience in corporate finance, corporate governance,
      financial reporting, litigation, formation, SEC regulations, corporate taxation,
      corporate acquisitions, mergers, and reorganization matters. Mr. Smith earned
      his BA from California State Fullerton in 1976 and received his JD from Western
      State University College of Law in 1980.





Mr.
      Smith
      is not a director of any other public company, nor is he related to any officer,
      director or affiliate of the Company. Mr. Smith is not a party to any pending
      legal proceeding, nor has he been subject to a bankruptcy petition filed against
      him, nor been convicted in, or subject to, any criminal
      proceeding.





**Audit
      Committee Financial Expert**





The
      Company does not have an audit committee financial expert.





**Compliance
      with Section 16(a) of the Exchange Act**





Section
      16(a) of the Exchange Act requires the Company’s officers, directors and persons
      who beneficially own more than 10% of the Company’s common stock to file reports
      of ownership and changes in ownership with the SEC. These reporting persons
      also
      are required to furnish the Company with copies of all Section 16(a) forms
      they
      file. None of the officers or directors of the Company have provided to the
      Company any filed reports upon their acquisition or disposition of securities
      of
      the Company. To the Company’s knowledge, no officers, directors and persons
      who beneficially own more than 10% of the Company’s common stock have failed to
      file the reports required pursuant to Section 16(a).





**Code
      of Ethics**





The
      Company has adopted a Code of Ethics. The Code of Ethics is Exhibit 14 to this
      10-KSB. The Company hereby undertakes to provide any person without charge,
      upon
      request, a copy of the Company’s Code of Ethics. Requests for copies of the
      Company’s Code of Ethics should be sent to:





ECO 2 Plastics, Inc.


5300
      Claus Rd.


P.O.
      Box
      760


Riverbank,
      CA. 95367


Attn:
      Rodney S. Rougelot





The
      Code
      of Ethics can also be found on the SEC web site.




13


**ITEM
        10. EXECUTIVE COMPENSATION** .


SUMMARY
      COMPENSATION TABLE





Name
                andPrincipal Position
            
            
            Year
            
            
            Salary
            
            
            Bonus
            
            
            Stock
              Awards
            
            
            Option
              Awards
            
            
            Non-Equity
                Incentive Plan Compensation
            
            
            Change
                in Pension Value and Nonqualified Deferred Compensation
                Earnings
            
            
            All
                Other Compensation
            
            
            TotalCEO
            
            
            2006
            
            $
            129,198.55
            
            $
            0
            
            $
            4,600,000
            (1)
            $
            0
            
            $
            0
            
            $
            0
            
            $
            8,700
            
            $
            4,737,898.55Rodney
                S. Rougelot appointed
            
            
            2005
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/AJuly
              2006
            
            
            2004
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/ACTO
              Gary
                De Laurentiis CEO
            
            
            2006
            
            $
            291,628.12
            
            $
            0
            
            $
            847,000
            (2)
            $
            0
            
            $
            0
            
            $
            0
            
            $
            7,500
            
            $
            1,146,128.12during
              2004
            
            
            2005
            
            $
            84,000
            
            $
            0
            
            $
            3,071,376
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            168,000
            (3)
            $
            3,323,376through
              July 2006.
            
            
            2004
            
            $
            23,400
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            197,386
            (4)
            $
            220,786CFO
            
            
            2006
            
            $
            153,815.30
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            153,815.30Frederick
                W. Smith, Jr.
            
            
            2005
            
            $
            48,000
            
            $
            0
            
            $
            96,250
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            96,000
            (5)
            $
            240,2502004
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/ACOO
            
            
            2006
            
            $
            45,833.33
            
            $
            0
            
            $
            0
            
            $
            1,600,000
            (6)
            $
            0
            
            $
            0
            
            $
            5,800
            
            $
            1,651,633Mario
                Sandoval
            
            
            2005
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/AAppointed
              October 2006
            
            
            2004
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A





(1)
            Under
                the terms of Mr. Rougelot’s employment agreement, he received 35,200,000
                shares of Company common stock, of which 17,600,000 (50%) shares
                are
                fully-vested, and of which 8,800,000 shares vest in September 2007
                and the
                remaining 8,800,000 vest pro-rata from October 2007 to September
                2008. The
                total value of the shares based on the $0.13 per share grant date
                quoted
                trading price of the Company’s common stock was approximately $4.6
                million. In connection with this agreement, the Company recorded
                compensation expense in 2006 of approximately $2.3 million for
                fully-vested shares, and $500,000 for a portion of the unvested shares
                amortized on a straight-line basis over the vesting periods. In addition,
                pursuant to terms of the executive’s employment agreement, the executive
                received an additional 8,800,000 fully-vested shares in connection
                with
                the certain agreement specified capital raising events, and as a
                result of
                the occurrence of such event, the Company recorded additional compensation
                expense of approximately $1.1 million based on the $0.125 per share
                closing quoted trading price on the date of the event. A total of
                44,000,000 million shares of Company common stock were issued to
                the
                executive in 2006, a portion of which is subject to return in accordance
                with vesting provisions.This
                information is also found in the Outstanding Equity Awards at Fiscal
                Year-End table and the Option Exercises and Stock Vested table
                below.





(2)
            Under
                the terms of Mr. De Laurentiis’ employment agreement, he will receive
                24,000,000 fully-vested shares or share equivalents (warrants), of
                which
                he had previously received 17,953,208 of such shares and share
                equivalents, or an additional 6,046,792 shares. In connection with
                this
                agreement, inasmuch as the shares were fully vested, the Company
                recorded
                compensation expense and an increase in additional paid-in capital
                of
                $847,000, which was determined on the $0.14 per share quoted trading
                price
                on the date of the employment agreement.Mr.
                De Laurentiis has not yet been issued these shares.This
                information is also found in the Outstanding Equity Awards at Fiscal
                Year-End table and the Option Exercises and Stock Vested table
                below.





(3)
            Accrued
                compensation for 2005.





(4)
            Of
                this amount, $31,186 was previously classified as “Other Annual
                Compensation” and $166,200 was paid as accrued compensation for
                2004.





(5)
            Accrued
                compensation for 2005.





(6)
            Under
                the terms of Mr. Sandoval’semployment
                agreement, he is to receive shares of Company common stock (or stock
                options, at the executive’s election) covering 5% of Common Stock
                Equivalents, as defined in the agreement. The Effective Date of the
                employment agreement is October 19, 2006, at which date the executive
                is
                to receive options to purchase 24,000,000 common shares (shares were
                not
                elected) of Company common stock, of which 12,000,000 (50%) warrant
                are
                fully-vested, and of which 6,000,000 warrants vest in October 2007
                and the
                remaining 6,000,000 vest pro-rata from November 2007 to October 2008.
                The
                warrants are exercisable at $0.0975 per share for ten years. In connection
                with this agreement, the Company recorded compensation expense of
                approximately $1.6 million based on thefair
                value as determined utilizing the Black-Scholes valuation
                modelas
                of the Effective Date for fully-vested shares, and $155,000 for a
                portion
                of the unvested shares amortized on a straight-line basis over the
                vesting
                periods. This information is also found in the Outstanding Equity
                Awards
                at Fiscal Year-End table and the Option Exercises and Stock Vested
                table
                below.




GRANTS
      OF
      PLAN BASED AWARDS.





No
      grants
      of plan based awards were granted during the 2006 fiscal year.





14




DESCRIPTION
      OF ADDITIONAL MATERIAL FACTORS





On
      July
      26, 2006, Gary M. De Laurentiis entered into an employment agreement with the
      Company, making him the new Chief Technology Officer. Pursuant to the terms
      of
      the employment agreement, Mr. De Laurentiis shall receive an annual salary
      of
      $290,000 and he shall receive equity in the Company equal to an aggregate amount
      of 24,000,000 shares of the Company’s common stock, of which he has already
      received 17,953,208 shares. Mr. De Laurentiis is also eligible to receive
      2,000,000 additional equity awards contingent upon certain events.





On
      July
      31, 2006, Rodney S. Rougelot entered into an employment agreement with the
      Company, making him the new Chief Executive Officer. Pursuant to the terms
      of
      the employment agreement, Mr. Rougelot shall receive an annual salary of
      $300,000 and shall receive equity in the Company equal to 8% of the Company’s
      issued and outstanding stock. Mr. Rougelot is also eligible to receive
      additional equity in connection with the successful performance of his duties.





In
      accordance with Mr. Rougelot’s employment agreement, the Company obtained a
      third party valuation, whereby it was concluded that, as of July 31, 2006,
      the
      appraised per share value of Mr. Rougelot’s stock grant was $0.006 per
      share.





On
      October 19, 2006, Mr. Rougelot’s annual salary increased to $330,000 in
      accordance with the terms of his employment agreement and the hiring of Mario
      Sandoval.





On
      October 19, 2006, Mario Sandoval entered into an employment agreement with
      the
      Company, making him the new Chief Operating Officer and Executive Vice President
      of Operations. Pursuant to the terms of the employment agreement, Mr. Sandoval
      shall receive an annual salary of $300,000 and shall receive equity in the
      Company of up to 5% of the Company’s issued and outstanding stock based on his
      length of service to the Company. Mr. Sandoval is also eligible to receive
      additional equity in connection with the successful performance of his
      duties.




OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END




Option
                Awards
            
            
            Stock
                AwardsNumber
                of Securities Underlying Unexercised Options
            
            
            Number
                of Securities Underlying Unexercised Options
            
            
            Equity
                Incentive Plan
                Awards:
                  Number of Securities 
                  Underlying
                Unearned
            
            
            Option
                Exercise
            
            
            Option
                Expiration
            
            
            Number
                of Shares or Units of Stock That Have
                Not
            
            
            Market
                Value of Shares or Units of Stock That Have
            
            
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not
            
            
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That HaveName
            
            
            Exercisable
            
            
            Unexercisable
            
            
            Options
            
            
            Price
            
            
            Date
            
            
            Vested
            
            
            Not Vested
            
            
            Vested
            
            
            Not
                  VestedCEO
              Rodney
                S. Rougelot (1)
            
            
            0
            
            
            0
            
            
            0
            
            $
            0
            
            
            N/A
            
            
            17,600,000
            
            $
            1,787,500
            
            
            0
            
            $
            0CTO
              Gary
                De Laurentiis (2)
            
            
            0
            
            
            0
            
            
            0
            
            $
            0
            
            
            N/A
            
            
            0
            
            $
            0
            
            
            0
            
            $
            0COO
              Mario
                Sandoval (3)
            
            
            0
            
            
            0
            
            
            0
            
            $
            0
            
            
            N/A
            
            
            12,000,000
            
            $
            1,600,000
            
            
            0
            
            $
            0





(1)
            Under
                the terms of Mr. Rougelot’s employment agreement, he received 35,200,000
                shares of Company common stock, of which 17,600,000 (50%) shares
                are
                fully-vested, and of which 8,800,000 shares vest in September 2007
                and the
                remaining 8,800,000 vest pro-rata from October 2007 to September
                2008. The
                total value of the shares based on the $0.13 per share grant date
                quoted
                trading price of the Company’s common stock was approximately $4.6
                million. In connection with this agreement, the Company recorded
                compensation expense in 2006 of approximately $2.3 million for
                fully-vested shares, and $500,000 for a portion of the unvested shares
                amortized on a straight-line basis over the vesting periods. In addition,
                pursuant to terms of the executive’s employment agreement, the executive
                received an additional 8,800,000 fully-vested shares in connection
                with
                the certain agreement specified capital raising events, and as a
                result of
                the occurrence of such event, the Company recorded additional compensation
                expense of approximately $1.1 million based on the $0.125 per share
                closing quoted trading price on the date of the event. A total of
                44,000,000 shares of Company common stock were issued to the executive
                in
                2006, a portion of which is subject to return in accordance with
                vesting
                provisions.This
                information is also found in the Summary Compensation table above
                and the
                Option Exercises and Stock Vested table
                below.




15







(2)
            Under
                the terms of Mr. De Laurentiis’ employment agreement, he will receive
                24,000,000 fully-vested shares or share equivalents (warrants), of
                which
                he had previously received 17,953,208 of such shares and share
                equivalents, or an additional 6,046,792 shares. In connection with
                this
                agreement, inasmuch as the shares were fully vested, the Company
                recorded
                compensation expense and an increase in additional paid-in capital
                of
                $847,000, which was determined on the $0.14 per share quoted trading
                price
                on the date of the employment agreement.Mr.
                De Laurentiis has not yet been issued these shares.This
                information is also found in the Summary Compensation table above
                and the
                Option Exercises and Stock Vested table
                below.





(3)
            Under
                the terms of Mr. Sandoval’semployment
                agreement, he is to receive shares of Company common stock (or stock
                options, at the executive’s election) covering 5% of Common Stock
                Equivalents, as defined in the agreement. The Effective Date of the
                employment agreement is October 19, 2006, at which date the executive
                is
                to receive options to purchase 24,000,000 common shares (shares were
                not
                elected) of Company common stock, of which 12,000,000 (50%) warrant
                are
                fully-vested, and of which 6,000,000 warrants vest in October 2007
                and the
                remaining 6,000,000 vest pro-rata from November 2007 to October 2008.
                The
                warrants are exercisable at $0.0975 per share for ten years. In connection
                with this agreement, the Company recorded compensation expense of
                approximately $1.6 million based on thefair
                value as determined utilizing the Black-Scholes valuation
                modelas
                of the Effective Date for fully-vested shares, and $155,000 for a
                portion
                of the unvested shares amortized on a straight-line basis over the
                vesting
                periods. This information is also found in the Summary Compensation
                table
                and the Option Exercises and Stock Vested table
                below.




OPTION
      EXERCISES AND STOCK VESTED TABLE




Option
                Awards
            
            
            Stock
                AwardsName
            
            
            Number
                of Shares Acquired on Exercise
            
            
            Value
                Realized onExercise
            
            
            Number
                of SharesAcquired on Vesting
            
            
            Value
                Realized onVestingCEO
              Rodney
                S. Rougelot (1)
            
            
            0
            
            
            0
            
            
            26,400,000
            
            $
            4,600,000CTO
              Gary
                De Laurentiis (2)
            
            
            0
            
            
            0
            
            
            6,046,792
            
            $
            847,000COO
              Mario
                Sandoval
            
            
            0
            
            
            0
            
            
            12,000,000
            
            $
            1,600,000





(1)
            Under
                the terms of Mr. Rougelot’s employment agreement, he received 35,200,000
                shares of Company common stock, of which 17,600,000 (50%) shares
                are
                fully-vested, and of which 8,800,000 shares vest in September 2007
                and the
                remaining 8,800,000 vest pro-rata from October 2007 to September
                2008. The
                total value of the shares based on the $0.13 per share grant date
                quoted
                trading price of the Company’s common stock was approximately $4.6
                million. In connection with this agreement, the Company recorded
                compensation expense in 2006 of approximately $2.3 million for
                fully-vested shares, and $500,000 for a portion of the unvested shares
                amortized on a straight-line basis over the vesting periods. In addition,
                pursuant to terms of the executive’s employment agreement, the executive
                received an additional 8,800,000 fully-vested shares in connection
                with
                the certain agreement specified capital raising events, and as a
                result of
                the occurrence of such event, the Company recorded additional compensation
                expense of approximately $1.1 million based on the $0.125 per share
                closing quoted trading price on the date of the event. A total of
                44,000,000 shares of Company common stock were issued to the executive
                in
                2006, a portion of which is subject to return in accordance with
                vesting
                provisions.This
                information is also found in the Summary Compensation table and
                Outstanding Equity Awards at Fiscal Year-End table
                above.





(2)
            Under
                the terms of Mr. De Laurentiis’ employment agreement, he will receive
                24,000,000 fully-vested shares or share equivalents (warrants), of
                which
                he had previously received 17,953,208 of such shares and share
                equivalents, or an additional 6,046,792 shares. In connection with
                this
                agreement, inasmuch as the shares were fully vested, the Company
                recorded
                compensation expense and an increase in additional paid-in capital
                of
                $847,000, which was determined on the $0.14 per share quoted trading
                price
                on the date of the employment agreement.Mr.
                De Laurentiis has not yet been issued these shares.This
                information is also found in the Summary Compensation table and the
                Outstanding Equity Awards at Fiscal Year-End table
                above.





(3)
            Under
                the terms of Mr. Sandoval’semployment
                agreement, he is to receive shares of Company common stock (or stock
                options, at the executive’s election) covering 5% of Common Stock
                Equivalents, as defined in the agreement. The Effective Date of the
                employment agreement is October 19, 2006, at which date the executive
                is
                to receive options to purchase 24,000,000 common shares (shares were
                not
                elected) of Company common stock, of which 12,000,000 (50%) warrant
                are
                fully-vested, and of which 6,000,000 warrants vest in October 2007
                and the
                remaining 6,000,000 vest pro-rata from November 2007 to October 2008.
                The
                warrants are exercisable at $0.0975 per share for ten years. In connection
                with this agreement, the Company recorded compensation expense of
                approximately $1.6 million based on thefair
                value as determined utilizing the Black-Scholes valuation
                modelas
                of the Effective Date for fully-vested shares, and $155,000 for a
                portion
                of the unvested shares amortized on a straight-line basis over the
                vesting
                periods. This information is also found in the Summary Compensation
                table
                and the Outstanding Equity Awards at Fiscal Year-End table
                above.




16




PENSION
      BENEFITS TABLE





The
      Company did not offer a pension plan during fiscal year 2006.




NONQUALIFIED
      DEFERRED COMPENSATION TABLE





The
      Company did not offer any non-qualified deferred compensation plans during
      fiscal year 2006.




DIRECTOR
      COMPENSATION DISCLOSURE





The
      Company did not enter into director compensation arrangements during the fiscal
      year 2006.




**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCHOLDER MATTERS.**





The
      following table sets forth certain information regarding the beneficial
      ownership of our common stock as of March 22, 2007:





Title
                of Class:
            
            
            Name
                and Address of Beneficial Holder:
            
            
            Amount
                and Nature of Beneficial Ownership:
            
            
            Percent
                of Class (12):Common,
                $.001 par value
            
            
            Gary
                De Laurentiis
              P.O.
                Box 760, 5300 Claus Rd.,
              Riverbank,
                CA 95367
            
            
            19,742,630
                (1
            )
            
            7
            %Common,
                $.001 par value
            
            
            Lawrence
                A. Krause
              1001
                Bayhill Drive, Suite 170
              San
                Bruno, CA 94066
            
            
            14,825,000
                (2
            )
            
            5
            %Common,
                $.001 par value
            
            
            David
                M. Otto
              601
                Union Street, Suite 4500
              Seattle,
                WA 98164
            
            
            18,760,933
                (3
            )
            
            6
            %Common,
                $.001 par value
            
            
            Rodney
                S. Rougelot
              P.O.
                Box 760, 5300 Claus Rd.
              Riverbank,
                CA 95367
            
            
            26,861,140
                (4
            )
            
            9
            %Common,
                $.001 par value
            
            
            Ronald
                M. Domingue
              5300
                Claus Road, Box 760
              Riverbank,
                CA 95367
            
            
            59,710,898
                (5
            )
            
            20
            %Common,
                $.001 par value
            
            
            William
                Whittaker
              8070
                La Jolla Shores Drive, #508
              La
                Jolla, CA 92037
            
            
            62,073,141
                (6
            )
            
            20
            %Common,
                $.001 par value
            
            
            Mario
                Sandoval
              5300
                Claus Road, Box 760
              Riverbank,
                CA 95367
            
            
            12,000,000
                (7
            )
            
            4
            %Common,
                $.001 par value
            
            
            Jerjis
                T. Alajaji
              5300
                Claus Road, Box 760
              Riverbank,
                CA 95367
            
            
            12,342,655
                (11
            )
            
            4
            %Common,
                $.001 par value
            
            
            Voting
                Trustee
              5300
                Claus Road, Box 760
              Riverbank,
                CA 95367
            
            
            17,600,000
                (8
            )
            
            6
            %Common,
                $.001 par value
            
            
            Excipio
                Group, S.A.
              Harbour
                House, Waterfront Drive
              P.O.
                Box 2221, Road Town
              Tortola,
                British Virgin Islands
            
            
            12,502,322
                (9
            )
            
            4
            %Common,
                $.001 par value
            
            
            Todd
                Greenhalgh
              5300
                Claus Road, Box 760
              Riverbank,
                CA 95367
            
            
            13,188,083
                (10
            )
            
            4
            %Common,
                $.001 par value
            
            
            Frederick
                W. Smith, Jr.
              5300
                Claus Road, Box 760
              Riverbank,
                CA 95367
            
            
            626,435
                (11
            )
            
            <1
            %Total
                Held by Officers and Directors:
            
            
            
            
            
            244,684,499Total
                Held by Officers, Directors and Certain Beneficial Owners:
            
            
            
            
            
            270,215,237


(1)
              Of
                  this amount, Mr. De Laurentiis owns 59,727 shares of common stock.
                  He has
                  a common stock purchase warrant to acquire up to 11,636,111 shares
                  at
                  $0.06 per share/cashless. This warrant expires on April 15, 2015.
                  Under
                  the terms of Mr. De Laurentiis’ employment agreement, he is entitled to
                  receive an aggregate of6,046,792shares
                  of common stock in the form of restricted grants of common stock
                  and
                  warrants. He is entitled to receive an additional 2,000,000 shares
                  upon
                  satisfying certain obligations. Mr. De Laurentiis has not been
                  issued any
                  common stock or equivalents in connection with his employment
                  agreement.


17




(2)
            Of
                this amount, Mr. Krause owns 200,000 shares of common stock. As the
                principal of KW Securities Corporation, Mr. Krause has a common stock
                purchase warrant to acquire up to 14,625,000 shares at $0.06 per
                share/cashless. This warrant expires on April 15,
                2015.





(3)
            Mr.
                Otto individually owns 2,500,000 shares of common stock. Mr. Otto
                is the
                principal of Otto Capital Holdings, LLC (“OCH”) and 3,231,085 shares are
                held by OCH. An additional2,802,925
                shares of common stock are held with Cambridge Partners, LLC
                (“Cambridge”), of which Mr. Otto is one of two members.Mr.
                Otto also has common stock purchase warrants to purchase a total
                of
                1,500,000 shares of common stock with a strike price of $0.06 per
                share/cashless. These warrants expire on April 15, 2010. Cambridge
                has
                common stock purchase warrants to acquire up to a total of 3,150,000
                shares of common stock with a strike price of $0.06 per share/cashless.
                These warrants expire on April 15, 2015. Finally, Saratoga Capital
                Partners, LLC (“Saratoga”), an entity Mr. Otto is also a member of, has
                common stock purchase warrants to acquire up to a total of 2,500,000
                shares of common stock with a strike price of $0.06 per share/cashless.
                These warrants expire on April 15, 2015. Saratoga also has a 10%
                convertible note of $300,000 which can convert at $0.0975 per share.





(4)
            Mr.
                Rougelot has a common stock purchase warrant to acquire up to 75,000
                shares at $0.06 per share/cashless. This warrant expires on April
                15,
                2015. Mr. Rougelot also has a 10% convertible debenture for $25,000
                with a
                $0.0975 conversion rate that will convert into 256,410 shares of
                common
                stock. Under the terms of Mr. Rougelot’s employment agreement, he is
                eligible to receive an aggregate amount of restricted common stock
                equal
                44,000,000 shares, of which 26,400,000 have fully vested. Mr. Rougelot
                acquired an additional 130,000 shares on the open market in November
                2005.





(5)
            Mr.
                Domingue owns a common stock purchase warrant to acquire up to 150,000
                shares at $0.06 per share/cashless. This warrant expires on April
                15,
                2015. He also has a 10% convertible note of $50,000 which can convert
                at
                $0.0975 per share that will convert into 512,821 shares. Mr. Domingue
                is a
                partner at Arbor Malone, LLC. On August 14, 2006, Arbor Malone loaned
                $2,300,000 to the Company in the form of a short-term bridge loan.
                In
                connection with this loan, Arbor Malone received (i) warrants to
                purchase
                a total of 23,000,000 shares of common stock with a strike price
                of $0.12
                per share and (ii) 10% convertible notes totaling $2,300,000 which
                can
                convert at $0.0975 per share. Upon conversion of the notes, Arbor
                Malone
                would be entitled to receive additional warrants to purchase a total
                of
                12,458,333 shares of common stock with a strike price of $0.12 per
                share.





(6)
            Mr.
                Whittaker is the general partner of Whittaker Capital Partners I,
                LP
                (“WCP”). WCP has (i) warrants to purchase a total of 14,047,500 shares
                of
                common stock, each with a strike price of $0.06 per share; and (ii)
                10%
                convertible notes totaling $4,682,500 which can convert at $0.0975
                per
                share.





(7)
            In
                connection with Mr. Sandoval’s employment agreement, he has been granted
                the option to purchase 24,000,000 shares of restricted stock with
                a strike
                price of $0.0975 per share. Of this amount, 12,000,000 shares have
                vested
                and Mr. Sandoval has been issued a common stock purchase warrant
                to
                acquire up to 12,000,000 at $0.0975 per share/cashless. This warrant
                will
                expire on January 17, 2017.





(8)
            Under
                the terms of Mr. Rougelot’s employment agreement, he is eligible to
                receive an aggregate amount of restricted common stock equal to a
                total of
                44,000,000 shares. Of this amount, 17,600,000 shares have not vested.
                In
                connection with an irrevocable proxy, David M. Otto has been appointed
                attorney-in-fact to vote the shares in connection with any shareholder
                meeting of ECO2in
                accordance with, and under the direction of, the Company’s Board of
                Directors. The amount of shares the Voting Trustee may vote will
                adjust in
                accordance with the vesting schedule in Mr. Rougelot’s employment
                agreement.





(9)
            Excipio
                Group, S.A. (“Excipio”), a company formed under the laws of the British
                Virgin Islands, owns 7,314,322 shares of common stock and has a common
                stock purchase warrant to acquire up to 1,440,000 shares at $0.06
                per
                share/cashless. This warrant will expire on April 15, 2015. Excipio
                also
                has a common stock purchase warrant to acquire up to 3,748,000 shares
                at
                $0.12 per share/cashless. This warrant will expire on April 15, 2010.




18




(10)
            Mr.
                Greenhalgh owns 9,036,923 shares of common stock. An additional 2,420,000
                shares of common stock will vest on September 15, 2007. Mr. Greenhalgh
                also has common stock purchase warrants to purchase a total of 594,750
                shares at $0.06 per share/cashless. These warrants expire on April
                15,
                2015, November 29, 2016 and January 17, 2017. Mr. Greenhalgh has
                a common
                stock purchase warrant to purchase a total of 3,300,000 shares at
                $0.0975
                per share/cashless. This warrant expires on January 17, 2017. Mr.
                Greenhalgh also has a 10% convertible note for $25,000 with a $0.0975
                conversion rate that will convert into 256,410 shares of common stock.
                Finally, Mr. Greenhalgh has a common stock purchase warrant to acquire
                up
                to 1,650,000 shares of common stock at $0.0975 per share/cashless
                that
                will vest on November 6, 2007.





(11)
            Amount
                consists of common stock only.





(12)
            As
                of March 28, 2007, there was 145,415,537 shares of common stock issued
                and
                outstanding. The total amount of shares that could be issued to certain
                beneficial owners and management within the next 60 days is 161,364,435
                shares. Based on these amounts, the percentage ownership is based
                on a
                fully diluted amount of 306,779,972 shares.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





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





In
      2006,
      the Company entered into a Funding Agreement with Itec Capital Group, LLC
      (“ICG”), a Washington limited liability company owned by the managing partner of
      OLG, who is one of the Company’s Directors, and Lawrence A. Krause, who is also
      one of the Company’s Directors, and KW
      Securities Corporation (“KW”) ,
      a
      company owned by Mr. Krause. Pursuant to terms of the Funding Agreement, the
      Company agreed to pay fees of 8% of Notes payable issued pursuant to certain
      financings and issue warrants based on securities sold and common shares
      convertible or exercisable into. Pursuant to a consulting agreement between
      ICG
      and Excipio Group, S.A. (“Excipio”), an entity affiliated with Hudson Investment
      Advisors, Inc., ICG agreed to pay Excipio a dollar amount and securities to
      be
      agreed upon from time to time upon completion of certain defined objectives
      and
      projects, and in this regard, ICG has agreed to pay Excipio fees and warrants
      in
      the amounts ICG receives from the Company. In November 2006, Excipio, ICG and
      the Company entered into a mutual settlement and release agreement, pursuant
      to
      which, among other things, in full satisfaction of amounts owed under all prior
      agreements or arrangements, the Company agreed to pay approximately $429,000
      (in
      addition to $296,000 previously paid) and issue a warrant to purchase 1,440,000
      shares of Company common stock with an exercise price of $0.06 per share for
      approximately eight and one-half years and a warrant to purchase 3,748,000
      shares of Company common stock with an exercise price of $0.12 per share for
      approximately three and one-half years. Additionally, if certain Company notes
      payable convert into Company common stock before February 6, 2007, Excipio
      shall
      be issued shares of Company common stock based on amounts of notes converted;
      no
      notes converted before February 6, 2007. The $429,000 is payable $200,000 upon
      execution of the settlement agreement and in varying amounts based on certain
      conditions, and in full no later than May 2007. At December 31, 2006,
      approximately $112,000 was still payable and is included in accrued liabilities.
      In connection with the settlement agreement, the consulting agreement between
      ICG and Excipio was cancelled and any further obligation under the consulting
      agreement has been waived and dismissed, and the Funding Agreement between
      the
      Company and ICG was amended to reflect the settlement of fees and expenses
      owed
      and paid under the Funding Agreement and that no additional fees or expenses
      shall accrued or become due in accordance with the Funding
      Agreement.





In
      August
      2006, the Company entered into an engagement agreement with OLG, a law firm,
      the
      managing partner of which is one of the Company’s Directors, whereby the prior
      agreement was superseded and replaced, and among other things, the Company
      issued 2,500,000 shares of its common stock. The agreement does not have a
      stated term. During 2006, the Company incurred OLG legal fee services of
      $967,000, of which $194,000 was recorded as deferred debt issue costs. Accounts
      payable to OLG for legal services was approximately $468,000 at December 31,
      2006.





In
      August
      2006, the Company entered into a loan agreement (the
      “Arbor Malone Loan Agreement”) with
      Arbor Malone, LLC, a Delaware limited liability company (“Arbor Malone”) pursuant
      to which the Arbor
      Malone undertook to loan the
      Company an aggregate amount totaling
      $2,300,000 (the
“Arbor Malone Loan”) . In
      accordance with the Arbor
      Malone Loan
      Agreement, the
      Company executed
      10% Convertible Debentures (“Arbor Malone Debenture”) totaling $2,300,000 ,
      with
      interest at the rate of ten percent (10%) per annum until paid and issued a
      warrant to Arbor Malone exercisable into 23,589,974 shares of ECO 2 ’s
      common
      stock at a per share price of $0.12 per share. All
      outstanding principal and accrued and unpaid interest shall become due twelve
      (12) months from the date upon which the Arbor Malone Debenture is executed
      (the
“Arbor Malone Maturity Date”).





At
      any
      time prior to or at the Arbor Malone Debenture Maturity Date, at the option
      of
      Arbor Malone, all principal and accrued interest due on the Arbor Malone
      Debenture may be converted into common stock of the Company at $0.0975 per
      share. If, upon the expiration of the maturity date, Arbor Malone elects not
      to
      convert their debenture, all outstanding principal and accrued and unpaid
      interest shall become due and payable. The converting
      party shall
      provide 15 days written notice to the Company of their election to convert
      their
      debenture.




19




In
      the
      event that Arbor Malone elects to convert, via written notice to the Company,
      all principal and accrued interest payable under the Arbor Malone Debenture
      and
      the Arbor Malone Loan Agreement will be converted into shares of common stock
      of
      the Company at a conversion price of $0.0975 per share. Further, upon exercise
      of the conversion right, the Company will issue to Arbor Malone a warrant
      exercisable into that number of shares of the Company’s common stock equal to
      the quotient of (i) 65% of the value of the loan divided by (ii) a per share
      price of $0.12. The conversion warrant will be exercisable at a per share price
      of $0.12.





In
      January 2006, the Company entered into an agreement with KW to act as the
      underwriter for the private placement of the Company’s securities. In connection
      with the KW agreement, the principal of KW, Lawrence A. Krause, was appointed
      to
      the Board of Directors in February 2006. The
      private placement memorandum (the “PPM”) sought up to $9 million, through the
      offering of a minimum of 20 Units for $25,000 per unit. Each Unit consists
      of a
      $25,000 junior secured subordinated convertible debenture, bearing interest
      at
      10% with principal and accrued interest due 18 months from issuance (“maturity
      date”), convertible into shares of the Company’s common stock at a price of
      $0.0975 per share, and a warrant, with a cashless exercise provision, to
      purchase 75,000 shares of restricted common stock of the Company, exercisable
      for approximately 10 years (expires April 15, 2015) at an exercise price of
      $0.06 per share. KW
      received, as a fee for services rendered, a common stock purchase warrant to
      purchase 14,625,000 shares of the Company’s common stock with a $0.06 per share
      strike price/cashless. On
      February 1, 2007, the offering closed with a total of $8 million raised.





In
      February, 2006, the Company issued a warrant to Jeffrey Chartier, a former
      Director, in exchange for services rendered to the Company. The warrant allows
      Mr. Chartier to purchase up to 500,000 shares of common stock of the Company
      at
      a price of $.12 per share. The warrant is exercisable for a period of ten (10)
      years and may be exercised for cash. The shares underlying the warrant have
      piggy-back registration rights.





In
      February, 2006, the Company issued a warrant to George Kanakis, a former
      Director, in exchange for services rendered to the Company. The warrant allows
      Mr. Kanakis to purchase up to 500,000 shares of common stock of the Company
      at a
      price of $.12 per share. The warrant is exercisable for a period of ten (10)
      years and may be exercised for cash. The shares underlying the Warrant have
      piggy-back registration rights.





**ITEM
      13. EXHIBITS**





See
      Exhibit Index immediately following the signature page below.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Salberg
      & Company, P.A. served as our independent certified public accountants for
      the fiscal year 2006 and 2005.




During
      the fiscal years ended December 31, 2006 and 2005, fees in connection with
      services rendered by Salberg & Company, P.A. are as set forth
      below:





Fee
                Category
            
            
            Fiscal
                2006
            
            
            Fiscal
                2005Audit
                Fees
            
            $
            112,000
            
            $
            95,000Audit-Related
                Fees
            
            
            1,500
            
            
            8,400Tax
                FeesAll
                Other FeesTotal
            
            $
            113,500
            
            $
            103,400





Audit
      fees consisted of fees for the audit of the Company's annual financial
      statements and review of quarterly financial statements as well as services
      normally provided in connection with statutory and regulatory filings or
      engagements, consents and assistance with and review of Company documents filed
      with the SEC.




Tax
      fees
      consisted primarily of fees for tax compliance, tax advice and tax planning
      services.




We
      made
      no other payments to Salberg & Company, P.A. during 2006 which constituted
      other fees.





**Policy
      for Pre-Approval of Audit and Non-Audit Services**




The
      Audit
      Committee's policy is to pre-approve all audit, audit-related and non-audit
      services to be provided by the independent registered public accounting
      firm and adopt and implement policies for such pre-approval. Independent
      auditors shall not be engaged to perform specific non-audit services proscribed
      by law or regulation. The Committee may delegate pre-approval authority to
      a
      member of the Committee. The decisions of any Committee member to whom
      pre-approval authority is delegated must be presented to the full Audit
      Committee at its next scheduled meeting.




All
      engagements of the independent registered public accounting firm to
      perform any audit services and non-audit services have been pre-approved by
      the
      Committee in accordance with the pre-approval policy. The policy has not been
      waived in any instance.





20


**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) 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, in the City of Riverbank, State
      of
      California, on March 29, 2007.


RegistrantECO2PLASTICS, INC./s/ Rodney
              S.
              RougelotBy:
                Rodney S. RougelotDirector,
              Chief
              Executive Officerand Interim Chief Financial
              Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of Registrant and in the
      capacities indicated on March 29, 2007.




/s/ Gary
              M.
              De LaurentiisGary
                M. De LaurentiisDirector
                and Chief Technology Officer  /s/ David
                M.
                OttoDavid
                  M. OttoDirector  /s/ Lawrence
                  A. KrauseLawrence
                    A. KrauseDirector  /s/ Ronald
                    DomingueRonald
                    DomingueDirector
 /s/
                        William WhittakerWilliam
                      WhittakerDirector
 21


**EXHIBIT
      INDEX**





Exhibit
                No.
            
            
            Description
            
            
            Location3.1(i)
            
            
            Amendment
                to Restated Certificate of Incorporation
            
            
            Incorporated
                by reference to Exhibit A to the DEFR14C filed by the Company on
                November
                30, 20053.2(i)
            
            
            Restated
                Certificate of Incorporation
            
            
            Incorporated
                by reference to Exhibit B to the DEF-14C filed by the Company on
                September
                9, 20023.3(i)
            
            
            Certificate
                of Incorporation
            
            
            Incorporated
                by reference to the Form S-18 Registration Statement filed by the
                Company,
                File No. 33-31-673.4(i)
            
            
            Amendment
                to Restated Certificate of Incorporation
            
            
            Incorporated
                by reference to the DEF-14C filed by the Company on February 22,
                2007.3.5(ii)
            
            
            Bylaws
            
            
            Incorporated
                by reference to Exhibit B to the DEF-14C filed by the Company on
                September
                9, 20024.1
            
            
            Form
                of Common Stock Warrant issued to Gary De Laurentiis (2,457,370),
                George
                Kanakis and George Gitschel
            
            
            Incorporated
                by reference to Exhibit 4.5 to the 10-KSB filed by the Company on
                April
                15, 20054.2
            
            
            Form
                of Common Stock Purchase Warrant issued to Jeffrey
                Chartier
            
            
            Incorporated
                by reference to Exhibit 4.2 to the 10-KSB filed by the Company on
                May 17,
                20064.3
            
            
            Form
                of Common Stock Purchase Warrant issued to George Kanakis
            
            
            Incorporated
                by reference to Exhibit 4.2 to the 10-KSB filed by the Company on
                May 17,
                20064.4
            
            
            Form
                of Common Stock Warrant issued to David M. Otto
            
            
            Incorporated
                by reference to Exhibit 4.5 to the 8-K filed by the Company on November
                22, 20054.5
            
            
            Form
                of Common Stock Warrant issued to Frederick Smith, Jr.
            
            
            Incorporated
                by reference to Exhibit 4.6 to the 8-K filed by the Company on November
                22, 20054.6
            
            
            Form
                of Common Stock Warrant issued to Gary M. De Laurentiis (20,000,000)
            
            
            Incorporated
                by reference to Exhibit 4.7 to the 8-K filed by the Company on November
                22, 20054.7
            
            
            Conversion
                of Dormition Skete, Inc. Promissory Notes
            
            
            Incorporated
                by reference to Exhibit 4.1 to the 8-K filed by the Company on November
                22, 20054.8
            
            
            Conversion
                of Dormition Skete, Inc. Promissory Note
            
            
            Incorporated
                by reference to Exhibit 4.2 to the 8-K filed by the Company on November
                22, 200510.1
            
            
            Commitment
                Letter from the California Integrated Waste Management
                Board
            
            
            Incorporated
                by reference to Exhibit 10.1 to the 10-QSB filed by the Company on
                November 15, 200410.2
            
            
            Agreement
                with H. Muehlstein & Co., Inc.
            
            
            Incorporated
                by reference to Exhibit 10.2 to the 10-KSB filed by the Company on
                April
                15, 200510.3
            
            
            Business
                Loan Agreement with the California Integrated Waste Management
                Board
            
            
            Incorporated
                by reference to Exhibit 10.1 to the 10-QSB filed by the Company on
                August
                19, 200510.4
            
            
            Promissory
                Note with the California Integrated Waste Management Board
            
            
            Incorporated
                by reference to Exhibit 10.2 to the 10-QSB filed by the Company on
                August
                19, 200510.5
            
            
            Commercial
                Security Agreement with the California Integrated Waste Management
                Board
            
            
            Incorporated
                by reference to Exhibit 10.3 to the 10-QSB filed by the Company on
                August
                19, 200510.6
            
            
            Commercial
                Guarantee with the California Integrated Waste Management
                Board
            
            
            Incorporated
                by reference to Exhibit 10.4 to the 10-QSB filed by the Company on
                August
                19, 2005




22




10.7
            
            
            Amendment
                No. 3 to Patent License Agreement with Honeywell
            
            
            Incorporated
                by reference to Exhibit 10.5 to the 10-QSB filed by the Company on
                August
                19, 200510.8
            
            
            Form
                of Loan Agreement with Capital Growth Equity Fund I, LLC
            
            
            Incorporated
                by reference to Exhibit 10.1 to the 10-QSB filed by the Company on
                December 6, 200510.9
            
            
            Form
                of Promissory Note with Capital Growth Equity Fund I, LLC
            
            
            Incorporated
                by reference to Exhibit 10.2 to the 10-QSB filed by the Company on
                December 6, 200510.10
            
            
            Form
                of Common Stock Purchase Warrant with Capital Growth Equity Fund
                I,
                LLC
            
            
            Incorporated
                by reference to Exhibit 10.3 to the 10-QSB filed by the Company on
                December 6, 200510.11
            
            
            Form
                of Loan Agreement with Capital Growth Investors
            
            
            Incorporated
                by reference to Exhibit 10.4 to the 10-QSB filed by the Company on
                December 6, 200510.12
            
            
            Form
                of Promissory Note with Capital Growth Investors
            
            
            Incorporated
                by reference to Exhibit 10.5 to the 10-QSB filed by the Company on
                December 6, 200510.13
            
            
            Form
                of Common Stock Purchase Warrant with Capital Growth Equity Fund
                I,
                LLC
            
            
            Incorporated
                by reference to Exhibit 10.6 to the 10-QSB filed by the Company on
                December 6, 200510.14
            
            
            Form
                of Loan Agreement with KW Investors
            
            
            Incorporated
                by reference to Exhibit 10.7 to the 10-QSB filed by the Company on
                December 6, 200510.15
            
            
            Form
                of Promissory Note with KW Investors
            
            
            Incorporated
                by reference to Exhibit 10.8 to the 10-QSB filed by the Company on
                December 6, 200510.16
            
            
            Form
                of Common Stock Purchase Warrant with KW Investors
            
            
            Incorporated
                by reference to Exhibit 10.9 to the 10-QSB filed by the Company on
                December 6, 200510.17
            
            
            Form
                of Common Stock Purchase Agreement with Tiger Paw Capital
                Corp.
            
            
            Incorporated
                by reference to Exhibit 10.10 to the 10-QSB filed by the Company
                on
                December 6, 200510.18
            
            
            Form
                of Investors Rights Agreement with Tiger Paw Capital Corp.
            
            
            Incorporated
                by reference to Exhibit 10.11 to the 10-QSB filed by the Company
                on
                December 6, 200510.19
            
            
            Form
                of Right of First Refusal Agreement with Tiger Paw Capital
                Corp.
            
            
            Incorporated
                by reference to Exhibit 10.12 to the 10-QSB filed by the Company
                on
                December 6, 200510.20
            
            
            Form
                of Covenant to Adjust with Tiger Paw Capital Corp.
            
            
            Incorporated
                by reference to Exhibit 10.13 to the 10-QSB filed by the Company
                on
                December 6, 200510.21
            
            
            Form
                of Consulting Agreement with Tiger Paw Capital Corp.
            
            
            Incorporated
                by reference to Exhibit 10.14 to the 10-QSB filed by the Company
                on
                December 6, 200510.22
            
            
            Form
                of Conditional Approval Letter from California Department of Conservation,
                Division of Recycling
            
            
            Incorporated
                by reference to Exhibit 10.15 to the 10-QSB filed by the Company
                on
                December 6, 200510.23
            
            
            Form
                of Conditional Commitment for Guarantee from California Department
                of
                Conservation, Division of Recycling
            
            
            Incorporated
                by reference to Exhibit 10.16 to the 10-QSB filed by the Company
                on
                December 6, 200510.24
            
            
            Form
                of Loan Agreement with the Elevation Fund, LLC
            
            
            Incorporated
                by reference to Exhibit 10.1 to the 8-K filed by the Company on August
                18,
                200510.25
            
            
            Form
                of Promissory Note with the Elevation Fund, LLC
            
            
            Incorporated
                by reference to Exhibit 10.2 to the 8-K filed by the Company on August
                18,
                200510.26
            
            
            Form
                of Common Stock Purchase Warrant with the Elevation Fund,
                LLC
            
            
            Incorporated
                by reference to Exhibit 10.3 to the 8-K filed by the Company on August
                18,
                200510.27
            
            
            Form
                of Security Agreement with the Elevation Fund, LLC
            
            
            Incorporated
                by reference to Exhibit 10.4 to the 8-K filed by the Company on August
                18,
                2005




23




10.28
            
            
            Form
                of Common Stock Purchase Agreement with Doug Froese
            
            
            Incorporated
                by reference to Exhibit 10.5 to the 8-K filed by the Company on November
                29, 200510.29
            
            
            Form
                of Investors Rights Agreement with Doug Froese
            
            
            Incorporated
                by reference to Exhibit 10.6 to the 8-K filed by the Company on November
                29, 200510.30
            
            
            Form
                of Right of First Refusal Agreement with Doug Froese
            
            
            Incorporated
                by reference to Exhibit 10.8 to the 8-K filed by the Company on November
                29, 200510.31
            
            
            Form
                of Covenant to Adjust with Doug Froese
            
            
            Incorporated
                by reference to Exhibit 10.7 to the 8-K filed by the Company on November
                29, 200510.32
            
            
            Form
                of Loan Agreement with Ji Y. Baek
            
            
            Incorporated
                by reference to Exhibit 10.1 to the 10-QSB filed by the Company on
                August
                14, 200610.33
            
            
            Form
                of Loan Agreement with Leroy and Lois Goldman
            
            
            Incorporated
                by reference to Exhibit 10.1 to the 8-K filed by the Company on September
                20, 200610.34
            
            
            Form
                of Loan Agreement with Arbor Malone, LLC
            
            
            Incorporated
                by reference to Exhibit 10.2 and 10.4 to the 8-K filed by the Company
                on
                September 20, 2006 and Exhibit 10.1 to the 8-K/A filed by the Company
                on
                September 21, 200610.35
            
            
            Form
                of Loan Agreement with Ji Y. Baek
            
            
            Incorporated
                by reference to Exhibit 10.3 to the 8-K filed by the Company on September
                20, 200610.36
            
            
            Form
                of Employment Agreement with Gary De Laurentiis
            
            
            Incorporated
                by reference to Exhibit 10.5 to the 8-K filed by the Company on September
                20, 200610.37
            
            
            Form
                of Employment Agreement with Rodney S. Rougelot
            
            
            Incorporated
                by reference to Exhibit 10.6 to the 8-K filed by the Company on September
                20, 200610.38
            
            
            Form
                of Settlement and Release Agreement with Rose Waste Systems, Inc.
                and
                George Gitschel.
            
            
            Incorporated
                by reference to Exhibit 10.7 to the 8-K filed by the Company on September
                20, 200610.39
            
            
            Form
                of Employment Agreement with Mario Sandoval
            
            
            Incorporated
                by reference to Exhibit 10.1 to the 8-K filed by the Company on October
                23, 200610.40
            
            
            Form
                of Honeywell Patent License Agreement Amendment 4
            
            
            Incorporated
                by reference to Exhibit 10.1 to the 10-QSB filed by the Company on
                November 20, 200610.41
            
            
            Form
                of Funding Agreement with Itec Capital Group, LLC
            
            
            Incorporated
                by reference to Exhibit 10.2 to the 10-QSB filed by the Company on
                November 20, 200610.42
            
            
            Form
                of Mutual Settlement and Release Agreement with Excipio Group,
                S.A.
            
            
            Incorporated
                by reference to Exhibit 10.3 to the 10-QSB filed by the Company on
                November 20, 200610.43
            
            
            Form
                of Service Agreement with TSG, LLC
            
            
            Incorporated
                by reference to Exhibit 10.4 to the 10-QSB filed by the Company on
                November 20, 200610.44
            
            
            Form
                of Engagement Agreement with KW Securities Corp.
            
            
            Attached.
                Referenced to Exhibit 10.5 to the 10-QSB filed by the Company on
                November
                20, 2006.10.45
            
            
            Form
                of Restricted Stock Agreement with Rodney S. Rougelot
            
            
            Incorporated
                by reference to Exhibit 10.1 to the 8-K filed by the Company on January
                5,
                2007.14
            
            
            Code
                of Ethics
            
            
            Incorporated
                by reference to Exhibit 14 to the 10-KSB filed by the Company on
                April 15,
                2005.23.1
            
            
            Consent
                of Salberg & Company, P.A.
            
            
            Attached




24




31.1
            
            
            Certification
                of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
            
            
            Attached31.2
            
            
            Certification
                of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
            
            
            Attached32.1
            
            
            Certification
                of CEO pursuant to Section 906 of the Sarbanes-Oxley Act
            
            
            Attached32.2
            
            
            Certification
                of CFO pursuant to Section 906 of the Sarbanes-Oxley Act
            
            
            Attached99.1
            
            
            Audit
                and Finance Committee Charter
            
            
            Incorporated
                by reference to Exhibit 99.1 to the 10-KSB filed by the Company on
                April
                15, 200599.2
            
            
            Compensation
                and Nominating Committee Charter
            
            
            Incorporated
                by reference to Exhibit 99.2 to the 10-KSB filed by the Company on
                April
                15, 200599.3
            
            
            Policy
                Governing Director Nominations and Security Holder-Board
                Communications
            
            
            Incorporated
                by reference to Exhibit 99.3 to the 10-KSB filed by the Company on
                April
                15, 2005




25




**ECO2
        Plastics, Inc. and Subsidiary**
 **(formerly
        ITEC Environmental Group, Inc.)**
 **December
        31, 2006 and 2005 Consolidated Financial Statements**
 Report
                    of Independent Registered Public Accounting Firm
                
                F-1Consolidated
                    Balance Sheet
                
                F-2Consolidated
                    Statements of Operations
                
                F-3Consolidated
                    Statement of Stockholders’ Deficit
                
                F-4Consolidated
                    Statements of Cash Flows
                
                F-5Notes
                    to Consolidated Financial Statements
                
                F-6
 
  Report
        of
        Independent Registered Public Accounting Firm
 
 To
        the
        Board of Directors and Shareholders of:
 ECO2
        Plastics, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheet of ECO2 Plastics, Inc.
        (f.k.a. ITEC Environmental Group, Inc.) and Subsidiary as of December 31,
        2006
        and the related consolidated statements of operations, changes in stockholders'
        deficit, and cash flows for the years ended December 31, 2006 and 2005. These
        consolidated financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall consolidated financial statement
        presentation. We believe that our audits provide a reasonable basis for our
        opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of ECO2 Plastics,
        Inc. (f.k.a. ITEC Environmental Group, Inc.) and Subsidiary as of December
        31,
        2006 and the consolidated results of its operations and its cash flows for
        the
        years ended December 31, 2006 and 2005 in conformity with accounting principles
        generally accepted in the United States of America.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        the
        Company will continue as a going concern. As discussed in Note 1 to the
        consolidated financial statements the Company reported a net loss of
        approximately $20.8 million and used cash for operating activities of
        approximately $4.1 million during the year ended December 31, 2006, and,
        as of
        that date, had a working capital deficiency of approximately $3.2 million
        and
        accumulated deficit of approximately $46.1 million. These matters raise
        substantial doubt about the Company’s ability to continue as a going concern.
        Management's plans as to these matters are also described in Note 1. The
        consolidated financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 SALBERG
        & COMPANY, P.A.
 Boca
        Raton, Florida
 March
        30,
        2007
  F-1
 
 **ECO2
                      Plastics, Inc. and Subsidiary****(formerly
                      ITEC Environmental Group, Inc.)****Consolidated
                      Balance Sheet****December
                      31, 2006****(in
                      thousands, except share and per share
                      data)**
  Current
                      assetsCash
                      and cash equivalents
                  
                  $
                  97Receivable
                      for cash in escrow for securities sold
                  
                  
                  1,244Inventory
                  
                  
                  213Prepaid
                      expenses and other current assets
                  
                  
                  62Total
                      current assets
                  
                  
                  1,616Property
                      and equipment, net
                  
                  
                  5,894Deferred
                      debt issue costs, net
                  
                  
                  2,736Other
                      assets
                  
                  
                  37Total
                      assets
                  
                  $
                  10,283Current
                      liabilitiesAccounts
                      payable
                  
                  $
                  534Accounts
                      payable - related party
                  
                  
                  468Accrued
                      interest
                  
                  
                  374Accrued
                      liabilities
                  
                  
                  709Current
                      portion of capital lease obligations
                  
                  
                  7Current
                      portion of convertible notes payable, net of debt discountHeld
                      by related party Directors, net of debt discount of $1,567
                  
                  
                  783Held
                      by others, net of debt discount of $1,613
                  
                  
                  1,409Current
                      portion of note payable to California Integrated Waste Management
                      Board
                  
                  
                  192Participation
                      Certificates obligations issued prior to 2004
                  
                  
                  354Total
                      current liabilities
                  
                  
                  4,830Non-current
                      liabilitiesCapital
                      lease obligations, net of current portion
                  
                  
                  9Convertible
                      notes payable, net of debt discount and current portionHeld
                      by related party Directors, net of debt discount of $4,264
                  
                  
                  420Held
                      by others, net of debt discount of $417
                  
                  
                  588Note
                      payable to California Integrated Waste Management Board, net
                      of discount
                      and current portion
                  
                  
                  1,706Total
                      non-current liabilities
                  
                  
                  2,723Total
                      liabilities
                  
                  
                  7,553Commitments
                      and contingencies (Note 12)Stockholders'
                      EquityPreferred
                      stock, $0.001 par value, 10,000,000 shares authorized, none
                      issued and
                      outstanding
                  
                  
                  -Common
                      stock, $0.001 par value, 750,000,000 shares authorized,114,263,824
                      shares issued and outstanding
                  
                  
                  11415,083,715
                      shares issuable
                  
                  
                  15Additional
                      paid-in capital
                  
                  
                  48,747Accumulated
                      deficit
                  
                  
                  (46,146
                  )Total
                      stockholders' equity
                  
                  
                  2,730Total
                      liabilities and stockholders' equity
                  
                  $
                  10,283
 See
            accompanying notes to consolidated financial statements.
  F-2
 **ECO2
                    Plastics, Inc. and Subsidiary****(formerly
                    ITEC Environmental Group, Inc.)****Consolidated
                    Statements of Operations****(in
                    thousands, except per share
                    data)**
  Year
                      ended December 31,2006
                  
                  2005Revenue
                  
                  $
                  61
                  
                  $
                  -Cost
                      of goods sold
                  
                  
                  50
                  
                  
                  -Gross
                      profit
                  
                  
                  11
                  
                  
                  -Operating
                      expensesTechnology
                      development
                  
                  
                  2,008
                  
                  
                  303Consulting
                      and legal fees
                  
                  
                  3,629
                  
                  
                  6,164General
                      and administrative
                  
                  
                  8,912
                  
                  
                  4,065Settlement
                      expense
                  
                  
                  402
                  
                  
                  -Total
                      operating expenses
                  
                  
                  14,951
                  
                  
                  10,532Loss
                      from operations
                  
                  
                  (14,940
                  )
                  
                  (10,532
                  )Other
                      income (expense)Interest
                      expense
                  
                  
                  (4,740
                  )
                  
                  (2,386
                  )Loss
                      on conversion of notes payable for stock
                  
                  
                  -
                  
                  
                  (516
                  )Gain
                      on extinguishment of debt
                  
                  
                  117
                  
                  
                  292Change
                      in fair value liability of warrants and derivatives
                  
                  
                  (1,197
                  )
                  
                  (2,183
                  )Total
                      other income (expense)
                  
                  
                  (5,820
                  )
                  
                  (4,793
                  )Loss
                      before income taxes
                  
                  
                  (20,760
                  )
                  
                  (15,325
                  )Income
                      taxes
                  
                  
                  -
                  
                  
                  -Net
                      loss
                  
                  $
                  (20,760
                  )
                  $
                  (15,325
                  )Net
                      loss per share, basic and diluted
                  
                  $
                  (0.25
                  )
                  $
                  (0.53
                  )Weighted
                      average shares used in computingnet
                      loss per share, basic and diluted
                  
                  
                  84,387
                  
                  
                  28,790
  See
          accompanying notes to consolidated financial statements.
  F-3
 **ECO2
                        Plastics, Inc. and Subsidiary****(formerly
                        ITEC Environmental Group, Inc.)****Consolidated
                        Statement of Changes in Stockholders' Deficit****For
                        the Years Ended December 31, 2006 and 2005****(in
                        thousands, except share
                        data)**
  DeferredCommon
                      stock
                  
                  Common
                      Stock Issuable
                  
                  Additional
                  
                  stock-based
                  
                  AccumulatedShares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  paid-in
                      capital
                  
                  consulting
                  
                  deficit
                  
                  TotalBalance
                      at December 31, 2004
                  
                  
                  6,898,914
                  
                  $
                  7
                  
                  
                  -
                  
                  $
                  -
                  
                  $
                  9,326
                  
                  $
                  (1,178
                  )
                  $
                  (10,061
                  )
                  $
                  (1,906
                  )Warrants
                      issued to officers for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,131
                  
                  
                  
                  
                  
                  
                  
                  
                  3,131Common
                      stock issued for services
                  
                  
                  33,647,088
                  
                  
                  34
                  
                  
                  
                  
                  
                  
                  
                  
                  4,642
                  
                  
                  (1,425
                  )
                  
                  
                  
                  
                  3,251Common
                      stock returned in settlement of debt
                  
                  
                  (1,342,692
                  )
                  
                  (1
                  )
                  
                  
                  
                  
                  
                  
                  
                  (120
                  )
                  
                  
                  
                  
                  
                  
                  
                  (121
                  )Common
                      stock issued for notes payable conversion
                  
                  
                  20,542,303
                  
                  
                  21
                  
                  
                  
                  
                  
                  
                  
                  
                  544
                  
                  
                  
                  
                  
                  
                  
                  
                  565Excess
                      of fair value of common stock issued over faceamount
                      of note payable converted to common stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  516
                  
                  
                  
                  
                  
                  
                  
                  
                  516Fair
                      value of derivative liability upon notes payable
                      conversion
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,490
                  
                  
                  
                  
                  
                  
                  
                  
                  1,490Common
                      stock issued, net of amount contingently refundable
                  
                  
                  2,579,411
                  
                  
                  2
                  
                  
                  
                  
                  
                  
                  
                  
                  225
                  
                  
                  
                  
                  
                  
                  
                  
                  227Fair
                      value of stock purchase rights issued with sale ofcommon
                      stock recorded as a derivative liability
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (392
                  )
                  
                  
                  
                  
                  
                  
                  
                  (392
                  )Contribution
                      of warrants for assignment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  46
                  
                  
                  
                  
                  
                  
                  
                  
                  46Fair
                      value of warrants reclassified to derivative liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (51
                  )
                  
                  
                  
                  
                  
                  
                  
                  (51
                  )Amortization
                      of deferred stock-based consulting expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,095
                  
                  
                  
                  
                  
                  2,095Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (15,325
                  )
                  
                  (15,325
                  )Balance
                      at December 31, 2005
                  
                  
                  62,325,024
                  
                  
                  63
                  
                  
                  -
                  
                  
                  -
                  
                  
                  19,357
                  
                  
                  (508
                  )
                  
                  (25,386
                  )
                  
                  (6,474
                  )Issuance
                      of shares and reclassification from temporaryequity
                      for common stock price reduction contingency
                  
                  
                  752,731
                  
                  
                  1
                  
                  
                  
                  
                  
                  
                  
                  
                  164
                  
                  
                  
                  
                  
                  
                  
                  
                  165Amortization
                      of deferred stock-based consulting
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  508
                  
                  
                  
                  
                  
                  508Contribution
                      of warrants for assignment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  413
                  
                  
                  
                  
                  
                  
                  
                  
                  413Reclassification
                      of fair value liability for warrants assigned
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (413
                  )
                  
                  
                  
                  
                  
                  
                  
                  (413
                  )Stock
                      issue costs
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (82
                  )
                  
                  
                  
                  
                  
                  
                  
                  (82
                  )Issuance
                      of shares for services
                  
                  
                  13,464,824
                  
                  
                  13
                  
                  
                  
                  
                  
                  
                  
                  
                  1,524
                  
                  
                  
                  
                  
                  
                  
                  
                  1,537Increase
                      in additional paid-in capital upon conversionof
                      convertible debt with embedded derivative
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  34
                  
                  
                  
                  
                  
                  
                  
                  
                  34Increase
                      in additional paid-in capital upon repaymentof
                      convertible debt with embedded derivative
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  168
                  
                  
                  
                  
                  
                  
                  
                  
                  168Issuances
                      of shares and warrants for settlements
                  
                  
                  2,564,103
                  
                  
                  2
                  
                  
                  
                  
                  
                  
                  
                  
                  399
                  
                  
                  
                  
                  
                  
                  
                  
                  401Issuance
                      of shares on exercise of warrants
                  
                  
                  8,757,142
                  
                  
                  9
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  9Reclassification
                      of fair value liability for warrants andembedded
                      options upon repayment of certain notes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,148
                  
                  
                  
                  
                  
                  
                  
                  
                  9,148Shares
                      issuable for services
                  
                  
                  
                  
                  
                  
                  
                  
                  9,036,923
                  
                  
                  9
                  
                  
                  1,250
                  
                  
                  
                  
                  
                  
                  
                  
                  1,259Warrants
                      issuable for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,902
                  
                  
                  
                  
                  
                  
                  
                  
                  2,902Warrants
                      issuable for executive compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,775
                  
                  
                  
                  
                  
                  
                  
                  
                  1,775Shares
                      issuable for executive compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  6,046,792
                  
                  
                  6
                  
                  
                  841
                  
                  
                  
                  
                  
                  
                  
                  
                  847Shares
                      issued for executive compensation
                  
                  
                  26,400,000
                  
                  
                  26
                  
                  
                  
                  
                  
                  
                  
                  
                  3,862
                  
                  
                  
                  
                  
                  
                  
                  
                  3,888Value
                      of beneficial cconversion feature and warrantsissued
                      with borrowings after August 18, 2006
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7,405
                  
                  
                  
                  
                  
                  
                  
                  
                  7,405Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (20,760
                  )
                  
                  (20,760
                  )Balance
                      at December 31, 2006
                  
                  
                  114,263,824
                  
                  
                  114
                  
                  
                  15,083,715
                  
                  
                  15
                  
                  
                  48,747
                  
                  
                  -
                  
                  
                  (46,146
                  )
                  
                  2,730
  See
              accompanying notes to consolidated financial statements.
  F-4
 **ECO2
                      Plastics, Inc. and Subsidiary****(formerly
                      ITEC Environmental Group, Inc.)****Consolidated
                      Statements of Cash Flows****(in
                      thousands)**
  Year
                        ended December 31,2006
                    
                    2005Cash
                        flows from operating activities:Net
                        loss
                    
                    $
                    (20,760
                    )
                    $
                    (15,325
                    )Adjustments
                        to reconcile net loss to net cashused
                        by operating activities:Depreciation
                        and amortization
                    
                    
                    551
                    
                    
                    62Gain
                        on extinguishment of debt
                    
                    
                    117
                    
                    
                    (292
                    )Loss
                        on conversion of debt for common stock
                    
                    
                    -
                    
                    
                    516Change
                        in fair value of warrants and derivatives
                    
                    
                    1,197
                    
                    
                    2,183Stock-based
                        compensation
                    
                    
                    10,045
                    
                    
                    9,139Amortization
                        of debt issue costs and discount
                    
                    
                    4,478
                    
                    
                    1,853Changes
                        in operating assets and liabilities:Inventory
                    
                    
                    (145
                    )
                    
                    (67
                    )Prepaid
                        expenses and deposits
                    
                    
                    (44
                    )
                    
                    18Accounts
                        payable
                    
                    
                    228
                    
                    
                    138Accrued
                        liabilities
                    
                    
                    307
                    
                    
                    411Other
                    
                    
                    (34
                    )
                    
                    -Net
                        cash used by operating activities
                    
                    
                    (4,060
                    )
                    
                    (1,364
                    )Cash
                        flows from investing activities:Purchase
                        of property, plant & equipment
                    
                    
                    (3,638
                    )
                    
                    (2,669
                    )Net
                        cash used by investing activities
                    
                    
                    (3,638
                    )
                    
                    (2,669
                    )Cash
                        flows from financing activities:Decrease
                        (increase) in restricted cash in escrow
                    
                    
                    58
                    
                    
                    (58
                    )Proceeds
                        from (payments on) CIWMB note payable
                    
                    
                    (93
                    )
                    
                    1,990Principal
                        payments on capital lease obligations
                    
                    
                    (7
                    )
                    
                    (11
                    )Proceeds
                        from sale of common stock
                    
                    
                    -
                    
                    
                    392Proceeds
                        from issuance of notes payable
                    
                    
                    9,659
                    
                    
                    1,957Payments
                        on notes payable
                    
                    
                    (1,200
                    )
                    
                    (90
                    )Payments
                        of debt issue costs
                    
                    
                    (750
                    )
                    
                    -Proceeds
                        from notes payable - officers
                    
                    
                    96
                    
                    
                    -Payments
                        on notes payable - officers
                    
                    
                    -
                    
                    
                    (120
                    )Net
                        cash provided by financing activities
                    
                    
                    7,763
                    
                    
                    4,060Net
                        increase in cash and cash equivalents
                    
                    
                    65
                    
                    
                    27Cash
                        and cash equivalents, beginning of period
                    
                    
                    32
                    
                    
                    5Cash
                        and cash equivalents, end of period
                    
                    $
                    97
                    
                    $
                    32**Supplemental
                        disclosures of cash flow information:**Cash
                        paid for interest
                    
                    $
                    281
                    
                    $
                    84Cash
                        paid for income taxes
                    
                    $
                    -
                    
                    $
                    -**Supplemental
                        Disclosure of non-cash investing and financing
                        activities**Common
                        stock issued for debt conversion or settlement
                    
                    $
                    279
                    
                    $
                    736Net
                        assets and liabilities settled with common stock
                    
                    $
                    619
                    
                    $
                    -Restricted
                        cash loan proceeds into escrow
                    
                    $
                    -
                    
                    $
                    1,990Debt
                        discounts
                    
                    $
                    10,939
                    
                    $
                    1,521Deferred
                        stock based consulting
                    
                    $
                    -
                    
                    $
                    1,425Deferred
                        debt issue costs
                    
                    $
                    2,962
                    
                    $
                    332Reclassification
                        of fair value of derivative liabilities to equity
                    
                    $
                    9,349
                    
                    $
                    1,490Reclassification
                        of fair value of warrant to derivative liability
                    
                    $
                    413
                    
                    $
                    51
  See
            accompanying notes to consolidated financial statements.
 F-5
  **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
        Itec Environmental Group, Inc.)**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**
  **Note
        1. Description of Business and Summary of Significant Accounting
        Policies**
  Organization
        and Business - ECO 2 Plastics, Inc. (f.k.a. Itec Environmental Group, Inc.) and its wholly-owned
        subsidiary ,
        ECO2
        Environmental Systems, Inc.  were
        incorporated under the laws of the State of Delaware in 2000, and formed
        for the
        purpose of acquiring certain patented technology and the development of a
        worldwide market for its usage. Unless the context indicates otherwise, all
        references herein to “ECO 2” or
        the
“Company” include ECO 2 Plastics, Inc and its
        wholly-owned inactive subsidiary. In March 2007, the Company changed its
        name to ECO 2 Plastics, Inc.
 
 Based
        in
        Riverbank, California, ECO 2 has
        developed a unique and revolutionary patent pending process and system, referred
        to as the Eco 2  TM Environmental System (the “Eco 2 Environmental System”). The Eco 2 Environmental System cleans post-consumer plastics, without the use of water,
        at
        a substantial cost savings versus traditional methods (the “Process”). This
        Process is licensed from Honeywell FM&T (“Honeywell”) and the Department of
        Energy (“DOE”) on an exclusive basis for the life of the patent. Since its
        inception, ECO 2 has
        invested in the development of the technology and equipment comprising the
        Eco 2 Environmental System, which includes the filing of a new “Process Patent” in May
        2005. This included building several scaled up versions of the Prototype
        Eco 2 Environmental System (the “Prototype”), testing of the Prototypes, building a
        pilot plant, evaluating the product produced by the Prototype and real-time
        testing. The Company’s first full scale production facility was constructed in
        Riverbank, California and is now mechanically complete, producing saleable
        product and ramping up to full scale operations. ECO 2 ’s
        goal
        is to build and operate plastic recycling plants (the “ECO 2 Plants”)
        in the USA that utilize the Eco 2 Environmental System and to expand the Eco 2 Environmental System worldwide. ECO 2 ’s
        growth
        strategy includes organic growth, strategic acquisitions and licensing or
        partnership agreements, where appropriate.
 
 Business
        risks and uncertainties - The
        Company operates in the evolving field of plastics materials recycling. New
        developments could both significantly and adversely affect existing and emerging
        technologies in the field. The Company's success in developing additional
        marketable products and processes and achieving a competitive position will
        depend on, among other things, its ability to attract and retain qualified
        management personnel and to raise sufficient capital to meet its operating
        and
        development needs. While the Company is seeking financing through equity
        and
        loans, there can be no assurance that it will be successful in accomplishing
        its
        objectives.
  Basis
        of presentation and Going Concern - The
        accompanying consolidated financial statements have been prepared in conformity
        with accounting principles generally accepted in the United States of America,
        which contemplate continuation of the Company as a going concern. The Company
        has reported recurring losses and cash used by operating activities, and
        has a
        net working capital deficiency that raises substantial doubt about its ability
        to continue as a going concern. During the years ended December 31, 2006
        and
        2005, the Company reported a net loss of approximately $20.8 million and
        $15.3
        million and used cash in operating activities of approximately $4.1 million
        and
        $1.4 million, respectively, and as of December 31, 2006, had a working capital
        deficiency of approximately $3.2 million and accumulated losses from inception
        of $46.1 million.
  Company
        management intends to raise additional debt and equity financing to fund
        future
        capital expenditures, operations and to provide additional working capital,
        and
        in this regard during 2006, the Company received cash of approximately $9.6
        million, and at December 31, 2006 has a receivable for cash in escrow for
        securities sold of approximately $1.2 million pursuant to sales of securities
        in
        connection with its 2006 private placement and subordinated debt offerings.
        Further, subsequent to December 31, 2006, the Company has raised approximately
        $2 million in connection with other offerings. There is no assurance that
        such
        financing will be obtained in sufficient amounts necessary to meet the Company's
        needs. In view of these matters, continuation as a going concern is dependent
        upon the Company's ability to meet its financing requirements, raise additional
        capital, and the success of its future operations or completion of a successful
        business combination.
  The
        accompanying consolidated financial statements do not include any adjustments
        to
        reflect the possible future effects on the recoverability and classification
        of
        assets or the amounts and classifications of liabilities that may result
        from
        the possible inability of the Company to continue as a going
        concern.
  Use
        of
        estimates in the preparation of financial statements - Preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect reported amounts of assets and liabilities and disclosure of contingent
        assets and liabilities at the date of the financial statements and reported
        amounts of revenue and expenses during the reporting period. Actual results
        could differ from those estimates. The more significant accounting estimates
        inherent in the preparation of the Company's financial statements include
        estimates as to the depreciable lives of property and equipment, valuation
        of
        inventories, valuation of equity related instruments and derivatives issued,
        and
        valuation allowance for deferred income tax assets.
  F-6
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Principles
        of Consolidation **-** The
        consolidated financial statements include the accounts of ECO 2 Plastics, Inc. and its inactive wholly-owned subsidiary. All material
        intercompany balances and transactions have been eliminated in
        consolidation
 
 Cash
        and cash equivalents - The
        Company considers deposits that can be redeemed on demand and investments
        that
        have original maturities of less than three months when purchased to be cash
        equivalents.
 
 Receivable
        for cash in escrow for securities sold - During
        December 2006, the Company received cash in escrow for the sale of notes
        payable
        and warrants, a portion of which had not been released to the Company as
        of
        December 31, 2006, and which has subsequently been received by the Company.
  Restricted
        cash in escrow - In
        2005, the Company received cash from the California Integrated Waste Management
        Board pursuant to a $2 million note payable, and received cash from an investor
        fund pursuant to a $600,000 note payable. Funds received from these borrowings
        were placed in escrow, with draws made by the Company upon satisfaction of
        certain conditions, including among others, presentation of invoices for
        purchases of authorized equipment. Until drawn, these funds were classified
        as
        Restricted Cash in Escrow as they were not otherwise available for use by
        the
        Company, and at December 31, 2005 the undrawn balance was $58,000, which
        was
        drawn in 2006.
  Accounts
        Receivable and allowance for doubtful accounts - The
        Company’s accounts receivable are due from companies in the packaging and
        manufacturing industries. Payments from customers are due within 30 days
        after a
        satisfactory credit check, if not satisfactory, payment is required in advance
        of shipment.
  Accounts
        receivable are stated at amounts due from customers net of an allowance for
        doubtful accounts. Accounts outstanding beyond payment terms are considered
        past
        due. The Company determines its allowance by considering a number of factors,
        including the length of time accounts receivable are past due, the Company’s
        previous loss history, the customer’s current ability to pay its obligation to
        the Company, and the condition of the general economy and the industry as
        a
        whole. The Company writes off accounts receivable when they become
        uncollectible, and payments subsequently collected on such accounts are credited
        to the allowance for doubtful accounts and bad debt expense. At
        December 31, 2006 and 2005, the Company had no allowance for doubtful
        accounts.
 
 Inventories -
        Inventories are comprised primarily of raw materials and, to a lesser extent,
        finished goods and recorded at cost determined on a first-in-first out
        basis.
  Property
        and equipment -
        Property and equipment are recorded at cost less accumulated depreciation
        and
        amortization. Expenditures for major additions and improvements are capitalized,
        and minor maintenance, repairs and replacements are charged to expense as
        incurred. When property and equipment are retired or otherwise disposed of,
        the
        cost and accumulated depreciation are removed from the accounts and any
        resulting gain or loss is included in the results of operations. Depreciation
        and amortization are provided using the straight-line method over the estimated
        useful lives of the respective assets, which are 3 years for computer equipment
        and software and furniture and fixtures, 5 to 7 years for manufacturing
        equipment and 7 years for the recycling plant.
 
 Impairment
        of long-lived assets -
        Long-lived assets are reviewed for impairment at least annually, and whenever
        events or changes in circumstances indicate that the carrying amount of the
        assets may not be recoverable. Impairment of long-lived assets would be
        recognized in the event that the net book values of such assets exceed the
        future undiscounted cash flows attributable to such assets.
 
 Deferred
        debt issue costs - The
        Company capitalizes costs incurred in connection with borrowings. These costs
        are amortized as an adjustment to interest expense over the life of the
        borrowing.
 
 Debt
        discount - The
        Company records, as applicable, fees paid to lenders, the fair value of warrants
        issued with debt securities, value of beneficial conversion features of
        convertible debt, or fair value of derivatives embedded in convertible debt
        instruments relating to debt securities, as a debt discount, which is amortized
        as an adjustment to interest expense over the life of the borrowing.
  Contingencies -
        Certain conditions may exist as of the date financial statements are issued,
        which may result in a loss to the Company, but which will only be resolved
        when
        one or more future events occur or fail to occur. Company management and
        its
        legal counsel assess such contingent liabilities, and such assessment inherently
        involves an exercise of judgment. In assessing loss contingencies related
        to
        legal proceedings that are pending against the Company or unasserted claims
        that
        may result in such proceedings, the Company's legal counsel evaluates the
        perceived merits of any legal proceedings or unasserted claims as well as
        the
        perceived merits of the amount of relief sought or expected to be sought
        therein. If the assessment of a contingency indicates that it is probable
        that a
        liability has been incurred and the amount of the liability can be estimated,
        then the estimated liability would be accrued in the Company's financial
        statements. If the assessment indicates that a potentially material loss
        contingency is not probable but is reasonably possible, or is probable but
        cannot be estimated, then the nature of the contingent liability, together
        with
        an estimate of the range of possible loss if determinable would be
        disclosed.
  F-7
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Fair
        value of financial instruments - The
        Company measures its financial assets and liabilities in accordance with
        generally accepted accounting principles. For certain of the Company's financial
        instruments, including cash and cash equivalents, receivables, accounts payable
        and accrued liabilities, the carrying amounts approximate fair value due
        to
        their short maturities. Amounts recorded for notes payable also approximate
        fair
        value because current interest rates offered to the Company for debt of similar
        maturities are substantially the same **.**
 
 Accounting
        for Derivatives - The
        Company evaluates its convertible debt, options, warrants or other contracts
        to
        determine if those contracts or embedded components of those contracts qualify
        as derivatives to be separately accounted for under Statement of Financial
        Accounting Standards 133 “ *Accounting
        for Derivative Instruments and Hedging Activities* ”
and
        related interpretations including EITF 00-19 “ *Accounting
        for Derivative Financial Instruments Indexed to, and Potentially Settled
        in, a
        Company’s Own Stock* ”.
        The
        result of this accounting treatment is that the fair value of the derivative
        is
        marked-to-market each balance sheet date and recorded as a liability. In
        the
        event that the fair value is recorded as a liability, the change in fair value
        is recorded in the consolidated statement of operations as other income or
        expense. Upon conversion or exercise of a derivative instrument, the instrument
        is marked to fair value at the conversion date and then that fair value is
        reclassified to equity. Equity instruments that are initially classified
        as
        equity that become subject to reclassification under SFAS 133 are reclassified
        to liability at the fair value of the instrument on the reclassification
        date.
 
 Revenue
        recognition - The
        Company recognizes revenue when there is persuasive evidence of an arrangement,
        the product has been delivered to the customer, the sales price is fixed
        or
        determinable, and collectibility is reasonably assured. The Company recognizes
        revenues from sales of recycled products upon shipment to customers. Amounts
        received in advance of when products are delivered are recorded as liabilities
        in the accompanying consolidated balance sheet.
 
 Cost
        of goods sold - Cost
        of goods sold includes the cost of raw materials processed.
 
 Income
        taxes - The
        Company accounts for income taxes in accordance with SFAS No. 109, “ *Accounting
        for Income Taxes* ,”
which
        requires recognition of deferred tax assets and liabilities for expected
        future
        tax consequences of events that have been included in financial statements
        or
        tax returns. Under this method, deferred income taxes are recognized for
        the tax
        consequences in future years of differences between the tax bases of assets
        and
        liabilities and their financial reporting amounts at each period end based
        on
        enacted tax laws and statutory tax rates applicable to the periods in which
        the
        differences are expected to affect taxable income. Valuation allowances are
        established, when necessary, to reduce deferred tax assets to amounts expected
        to be realized. The
        Company continues to provide a full valuation allowance to reduce its net
        deferred tax asset to zero, inasmuch as Company management has not determined
        that realization of deferred tax assets is more likely than not. The
        provision for income taxes represents taxes payable for the period and change
        during the period in net deferred tax assets and liabilities.
  Research
        and development cost -
        Research and development represent costs incurred in connection with the
        Company’s development of recycling processes, and such costs are expensed as
        incurred and included in technology development expenses.
 
 Stock-based
        compensation - In
        January 2005 the Company early adopted *Statement
        of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based
        Compensation* (“FAS
        123R”). FAS 123R sets forth the accounting for share-based payment transactions
        in which an enterprise receives employee services in exchange for (a) equity
        instruments of the enterprise or (b) liabilities that are based on the fair
        value of the enterprise's equity instruments or that may be settled by the
        issuance of such equity instruments. The statement requires that such
        transactions be accounted for using a fair-value-based method, which requires
        recording expense over the requisite service period for the fair value of
        options or warrants granted to employees and consultants. Upon adoption,
        the
        Company applied the
        modified-prospective transition method for the transition from APB 25 to
        SFAS
        123R. There was no cumulative effect from the change in accounting
        principles from APB 25 to SFAS 123R.
 
 Basic
        and diluted net loss per share - Basic
        net loss per common share is computed by dividing net loss by the
        weighted-average number of common shares outstanding during the period. Diluted
        net loss per common share is determined using the weighted-average number
        of
        common shares outstanding during the period, adjusted for the dilutive effect
        of
        common stock equivalents, consisting of shares that might be issued upon
        exercise of common stock options, warrants or convertible promissory notes.
        In
        periods where losses are reported, the weighted-average number of common
        shares
        outstanding excludes common stock equivalents, because their inclusion would
        be
        anti-dilutive. Computations of net loss per share for the year ended December
        31, 2006, exclude 113,442,359 shares relating to common stock issuable upon
        conversion of convertible notes payable, and 123,903,310 shares issuable
        upon
        exercise of outstanding and issuable warrants to purchase common stock.
        Computations of net loss per share for the year ended December 31, 2005,
        exclude
        6,632,653 shares relating to common stock issuable upon conversion of
        convertible notes payable, 43,567,930 shares issuable upon exercise of
        outstanding and issuable warrants, and 19,458,403 shares issuable upon exercise
        of rights to purchase common stock. These common stock equivalents could
        have
        the effect of decreasing diluted net income per share in future
        periods.
  F-8
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Concentrations -
        Financial instruments that potentially subject the Company to concentrations
        of
        credit risk consist principally of cash equivalents. At times, amounts of
        cash
        or cash equivalents in U.S. financial institutions exceed amounts insured
        by
        agencies of the U.S. Government. The Company has not experienced any losses
        in
        such accounts and believes it is not exposed to any significant credit risk
        on
        cash and cash equivalents, as these deposits and investments are held by
        high
        credit quality financial institutions.
 
 The
        Company’s business is reliant on its licensing of technology from Honeywell
        International, Inc. See Note 4 for a discussion of this concentration and
        associated risks.
 
 In
        2005,
        the Company  entered
        into a three year agreement with a company to be it’s exclusive agent for the
        sale of PET flake and post-consumer HDPE natural flake and pellets in the
        USA
        and Canada. This agreement prohibits the Company from engaging additional
        sales
        agents, but does not limit the Company’s direct sales to customers.
 
 Development-stage
        company -
        Through December 31, 2005, the Company presented its consolidated financial
        statements in accordance with SFAS No. 7 “ *Accounting
        and Reporting by Development Stage Enterprises* ”.
        This
        statement specifies the guidelines for identifying an enterprise in the
        development stage and the standards of financial accounting and reporting
        for
        such an enterprise, which includes among other things, presentation of inception
        to date consolidated statements of operations and cash flows. During 2006,
        the
        Company commenced initial production activities at its recycling plant in
        Riverbank, and accordingly, it has been determined that the Company is no
        longer
        in the development stage for financial statement presentation
        purposes.
 
 Reclassifications -
        Certain amounts in 2005 financial statements have been reclassified or rounded
        to conform with 2006 presentations.
 
 Recent
        accounting pronouncements - In
        May
        2005, the FASB issued Statement of Financial Accounting Standards No. 154,
        “ *Accounting
        Changes and Error Corrections* ”,
        (“SFAS
        154”). SFAS 154 replaces APB Opinion No. 20, “ *Accounting
        Changes* ,”
and
        SFAS No. 3, “ *Reporting
        Accounting Changes in Interim Financial Statements* ,”
and
        changes the requirements for the accounting for and reporting of a change
        in
        accounting principle. The Company adopted SFAS 154 in 2006. The Company’s
        consolidated results of operations and financial condition will only be impacted
        by SFAS 154 if the Company implements changes in accounting principles that
        are
        addressed by the standard or corrects accounting errors in future
        periods.
 
 In
        November 2005, the FASB issued FASB Staff Position No. 123R-3,
“ *Transition
        Election Related to Accounting for the Tax Effects of Share-Based Payment
        Awards.* ”
The
        FSP
        provides an alternative method of calculating excess tax benefits (the APIC
        pool) from the method defined in SFAS123R for stock-based payments. A one-time
        election to adopt the alternate method in this FSP is available to those
        entities adopting SFAS 123R using either the modified retrospective or modified
        prospective method. The Company elected not to use this alternate method
        to
        calculate its APIC pool at adoption of SFAS 123R.
 
 In
        February 2006, the FASB issued FASB Staff Position SFAS No. 123R-4
“ *Classification
        of Options and Similar Instruments Issued as Employee Compensation That Allow
        for Cash Settlement upon the Occurrence of a Contingent Event* .”
The
        FSP amends SFAS 123R for awards with contingent events that are not probable
        and
        outside the control of the employee that are settled in cash to classify
        such
        awards as an equity award. If the contingent event later becomes probable
        and
        the award had been reported as an equity award, the change in classification
        would be accounted for as a modification. This FSP did not have an impact
        on our
        consolidated financial statements or results of operations since we do not
        have
        such awards.
 
 In
        July
        2006, the FASB issued FASB Interpretation No. 48, *Accounting
        for Uncertainty in Income Taxes* (“FIN  48”),
        which prescribes a recognition threshold and measurement process for recording
        in the financial statements uncertain tax positions taken or expected to
        be
        taken in a tax return. Additionally, FIN No. 48 provides guidance on
        the recognition, classification, accounting in interim periods and disclosure
        requirements for uncertain tax positions. FIN 48 will be effective for the
        Company beginning January 1, 2007. Although the Company is still evaluating
        the potential effects of FIN 48, it is expected that the adoption of FIN
        48 will
        not have a significant impact on the Company’s consolidated results of
        operations or financial position.
  F-9
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108, “ *Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements* ”
(“SAB
        108’).  SAB 108 provides interpretive guidance on how the effects of the
        carryover or reversal of prior year misstatements should be considered in
        quantifying a current year misstatement.  The SEC staff believes that
        registrants should quantify errors using both a balance sheet and income
        statement approach and evaluate whether either approach results in quantifying
        a
        misstatement that, when all relevant quantitative and qualitative factors
        considered, is material.  SAB 108 is effective for fiscal years ending on
        or after November 15, 2006, with early application encouraged.  Application
        of SAB 108 did not have a significant impact on the Company’s consolidated
        results of operations or financial position.
 
 In
        September 2006, the FASB issued SFAS No. 157, “ *Fair
        Value Measurements* ,”
which
        establishes guidelines for measuring fair value and expands disclosures
        regarding fair value measurements. SFAS No. 157 does not require any new
        fair
        value measurements, but rather it eliminates inconsistencies in the guidance
        found in various prior accounting pronouncements. SFAS No. 157 is effective
        for
        fiscal years beginning after November 15, 2007. Earlier adoption is encouraged
        provided financial statements, including for interim periods, for that fiscal
        year have not been issued. Although Company management is still evaluating
        the
        potential effects of SFAS No. 157, the adoption is not expected to have a
        material impact on the Company’s financial position, results of operations, or
        cash flows.
 
 In
        October 2006, the FASB issued FASB Staff Position No. 123(R)-6 “ *Technical
        Corrections of FASB No. 123R* ”
(“FSP
        123(R)-6”). FSP 123(R)-6 amends certain provisions of SFAS 123(R) relating to,
        among other things, the definition of short-term inducement. The provisions
        of
        this FSP are to be applied in the first reporting period beginning after
        the FSP
        is posted to the FASB website. The application of the provisions of FSP 123(R)-6
        did not have a significant impact on the Company’s financial position, results
        of operations, or cash flows.
 
 In
        October 2006, the FASB issued FASB Staff Position No. 123R-5, “ *Amendment
        of FASB Staff Position FAS 123(R)-1* ”
(“FSP
        123R-5”), which amends FSP 123R-1 for equity instruments that were originally
        issued as employee compensation and then modified, with such modification
        made
        to the terms of the instrument solely to reflect an equity restructuring
        that
        occurs when the holders are no longer employees. In such circumstances, no
        change in the recognition or the measurement date of those instruments will
        result if both of the following conditions are met: (i) there is no increase
        in
        fair value of the award (or the ratio of intrinsic value to the exercise
        price
        of the award is preserved, that is, the holder is made whole), or the
        anti-dilution provision is not added to the terms of the award in contemplation
        of an equity restructuring; and (ii) all holders of the same class of equity
        instruments (for example, stock options) are treated in the same manner.
        FSP
        123R-5 is not expected to have a significant impact on the Company’s
        consolidated results of operations or financial position.
 
 In
        December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2
“ *Accounting
        for Registration Payment Arrangements* ”
(FSP
        EITF 00-19-2”), which addresses an issuer’s accounting and disclosures relating
        to registration payment arrangements. Inasmuch as the Company does not have
        any
        such registration payment arrangements, it is not expected that adoption
        of the
        provision of FSP EITF 00-19-2 will have a significant impact on the Company’s
        financial position, results of operations, or cash flows.
 
 **Note
        2.**  **Inventories**
 
 Inventories
        at December 31, 2006 consist of the following (in thousands):
 Raw
                    materials
                
                $
                208Finished
                    goods
                
                
                5Total
                
                $
                213
  **Note
        3. Property and Equipment**
 
 Property
        and equipment at December 31, 2006 consist of the following (in
        thousands):
 Manufacturing
                    tools
                
                $
                31Furniture
                    and equipment
                
                
                95Recycling
                    plant and construction in progress
                
                
                6,460Total
                    property and equipment
                
                
                6,586Less
                    accumulated depreciation and amortization
                
                
                (692
                )Property
                    and equipment, net
                
                $
                5,894
  F-10
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 During
        2006 and 2005, the Company capitalized interest of approximately $43,000
        and
        $29,000, respectively, into the recycling plant during the construction
        period.
 
 During
        2005, equipment with a net book value of approximately $61,000 was impaired
        and
        the net amount charged to operations as part of general and administrative
        expenses.
 
 The
        Company has a lease agreement for certain plant equipment, which has been
        accounted for as a capital lease and capitalized assets are included in amounts
        of property and equipment. The cost of these leased assets approximates $25,000
        and at December 31, 2006 had been fully amortized. Future minimum lease payments
        required under this capital lease agreement approximate $11,000 in
        2007.
 
 **Note
        4. Technology License**
 
 In
        2005,
        the Company and Honeywell International, Inc. (“Honeywell”) amended certain
        terms of the license agreement entered into by the parties in 2000, which,
        among
        other things, extended the agreement to be in effect for the life of the
        patent.
        Pursuant to terms of the Agreement, as amended, the Company obtained certain
        worldwide license rights to practice the methods and to make, use, and sell
        the
        products which are covered by the proprietary rights, limited to the field
        of
        use of separating and recovering motor oil from high density polyethylene
        plastic. Under this amended Agreement, the Company is required to pay minimum
        annual royalties of $50,000 for 2006, $100,000 for 2007, $200,000 for 2008
        and
        $300,000 for 2009 and for years thereafter. The royalty provision was amended
        whereby the Company shall pay a royalty rate of $.005 per pound of recycled
        plastics sold in the United States which shall be due within 30 days of the
        close of the previous quarter. In 2006, the Company and Honeywell amended
        certain terms of the license agreement, which among other things, made the
        license grant to the Company an exclusive, nontransferable, worldwide license
        to
        practice the methods and to make, use, and sell the products and/or services
        covered by the Proprietary Rights limited to the field of use, as defined,
        and
        to certain sublicense rights. Pursuant to terms of the amendment, the first
        annual minimum payment is due in February 2007.
 
 Honeywell
        may terminate this agreement in the event of a bankruptcy filing or insolvency
        of the Company, an assignment for the benefit of creditors of the Company,
        the
        nationalization of the industry which encompasses any products or services,
        any
        suspension of payments under the terms of the agreement by government
        regulation, the Company's failure to commence manufacture, a substantial
        change
        in ownership of the Company (whether resulting from merger, acquisition,
        consolidation or otherwise), another company or person acquiring control
        of the
        Company, or the existence of a state of war between the United States and
        any
        country where the Company has a license to manufacture products or provide
        services. In addition, if either party to the agreement defaults for any
        reason
        in any of the obligations under the terms of the agreement, the other party
        will
        have the right to terminate the agreement by giving at least 60 days' written
        notice. Among other things, terms of the agreement require the Company to
        observe all applicable United States and foreign laws, regulations, rules,
        and
        decrees with respect to the transfer of the proprietary rights and related
        technical data to foreign countries and failure to conform to such laws,
        regulations, rules and decrees may result in criminal liability.
 
 **Note
        5.  Notes Payable to California Integrated Waste Management
        Board**
 
 Notes
        payable and related unamortized debt discount at December 31, 2006 consist
        of
        the following (in thousands):
 
 Note
                  payable to CIWMB
              
              $
              1,907Debt
                  discount, net of amortization
              
              
              (9
              )1,898Less
                  current portion
              
              
              192Note
                  payable to CIWMB, net of discount and net of current
                  portion
              
              $
              1,706
   F-11
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Pursuant
        to terms of a Business Loan Agreement, Security Agreements, and $2 million
        Promissory Note with the California Integrated Waste Management Board (“CIWMB”),
        in June 2005, the Company received cash into escrow after deduction of $10,000
        loan fees paid to CIWMB. The loan fee was recorded as a debt discount, which
        is
        amortized over the loan term.  The promissory note bears interest at 4.25%
        per annum, with interest only monthly payments during the first year, and
        then
        principal and interest monthly payments of approximately $22,500 starting
        in
        July 2006 until fully paid in May 2015. The promissory note is collateralized
        by
        equipment purchased for the recycling plant, a secondary security interest
        in
        all other machinery and equipment and other Company assets, and guaranteed
        by
        the Company's Chief Technical Officer (former Chief Executive Officer). The
        Company made draws from cash in escrow upon meeting certain conditions,
        including presentation of equipment invoices. Minimum annual principal payments
        approximate $192,000 in 2007, $200,000 in 2008, $209,000 in 2009, $219,000
        in
        2010, $229,000 in 2011 and $842,000 thereafter during 2012 through
        2015.
 
 **Note
        6. Convertible Notes Payable**
 
 Convertible
        notes payable and related unamortized debt discount at December 31, 2006
        consist
        of the following (in thousands):
 **Notes**
                
                **Unamortized******
                  **Debt
                    discount**
                
                **Notes,
                    net of******
                  **debt
                    discount**Private
                    Placement Notes
                
                $
                8,059
                
                $
                (5,939
                )
                $
                2,120Subordinated
                    Notes
                
                
                3,002
                
                
                (1,922
                )
                
                1,080Total
                
                
                11,061
                
                
                (7,861
                )
                
                3,200Less
                    current portion
                
                
                (
                    5,372
                )
                
                3,180
                
                
                (2,192
                )Convertible
                    Notes payable, net
                
                $
                5,689
                
                $
                (4,681
                )
                $
                1,008
 Private
        Placement Notes -
        As of
        December 31, 2006, the Company received subscriptions and related funds into
        escrow pursuant to a private placement memorandum (the “PPM”) of up to $9
        million, through the offering of a minimum of 20 Units for $25,000 per unit.
        Each Unit consists of a $25,000 junior secured subordinated convertible
        debenture (the “Private Placement Notes”), bearing interest at 10% with
        principal and accrued interest due 18 months from issuance (“maturity date”),
        convertible into shares of the Company’s common stock at a price of $0.0975 per
        share, and a warrant, with a cashless exercise provision, to purchase 75,000
        shares of restricted common stock of the Company, exercisable for approximately
        10 years (expires April 15, 2015) at an exercise price of $0.06 per share
        (the
“Private Placement Warrants”). The conversion price of the debentures and
        exercise price of the warrant are subject to anti-dilution downward adjustments
        in the event the Company sells common stock or securities convertible into
        common stock at a price below the conversion or exercise prices. The security
        is
        subordinated only to the security interest granted to CIWMB. The shares
        underlying the debentures and warrants are subject to piggy back registration
        rights. In addition, a registration statement must be filed within 30 days
        after
        an investor elects to convert all or any portion of the debenture. During
        2006,
        the Company amended the PPM, with the written consent and approval of PPM
        investors to, among other things, eliminate penalty provisions relating to
        registration rights, which could have had the effect of potentially lowering
        the
        conversion price of convertible debentures based on filing and effectiveness
        deadlines. During 2006, proceeds for approximately $7.9 million of Private
        Placement Notes had been received into escrow, and as a result the Company
        has
        recorded convertible notes payable and approximately 23.7 million warrants.
        At
        December 31, 2006, approximately $1.2 million of escrowed funds had not been
        disbursed to the Company, which is reported as a receivable for cash in escrow
        for securities sold, and which was disbursed to the Company in 2007. During
        2006, holders of $150,000 of other notes payable converted those notes, plus
        accrued interest into subscription units comprised of approximately $159,000
        of
        Private Placement Notes and 450,000 warrants. Additionally, during 2006,
        the
        Company also issued $50,000 of Private Placement Notes and 150,000 Private
        Placement Warrants, to a consultant for services to be provided pursuant
        to a
        one-year consulting agreement, and $10,000 of Private Placement Notes and
        30,000
        Private Placement Warrants for an expense reimbursement. As of December 31,
        2006, the offering had not closed and the debentures and warrants not been
        issued. On February 1, 2007, the offering closed.
 
 Prior
        to
        August 18, 2006, the Company had certain notes payable outstanding that included
        a variable conversion price, which qualified the embedded conversion option
        as a
        derivative pursuant to SFAS 133 and related interpretations, since the
        conversion price was variable and the ability to have enough authorized common
        shares to fulfill its potential obligations under convertible debt contracts
        was
        not under Company control. In such circumstances, the debenture instrument
        is
        separated into a debt instrument and an embedded option instrument for financial
        statement purposes and the embedded option instrument is recorded as a liability
        at fair value and marked to fair value at each reporting date through the
        statement of operations as other income or expense. The existence of the
        absence
        of the ability to have enough authorized common shares to fulfill its potential
        obligations for the repaid notes payable, required that all conversion features
        and all warrants outstanding also be accounted for at fair value and marked
        to
        fair value through the statement of operations.
  F-12
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 At
        the
        Private Placement Note issuance dates through August 18, 2006, the total
        fair
        value liability recorded for the Private Placement Note embedded conversion
        options and Private Placement Warrants was approximately $3.8 million and
        at
        August 18, 2006, the total fair value liability recorded approximated $2.4
        million. The fair value of the embedded conversion option and warrant was
        computed using a Black-Scholes option pricing method with the following
        assumptions: contractual term of 1 year (due to its short term) and contractual
        term of 10 years (since no historical basis yet exists), respectively,
        volatility of approximately 175% (based on historical volatility over the
        expected term), respectively, zero dividends and an interest rate of
        approximately 5%. The full fair value of the warrants of approximately $1.1
        million, and $1.5 million of the $2.7 million fair value of the embedded
        conversion feature were allocated to debt discount, the maximum to be recorded,
        and the remaining $1.2 million to operations for the year ended December
        31,
        2006, respectively, as a change in fair value of warrants and derivatives.
        At
        August 18, 2006, when the Company no longer had an inability to have enough
        authorized common shares to fulfill its potential obligations, the fair value
        liability of approximately $2.4 million recorded at that date was reclassified
        to additional paid-in capital.
 
 In
        2006,
        debt discount of approximately $7.7 million has been recorded, of which
        approximately $1.8 million was amortized to interest expense during the year
        ended December 31, 2006. The fair value of warrants was computed using a
        Black-Scholes option pricing method with the following assumptions: contractual
        term of 10 years, volatility of approximately 175%, zero dividends and interest
        rate of approximately 5%.
 
 Subsequent
        to December 31, 2006, proceeds from the sale of Private Placement Notes of
        approximately $2.0 million have been received in escrow and the Company has
        received substantially all escrow funds.
 
 Subordinated
        Notes - During
        2006, the Company received $2.8 million pursuant to a private placement of
        subordinated convertible notes (the “Subordinated Notes”), bearing interest at
        10%, with principal and accrued interest due 12 months from issuance (“maturity
        date”), convertible into shares of the Company’s common stock at a price of
        $0.0975 per share, and warrants, with cashless exercise provisions, to purchase
        28,000,000 shares of restricted common stock of the Company, exercisable
        until
        April 2015 at an exercise price of $0.12 per share (the “Subordinated Notes
        Warrants”). The conversion price of the debentures is subject to anti-dilution
        downward adjustments in the event the Company sells common stock or securities
        convertible into common stock at a price below the conversion price. The
        Subordinated Notes rank pari passu with Private Placement Notes and are
        subordinated only to the security interest granted to CIWMB. The shares
        underlying the notes and warrants are subject to piggy back registration
        rights.
        In addition, a registration statement must be filed within 30 days after
        an
        investor elects to convert all or any portion of the note. In August 2006,
        the
        holder of a $200,000 short-term convertible note payable converted the note,
        plus accrued interest into a Subordinated Note of $202,000 and 2,020,000
        warrants. In the event the holders of Subordinated Notes elect to convert
        such
        notes into shares of Company common stock, the Company will issue warrants
        exercisable into that number of shares of the Company’s common stock equal to
        the quotient of (i) 65% of the value of the converted notes divided by (ii)
        a
        per share price of $0.12. Pursuant to terms of the subordinated convertible
        notes purchase agreement, holders of a majority of the Subordinated Notes
        have
        the right to designate one person to become a member of the Company’s Board of
        Directors, and in this regard did so designate a person who became one of
        the
        Company’s Directors in 2006.
 
 **Note
        7. Notes payable that have been repaid or converted**
 
 In
        January 2005, the Company issued for cash a 10% note payable for $50,000
        due in
        July 2005. The proceeds were used for working capital. In June 2005, the
        Company
        issued 2,576,750 shares of its common stock upon conversion of the note payable.
        The Company recorded the excess of estimated fair value of shares issued
        (based
        on the $0.115 per share quoted market price on the conversion date) of
        approximately $156,000 as an increase in additional paid-in capital and as
        a
        loss on conversion of notes payable for common stock.
  In
        April
        2005, the Company issued for cash a 10% note payable for $60,000 due in August
        2005, and convertible into shares of Company common stock at a per share
        price
        of the lesser of approximately $0.02, or 50% of the closing stock price on
        the
        date of conversion. The embedded conversion option qualified as a derivative
        pursuant to SFAS 133 since the conversion price is variable and the ability
        to
        have enough authorized common shares to fulfill its potential obligations
        under
        convertible debt contracts is not under the Company control. The estimated
        fair
        value of the conversion option of approximately $259,000 was computed using
        a
        Black-Scholes option pricing method with the following assumptions: contractual
        term of .5 years (due to its short term), volatility of 207% (based on
        historical volatility over the expected term), zero dividends and interest
        rate
        of 4.5%. The $259,000 was allocated $60,000 to debt discount, the maximum
        to be
        recorded, and $199,000 to other expense as a change in fair value of warrants
        and derivatives. The discount is amortized to interest expense over the term
        of
        the note. In June 2005, the note was converted into 3,029,100 shares of Company
        common stock in accordance with conversion terms and the then fair value
        liability of approximately $167,000 was reclassified to equity. The full
        amount
        of the $60,000 debt discount was amortized to interest expense in 2005.
  F-13
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 In
        June
        2005, the Company issued for cash a 10% note payable for $128,000 due in
        October
        2005, and convertible into shares of Company common stock at the lesser of
        50%
        of the quoted trade price on the conversion date or $0.045 per share. The
        embedded conversion option qualified as a derivative pursuant to SFAS 133
        since
        the conversion price is variable and the ability to have enough authorized
        common shares to fulfill its potential obligations under convertible debt
        contracts is not under the Company control. The estimated fair value of the
        conversion option of approximately $156,000 was computed using a Black-Scholes
        option pricing method with the following assumptions: contractual term of
        .33
        years (due to its short term), volatility of 207% (based on historical
        volatility over the expected term), zero dividends and interest rate of 4.5%.
        The $156,000 was allocated $128,000 to debt discount, the maximum to be
        recorded, and $28,000 to operations as a change in fair value of warrants
        and
        derivatives. The discount was amortized to interest expense over the note
        term.
        The full amount of the $128,000 debt discount was amortized to interest expense
        in 2005. In October 2005, the note was converted into 2,937,937 common shares
        and the then fair value liability of $310,000 was reclassified to
        equity.
  In
        July
        2005, the Company issued for cash a 10% note payable for $250,000 due in
        October
        2005, and convertible into shares of Company common stock at the lesser of
        50%
        of the quoted trade price on the conversion date or $0.028 per share. The
        embedded conversion option qualified as a derivative pursuant to SFAS 133
        since
        the conversion price is variable and the ability to have enough authorized
        common shares to fulfill its potential obligations under convertible debt
        contracts is not under the Company control. The estimated fair value of the
        conversion option of approximately $442,000 was computed using a Black-Scholes
        option pricing method with the following assumptions: contractual term of
        .33
        years (due to its short term), volatility of 207% (based on historical
        volatility over the expected term), zero dividends and interest rate of 4.45%.
        The $442,000 was allocated $250,000 to debt discount, the maximum to be
        recorded, and $192,000 to operations as a change in fair value of warrants
        and
        derivatives. The discount was amortized to interest expense over the note
        term.
        The full amount of the $250,000 debt discount was amortized to interest expense
        in 2005. In November 2005, the note was converted to 9,404,718 shares of
        Company
        common stock and the then fair value liability of $932,000 was reclassified
        to
        equity.
 
 In
        July
        2005, the Company issued for cash a 10% note payable for $30,000 due in November
        2005, and convertible into shares of Company common stock at the lesser of
        50%
        of the quoted trade price on the conversion date or $0.035 per share. In
        addition, the Company issued to warrants to purchase 300,000 shares of its
        common stock at a per share price of $0.25 per share. The embedded conversion
        option qualified as a derivative pursuant to SFAS 133 since the conversion
        price
        is variable and the ability to have enough authorized common shares to fulfill
        its potential obligations under convertible debt contracts is not under the
        Company control. The estimated fair value of the conversion option of
        approximately $54,000 was computed using a Black-Scholes option pricing method
        with the following assumptions: contractual term of .33 years, volatility
        of
        207% (based on historical volatility over the expected term), zero dividends
        and
        interest rate of 4.5%, and was allocated $30,000 to debt discount the maximum
        to
        be recorded, and $24,000 to other expense as a change in fair value of warrants
        and derivatives. The discount is amortized to interest expense over the term
        of
        the note. The full amount of the $30,000 debt discount was amortized into
        interest expense in 2005. In November 2005, the note was converted to 885,326
        shares of Company common stock and the then fair value liability of $81,000
        was
        reclassified to equity.
 
 In
        August
        2005, the Company borrowed $33,000 on a short-term borrowing arrangement.
        The
        proceeds were used for working capital. In August 2005, the Company issued
        1,708,472 shares of its common stock upon conversion of the note payable,
        and
        recorded the excess of estimated fair value of the shares issued (based on
        the
        $.23 per share quoted market price on the conversion date) of $360,000 as
        an
        increase in additional paid-in capital and as a loss on conversion of notes
        payable for common stock.
 
 In
        August
        2005, the Company received from The Elevation Fund, LLC (“Elevation”) cash of
        $600,000 in consideration for (i) a $600,000 promissory note, bearing interest
        at the greater of prime plus 5% or 10.75% (18% if there is an event of default)
        and due in 90 days or earlier in certain circumstances (the “Bridge Notes”), and
        (ii) cashless exercise warrants to purchase 8,500,000 shares of the Company's
        common stock at an exercise price of $0.001 per share, immediately exercisable
        for ten years (the “Bridge Warrants”). The warrant value was recorded at
        approximately $352,000, the proportionate portion of the value of the warrant
        using a Black-Scholes option pricing method to the total of the warrant value
        and face amount of the note, as an increase in additional paid-in capital
        and as
        a debt discount to be amortized to interest expense over the term of the
        note.
        The full amount of the $352,000 debt discount was amortized into interest
        expense in 2005. The $20,000 origination fee to be paid directly to Elevation
        was also deferred as a debt discount and amortized to interest expense. The
        Bridge Notes were collateralized by a second position lien in all Company
        equipment and a blanket lien on all other assets. In April 2006, the Company
        received notice from Elevation that the Company defaulted on the loan, accrued
        interest and fees in 2005, and notified the Company that interest is accruing
        at
        the default rate of 18%. In June 2006, the Company entered into a Forbearance
        Agreement with Elevation, which provides for, among other things, payments,
        comprised of principal, interest, fees, costs and expenses, which were paid
        in
        full in August 2006 and included $600,000 principal and approximately $120,000
        of interest. In August 2006, the Company and Elevation executed a Settlement
        Agreement and Release.
  F-14
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Additionally
        in August 2005, the Company received from another investor (“Investor”) cash of
        $100,000 in consideration for (i) a $100,000 Bridge Note, and (ii) Bridge
        Warrants for 1,418,439 shares of Company common stock. The warrant value
        was
        recorded at $65,000 as an increase in additional paid-in capital and as a
        debt
        discount and was amortized to interest expense over the note term . The full
        amount of debt discount was amortized to interest expense in 2005. In April
        2006
        the Company received notice from the Investor that the Company has defaulted
        on
        the loan in December 2005. The notification states that interest is accruing
        at
        the default rate of 18% and declares that all unpaid amounts of principal
        and
        interest are immediately due and payable. In May 2006, the Company entered
        into
        a Forbearance Agreement with the Investor and other note holders as described
        in
        the following paragraph, which provides for, among other things, payments
        comprised of principal, interest, costs and expenses, which were paid in
        full in
        August 2006 and included $100,000 principal and approximately $12,000 of
        interest. In August 2006, the Company and the Investor executed a Settlement
        Agreement and Release.
 
 Additionally,
        in 2005, the Company received from other investors (the “Lenders”) cash of
        $650,000 in consideration for promissory notes totaling $650,000, bearing
        interest at 10% (18% if there is an event of default), due in 120 days or
        earlier in certain circumstances (the “Lenders Notes”), and convertible into
        shares of the Company's common stock at a per share price of the lesser of
        75%
        of (i) $.13, or (ii) the price of the common stock of the Company on the
        Over
        The Counter Bulletin Board on the day the Lenders elect to convert. The embedded
        conversion option qualified as a derivative pursuant to SFAS 133 since the
        conversion price is variable and the ability to have enough authorized common
        shares to fulfill its potential obligations under convertible debt contracts
        is
        not under the Company control. The estimated value of the conversion options
        of
        approximately $833,000 was computed using a Black-Scholes option pricing
        method
        with the following assumptions: contractual term of .33 years (due to its
        short
        term), volatility of 207% (based on historical volatility over the expected
        term), zero dividends and interest rate of 4.5%, and was allocated $636,000
        to
        debt discount, the maximum to be recorded, and $197,000 to other expense
        as a
        change in fair value of warrants and derivatives. The discount was amortized
        to
        interest expense over the note term. The full amount of the $600,000 debt
        discount was amortized to interest expense in 2005. At December 31, 2005
        the
        fair value liability has been marked down to $159,000 using the Black-Scholes
        option pricing method with the following assumptions: contractual term of
        .01
        years (due to its short term), volatility of 207% (based on historical
        volatility over the expected term), zero dividends and interest rate of 4.5%.
        In
        April 2006, the Company received notice from a representative of some of
        the
        Lenders representing $500,000 of these notes that the Company defaulted on
        the
        loans principal in 2005. The notification states that interest is accruing
        at
        the default rate of 18% and declares that all unpaid amounts of principal
        and
        interest are immediately due and payable with such interest continuing to
        accrue
        until the notes are paid in full. In May 2006, the Company entered into a
        Forbearance Agreement with the notifying Lenders and the Investor as described
        in the previous paragraph, which provides for, among other things, payments
        comprised of principal, interest, fees, costs and expenses, which were paid
        in
        full in August and included $500,000 principal and approximately $62,000
        of
        interest. In August 2006, the Company and Lenders executed a Settlement
        Agreement and Release.
 
 During
        2006, holders of $150,000 converted Lenders Notes, together with accrued
        interest, into approximately $159,000 of Private Placement Notes and 450,000
        Subordinated Note Warrants.
 
 Bridge
        Notes, as described above, were convertible in whole or in part into securities
        offered by the Company in its private placement offering of debentures and
        warrants (the “Private Placement”) on the same terms as such securities are sold
        to the other investors in the Private Placement, and in this regard the Company
        granted the lender the right to invest up to the Bridge Notes amount on the
        same
        terms as are offered to other investors in the Private Placement. The Company
        has agreed to prepare and, as soon as practicable, but in no event later
        than 75
        days following the closing date of the Private Placement (the “Filing
        Deadline”), file with the Securities and Exchange Commission (the “SEC”) a
        registration statement on Form SB-2 covering the resale of all shares of
        common
        stock underlying the Bridge Warrants, and has further agreed to use its
        reasonable best efforts to have such registration statement declared effective
        by the SEC as soon as practicable, but in no event later than the date which
        is
        180 days following the closing date of the Private Placement (the “Effectiveness
        Deadline”). In the event the registration statement required to be filed is not
        filed by the Filing Deadline, the Company shall issue to the lender additional
        cashless warrants to purchase shares of the Company's common stock (“Additional
        Warrants”) in an amount equal to 10% of the number of shares underlying the
        Bridge Warrant issued to the lender for each 30 day period (or a portion
        thereof) during which time such registration statement has not been filed
        with
        the SEC, which Additional Warrants shall be issued on the first day of each
        30
        day period commencing on the Filing Deadline. In addition, in the event the
        registration statement required to be filed is not declared effective by
        the SEC
        by the Effectiveness Deadline, the Company shall issue to the Lender Additional
        Warrants in an amount equal to 10% of the number of shares underlying the
        Warrant issued to the Lender for each 30 day period (or portion thereof)
        during
        which time such registration statement has not been declared effective by
        the
        SEC, which Additional Warrants shall be issued on the first day of each 30
        day
        period and commencing on the Effectiveness Deadline. The exercise price for
        the
        Additional Warrants issued shall be the same as the exercise price of the
        warrants that are issued in the Private Placement. Due to the contingent
        nature
        of the registration statement filing penalties and Company management’s belief
        that at December 31, 2006 that it is not more likely than not that such
        penalties will be payable, no liability has been recorded.
  F-15
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 In
        July
        2006, the Company entered into a loan agreement pursuant to which the Company
        received cash of $200,000 in consideration for a $200,000 promissory note
        bearing interest at 12% due one month from issuance and 600,000 ten-year
        warrants to purchase Company common stock at $0.12 per share. The note was
        convertible at the holder’s option and in August 2006, $202,000, including
        accrued interest, was converted into $202,000 of Subordinated Notes and
        2,020,000 warrants to purchase shares of Company common stock at $0.12 per
        share
        until April 2015.
 
 **Note
        8. Participation Certificates Obligations Issued Prior to
        2004**
 
 In
        2000,
        the Company’s Board of Directors authorized the issuance of its common stock to
        various investors. An agreement between the Company’s then President and
        investors allowed participants in the Italian General Plastics Development
        Program to make advances based on Company common stock. Funds thus generated
        (approximately $815,000) were to be repaid when the Company became a public
        company. Upon repayment of funds advanced, investors would retain their stock
        ownership. To comply with Italian regulations, the Company’s then President
        personally issued shares of Company common stock to the investors. Funds
        advanced by investors were deposited in accounts in the former President's
        name
        and the advances were to made to the Company’s former President. Based upon the
        substance of the transactions, the transactions have been presented as Company
        borrowings in the accompanying consolidated balance sheet. The Company’s former
        President has represented that funds received are assets of Company and that
        the
        Company has assumed the related obligations. Prior to December 31, 2004,
        the
        Company entered into various agreements, including a settlement and release
        agreement, with certain investors pursuant to which the investors received
        shares of Company common stock in exchange for their prior participation
        certificates. The balance outstanding approximates $354,000, which has not
        changed since 2004.
 
 **Note
        9. Common Stock, Stock Warrants and Other Rights to Purchase Common
        Stock**
 
 Authorized
        Shares - The
        Articles of Incorporation of Itec authorize a maximum of 750,000,000 shares
        of
        $0.001 par value common stock and 10,000,000 shares of $0.001 par value
        preferred stock. Each share of common stock is entitled to one voting right,
        the
        right to share in earnings and the right to share in assets upon
        liquidation.
 
 Common
        Stock Issued for Services and Settlement - In
        2004, Itec executed an agreement with an investment advisor whereby the Company
        issued a 24% note payable for $500,000 in exchange for, among other things,
        303,030 shares of the Company's common stock During 2005, the Company issued
        an
        additional 3,000,000 shares of common stock for services. Such shares were
        valued at $330,000 based on the quoted trading price of $.11 per share on
        the
        grant date. In July 2005, the Company entered into a settlement and release
        agreement with the investment advisor pursuant to which, among other things,
        the
        Company paid $90,000 and received 1,342,692 shares of it's common stock back
        from escrow, valued at $121,000, which were the remaining amount of the
        3,000,000 shares issued in 2005. All amounts due and payable between the
        companies were considered fully-settled, and the note payable and agreement
        were
        cancelled and terminated. In connection with this settlement, the Company
        recorded a gain on extinguishment of debt of approximately $292,000 in 2005,
        which included a decrease in additional paid-in capital of approximately
        $121,000, the fair value of shares cancelled.
 
 During
        2005, the Company issued 17,207,634 shares, valued at approximately $2.4
        million
        based on quoted trade prices at the grant dates ranging from $.07 to $.24
        per
        share and averaging approximately $.14 per share, to consultants for services.
        The value was recognized over the respective terms of the agreements resulting
        in deferred stock based consulting expense of approximately $365,000 at December
        31, 2005 and was fully amortized during 2006.
 
 Pursuant
        to an agreement with The Otto Law Group, PLLC (“OLG”), a law firm, the managing
        partner of which is one of the Company’s Directors, for legal services, the
        Company periodically issued vested non-forfeitable common shares, and any
        proceeds from the sale of such shares by OLG and reported to the Company
        were
        credited against invoice amounts due to OLG for legal services. The agreement
        had no stated term. Due to the contingent nature of the proceeds and the
        unstated term of the agreement, the fair value of shares issued has been
        expensed when issued. During 2005 the Company issued 9,957,692 common shares
        pursuant to the legal services agreement. The shares were valued at the quoted
        trading prices on the respective grant dates which ranged from $.09 to $.23
        per
        share or an average of approximately $.16 per share, resulting in an expense
        of
        approximately $1.6 million. During 2005, the Company also recognized
        approximately $1.2 million of stock based legal expenses that had previously
        been deferred. During 2006, the Company issued 2,802,925 shares of its common
        stock and recorded legal expense of approximately $336,000, which was determined
        based on the $0.12 per share quoted trading price on date of issuance. During
        2005, the Company applied $436,000 of proceeds received by OLG from sales
        of
        their shares to the accounts payable balance due OLG. There were no reported
        stock sale proceeds during 2006. In August 2006, the Company entered into
        an
        engagement agreement with OLG, whereby the prior agreement was superseded
        and
        replaced, and among other things, the Company issued 2,500,000 shares of
        its
        common stock. The shares were valued at the quoted trading price of $0.11
        on the
        grant date, resulting in an expense of $275,000.
  F-16
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 During
        2005, pursuant to the “safe harbor” private offering exemption provided by Rule
        506 of Regulation D under Section 4(2) and of the Securities Act of 1933
        (the
“Securities Act”), the Company issued 2,737,220 shares of its common stock (and
        certain registration rights) to Brean Murray Carret & Co., LLC (“BMC”) as
        retainer for certain corporate finance and investment banking services to
        be
        provided pursuant to the corporate finance representation agreement between
        the
        parties entered into in 2005. The agreement was for a period of one year,
        extendable to two years upon completion of a successful financing. In the
        event
        of a consummated transaction, the Company would pay the investment banker
        fees
        ranging from 2% to 8% of amounts raised, varying in amounts of securities
        issued
        in the financing, depending of the type of securities and nature of transaction.
        The shares were valued at $246,000 based on a $.09 quoted trading price on
        the
        grant date. The $246,000 was deferred and amortized over the service term
        resulting in a deferred expense of $143,000 at December 31, 2005 and was
        fully
        amortized in 2006. In October 2005, the Company issued an additional 744,542
        shares of its common stock and warrants to purchase of 850,000 shares of
        common
        stock at a per share price of $0.001 for a term of 5 years to BMC and recorded
        deferred debt issue costs of $209,000, based on the $.10 quoted trade price
        at
        the issue date. The full amount of debt issue costs was amortized to interest
        expense in 2005.
 
 During
        2006, the Company issued 2,802,925 shares of its common stock to Cambridge
        Partners, LLC for investor advisory services provided to the Company and
        recorded consulting expense of approximately $336,000, which was determined
        based on the $0.12 per share quoted trading price on the grant
        date.
 
 During
        2006, the Company issued 5,000,000 shares of its common stock to Hudson
        Investment Advisors, Inc. for consulting services provided to the Company
        and
        recorded consulting expense of approximately $550,000, which was determined
        based on the $0.11 per share quoted trading price on the grant
        date.
  During
        2006, the Company issued 358,974 shares of its common stock to an individual
        for
        consulting services provided to the Company and recorded consulting expense
        of
        approximately $39,000, which was determined based on the $0.11 per share
        quoted
        trading price on the grant date.
 
 During
        July 2006, as further described in Note 12, the Company entered into an
        employment agreement with its former Chief Executive Officer to serve as
        Chief
        Technology Officer, pursuant to which, among other things, the executive
        will
        receive 24,000,000 fully-vested shares or share equivalents (warrants), of
        which
        he had previously received 17,953,208 of such shares and share equivalents,
        or
        an additional 6,046,792 shares. In connection with this agreement, inasmuch
        as
        the shares were fully vested, pursuant to SFAS 123R, the Company recorded
        compensation expense and an increase in additional paid-in capital of $847,000,
        which was determined on the $0.14 per share quoted trading price on the date
        of
        the employment agreement.
 
 During
        July 2006, the Company entered into an employment agreement with an individual
        to serve as its Chief Executive Officer and a Director, pursuant to which,
        among
        other things, the executive will receive shares of Company common stock (or
        stock options, at the executive’s election) covering 8% of Common Stock
        Equivalents, as defined in the agreement. The Effective Date of the employment
        agreement is September 18, 2006, at which date the executive is to receive
        35,200,000 shares (options were not elected) of Company common stock, of
        which
        17,600,000 (50%) shares are fully-vested, and of which 8,800,000 shares vest
        in
        September 2007 and the remaining 8,800,000 vest pro-rata from October 2007
        to
        September 2008. The total value of the shares based on the $0.13 per share
        grant
        date quoted trading price of the Company’s common stock was approximately $4.6
        million. In connection with this agreement, the Company recorded compensation
        expense of approximately $2.3 million for fully-vested shares, and $500,000
        for
        a portion of the unvested shares amortized on a straight-line basis over
        the
        vesting periods. In addition, pursuant to terms of the executive’s employment
        agreement, the executive is to receive an additional 8,800,000 fully-vested
        shares in connection with the certain agreement specified capital raising
        events, and as a result of the occurrence of such event, the Company recorded
        additional compensation expense of approximately $1.1 million based on the
        $0.125 per share closing quoted trading price on the date of the event. A
        total
        of 44,000,000 shares of Company common stock were issued to the executive
        in
        2006, a portion of which is subject to return in accordance with vesting
        provisions. The accompanying consolidated financial statements reflect
        26,400,000 shares as fully-vested, issued and outstanding at December 31,
        2006.
        As of December 31, 2006, there was approximately $1.8 million of unrecognized
        compensation expense related to unvested stock awards, which is expected
        to be
        recognized as expense of approximately $1.4 million in 2007 and $405,000
        in
        2008.
  F-17
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
  In
        connection with an agreement with an executive recruiter, the Company is
        obligated to pay compensation based on first-year compensation of placed
        executives. Pursuant to the agreement and placement of the Company’s Chief
        Executive and Operating Officers, the recruiter is entitled to receive
        11,456,923 shares of Company common stock, of which 9,036,923 shares are
        fully-vested, and of which 2,420,000 shares vest in September 2007, and warrants
        to purchase 519,750 shares of Company common stock at a per share price of
        $0.06
        per share exercisable for 10 years, and warrants to purchase 4,950,000 shares
        of
        Company common stock at a per share price of $0.0975 exercisable for 10 years.
        In connection with this agreement, the shares are valued at approximately
        $1.5
        million based on the quoted trading prices of $0.13 and $0.135 on the effective
        dates and the warrants are valued at approximately $737,000 computed using
        a
        Black-Scholes option pricing method with the following assumptions: contractual
        term of 10 years, volatility of 183% (based on historical volatility over
        the
        term), zero dividends and interest rate of approximately 4.8%. In 2006, the
        Company recorded compensation expense of approximately $1.7 million for
        fully-vested shares and fully-vested warrants, and $129,000 for a portion
        of the
        unvested shares and warrants amortized on a straight-line basis over the
        vesting
        periods. As of December 31, 2006, there was approximately $446,000 of
        unrecognized compensation expense related to unvested stock and stock warrants,
        which is expected to be recognized as expense in 2007.
 
 In
        May
        2006, a complaint was filed against the Company by Rose Waste Systems, Inc.
        (“plaintiff”) in an action for monetary damages for, among other claims, the
        purchase price of certain
        plastic recycling processing equipment (the “equipment”) acquired by the Company
        from a third party vendor. In September 2006, the Company entered into a
        settlement agreement with the plaintiff, and in connection therewith, among
        other things, issued the plaintiff 2,564,103 shares of the Company’s common
        stock, which has been recorded as settlement expense of approximately $282,000
        and which is included in general and administrative expense.
 
 Common
        Stock Issued for Cash - In
        November 2005, pursuant to the “safe harbor” private offering exemption provided
        by Rule 506 of Regulation D under Section 4(2) and of the Securities Act,
        the
        Company received cash for working capital purposes of $175,000 and issued
        to an
        investor 1,029,411 shares of its common stock and the right to purchase an
        additional 7,794,117 shares (“option shares”) of common stock at $0.17 per share
        pursuant to terms of a Common Stock Purchase Agreement, Investor Rights
        Agreement, Covenant to Adjust and First Right of Refusal Agreement.
        Additionally, in November 2005, pursuant to the “safe harbor” private offering
        exemption provided by Rule 506 of Regulation D under Section 4(2) and of
        the
        Securities Act, the Company received cash for working capital purposes of
        $167,000 and issued 1,192,857 shares of its common stock and the right to
        purchase an additional 9,521,429 shares of common stock at $0.14 per share
        pursuant to terms of a Common Stock Purchase Agreement, Investor Rights
        Agreement, Covenant to Adjust and First Right of Refusal Agreement.
        Additionally, in December 2005, pursuant to the “safe harbor” private offering
        exemption provided by Rule 506 of Regulation D under Section 4(2) and of
        the
        Securities Act of 1933, the Company received cash for working capital purposes
        of $50,000 and issued 357,143 shares of its common stock and the right to
        purchase an additional 2,142,857 shares of common stock at $.14 per share
        pursuant to terms of a Common Stock Purchase Agreement, Investor Rights
        Agreement, Covenant to Adjust and First Right of Refusal Agreement. Additional
        investment rights are exercisable for a 60 day period after notice is given
        regarding certain events, and such rights are no longer exercisable. The
        Company
        gave notice regarding such certain events to holders of additional investment
        rights in October 2006. The Covenant to adjust required a decrease in the
        original purchase price if certain “efficiency” conditions, as defined in the
        agreement were not met. The Shares purchase prices were subject to reduction
        to
        a minimum $.11 per share for the $.17 shares and $0.08 per share for the
        $.14
        shares, conditional upon when certain recycling volume and purity specifications
        were met (the “Efficiency” conditions) .The reduction in purchase price was
        payable, at the investors option, in cash or additional shares of common
        stock.
        The $164,571 maximum redemption values of the above shares were reclassified
        to
        temporary equity at December 31, 2005. In January 2006, the Company issued
        additional shares at the investors election of 198,810 and 416,666 shares,
        based
        on a reduced purchase price of $.12 (for the $.14 purchase price shares),
        and
        137,255 shares for a reduced purchase price of $.15 (for the $.17 purchase
        price
        shares) and the covenant to adjust was amended to eliminate any further
        adjustments to the original purchase price, and the temporary equity was
        reclassified to permanent equity in 2006. The investor rights agreement contains
        registration rights on the issued shares and option shares which require
        the
        Company to prepare and file a registration statement and use its best efforts
        to
        cause such registration statement to become effective and keep it effective
        for
        90 days including filing any required amendments.
  F-18
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Stock
        Issued Upon Exercise of Warrants - In
        2006, the Company issued 8,757,142 shares of its common stock in connection
        with
        the exercise of warrants to purchase common stock in exchange for the purchase
        price of approximately $9,000.
 
 Stock
        Options -
        Effective pursuant to resolution of the Board of Directors in 2005, the Company
        adopted a 2005 Stock Plan to provide a source for the issuance of common
        stock
        of Itec in connection with compensatory programs sponsored by the Company
        and
        any other circumstances deemed by the Board of Directors as such a special
        situation. The number of shares available for granting awards under the
        Plan is 15,000,000 shares. The Plan is eligible to any employee of the
        Company, any individual who is a member of the board of directors of the
        Company
        or any individual performing services for the Company as a Non-employee
        Contractor and any individual who has accepted an offer of employment with
        the
        Company. Unless the Board of Directors determines otherwise, shares of
        non-vested Stock awarded to a Participant will be forfeited if the Participant
        terminates employment or service for any reason other than death, disability,
        retirement or involuntary termination.
 
 In
        2001,
        the Company adopted the 2001 Stock Plan which covers the issuance of up to
        6,060
        shares of common stock either directly or pursuant to options to eligible
        employees, directors, officers of and consultants and advisors of the Company.
        The Company filed a registration statement on Form S-8 with the Securities
        and
        Exchange Commission to register the shares covered under this Plan.
  In
        2002,
        the Company established the 2002 Stock Plan which covers issuance of 12,121
        shares of common stock either directly or pursuant to options to eligible
        employees, directors, officers of and consultants and advisors of the Company.
        The Company filed a registration statement on Form S-8 with the Securities
        and
        Exchange Commission to register the shares covered under this Plan.
  In
        2002,
        the Company established the Itec Environmental Group, Inc. 2002 Stock Plan
        which
        covers the issuance of 24,242 shares of common stock either directly or pursuant
        to options to eligible employees, directors, officers of and consultants
        and
        advisors of the Company. The Company filed a registration statement on Form
        S-8
        with the Securities and Exchange Commission to register the shares covered
        under
        the Plan. In 2002, the Company issued 24,242 shares under the terms of this
        Plan.
 
 In
        2003,
        the Company established the 2003 Stock Plan which covers the issuance of
        121,212
        shares of common stock either directly or pursuant to options to eligible
        employees, directors, officers of and consultants and advisors of the Company.
        The Company filed a registration statement on Form S-8 with the Securities
        and
        Exchange Commission to register the shares covered under the Plan. In 2003,
        the
        Company issued warrants convertible into 1,212 shares of common stock under
        this
        plan to employees and consultants. The warrants have an exercise price of
        $6.60
        per share. In 2003, the Company issued 60,845 shares under this
        plan.
  Stock
        Warrants -
        Warrants have been granted with exercise prices that are equal to, or
        more or less than, the current fair value of the Company's common stock at
        the
        date of grant. Therefore they were expensed at the grant date. The fair value
        of
        warrants issued during 2005 was estimated using the Black-Scholes option-pricing
        model with the following assumptions: a dividend yield of 0%; expected
        volatility of 200% to 427% (based on historical volatility over the expected
        term); risk-free interest rates of approximately 3.6% to 4.6%; and contractual
        terms of 5 and 10 years. The fair value of warrants issued during 2006 was
        estimated using the Black-Scholes option-pricing model with the following
        assumptions: a dividend yield of 0%; expected volatility of approximately
        172%
        to 183% (based on historical volatility over the terms); risk-free interest
        rates of approximately 5%; and contractual terms of 3.5 to 10 years. The
        weighted-average fair value of warrants granted during 2005 and 2006
        approximated $0.12 and $0.13, respectively.
 
 In
        2005,
        the Company issued to its CEO fully-vested, five-year warrants to purchase
        4,457,370 shares of common stock at an exercise price of $0.06 per share,
        and
        fully-vested ten-year warrants to purchase 20,000,000 shares of common stock
        at
        an exercise price of $0.06. The estimated fair value of these warrants
        determined utilizing the Black-Scholes valuation model of approximately $402,000
        and $2,635,000, respectively, was recorded as compensation expense since
        there
        is no vesting requirement.
  In
        2005,
        the Company issued to its CFO fully-vested, five-year warrants to purchase
        250,000 shares of common stock at an exercise price of $0.06 per share, and
        fully-vested ten-year warrants to purchase 500,000 shares of common stock
        at an
        exercise price of $0.06. The estimated fair value of these warrants determined
        utilizing the Black-Scholes valuation model of approximately $29,000 and
        $67,000, respectively, was recorded as compensation expense since there is
        no
        vesting requirement.
  F-19
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 In
        2005,
        the Company issued fully-vested, five-year warrants to consultants and advisors
        to purchase 4,000,000 shares of common stock at an exercise price of $0.06
        per
        share. The Company recorded consulting expense of $466,000 related to these
        issuances, which was determined utilizing the Black-Scholes valuation model.
        Additionally, in 2005, the Company issued fully-vested, five-year warrants
        to
        consultants and advisors to purchase 2,100,000 shares of common stock at
        exercise prices of $.05 for 100,000, $.09 for 500,000, $.10 for 1,000,000
        and
        $.045 for 500,000. The warrants were valued at approximately $150,000 which
        was
        expensed as consulting fees.
 
 During
        2005, the Company issued warrants to a financial advisor for fund-raising
        services provided for the purchase of (i) 500,000 shares at $0.10 per share
        for
        10 years, (ii) 320,000 shares at $0.05 per share for 5 years, (iii) 300,000
        shares at $0.02 per share for 10 years, and (iv) 40,000 shares at $0.045
        per
        share for 10 years. The estimated fair value of these warrants determined
        utilizing the Black-Scholes valuation model of approximately $197,000 has
        been
        recorded as deferred debt issue costs to be amortized to interest expense
        over
        the lives of the related borrowings. The full amount of the $197,200 debt
        discount was amortized into interest expense in 2005.
  During
        2005, the Company issued fully-vested ten-year warrants to lenders to purchase
        9,938,439 shares of its common stock at a per share price of $0.001, and
        five-year warrants to lenders to purchase 300,000 shares of its common stock
        at
        a per share price of $0.25. The Company recorded $436,000 as a debt discount,
        based on the valuation of the warrants using a Black-Scholes option price
        method, which was fully amortized to interest expense in 2005.
 
 In
        2005,
        pursuant to terms of the common stock purchase agreement, the Company entered
        into a one-year consulting agreement with three individuals, providing for,
        among other things, issuance of 4,000,000 shares of Company common stock,
        which
        were issued in 2005, and payment of $15,000 per month. In 2006, the Company
        and
        consultants entered into amendments of the consulting agreements, pursuant
        to
        which, among other things, the monthly payments were eliminated.
 
 In
        February 2006, in connection with and upon their resignation, the Company
        granted cashless exercise warrants for the purchase 500,000 shares of the
        Company’s common stock to each of two former Directors of the Company, having an
        exercise price of $0.12 and expiring in 10 years. The Company recorded $120,000,
        the fair value as determined utilizing the Black-Scholes valuation model,
        as
        general and administrative expense since the warrants are fully-vested.
 
 During
        2005, the Company’s former Chief Executive Officer assigned 400,000 of his
        warrants exercisable at $0.06 per share to consultants for services provided
        to
        the Company, and in connection therewith, the Company recognized consulting
        expense of approximately $46,000, the estimated fair value of warrants at
        date
        of grant as determined utilizing the Black-Scholes option valuation model.
        During 2006 the Company’s former Chief Executive Officer assigned 3,213,889 of
        his warrants exercisable at $0.06 per share to consultants for services provided
        to the Company, and in connection therewith, the Company recognized consulting
        expense of approximately $331,000 and stock issue costs of $82,000, the
        estimated fair value of warrants at date of grant as determined utilizing
        the
        Black-Scholes option valuation model.
 
 During
        2006, the Company also entered into an employment agreement with an individual
        to serve as its Chief Operating Officer, pursuant to which, among other things,
        the executive will receive shares of Company common stock (or stock options,
        at
        the executive’s election) covering 5% of Common Stock Equivalents, as defined in
        the agreement. The Effective Date of the employment agreement is October
        19,
        2006, at which date the executive is to receive options to purchase 24,000,000
        common shares (shares were not elected) of Company common stock, of which
        12,000,000 (50%) warrant are fully-vested, and of which 6,000,000 warrants
        vest
        in October 2007 and the remaining 6,000,000 vest pro-rata from November 2007
        to
        October 2008. The warrants are exercisable at $0.0975 per share for ten years.
        In connection with this agreement, the Company recorded compensation expense
        of
        approximately $1.6 million based on the fair
        value as determined utilizing the Black-Scholes valuation model as of
        the Effective Date for fully-vested shares, and $155,000 for a portion of
        the
        unvested shares amortized on a straight-line basis over the vesting periods.
        As
        of December 31, 2006, there was approximately $1.5 million of unrecognized
        compensation expense related to unvested stock warrants, which is expected
        to be
        recognized as expense of approximately $810,000 in 2007 and $655,000 in
        2008.
 
 In
        connection with sales of Private Placement units comprised of Private Placement
        Notes and warrants, during the year ended December 31, 2006, approximately
        warrants to purchase 24,000,000 shares of common stock at a per share price
        of
        $0.06 for 10 years are issuable.
  F-20
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Additionally,
        in connection with sales of Private Placement units and Subordinated Notes
        and
        Warrants, pursuant to terms of a funding agreement with a related party,
        the
        Company agreed to issue warrants based on securities sold and common shares
        convertible or exercisable into. In 2006, the Company has recorded debt issue
        costs of approximately $655,000 based on the fair value of approximately
        1,440,000 warrants exercisable at $0.06 per share for approximately eight
        and
        one-half years and 3,748,000 warrants exercisable at $0.12 per share for
        approximately three and one-half years, determined utilizing the Black-Scholes
        valuation model.
  Additionally,
        in connection with sales of Private Placement units and Subordinated Notes
        and
        warrants, pursuant to terms of a placement agent agreement with KW Securities,
        the Company agreed to issue warrants based on securities sold. In 2006, the
        Company has recorded debt issue costs of approximately $2.1 million based
        on the
        fair value of 14,625,000 warrants exercisable at $0.06 per share for
        approximately eight and one-half years, determined utilizing the Black-Scholes
        valuation model.
 
 In
        2005,
        pursuant to the terms of a common stock purchase agreements (see Stock Issued
        for Cash above), the Company issued additional investment rights (“Option
        Shares”) to purchase 9,521,429 common shares at $.17 per share, 7,794,117 common
        shares at $.14 per share and 2,142,857common shares at $.14 per share (for
        a
        total of 19,458,403 additional investment rights common shares). Additional
        investment rights are exercisable for a 60 day period after notice is given
        regarding certain events. The Company gave notice regarding such certain
        events
        to holders of additional investment rights in October 2006, and such rights
        are
        no longer exercisable. The Option Shares exercise prices were subject to
        reduction to $.11 per share for the $.17 options and $0.08 per share for
        the
        $.14 options, conditional upon when certain recycling volume and purity
        specifications are met (the “Efficiency” conditions). In January 2006 the
        Company reduced the purchase prices to $.12 and $.15 (for the $.14 and $.17
        option, respectively) and the covenant to adjust was amended to eliminate
        further adjustments to the option shares purchase price. The investor rights
        agreement contain registration rights on the issued shares and option shares
        which require the Company to prepare and file a registration statement and
        use
        its best efforts to cause such registration statement to become effective
        and
        keep it effective for 90 days including filing any required amendments. Since
        this is a best efforts clause and there are no liquidating damages or penalties,
        the option shares qualify as equity pursuant to EITF 00-19 as the Company
        may
        issue unregistered shares upon exercise of the options and there is no cash
        penalty, and other criteria for equity classification are met. However, since
        there is an authorized shares issue derived from the variable conversion
        rate
        convertible debt, theses option shares were classified as liabilities at
        fair
        value until August 18, 2006. The fair value at the issuance date was recorded
        at
        $1.6 million with a charge to operations to change in fair value liability
        of
        warrants and derivatives of approximately $1.2 million. The reduction in
        fair
        value credited to the change in fair value liability of warrants and derivatives
        from the issuance date through December 31, 2005 was $468,000 resulting in
        a
        warrant liability of approximately $1.1 million at December 31, 2005. During
        2006, the Company recognized other income of approximately $816,000, relating
        to
        the decrease in the fair value liability of such investment rights, which
        such
        fair value liability approximated $321,000 at August 18, 2006. At August
        18,
        2006, when the Company no longer had the inability to have enough authorized
        common shares to fulfill its potential obligations, the $321,000 fair value
        liability recorded at that date was reclassified to additional paid-in
        capital.
 
 In
        2005,
        the Company had determined that pursuant to EITF 00-19, all of the Company’s
        warrants and investment rights granted to non-employees are to be classified
        as
        liabilities, since the Company has issued convertible debt with variable
        conversion terms, the ability to have enough authorized common shares to
        fulfill
        its potential obligations under convertible debt and warrant contracts is
        not
        under the Company control and accordingly the criteria for classification
        as
        equity instruments under EITF 00-19 is not met. Accordingly, as of December
        31,
        2005 and August 18, 2006 (see below), the warrant liability recorded was
        approximately $3.4 million and $2.8 million, respectively, which represents
        the
        fair value of outstanding warrants at those dates computed using the
        Black-Scholes option pricing method with the assumptions as discussed above.
        During 2005, the Company recognized approximately $2.1 million of expense
        relating to the change in fair value of the warrants during the year. During
        the
        year ended December 31, 2006, the Company recognized approximately $623,000
        of
        other income relating to the change in fair value of warrants during the
        year,
        which is included in the accompanying statement of operations as the change
        in
        fair value liability of warrants and derivatives. At August 18, 2006, when
        the
        Company no longer had the inability to have enough authorized common shares
        to
        fulfill its potential obligations, the fair value liability of all outstanding
        warrants and investment rights recorded at that date was reclassified to
        additional paid-in capital.
 
 The
        following summarizes activity for stock warrants issued to lenders in connection
        with borrowings, all of which are exercisable:
 Outstanding
              
              Weighted
                  averageexercise
                  price
              
              Weighted
                  average remaining contractuallife
                  in years
              
              Aggregate
                  intrinsic value(in
                  thousands)Balance
                  at December 31, 2004
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -Granted
              
              
              13,498,439
              
              
              0.02Exercised
              
              
              -
              
              
              -Expired/
                  Cancelled
              
              
              -
              
              
              -Balance
                  at December 31, 2005
              
              
              13,498,439
              
              $
              0.02
              
              
              8.6
              
              $
              1,350Granted/Issuable
              
              
              55,180,000
              
              
              0.09Exercised
              
              
              (8,800,000
              )
              
              0.002Expired/
                  Cancelled
              
              
              -
              
              
              -Balance
                  at December 31, 2006
              
              
              59,878,439
              
              $
              0.09
              
              
              5.8
              
              $
              3,518
 
 ****   ****
 F-21
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
  The
        following summarizes activity for stock warrants issued to consultants for
        services, all of which are exercisable:
 Outstanding
                
                Weighted
                    averageexercise price
                
                Weighted
                    average remaining contractuallife
                    in years
                
                Aggregate
                    intrinsic value(in
                    thousands)Balance
                    at December 31, 2004
                
                
                12,121
                
                $
                29.70
                
                
                2.8
                
                $
                -Granted
                
                
                5,750,000
                
                
                0.05Exercised
                
                
                -
                
                
                -Expired/
                    Cancelled
                
                
                -
                
                
                -
                
                
                -Balance
                    at December 31, 2005
                
                
                5,762,121
                
                $
                0.05
                
                
                5.3
                
                $
                410Granted/Issuable
                
                
                26,412,750
                
                
                0.08Exercised
                
                
                -
                
                
                -Expired/
                    Cancelled
                
                
                -
                
                
                -
                
                
                -Balance
                    at December 31, 2006
                
                
                32,174,871
                
                $
                0.08
                
                
                7.4
                
                $
                2,491
  The
        following summarizes activity for stock warrants issued to employees, all
        of
        which are exercisable:
 Outstanding
                  
                  Weighted
                      averageexercise price
                  
                  Weighted
                      average remaining contractuallife
                      in years
                  
                  Aggregate
                      intrinsic value(in
                      thousands)Balance
                      at December 31, 2004
                  
                  
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -Granted
                  
                  
                  19,850,000
                  
                  
                  0.06Exercised
                  
                  
                  -
                  
                  
                  -Expired/
                      Cancelled
                  
                  
                  -
                  
                  
                  -Balance
                      at December 31, 2005
                  
                  
                  19,850,000
                  
                  $
                  0.06
                  
                  
                  9.7
                  
                  $
                  1,191Granted/Issuable
                  
                  
                  12,000,000
                  
                  
                  0.10Exercised
                  
                  
                  -
                  
                  
                  -Expired/
                      Cancelled
                  
                  
                  -
                  
                  
                  -Balance
                      at December 31, 2006
                  
                  
                  31,850,000
                  
                  $
                  0.07
                  
                  
                  9.2
                  
                  $
                  2,416
  The
        following summarizes activity for all stock warrants, all of which are
        exercisable:
 
 Outstanding
              
              Weighted
                    averageexercise price
              
              Weighted
                    average remaining contractuallife in years
              
              Aggregateintrinsic
                    value(in thousands)Balance
                  at December 31, 2004
              
              
              12,121
              
              $
              29.70
              
              
              2.8
              
              $
              -Granted
              
              
              39,098,439
              
              
              0.04Exercised
              
              
              -
              
              
              -Expired/
                  Cancelled
              
              
              -
              
              
              -Balance
                  at December 31, 2005
              
              
              39,110,560
              
              $
              0.05
              
              
              8.3
              
              $
              2,951Granted/Issuable
              
              
              93,592,750
              
              
              0.08Exercised
              
              
              (8,800,000
              )
              
              0.002Expired/
                  Cancelled
              
              
              -
              
              
              -Balance
                at December 31, 2006
              
              
              123,903,310
              
              $
              0.08
              
              
              6.9
              
              
              $8,425
 ****
 F-22
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Additional
        information regarding all warrants outstanding as of December 31, 2006, is
        as
        follows:
 Range
                      of exercise prices
                  
                  Shares
                  
                  Weightedlifeaverageremaining
                  
                  Weighted
                      averageexercise price$0.001
                  
                  
                  2,328,439
                  
                  
                  6.1
                      years
                  
                  $
                  0.001$
                      0.045 -$0.05
                  
                  
                  1,960,000
                  
                  
                  3.7
                      years
                  
                  $
                  0.05$0.06
                  
                  
                  65,484,750
                  
                  
                  7.9
                      years
                  
                  $
                  0.06$
                      0.09 -$0.10
                  
                  
                  17,950,000
                  
                  
                  9.8
                      years
                  
                  $
                  0.10$
                      0.12 -$0.13
                  
                  
                  35,868,000
                  
                  
                  3.8
                      years
                  
                  $
                  0.12$0.25
                  
                  
                  300,000
                  
                  
                  3.5
                      years
                  
                  $
                  0.25$29.70
                  
                  
                  12,121
                  
                  
                  0.8
                      years
                  
                  $
                  29.70Total
                  
                  
                  123,903,310
                  
                  
                  6.9
                      years
                  
                  $
                  0.08
  **Note
        10.** **Income
        Taxes**
 
 At
        December 31, 2006, the Company has available approximately $21 million of
        net
        operating loss carryforwards available to offset future federal and state
        income
        taxes, which expire through 2026. Realization is dependent on generating
        sufficient taxable income prior to expiration of the loss carryforwards.
        A
        change of greater than 50% of the Company ownership could significantly limit
        utilization of the tax credits. At December 31, 2006 and 2005, the Company
        has
        provided a valuation allowance to reduce its net deferred tax asset to zero. The
        valuation allowance increased by approximately $3.2 million and $1.6 million
        during 2006 and 2005, respectively.
 
 Deferred
        income taxes represent the net tax effects of temporary differences between
        the
        carrying amounts of assets and liabilities for financial reporting purposes
        and
        amounts used for income tax purposes. Significant components of deferred
        tax
        assets and liabilities consist of the following at December 31, 2006:
  Deferred
                    tax assetsNet
                    operating loss carryforward
                
                $
                8,174Accrued
                    liabilities due to related parties
                
                
                216Total
                    deferred tax assets
                
                
                8,390Deferred
                    tax liabilities - property and equipment
                
                
                (10
                )Net
                    deferred tax assets before valuation allowance
                
                
                8,380Valuation
                    allowance
                
                
                (8,380
                )Net
                    deferred tax assets
                
                $
                -
  A
        reconciliation of the provision for income tax expense with the expected
        income
        tax computed by applying the federal statutory income tax rate to loss before
        provision for income taxes for the years ended December 31, 2006 and 2005,
        is as
        follows:
 2006
                
                2005Income
                    tax benefit computed at statutory rate
                
                
                (34
                %)
                
                (34
                %)State
                    income tax benefit, net of federal benefit
                
                
                (
                    2
                %)
                
                (
                    1
                %)Nondeductible
                    stock-based compensation and other
                
                
                21
                %
                
                25
                %Valuation
                    allowance
                
                
                15
                %
                
                10
                %Effective
                    tax rate
                
                
                0
                %
                
                0
                %
 
 **Note
        11.  Related Party Transactions**
  Certain
        of the Company’s Directors are holders of the Company’s Private Placement Notes
        and Subordinated Notes in the amounts of approximately $4.7 million held
        by one
        Director and $2.3 million held by another Director.
  F-23
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 In
        2000,
        the Company's Board of Directors authorized the Company to make a loan of
        $250,000 to the Company's then Chief Executive Officer. The loan was interest
        only for ten years with the total principal due at the end of ten years,
        and the
        balance outstanding was approximately $148,000 at December 31, 2006 and 2005.
        The Company had also received advances, bearing interest at 10% and due on
        demand, from this officer primarily to accommodate working capital needs.
        During
        2005, approximately $70,000 of advances were repaid and at December 31, 2005,
        advances payable approximated $15,000. During 2006, additional advances of
        approximately $96,000 were made. In July 2006, the Company entered into an
        employment agreement with this executive, pursuant to which, among other
        things,
        the executive will serve as the Company’s Chief Technology Officer and as a
        Director, at an annual compensation rate of $290,000, and will receive
        24,000,000 shares or share equivalents (warrants), of which 17,953,208 was
        previously received, or an additional 6,046,792 shares or warrants. Further,
        such share awards are in consideration for the release and forgiveness of
        amounts due to or from such executive, which included assets of approximately
        $179,000 and liabilities of approximately $798,000. In connection with this
        agreement, the Company recorded compensation expense of approximately $228,000,
        and an increase in additional paid-in capital of $847,000, representing the
        value of the awards based on the $0.14 per share quoted trading price on
        the
        effective date of the employment agreement.
 
 Pursuant
        to an agreement with The Otto Law Group, PLLC (“OLG”), a law firm, the managing
        partner of which is one of the Company’s Directors, for legal services, the
        Company periodically issued vested non-forfeitable common shares, and any
        proceeds from the sale of such shares by OLG and reported to the Company
        were
        credited against invoice amounts due to OLG for legal services. The agreement
        had no stated term. Due to the contingent nature of the proceeds and the
        unstated term of the agreement, the fair value of shares issued has been
        expensed when issued. During 2005 the Company issued 9,957,692 common shares
        pursuant to the legal services agreement. The shares were valued at the quoted
        trading prices on the respective grant dates which ranged from $.09 to $.23
        per
        share or an average of approximately $.16 per share, resulting in an expense
        of
        approximately $1,635,000. During 2005, the Company also recognized approximately
        $1.2 million of stock based legal expenses relating to this same services
        provider that had been deferred During 2006, the Company issued 2,802,925
        shares
        of its common stock and recorded legal expense of approximately $336,000,
        which
        was determined based on the $0.12 per share quoted trading price on date
        of
        issuance. There were no reported stock sale proceeds during 2006. In August
        2006, the Company entered into an engagement agreement with OLG, whereby
        the
        prior agreement was superseded and replaced, and among other things, the
        Company
        issued 2,500,000 shares of its common stock. The shares were valued at the
        quoted trading prices of $0.11 on the grant date, resulting in an expense
        of
        $275,000. During 2006, the Company incurred OLG legal fee services of $967,000,
        of which $194,000 was recorded as deferred debt issue costs. Accounts payable
        to
        OLG for legal services was approximately $468,000 at December 31, 2006 and
        reported as accounts payable - related party in the accompanying consolidated
        balance sheet.
 
 During
        2006, the Company issued 2,802,925 shares of its common stock to Cambridge
        Partners, LLC (“Cambridge”) for investor advisory services provided to the
        Company and recorded consulting expense of approximately $336,000, which
        was
        determined based on the $0.12 per share quoted trading price on the issuance
        date. The managing partner of OLG, one of the Company’s Directors, is one of the
        two members of Cambridge.
 
 In
        2006,
        the Company entered into an agreement with KW Securities, Inc. (“KW”), a
        registered broker dealer and a company owned by Lawrence Krause, one of the
        Company’s Directors, for KW to serve as placement agent for the Private
        Placement Offering. Pursuant to terms of the agreement, as amended, among
        other
        things, the Company shall pay compensation of warrants to purchase Company
        common stock at a per share price of $0.06 until April 2015, at varying rates
        of
        warrants for funds raised based on securities sold. In connection with sales of Private Placement units and Subordinated Notes and
        warrants in 2006, the Company has recorded debt issue costs of approximately
        $2.1 million based on the fair value of 14,625,000 warrants exercisable at
        $0.06
        per share for approximately eight and one-half years, determined utilizing
        the
        Black-Scholes valuation model, which such warrants were issued to KW in 2007.
        Upon the closing of the PPM in 2007, the agreement with KW
        terminated.
 
 In
        2006,
        the Company entered into a Funding Agreement with Itec Capital Group, LLC
        (“ICG”), a Washington limited liability company owned by the managing partner of
        OLG, who is one of the Company’s Directors, and Lawrence Krause, who is also one
        of the Company’s Directors, and KW, a company owned by Mr. Krause. Pursuant to
        terms of the Funding Agreement, the Company agreed to pay fees of 8% of Notes
        payable issued pursuant to certain financings and issue warrants based on
        securities sold and common shares convertible or exercisable into. Pursuant
        to a
        consulting agreement between ICG and Excipio Group, S.A. (“Excipio”), an entity
        affiliated with Hudson Investment Advisors, Inc., ICG agreed to pay Excipio
        a
        dollar amount and securities to be agreed upon from time to time upon completion
        of certain defined objectives and projects, and in this regard, ICG has agreed
        to pay Excipio fees and warrants in the amounts ICG receives from the Company.
        In November 2006, Excipio, ICG and the Company entered into a mutual settlement
        and release agreement, pursuant to which, among other things, in full
        satisfaction of amounts owed under all prior agreements or arrangements,
        the
        Company agreed to pay approximately $429,000 (in addition to $296,000 previously
        paid) and issue a warrant to purchase 1,440,000 shares of Company common
        stock
        with an exercise price of $0.06 per share for approximately eight and one-half
        years and a warrant to purchase 3,748,000 shares of Company common stock
        with an
        exercise price of $0.12 per share for approximately three and one-half years.
        Additionally, if certain Company notes payable convert into Company common
        stock
        before February 6, 2007, Excipio shall be issued shares of Company common
        stock
        based on amounts of notes converted; no notes converted before February 6,
        2007.
        The $429,000 is payable $200,000 upon execution of the settlement agreement
        and
        in varying amounts based on certain conditions, and in full no later than
        May
        2007. At December 31, 2006, approximately $112,000 was still payable and
        is
        included in accrued liabilities. In connection with the settlement agreement,
        the consulting agreement between ICG and Excipio was cancelled and any further
        obligation under the consulting agreement has been waived and dismissed,
        and the
        Funding Agreement between the Company and ICG was amended to reflect the
        settlement of fees and expenses owed and paid under the Funding Agreement
        and
        that no additional fees or expenses shall accrued or become due in accordance
        with the Funding Agreement.
  F-24
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 In
        2004,
        the Company received advances totaling $50,000 from its Chief Financial Officer
        primarily to accommodate working capital needs of the Company. Such advances
        were unsecured, bear interest at 10%, due on demand, and were repaid in
        2005.
  **Note
        12. Commitments and Contingencies**
  Legal
        Matters
 
 In
        2005,
        pursuant to an arbitration award, the Company has been ordered to pay
        EnviroPlastic Hungary the sum of $150,000, plus fees and costs, for the return
        of a deposit previously paid to the Company. The Company recorded an additional
        accrued liability and expense during 2005 to provide for the full amount
        of the
        award. In 2006, the Company entered into an agreement to payoff the remaining
        balance of approximately $140,000 for $110,000 and recorded a gain on
        extinguishment of debt of $30,000 upon repayment in 2006.
 
 In
        2006,
        a judgment was awarded against the Company relating to amounts owed as claimed
        by a former employee, and the Company paid the judgment award of approximately
        $70,000 in satisfaction of the judgment.
 
 In
        May
        2006, a complaint was filed against the Company by Rose Waste Systems, Inc.
        (“plaintiff”) in an action for monetary damages for, among other claims, the
        purchase price of certain
        plastic recycling processing equipment (the “equipment”) acquired by the Company
        from a third party vendor. In September 2006, the Company entered into a
        settlement agreement with the plaintiff, and in connection therewith, among
        other things, issued the plaintiff 2,564,103 shares of the Company’s common
        stock, which has been recorded as settlement expense of approximately $282,000
        and which is included in general and administrative expense.
 
 During
        2005, the Company issued 2,737,220 shares of its common stock (and certain
        registration rights) to Brean Murray Carret & Co., LLC (“BMC”) as retainer
        for certain corporate finance and investment banking services to be provided
        pursuant to the corporate finance representation agreement between the parties
        entered into in 2005. The agreement was for a period of one year, extendable
        to
        two years upon completion of a successful financing. In the event of a
        consummated transaction, the Company would pay BMC fees ranging from 2% to
        8% of
        amounts raised, varying in amounts of securities issued in the financing,
        depending of the type of securities and nature of transaction. In October
        2005,
        the Company issued to BMC an additional 744,542 shares of its common stock
        and
        warrants to purchase 850,000 shares of Company common stock at a per share
        price
        of $0.001 for a term of 5 years. In December 2006, BMC filed an arbitration
        claim against the Company with the NASD seeking in excess of $1 million from
        the
        Company. The Company filed a response and affirmative defenses and a
        counterclaim against BMC, and BMC subsequently filed its response and
        affirmative defenses to the Company’s counterclaim in March 2007. It is the
        Company’s position, among other things, that the BMC claim does not contain any
        legal, factual or substantive merit, that the Company intends to vigorously
        defend BMC’s claim, that it intends to vigorously pursue its counterclaim
        against BMC, and that it is not probable that a loss will be incurred.
        Arbitration, if it should occur with respect to this matter, is inherently
        uncertain and always difficult to predict. However, based on the Company’s
        understanding and evaluation of the relevant facts and circumstances, it
        believes that the above-described matter is not likely to have a material
        adverse effect on its consolidated results of operations, financial position
        or
        cash flows. There is a possibility of a material adverse impact on the results
        of operations of the period in the matter is ultimately resolved, if it is
        resolved unfavorably, or in the period in which an unfavorable outcome becomes
        probable and reasonably estimable.
  F-25
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Employment
        Agreements
 
 In
        July
        2006, the Company entered into an employment agreement with no stated term
        with
        its former Chief Executive Officer, pursuant to which, among other things,
        the
        executive will serve as its Chief Technology Officer and as a Director, at
        an
        annual compensation rate of $290,000, and receive other customary employment
        benefits, receive additional stock-based awards (as described in Note 11)
        and be
        eligible to receive additional compensation as cash bonuses, and in certain
        circumstances, severance on termination.
 
 During
        2006, the Company entered into an employment agreement with no stated term
        with
        an individual to serve as its Chief Executive Officer and a Director, at
        an
        annual compensation rate of $330,000 (subject to increase under certain
        conditions), and receive other customary employment benefits, and be eligible
        to
        received additional compensation as cash bonuses, and in certain circumstances,
        severance on termination. Additionally, pursuant to terms of the employment
        agreement, the executive will receive shares of Company common stock (or
        stock
        options, at the executive’s election) covering 8% of Common Stock Equivalents,
        as defined in the agreement. The Effective Date of the employment agreement
        is
        September 18, 2006, at which date the executive is to receive 35,200,000
        shares
        (options were not elected) of Company common stock, of which 17,600,000 (50%)
        shares are fully-vested, and of which 8,800,000 shares vest in September
        2007
        and the remaining 8,800,000 vest pro-rata from October 2007 to September
        2008.
        The total value of the shares based on the $0.13 per share grant date quoted
        trading price of the Company’s common stock was approximately $4.6 million. In
        connection with this agreement, the Company recorded compensation expense
        of
        approximately $2.3 million for fully-vested shares, and $500,000 for a portion
        of the unvested shares amortized on a straight-line basis over the vesting
        periods. In addition, pursuant to terms of the executive’s employment agreement,
        the executive is to receive an additional 8,800,000 fully-vested shares in
        connection with the certain agreement specified capital raising events, and
        as a
        result of the occurrence of such event, the Company recorded additional
        compensation expense of approximately $1.1 million based on the $0.125 per
        share
        closing quoted trading price on the date of the event. A total of 44,000,000
        million shares of Company common stock were issued to the executive in 2006,
        a
        portion of which is subject to return in accordance with vesting provisions.
        The
        accompanying consolidated financial statements reflect 26,400,000 shares
        as
        fully-vested, issued and outstanding at December 31, 2006.
 
 During
        2006, the Company also entered into an employment agreement with no stated
        term
        with an individual to serve as its Chief Operating Officer, at an annual
        compensation rate of $300,000, and receive other customary employment benefits,
        relocation expenses, and be eligible to received additional compensation
        as cash
        bonuses, and in certain circumstances, severance on termination. Additionally,
        pursuant to terms of the employment agreement the executive will receive
        shares
        of Company common stock (or stock options, at the executive’s election) covering
        5% of Common Stock Equivalents, as defined in the agreement. The Effective
        Date
        of the employment agreement is October 19, 2006, at which date the executive
        is
        to receive options to purchase 24,000,000 common shares (shares were not
        elected) of Company common stock, of which 12,000,000 (50%) warrant are
        fully-vested, and of which 6,000,000 warrants vest in October 2007 and the
        remaining 6,000,000 vest pro-rata from November 2007 to October 2008. The
        warrants are exercisable at $0.0975 per share for ten years. In connection
        with
        this agreement, the Company recorded compensation expense of approximately
        $1.6
        million based on the fair
        value as determined utilizing the Black-Scholes valuation model as of
        the Effective Date for fully-vested shares, and $155,000 for a portion of
        the
        unvested shares amortized on a straight-line basis over the vesting
        periods.
 
 Executive
        Search Agreement
 
 In
        connection with an agreement with an executive recruiter, the Company is
        obligated to pay compensation based on first-year compensation of placed
        executives. Pursuant to the agreement and placement of the Company’s Chief
        Executive and Operating Officers, the recruiter is entitled to receive
        11,456,923 shares of Company common stock, of which 9,036,923 shares are
        fully-vested, and of which 2,420,000 shares vest in September 2007, and warrants
        to purchase 519,750 shares of Company common stock at a per share price of
        $0.06
        per share exercisable for 10 years, and warrants to purchase 4,950,000 shares
        of
        Company common stock at a per share price of $0.0975 exercisable for 10 years.
        In connection with this agreement, the shares are valued at approximately
        $1.5
        million based on the quoted trading prices of $0.13 and $0.135 on the effective
        dates and the warrants are valued at approximately $737,000 computed using
        a
        Black-Scholes option pricing method with the following assumptions: contractual
        term of 10 years, volatility of 183% (based on historical volatility over
        the
        term), zero dividends and interest rate of approximately 4.8%. In 2006, the
        Company recorded compensation expense of approximately $1.7 million for
        fully-vested shares and fully-vested warrants, and $129,000 for a portion
        of the
        unvested shares and warrants amortized on a straight-line basis over the
        vesting
        periods.
  F-26
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 Consulting
        Agreements
 
 In
        February 2006, the Company entered into an agreement with Knight Capital
        Markets, LLC to act as placement agent in connection with the private placement
        of the Company’s securities for a term of six months. The Company shall pay
        compensation of 7% of the gross proceeds of the proposed offering to be paid
        at
        closing of the proposed offering and a warrant to purchase that number of
        shares
        of common stock of the Company equal to the aggregate of (a) 7% of the shares
        of
        common stock sold at a per share exercise price equal to the per share price
        of
        such shares in the offering, and (b) to the extent the securities are not
        common
        stock, 7% of the common stock acquirable upon exercise, exchange or conversion
        of such securities at a per share exercise price equal to the minimum per
        share
        price payable by an investor. The agreement expired August 17, 2006, and
        no
        compensation was paid or payable.
 
 In
        March
        2006, the Company entered into an agreement with Sanders Morris Harris, Inc.
        to
        act as an exclusive financial advisor for a term of six months. The agreement
        requires a retainer of $30,000 of which $15,000 is payable upon execution
        of
        agreement with remaining $15,000 payable 30 days from execution of agreement.
        The retainer will be credited against the following financing or acquisition
        fees (i) 7% of gross proceeds of any financing executed by the Company; (ii)
        a
        warrant to purchase a number of shares of common stock equal to 10% of shares
        sold in the financing with an exercise price equal to the offering price
        of the
        shares of common stock to be sold in the financing. (iii) an acquisition
        fee
        equal to 3% of the transaction value payable in cash upon the closing of
        a
        transaction, subject to a minimum fee of $350,000. Later in 2006, the agreement
        was cancelled by mutual agreement of the parties.
 
 In
        June
        2006, the Company entered into an agreement with an Alvin Tang to provide
        consulting services on a non-exclusive basis to assist the Company in finding
        licensing and distribution agreements, equity capital, debt financing and
        joint
        venture partners. The initial term of the agreement was 90 days, and would
        be
        automatically extended for an additional five-year term from the funding
        date
        following completion of debt funding pursuant to which the Company received
        no
        less than $30 million (the “Financing Amount”). As compensation, the Company
        would pay fees of 10% of the gross proceeds of funds raised and exercisable,
        five-year warrants to purchase that number of shares of common stock of the
        Company equal to 40% of all issued and outstanding stock of the Company at
        a per
        share price of $0.001. Should the Company accept an amount less than the
        Financing Amount, the consultant would be paid a fee of 10% of the lesser
        amount
        and proportionately less warrants depending on funds raised. Additionally,
        the
        consultant will be paid fees based on revenues for licensing agreements,
        distribution agreements or joint ventures or other business relationships
        entered into by the Company with parties that were referred by the consultant.
        The agreement expired in September 2006, and no compensation was paid or
        payable.
 
 Other
        Commitments and Contingencies
 
 The
        Company leases space for its recycling plant and offices in Riverbank,
        California pursuant to a lease expiring in March 2009. Future minimum lease
        payments under the lease approximate $220,000 during 2006 through 2008 and
        $37,000 in 2009.
 
 In
        April
        2006, the Company executed a non-binding letter of intent to acquire certain
        assets constituting the operations of two plastics recycling plants and to
        enter
        into a supply agreement with the seller for the seller to supply plastics
        to the
        two operations. The letters of intent expired unexecuted in 2006.
 
 In
        2005,
        the Company  entered
        into a three year Agency Agreement with H. Muehlstein & Co., Inc.
        (“Muehlstein”), pursuant to which Muehlstein will act as the Company’s exclusive
        agent for the annual purchase and sale of up to sixty million pounds, subject
        to
        increase under certain circumstances, of ECO 2 ’s
        PET
        flake and post-consumer HDPE natural flake and pellets in the USA and Canada.
        This agreement prohibits the Company from engaging additional sales agents,
        but
        does not limit the Company’s direct sales to customers.
 
 **Note
        13. Subsequent Events**
 
 In
        January 2007, pursuant to receipt of notices of cash and cashless exercises
        of
        warrants, the Company issued 1,701,297 shares of its common stock and received
        proceeds of approximately $1,000.
 
 In
        February 2007, the Company entered into a consulting services agreement,
        which
        agreement terminates December 31, 2007, with the Company’s former Chief
        Financial Officer, pursuant to which, among other things, the Company will
        issue
        to the former officer 492,308 fully-vested shares of its common stock, and
        pay
        annual compensation of $120,000 in consideration for services during the
        term
        and in exchange for the release of any claim to accrued compensation recorded
        by
        the Company while previously employed by the Company as its Chief Financial
        Officer, which such amount was $168,000 at December 31, 2006. In connection
        with
        this agreement, the Company will record the shares as an increase in common
        stock and additional paid-in capital of approximately $133,000 based on the
        $0.27 quoted trading price on the agreement date and compensation expense
        of
        approximately $85,000.
  F-27
 **ECO** **2** **Plastics, Inc. and Subsidiary** ****
 **(formerly
          Itec Environmental Group, Inc.)**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**
 In
        addition to the PPM, in February 2007, the Company received an additional
        $2
        million pursuant to investment terms substantially similar to the PPM (the
        “Additional Investment”). As a result the Company issued a $2 million junior
        subordinated convertible debenture, bearing interest at 10% with principal
        and
        accrued interest due 18 months from issuance (“maturity date”), convertible into
        shares of the Company’s common stock at a price of $0.0975 per share, and a
        warrant, with a cashless exercise provision, to purchase 6,000,000 shares
        of
        restricted common stock of the Company, exercisable for approximately 10
        years
        (expires April 15, 2015) at an exercise price of $0.06 per share. The conversion
        price of the debenture and exercise price of the warrant are subject to
        anti-dilution downward adjustments in the event the Company sells common
        stock
        or securities convertible into common stock at a price below the conversion
        or
        exercise prices. The debenture ranks pari passu with Private Placement Notes
        and
        Subordinated Notes and is subordinated only to the security interest granted
        to
        CIWMB. Shares underlying the debenture and warrants are subject to piggy
        back
        registration rights. In addition, a registration statement must be filed
        within
        30 days after the investor elects to convert all or any portion of the
        debenture. In connection with the Additional Investment, the Additional
        Investment’s placement agent received a cash payment of $85,000 and will receive
        warrants, with a cashless exercise provision, to purchase 314,815 shares
        of
        restricted common stock of the Company at a per share price of $0.06 exercisable
        for 10 years. Pursuant to terms of the Additional Investment purchase agreement,
        the holder of the Additional Investment notes has the right to designate
        one
        person to become a member of the Company’s Board of Directors.
 
 In
        March
        2007, the Company changed its name to ECO 2 Plastics, Inc.
   F-28