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, 2005





Commission
      File # 033-31067





ITEC
      ENVIRONMENTAL GROUP, 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)





209-863-8076


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





(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. x





Revenues
      for year ended December 31, 2005 were nil.





Aggregate
      market value of the voting common stock held by non-affiliates of the registrant
      as of December 31, 2005 was $7,284,334.





Number
      of
      shares of the registrant's common stock outstanding as of May 5, 2006 was
      67,619,186.












**PART
      I**




**ITEM
      1. DESCRIPTION OF BUSINESS**





**Business
      Description**





Founded
      in 1999 and based in Riverbank, California, Itec Environmental Group, Inc.,
      a
      Delaware corporation (“Itec” or the “Company”), is a publicly-traded company
      (OTCBB: ITEC ),
      that
      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 cost
      savings of thirty percent (30%) to forty percent (40%) 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. Over the past five (5) years Itec has invested approximately
      $8,500,000 in the development of the technology and equipment comprising the
      Eco 2 Environmental System, which includes the filing of a new “Process Patent” with
      Honeywell 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. Itec’s goal is to build and operate plastic recycling plants (the “Itec
      Plants”) in the USA that utilize the Eco 2 Environmental System and to sell the Eco 2 Environmental System worldwide to third parties.





In
      August
      2004, the State of California Integrated Waste Management Board (“CIWMB”),
      through the Recycle Market Development Zone Loan (“RMDZ”) Program, approved a
      $2,000,000 “matching funds loan” to assist Itec in building a plant in
      California. In order to qualify for the loan the Company leased a fifty eight
      thousand (58,000) square foot building in Riverbank, California with a five
      (5)
      year lease, which includes a five (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 Itec 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 “Riverbank” or
“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 Itec to provide convenient access for the generators of the feedstock
      (bales of plastic bottles) from over ten million residential customers.





Itec
      intends to locate its second plant in the greater Los Angeles basin, which
      is
      home to over eighteen million five hundred thousand people. Itec’s research
      indicates that the greater Los Angeles basin generates an enormous amount of
      plastic containers. In addition, a strong case can be made for a third Itec
      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 $0.22 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 twenty four million dollars per year.





Construction
      of Riverbank is substantially complete and the Plant has been in operating
      on a
      trial basis in the first quarter of 2006. Based on the test production runs,
      the
      company believes that the Plant will actually produce more product than
      originally anticipated.




Itec
      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. The Plastic Recycling Corporation of California (“PRCC”) has up to one
      hundred million pounds of material available per year, a majority of which
      is
      currently being sold to China.








2





Itec
      believes it can
      exploit extensive contacts
      within the USA plastic container collection and processing industries to its
      benefit. Through these contacts, Itec 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, Itec 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 alone generate
      more plastic than ten Itec plants would be capable of processing. Itec believes
      it can secure feedstock agreements with these companies on a regional
      basis.





Itec
      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
      produce an enormous amount of PET and HDPE containers. Itec can utilize its
      relationships and technology to secure feedstock from these companies on an
“as
      needed” basis.





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. Itec and its Strategic
      Alliance Partners have contacts within these government agencies, as well as
      other communities that provide these services.





Approximately
      one year ago, Itec was approached by a representative from one of the “Big Three
      Automakers,” which consists of General
      Motors, Ford and Chrysler, 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
      two and a half percent (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. Itec has tested contaminated samples submitted by
      the
      representative and has successfully cleaned the plastic to acceptable
      environmentally safe levels. Itec 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 representative has discussed the possibility of using
      Itec’s Eco 2 Environmental System to mitigate PCB contamination by building a plant in
      Detroit to produce 4,000 pounds per hour. Once successful, the group proposes
      to
      build up to fifty additional Itec plants to consume the plastic
      domestically.




Further,
        Itec believes that the international market for Itec’s products and services is
        substantial and in the past has been in negotiations with foreign governments
        for the construction of Itec plants. In most cases, Itec will be able to
        secure
        the plant feedstock for little or no cost (versus $0.23 per pound in the
        USA),
        which should increase Itec’s operating profit margins.
  Itec
        plans to grow by building plants throughout the USA and by acquiring companies
        in related fields and markets. On or about April 5, 2006 the Company entered
        into a non-binding letter of intent with Waste Management Recycle America,
        LLC
        (“WMRA”) to acquire the plastics businesses they conduct at South Chicago and
        Raleigh, North Carolina. The company is presently conducting due diligence
        on
        the target operations and no assurance can be given that these discussions
        with
        WMRA will lead to a definitive agreement to acquire the target
        businesses.





3








In
      February 2005, Itec entered into a three year “Agency Agreement” with H.
      Muehlstein & Co., Inc. (“Muehlstein”), pursuant to which Muehlstein will act
      as Itec’s exclusive agent for the annual purchase and sale of up to sixty
      million pounds of Itec’s PET flake and post-consumer HDPE natural flake and
      pellets in the USA and Canada. Muehlstein is willing to expand that number
      as
      Itec builds additional plants throughout the USA. In addition, Muehlstein has
      agreed to market all of the Itec processed material from each of the proposed
      foreign government ventures listed above.




**ITEM
      2. DESCRIPTION OF PROPERTY**





The
      Company does not own any real property. Itec has entered into a five (5) year
      use agreement with a five (5) year option on a 51,394 sq. ft. steel frame
      building in the heavy industrial complex building in Riverbank, California.
      The
      agreement includes 3,500 sq. ft. of office space.




**ITEM
      3. LEGAL PROCEEDINGS**





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





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





Not
      applicable.





**PART
      II**




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





As
      of May
      5, 2006, Itec Environmental Group had 67,619,186 shares of common stock issued
      and outstanding and had approximately 881 stockholders of record.





Itec’s
      common stock is not traded on a registered securities exchange, or the NASDAQ.
      Itec’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, 2005
            
            $
            .18
            
            $
            .11September
                30, 2005
            
            $
            .279
            
            $
            .05June
                30, 2005
            
            $
            .15
            
            $
            .055March
                31, 2005
            
            $
            .31
            
            $
            .06December
                31, 2004
            
            $
            .43
            
            $
            .0014September
                30, 2004
            
            $
            .017
            
            $
            .0015June
                30, 2004
            
            $
            .12
            
            $
            .008March
                31, 2004
            
            $
            .07
            
            $
            .02





May
      5,
      2006, the closing price was $.13 per share.





4





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.




**Equity
                  Compensation Plan Information**Plan
                  Category
              Number
                  of securities to
              
              Weighted-average
              Number
                  of securitiesbe
                  issued upon exercise
              
              exercise
                  price of
              remaining
                  available forof
                  outstanding options,
              
              outstanding
                  options,
              future
                  issuance underwarrants
                  and rights (a)
              
              warrants
                  and rights (b)
              equity
                  compensationplans
                  (excludingsecurities
                  reflected incolumn
                  (a))Equity
                  compensation
              N/A
              
              N/A
              N/Aplans
                  approved bysecurity
                  holdersEquity
                  compensation
              4,457,370(1)
              
              $.06
              N/Aplans
                  not approved bysecurity
                  holders
              15,000,000(2)
              
              Price
                  as listed on the
              5,150,000OTCBB
                  at the time ofissuance.19,500,000(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/A





(1) Consists
      of a Warrant issued by the Company to Gary De Laurentiis, its Chairman &
CEO 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 Laurentiss may purchase up to 2,000,000 shares
      of common stock of the Company at a price of $.06 per share.




(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 CEO.




(3)
      Consists of a Warrant issued by the Company to Gary De Laurentiis, its Chairman
      & CEO 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.





5





(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 Smith, Jr., its 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, its 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, its 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.





**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:





In
      February, 2006, Itec Environmental Group, Inc., a Delaware corporation (the
      “Company” or “Itec”), pursuant to the private offering exemption provided by
      Section 4(2) of the Securities Act of 1933 (the “Exemption”), in exchange for
      services provided by Jeffrey Chartier to the Company, the Company issued a
      warrant to Jeffrey Chartier ,
      its
      Director, pursuant
      to which Mr. Chartier may purchase up to 500,000 shares of common stock of
      the
      Company at the price of $.12 per share (the “Chartier Warrant”). The Chartier
      Warrant is exerciseable for a period of ten (10) years and may be exercised
      for
      cash. The shares underlying the Chartier Warrant have piggy-back registration
      rights.





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





In
      December 2005, pursuant to the Exemption, the Company sold 357,143 shares of
      common stock at a price of approximately $.14 per share for proceeds of $50,000
      to three accredited investors: Tiger Paw, Froese and Joe Aldridge.





In
      November, 2005, pursuant to the Exemption, the Company issued (i) 200,000 shares
      of the Company's common stock to Todd Weimer and (ii) 200,000 shares of the
      Company’s common stock to Don Prestage, pursuant to the consulting agreement
      between the Company, Todd Weimer and Don Prestage entered into in November
      of
      2005. Todd Weimer and Don Prestage’s shares carry piggyback registration rights
      for the first registration statement filed by the Company.





In
      November, 2005, pursuant to the Exemption, the Company issued or became
      obligated to issue 1,500,000 shares of the Company's common stock to Chester
      Aldridge pursuant to a consulting agreement between the Company and Mr.
      Aldridge.








6





In
      November, 2005, pursuant to the Exemption, the Company issued or became
      obligated to issue, subject to cancellation, 1,000,000 shares of the Company's
      common stock to David Baker pursuant to the consulting agreement between the
      Company and Mr. Baker.





In
      November, 2005, pursuant to the Exemption, in exchange for services provided
      to
      the Company, the Company issued a warrant to purchase 850,000 shares of the
      Company’s common stock, exercise price of $.001 per share, to Brean Murray &
Co., Inc. (“BMCI”), pursuant to the engagement agreement for certain corporate
      finance and investment banking services being provided pursuant to the corporate
      finance representation agreement between the parties entered into in May of
      2005.





In
      August, 2005 Itec entered into certain material definitive agreements with
      twelve individual investors (the “CGF Investors”) including, but not limited to
      the following: (i) Loan Agreements, (ii) Senior Secured Convertible Promissory
      Notes $500,000 in the aggregate and (iii) Common Stock Purchase Warrants to
      purchase an aggregate of 500,000 shares, exercise price of $.13 per share
      (collectively the “CGF Investors Transaction Documents”).





Pursuant
      to the CGF Investors Transaction Documents, the CGF Investors loaned Itec
      $500,000 (the “CGF Investor Loan”), which shall be repaid by Itec upon the
      earlier of either (i) December 23, 2005, or (ii) completion of the contemplated
      financing through Itec’s investment bank, BMCI of $7,500,000 in the aggregate
      (the “Financing”). In connection with the CGF Investor Loan, the CGF Investors
      may receive Common Stock Purchase Warrants to purchase in the aggregate, 500,000
      shares of Itec common stock, if the CGF Investor Loan is not converted into
      stock pursuant to the promissory notes. The shares of common stock underlying
      the warrant are exerciseable at an exercise price of $.13 per share. The
      maturity date of the loan was previously mistakenly reported as December 14,
      2005.





In
      2005,
      the Company issued, or became obligated to issue, subject to cancellation,
      2,000,000 shares of common stock of the Company to Robert Koch in exchange
      for
      services to be performed by Mr. Koch for the Company pursuant to a consulting
      agreement.




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





FORWARD
      LOOKING STATEMENTS CAUTIONARY




This
      Item
      6. and the report on Form 10KSB for the year ended December 31, 2005 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.








7





Organization
      and Business - ITEC
      Environmental Group, Inc. (f.k.a. Beechport Capital Corp. (“Beechport”)) was
      organized as a Colorado corporation in January 1989, in order to evaluate,
      structure and complete a merger with or acquisition of prospects consisting
      of
      private companies, partnerships or sole proprietorships. At a special September
      2002 meeting of the shareholders of Beechport, the Company authorized a merger
      of Beechport into its wholly-owned subsidiary, Itec Environmental Group, Inc.
      This business combination resulted in the shareholders of Itec owning
      approximately 67% of the issued and outstanding shares of the Company’s common
      stock upon completion of the transaction, and the Company holding 100% of Itec’s
      common stock. The transaction was accounted for as a reverse merger, and
      therefore Itec was deemed to be the acquirer, for accounting purposes. This
      transaction is treated as a recapitalization of Itec, with no revaluation of
      assets and liabilities. Beechport was a shell corporation at the date of the
      exchange, and, therefore the acquisition was recorded under the reverse merger
      guidelines.




Itec
      Environmental Group, Inc. (“Itec” or the “Company”) was incorporated under the
      laws of the State of Delaware in March 2000. Itec was formed for the purpose
      of
      acquiring certain patented technology and the development of a worldwide market
      for its usage. The Company's subsidiary, ECO2 Environmental Systems, Inc.
      (“ECO2”), was incorporated under the laws of the State of Delaware in April
      2000. Unless the context indicates otherwise, all references herein to the
      Company include Itec, its predecessor, Beechport, and its wholly-owned
      subsidiary, ECO2.





The
      Company is primarily engaged in activities to become a worldwide supplier of
      recycled plastics using its proprietary process and equipment and to form
      strategic alliances to become the major supplier of recycling equipment outside
      of the United States. The Company has commenced construction of its first
      recycling line at its Riverbank plant and at December 31, 2005 had invested
      approximately $2.9 million in the recycling plant construction in progress
      and
      installation of equipment necessary to achieve plant production and expects
      to
      commence production in 2006.





In
      June
      2005, pursuant to terms of a 4.25% promissory note the Company received into
      an
      escrow account $1,990,000, after deduction of $10,000 for loan fees to the
      lender, from the California Integrated Waste Management Board (the “CIWMB”). The
      CIWMB makes low interest loans to local government agencies and private business
      entities within a Recycling Market Development Zone to increase diversion of
      nonhazardous solid waste from landfills and to promote market demand for
      secondary and post consumer materials. Approval for the loan was based on the
      Company's projection to build its first Eco2 Environmental System Plant and
      to
      divert post consumer plastic bottles as a result of the loan. Borrowing of
      CIWMB
      funds required, among other things, verification of matching funds, which will
      co-fund equipment purchases. In August 2005 the Company received an investment
      and deposited funds sufficient to enable the Company to begin construction
      of
      its first Eco2 Environmental System Plant recycling plant.





We
      use
      patented technology and proprietary equipment to recycle plastic. We license
      environmental technology using a carbon dioxide cleaning process from Honeywell.
       The narrowest application of this environmental technology allows for the
      100% recycling of plastic motor oil containers and the residual oil left inside
      each container.  By using the carbon dioxide cleaning process, the Company
      can focus on environmental protection and environmental safety by creating
      no
      chemical waste disposal in the oil recycling and plastic recycling
      process.




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 retain qualified management personnel and to raise
      sufficient capital to meet its operating and development needs.








8





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 valuation of equity related instruments
      issued, and 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.




Going
      concern presentation - The
      accompanying consolidated financial statements have been prepared in conformity
      with generally accepted accounting principles, which contemplate continuation
      of
      the Company as a going concern. The Company has incurred recurring losses from
      operations and has a net working capital deficiency and net capital deficiency
      that raises substantial doubt about its ability to continue as a going concern.
      The Report of Independent Registered Public Accounting Firm included in 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”. The result of this accounting treatment is that the fair
      value of the embedded 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 will recognize revenue when there is persuasive evidence of an
      arrangement, the product has been delivered or the services have been provided
      to the customer, the sales price is fixed or determinable, and collectibility
      is
      reasonably assured. The Company will recognize revenues from sales of recycled
      products upon delivery to customers. The Company will recognize revenues from
      sales of equipment or systems outside the United States 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 provision for income taxes represents the tax payable for
      the period and change during the period in net deferred tax assets and
      liabilities.







9





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







Results
      of Operations - We
      had no
      revenues in 2005, compared with $1,750 in 2004, and inception to date revenues
      of $494,387. The decline of revenue in 2005 and the small amount of revenue
      in
      2004 was a 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. This change in business strategy required our
      management to focus their efforts on raising capital of approximately $5.2
      million in 2004 and 2005 to fund our revised business strategy. We are a
      development stage company and accordingly have not as yet begun generating
      operational revenues.




Total
      operating expense for 2005 is $10,531,972 compared with $2,282,930 in 2004.
      The
      increase of $8,249,042, or 361%, is due primarily to stock-based compensation
      expense of approximately $5.2 million recorded for legal and consulting fees
      for
      corporate financing and capital raising efforts, of warrant expense to officers
      of approximately $3.1 million included in general and administrative expense
      and
      other general and administrative expenses. These increases are directly related
      to the use by the Company of legal and strategic business consultants, who
      have
      assisted us in our redirection and recapitalization efforts, which have been
      paid through issuance of common stock and warrants. Consulting and legal fees
      were approximately $6,164,053 and $1,192,390 for the years ended December 31,
      2005 and 2004, respectively. Additionally, we granted fully-vested warrants
      to
      our Chief Executive Officer and Chief Financial Officer for their continued
      efforts in developing our business objectives. Pursuant to guidelines of SFAS
      123R, we recorded the fair value of the warrants granted as compensation expense
      in the amount of approximately $3,131,000, which is included in general and
      administrative expense. All remaining payroll expenses represent payroll
      accruals for these same executive officers who are continuing to provide
      services without receiving full cash remuneration.




The
      Company recorded interest expense of $2,386,301 for 2005, as compared to
      $273,327 for 2004. The increase is due to increased borrowing during 2005,
      the
      majority of which represents amortization of deferred debt issue costs and
      debt
      discount recorded in connection with such borrowings.




The
      Company recorded a gain on extinguishment of debt of $292,389 and $634,211
      during 2005 and 2004, respectively. The Company recorded a loss on conversion
      of
      notes payable for stock in 2005 of $515,864.





Net
      loss
      increased to $15,324,904 for the year ended December 31, 2005, compared with
      $2,237,699 for 2004, due primarily to increased consulting and professional
      fees, stock-based officer compensation general and administrative expense and
      increased interest expense, as described above.




At
      December 31, 2005, the Company has substantial net operating loss carry-forwards
      available to offset future income taxes which expire through 2024.
 Realization is dependent on generating sufficient taxable income prior to
      expiration of the loss carry-forwards.  A change of greater than 50% of the
      Company ownership could significantly reduce the availability of these tax
      credits.  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.







10





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




At
      December 31, 2005, we had a working capital deficit of approximately $7.4
      million (including fair value liabilities for warrants and embedded derivative
      of $3.5 million), compared to a working capital deficit of $1.6 million at
      December 31, 2004.  At December 31, 2005, we had total assets of $3.1
      million and a total stockholders’ deficit of $6.4 million, compared with total
      assets of $423,000 and total stockholder's deficit of $1.9 million at December
      31, 2004. Total assets increased primarily due to the $2.6 million increase
      in
      property and equipment relating to the construction of the Company’s recycling
      plan, utilizing the proceeds of the $2,000,000 equipment acquisition/matching
      funds loan from the California Waste Management Board (CIWMB) and of $600,000
      of
      borrowings designated for equipment matching purchases and related equipment
      purchases. At December 31, 2005, there was cash of approximately $58,000 held
      in
      an escrow account for release upon presentation of equipment purchase
      invoices.




During
      2005, cash used by operating activities increased to $1.4 million from $854,000
      in 2004, due primarily to an increase in net loss of offset by non-cash
      expenses. During 2005, cash used by investing activities was
      approximately $2.7 million due to building our recycling plant. During 2005,
      we
      received approximately $2 million in proceeds from issuances of notes payable,
      $392,000 from issuances of common stock and $1.9 million in fund draws from
      the
      CIWMB restricted cash escrow account while repaying approximately $221,000
      in
      loans and leases.




At
      December 31, 2005, the Company does not have sufficient cash to meet its needs
      for the next twelve months. However, the Company continues to be in the process
      of raising funds, and Company management anticipates being able to raise
      sufficient cash to meet the Company’s needs through 2006. There is no guarantee,
      however, that our efforts will result in raising cash in amounts sufficient
      to
      meet the Company’s needs.




During
      2006, the Company has received subscriptions and related funds into escrow
      pursuant to a private placement memorandum in which $2.5 million, which can
      be
      increased to $5 million, of bridge financing is to be raised through the
      offering of a minimum of 20 Units for $25,000 per unit. Each Unit consists
      of a
      $25,000 junior secured subordinated convertible debenture, bearing interest
      at
      10% with principal and accrued interest due in 18 months from issuance
      (“maturity date”), convertible immediately and up to the maturity date, into
      shares of the Company’s common stock at a price of $0.0975 per share, and a
      warrant, with a cashless exercise provision, to purchase 75,000 shares of
      restricted common stock of the Company, exercisable for approximately 10 years
      (expires April 15, 2015) at an exercise price of $0.06 per share. The conversion
      price of the debentures and exercise price of the warrant are subject to
      anti-dilution downward adjustments in the event the Company sells common stock
      or securities convertible into common stock at a price below the conversion
      or
      exercise prices, and subject to other adjustments as described below relating
      to
      the registration rights. The security is subordinated only to the security
      interest granted to CIWMB. The shares underlying the debentures and warrants
      are
      subject to piggy back registration rights. In addition a registration statement
      must be filed within 30 days after an investor elects to convert all or any
      portion of the debenture. If the registration statement is not filed within
      that
      time frame the investor shall be paid 10% of the shares of common stock into
      which the debenture converts in additional cashless exercise warrants at an
      exercise price of $.06 per share for each 30 days beyond the initial 30 day
      period. If the registration statement is not effective within 180 days after
      filing, the investor will get paid 10% of the shares of common stock into which
      the debenture converts in additional cashless exercise warrants at an exercise
      price of $.06 for each 30 days beyond the initial 150 day period. Should the
      Securities and Exchange Commission fail to declare a registration statement
      effective on or before May 1, 2007 or should such registration statement
      thereafter cease to be effective, then the conversion price shall decrease
      by
      $.03 upon the occurrence of every 30-day period thereafter (or part thereof)
      that the registration statement shall not be declared or remain effective,
      provided, however, that in no event shall the aggregate reduction in conversion
      price be greater than $.0975. Through April 2006, funds totaling approximately
      $1.1 million have been received into escrow upon subscription for Units and
      three prior notes holders converted their notes totaling $150,000 plus accrued
      interest into the subscription unit. The Company has not closed the offering
      as
      of May 1, 2006 and the debentures and warrants have not been issued. The Company
      believes that the embedded conversion option in the debenture qualifies as
      a
      derivative under FASB Statement 133 and related interpretations since the
      debenture conversion price is variable, and thus the debenture instrument will
      be separated into a debt instrument and embedded option instrument for financial
      statement purposes and the embedded option instrument will be recorded as a
      liability at fair value with marked to fair value through statement of
      operations as other income or expense. Due to the authorized shares issue this
      causes under EITF 00-19, the warrants will also be classified as a warrant
      liability to be marked to fair value through the statement of
      operations.








11





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
      December 2004, the Financial Accounting Standards Board (“FASB”) released a
      revision to Statement of Financial Accounting Standard (“SFAS”) No. 123,
      Accounting for Stock-Based Compensation (“FAS 123R”). FAS 123R addresses the
      accounting for share-based payment transactions in which an enterprise receives
      employee services in exchange for (a) equity instruments of the enterprise
      or
      (b) liabilities that are based on the fair value of the enterprise's equity
      instruments or that may be settled by the issuance of such equity instruments.
      The statement eliminates the ability to account for share-based compensation
      transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees,
      and generally requires instead that such transactions be accounted for using
      a
      fair-value-based method. The Company adopted FAS 123R effective with the year
      beginning January 1, 2005.




In
      December 2004, the Financial Accounting Standards Board issued SFAS No. 151,
      “Inventory Costs, an amendment of ARB No. 43, Chapter 4”, which clarifies the
      accounting for abnormal amounts of idle facility expense, freight, handling
      costs, and charges regardless of whether they meet the criterion of “so
      abnormal” that was originally stated in Accounting Research Bulletin No. 43,
      chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed
      production overheads to conversion costs be based on the normal capacity of
      the
      production facilities. SFAS No. 151 is effective for inventory costs incurred
      during fiscal years beginning after June 15, 2005. Implementation of this new
      standard to did not have a material impact on its financial position, results
      of
      operations or cash flows.




In
      December 2004, the Financial Accounting Standards Board Statement issued SFAS
      No. 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29”,
      which amends Opinion 29 by eliminating the exception for nonmonetary exchanges
      of similar productive assets and replaces it with a general exception for
      exchanges of nonmonetary assets that do not have commercial substance. A
      nonmonetary exchange has commercial substance if the future cash flows of the
      entity are expected to change significantly as a result of the exchange. SFAS
      No. 153 is effective for a fiscal year beginning after June 15, 2005, and
      implementation is done prospectively. Implementation of this new standard did
      not have a material impact on its financial position, results of operations
      and
      cash flows.




In
      May
      2005, the FASB issued Statement of Financial Accounting Standards No. 154,
      “Accounting Changes and Error Corrections”, (SFAS 154”). SFAS 154 replaces APB
      Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting
      Changes in Interim Financial Statements,” and changes the requirements for the
      accounting for and reporting of a change in accounting principle. The Company
      is
      required to adopt SFAS 154 in 2007. The Company's results of operations and
      financial condition will only be impacted by SFAS 154 if the Company implements
      changes in accounting principles that are addressed by the standard or correct
      accounting errors in future periods.







12




**ITEM
        7. FINANCIAL STATEMENTS**
 
 *The
        company changed independent public auditors in 2005. See, Item 8 below. The
        financial statements for the fiscal years ended December 31, 2004 and December
        31, 2003 are reported on by our former auditors, which report is included
        in this form10KSB for the year ended December 31, 2005 with their reissued
        opinion. The financial statements for the fiscal years ended December 31,
        2002
        and December 31, 2001 are reported on by different former auditors, which
        report
        is included in this Form 10KSB for the year ended December 31,
        2005.*


**Report
        of Independent Registered Public Accounting Firm**
 
 
 To
        the
        Board of Directors and Shareholders of:
 ITEC
        Environmental Group, Inc.
 (A
        Development Stage Company)
 
 We
        have
        audited the accompanying consolidated balance sheet of ITEC Environmental
        Group,
        Inc. and Subsidiary (A Development Stage Company) as of December 31, 2005
        and the related consolidated statements of operations, changes in stockholders'
        deficit, and cash flows for the year then ended. 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 audit. The financial statements as of December 31,
        2004
        were audited by other auditors whose report dated March 19, 2005 on those
        statements included an explanatory paragraph describing conditions that raised
        substantial doubt about the Company’s ability to continue as a going concern.
        The financial statements for the period March 28, 2000 (inception) through
        December 31, 2004 include total revenues and net loss of $494,387 and
        $10,061,500, respectively. Our opinion on the statements of operations, changes
        in stockholders’ equity (deficit), and cash flows for the period March 28, 2000
        (inception) through December 31, 2005, insofar as it relates to amounts for
        periods through December 31, 2004, is based solely on the reports of other
        auditors’.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit 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 audit provides 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 ITEC
        Environmental Group, Inc. and Subsidiary (A Development Stage Company) as
        of
        December 31, 2005 and the consolidated results of its operations and its
        cash
        flows for the year then ended 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 $15,324,904
        and used cash for operating activities of $1,364,227 during the year ended
        December 31, 2005, and, as of that date, had a working capital deficiency
        of
        $7,388,811 and total stockholders' deficiency of $6,474,315, which includes
        accumulated losses from March 28, 2000 (inception) to December 31, 2005 of
        $25,386,404. In addition, on November 1, 2005 the Company defaulted on the
        principal and accrued interest payment on a $600,000 loan and in December
        2005
        defaulted on another $600,000 of loans to a group of investors as more fully
        described in Notes 5 and 9. 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
 May
        1,
        2006





13





**Report
      of Independent Certified Public Accountants**








Board
      of
      Directors and Shareholders


ITec
      Environmental Group, Inc.


(A
      Development Stage Company)








We
      have
      audited the accompanying consolidated statements of operations, shareholders'
      equity and cash flows of ITec Environmental Group, Inc., (a Development Stage
      Company) (“ITec”), for the year ending December 31, 2004 and 2003. These
      consolidated financial statements are the responsibility of Company's
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits. We did not audit the consolidated
      financial statements of ITec from inception on March 28, 2000 through December
      31, 2002. The consolidated financial statements as of December 31, 2002 and
      for
      the period from inception on March 28, 2000 through December 31, 2002, were
      audited by other auditors whose reports reflected a net loss of $6,190,267
      of
      the total net loss from inception to December 31, 2004. Those statements were
      audited by other auditors whose report has been furnished to us, and our
      opinion, insofar as it relates to the amounts included for such prior periods,
      is based solely on the report of the other auditors.





We
      conducted our audits in accordance with standards of the Public Company
      Oversight Board (United States). Those standards require that we plan and
      perform the audits to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      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 results of operations of ITec Environmental Group,
      Inc., (a Development Stage Company), as of December 31, 2004, and its cash
      flows
      for the year then ended in conformity with accounting principles generally
      accepted in the United States of America.





The
      other
      auditor’s report on the 2002 financial statements of ITec included an
      explanatory paragraph describing conditions that raised substantial doubt about
      the Company’s ability to continue as a going concern.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in the Note 2 to
      the
      consolidated financial statements, the Company has suffered recurring losses
      and
      has incurred a net loss of $2,237,699 during the year ended December 31, 2004.
      This condition raises substantial doubt about the Company’s ability to continue
      as going concern. Management plans to raise additional equity and pursue
      financing arrangements to remedy the capital and loss deficiencies. The
      consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.








*/s/
      Pohl, McNabola, Berg & Company, LLP*





Pohl,
      McNabola, Berg & Company LLP


San
      Francisco, CA


March
      19,
      2005





**REPORT
        OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT**
 
 The
        Shareholders
 ITEC
        ENVIRONMENTAL GROUP,INC
 (A
        Development-Stage Company)
 
 I
        have
        audited the accompanying consolidated statements of operations, changes in
        stockholders' deficit, and cash flows of ITEC ENVIRONMENTAL GROUP, INC AND
        SUBSIDIARY (A Development-Stage Company) for the years ended December 31,
        2002
        and 2001 included in the development stage period from March 28, 2000
        (inception) to December 31, 2005. These consolidated financial statements
        are
        the responsibility of management. My responsibility is to express an opinion
        on
        these consolidated financial statements based on my audit. Other Auditors,
        whose
        report, dated April 3, 2001, expressed an opinion on these financial statements,
        audited the financial statements of Itec for the period from inception on
        March
        28, 2000 through December 31 2000. The financial statements for the period
        from
        inception on March 28, 2000 through December 31 2000 reflect a loss of
        $1,413,949 of the total net loss from inception. The other auditors' report
        has
        been furnished to us, and my opinion, insofar as it relates to the amounts
        included for such prior periods, is based solely on the report of the other
        auditors.
 
 I
        conducted my audit in accordance with the auditing standards generally accepted
        in the United States. Those standards require that we plan and perform the
        audit
        to obtain reasonable assurance about whether the financial statements are
        free
        of material misstatement. An audit includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial statements. An audit
        also includes assessing the accounting principles used and significant estimates
        made by management, as well as evaluating the overall financial statement
        presentation. I believe that my audits provide a reasonable basis for my
        opinion.
 
 In
        my
        opinion, the consolidated financial statements for the years ended December
        31,
        2002 and 2001 included in the development stage period from March 28, 2000
        (inception) to December 31, 2005 present fairly, the consolidated operations,
        changes in stockholders' deficit and cash flows of ITEC ENVIRONMENTAL GROUP,
        INC., (a development stage company), for the years then ended in conformity
        with
        generally accepted accounting principles consistently applied.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the company will continue as a going concern. As discussed in the Notes to
        the
        consolidated financial statements, the Company has sustained losses from
        initial
        startup costs and has a lack of substantial capital that raises substantial
        doubt about its ability to continue as a going concern. Management plans
        to
        pursue financing arrangements and aggressive sales of equipment to remedy
        the
        capital and loss circumstances. The consolidated financial statements do
        not
        include any adjustments that might result from the outcome of this
        uncertainty.
 
 /s/
        Henry
        Schiffer, CPA
 -----------------------
 Henry
        Schiffer, CPA
 An
        Accountancy Corporation
 
 Beverly
        Hills, California
 March
        28,
        2003


14





**ITEC
        Environmental Group, Inc. and Subsidiary**
 **(A
        Development Stage Company)**
 
 **Financial
        Statements**
 
 **December
        31, 2005 and 2004**
  15
  **ITEC
          Environmental Group, Inc. and Subsidiary**
 **(A
          Development Stage Company)**
 **Consolidated
          Balance Sheet**
 **December
          31, 2005**
   Current
                    assetsCash
                    and cash equivalents
                
                $
                32,365Restricted
                    cash held in escrow
                
                
                57,854Inventories
                
                
                67,664Prepaid
                    expenses and other current assets
                
                
                16,445Total
                    current assets
                
                
                174,328Property
                    and equipment, net
                
                
                2,805,545Notes
                    receivable - officer
                
                
                147,973Deposits
                
                
                36,739Total
                    assets
                
                $
                3,164,585Current
                    liabilitiesAccounts
                    payable
                
                $
                667,957Accounts
                    payable - related party
                
                
                114,861Accrued
                    compensation and other amounts due officers
                
                
                862,741Accrued
                    liabilities
                
                
                506,672Current
                    portion of capital lease obligations
                
                
                9,233Notes
                    and convertible notes payable issued and due in 2005
                
                
                1,350,000Current
                    portion of California Integrated Waste Management Board note
                    payable
                
                
                92,794Fair
                    value liability for convertible notes payable embedded
                    derivative
                
                
                159,032Fair
                    value liability for warrants
                
                
                3,445,869Loans
                    payable issued prior to 2004
                
                
                353,980Total
                    current liabilities
                
                
                7,563,139Non-current
                    liabilitiesCapital
                    lease obligations, net of current portion
                
                
                13,484Notes
                    payable to California Integrated Waste ManagementBoard,
                    net of discount of $9,500 and of current portion
                
                
                1,897,706Total
                    non-current liabilities
                
                
                1,911,190Total
                    liabilities
                
                
                9,474,329Commitments
                    and contingencies (Note 9)Common
                    stock price reduction contingency
                
                
                164,571Stockholders'
                    DeficitPreferred
                    stock, $0.001 par value, 10,000,000 sharesauthorized
                    , none issued and outstanding
                
                
                —Common
                    stock, $0.001 par value, 750,000,000 sharesauthorized,
                    62,325,024 shares issued and outstanding
                
                
                62,325Additional
                    paid-in capital
                
                
                19,357,764Deferred
                    stock-based consulting
                
                
                (508,000
                )Deficit
                    accumulated during the development stage
                
                
                (25,386,404
                )Total
                    stockholders' deficit
                
                
                (6,474,315
                )Total
                    liabilities and stockholders' deficit
                
                $
                3,164,585
 See
          accompanying notes to consolidated financial statements.
 16
 **ITEC
          Environmental Group, Inc. and Subsidiary**
 **(A
          Development Stage Company)**
 **Consolidated
          Statements of Operations**
  Year
                    ended December 31,
                
                March
                          28,2000
                      (inception)
                    through
                    December
                      31,2005
                
                2004
                
                2005Revenue
                
                $
                —
                
                $
                1,750
                
                $
                494,387Cost
                    of goods sold
                
                
                —
                
                
                68,704
                
                
                295,977Gross
                    profit
                
                
                —
                
                
                (66,954
                )
                
                198,410Operating
                    expensesTechnology
                    development
                
                
                302,764
                
                
                166,102
                
                
                814,352Consulting
                    and legal fees
                
                
                6,164,053
                
                
                1,192,390
                
                
                11,164,125General
                    and administrative
                
                
                4,065,155
                
                
                924,438
                
                
                8,503,993Total
                    operating expenses
                
                
                10,531,972
                
                
                2,282,930
                
                
                20,482,470Loss
                    from operations
                
                
                (10,531,972
                )
                
                (2,349,884
                )
                
                (20,284,060
                )Other
                    expense (income)Interest
                    expense
                
                
                2,386,301
                
                
                273,327
                
                
                3,070,909Loss
                    on conversion of notes payable for stock
                
                
                515,864
                
                
                —
                
                
                515,864Gain
                    on extinguishment of debt
                
                
                (292,389
                )
                
                (634,211
                )
                
                (926,600
                )Change
                    in fair value liability of warrants and derivatives
                
                
                2,183,156
                
                
                —
                
                
                2,183,156Other
                    expense
                
                
                —
                
                
                247,899
                
                
                254,067Total
                    other (income) expense
                
                
                4,792,932
                
                
                (112,985
                )
                
                5,097,396Net
                    loss before income taxes
                
                
                (15,324,904
                )
                
                (2,236,899
                )
                
                (25,381,456
                )Provision
                    for income taxes
                
                
                —
                
                
                800
                
                
                4,948Net
                    loss
                
                $
                (15,324,904
                )
                $
                (2,237,699
                )
                $
                (25,386,404
                )Net
                    loss per share, basic and diluted
                
                $
                (0.53
                )
                $
                (1.40
                )
                $
                (5.96
                )Weighted
                    average shares usedin
                    computing net loss per share, basic and diluted
                
                
                28,789,927
                
                
                1,595,427
                
                
                4,260,523
 See
          accompanying notes to consolidated financial statements.
 17
 **ITEC
          Environmental Group, Inc. and Subsidiary**
 **(A
          Development Stage Company)**
 **Consolidated
          Statement of Changes in Stockholders' Deficit**
 **For
          the Years Ended December 31, 2005 and 2004 and for the Period from March
          28,
          2000 (inception) through December 31, 2005**
 Deficit
                    accumulatedDeferred
                
                during
                    theCommon
                    stock
                
                
                
                Additional
                
                stock-based
                
                developmentShares
                
                Amount
                
                paid-in
                    capital
                
                consulting
                
                stage
                
                TotalBalance
                    at March 28, 2000
                
                
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —Sale
                    of common stock
                
                
                40,315
                
                
                40
                
                
                6,612
                
                
                
                
                
                
                
                
                6,652Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,215,313
                )
                
                (1,215,313
                )Balance
                    at December 31, 2000
                
                
                40,315
                
                
                40
                
                
                6,612
                
                
                —
                
                
                (1,215,313
                )
                
                (1,208,661
                )Common
                    stock issued in connection with reverse merger
                
                
                20,291
                
                
                21
                
                
                (21
                )
                
                
                
                
                
                
                
                —Common
                    stock issued for services
                
                
                16,315
                
                
                16
                
                
                1,092,112
                
                
                
                
                
                
                
                
                1,092,128Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,411,222
                )
                
                (2,411,222
                )Balance
                    at December 31, 2001
                
                
                76,921
                
                
                77
                
                
                1,098,703
                
                
                —
                
                
                (3,626,535
                )
                
                (2,527,755
                )Sale
                    of common stock
                
                
                135,182
                
                
                135
                
                
                1,641,767
                
                
                
                
                
                
                
                
                1,641,902Common
                    stock issued for services
                
                
                42,425
                
                
                43
                
                
                888,395
                
                
                
                
                
                
                
                
                888,438Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,563,732
                )
                
                (2,563,732
                )Balance
                    at December 31, 2002
                
                
                254,528
                
                
                255
                
                
                3,628,865
                
                
                —
                
                
                (6,190,267
                )
                
                (2,561,147
                )Sale
                    of common stock
                
                
                36,618
                
                
                37
                
                
                172,903
                
                
                
                
                
                
                
                
                172,940Common
                    stock issued for compensation
                
                
                12,121
                
                
                12
                
                
                71,988
                
                
                
                
                
                
                
                
                72,000Common
                    stock issued for services
                
                
                124,481
                
                
                124
                
                
                820,013
                
                
                
                
                
                
                
                
                820,137Warrants
                    issuance
                
                
                
                
                
                
                
                
                6,000
                
                
                
                
                
                
                
                
                6,000Share
                    adjustment
                
                
                (403
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                —Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,633,534
                )
                
                (1,633,534
                )Balance
                    at December 31, 2003
                
                
                427,345
                
                
                428
                
                
                4,699,769
                
                
                —
                
                
                (7,823,801
                )
                
                (3,123,604
                )Common
                    stock issued for notes payable conversion
                
                
                1,006,625
                
                
                1,007
                
                
                1,863,235
                
                
                
                
                
                
                
                
                1,864,242Common
                    stock issued for accounts payable conversion
                
                
                318,434
                
                
                318
                
                
                285,181
                
                
                
                
                
                
                
                
                285,499Common
                    stock issued for debt conversion
                
                
                1,170,434
                
                
                1,171
                
                
                306,286
                
                
                
                
                
                
                
                
                307,457Common
                    stock issued for Directors compensation
                
                
                149,775
                
                
                150
                
                
                240,350
                
                
                
                
                
                
                
                
                240,500Common
                    stock issued for services
                
                
                3,826,301
                
                
                3,826
                
                
                1,930,937
                
                
                
                
                
                
                
                
                1,934,763Common
                    stock issued for future legal services
                
                
                
                
                
                
                
                
                
                
                
                (1,177,418
                )
                
                
                
                
                (1,177,418
                )Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,237,699
                )
                
                (2,237,699
                )Balance
                    at December 31, 2004
                
                
                6,898,914
                
                
                6,900
                
                
                9,325,758
                
                
                (1,177,418
                )
                
                (10,061,500
                )
                
                (1,906,260
                )Warrants
                    issued to officers for services
                
                
                —
                
                
                —
                
                
                3,130,766
                
                
                —
                
                
                —
                
                
                3,130,766Common
                    stock issued for services
                
                
                33,647,088
                
                
                33,647
                
                
                4,642,591
                
                
                (1,425,292
                )
                
                
                
                
                3,250,946Common
                    stock returned in settlement of debt
                
                
                (1,342,692
                )
                
                (1,343
                )
                
                (119,500
                )
                
                
                
                
                
                
                
                (120,843
                )Common
                    stock issued for notes payable conversion
                
                
                20,542,303
                
                
                20,542
                
                
                544,210
                
                
                
                
                
                
                
                
                564,752Excess
                      of fair value of common stock issued over face amount ofnote
                      payable converted to common stock
                
                
                
                
                
                
                
                
                515,864
                
                
                
                
                
                
                
                
                515,864Fair
                    value of derivative liability upon conversion of notes
                    payable
                
                
                
                
                
                
                
                
                1,489,977
                
                
                
                
                
                
                
                
                1,489,977Common
                    stock issued for cash, net of amount contingently
                    refundable
                
                
                2,579,411
                
                
                2,579
                
                
                224,749
                
                
                
                
                
                
                
                
                227,328Fair
                    value of stock purchase rights issued with sale of common stock,
                    recored
                    as derivative liability
                
                
                
                
                
                
                
                
                (391,900
                )
                
                
                
                
                
                
                
                (391,900
                )Contribution
                    of warrants for assignment
                
                
                
                
                
                
                
                
                46,400
                
                
                
                
                
                
                
                
                46,400Fair
                    value of warrants reclassified to derivative liabilities
                
                
                
                
                
                
                
                
                (51,151
                )
                
                
                
                
                
                
                
                (51,151
                )Amortization
                    of deferred stock-based consulting expense
                
                
                
                
                
                
                
                
                
                
                
                2,094,710
                
                
                
                
                
                2,094,710Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (15,324,904
                )
                
                (15,324,904
                )Balance
                    at December 31, 2005
                
                
                62,325,024
                
                $
                62,325
                
                $
                19,357,764
                
                $
                (508,000
                )
                $
                (25,386,404
                )
                $
                (6,474,315
                )
  See
          accompanying notes to consolidated financial statements.
 18
 **ITEC
          Environmental Group, Inc. and Subsidiary**
 **(A
          Development Stage Company)**
 **Consolidated
          Statements of Cash Flows**
  March
                    28,2000(inception)throughYear
                    ended December 31,
                
                December
                    31,2005
                
                2004
                
                2005Cash
                    flows from operating activities:Net
                    loss
                
                $
                (15,324,904
                )
                $
                (2,237,699
                )
                $
                (25,386,404
                )Adjustments
                    to reconcile net loss to net cashused
                    in operating activities:Depreciation
                
                
                57,004
                
                
                57,007
                
                
                168,120Amortization
                
                
                5,500
                
                
                10,000
                
                
                50,500Gain
                    on extinguishment of debt
                
                
                (292,388
                )
                
                (634,211
                )
                
                (926,599
                )Loss
                    on conversion of debt for common stock
                
                
                515,864
                
                
                —
                
                
                515,864Change
                    in fair value of warrants and derivatives
                
                
                2,183,156
                
                
                
                
                
                2,183,156Issuance
                    of common stock for services
                
                
                3,250,946
                
                
                757,345
                
                
                6,808,994Issuance
                    of common stock for compensation
                
                
                —
                
                
                240,500
                
                
                312,500Issuance
                    of warrants for compensation
                
                
                3,130,766
                
                
                —
                
                
                3,130,766Issuance
                    of warrants to consultants recorded as derivatiive
                    liabilities
                
                
                615,946
                
                
                —
                
                
                615,946Warrants
                    paid to consultants by principle stockholder
                
                
                46,400
                
                
                —
                
                
                46,400Amortization
                    of deferred stock based fees
                
                
                2,094,710
                
                
                —
                
                
                2,094,710Amortization
                    of debt issue costs and discount
                
                
                1,852,724
                
                
                —
                
                
                1,852,724Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                —
                
                
                268,987
                
                
                —Inventory
                
                
                (67,664
                )
                
                55,094
                
                
                (67,664
                )Prepaid
                    expenses and deposits
                
                
                18,024
                
                
                (48,569
                )
                
                (53,185
                )Accounts
                    payable
                
                
                138,463
                
                
                (2,467
                )
                
                1,068,317Accrued
                    liabilities
                
                
                411,226
                
                
                679,320
                
                
                1,878,594Net
                    cash used in operating activities
                
                
                (1,364,227
                )
                
                (854,693
                )
                
                (5,707,261
                )Cash
                    flows from investing activities:Purchase
                    of property, plant & equipment
                
                
                (2,668,948
                )
                
                —
                
                
                (2,924,636
                )Purchase
                    of license fees
                
                
                —
                
                
                —
                
                
                (50,000
                )Advances
                    (repayments) made on notes receivable from officer
                
                
                —
                
                
                14,690
                
                
                (147,973
                )Net
                    cash provided by (used in) investing activities
                
                
                (2,668,948
                )
                
                14,690
                
                
                (3,122,609
                )Cash
                    flows from financing activities:Cash
                    draws from CIWMB restricted escrow funds
                
                
                1,932,146
                
                
                —
                
                
                1,932,146Principal
                    payments on capital lease obligations
                
                
                (11,320
                )
                
                (4,851
                )
                
                (26,311
                )Proceeds
                    from sale of common stock
                
                
                391,901
                
                
                —
                
                
                2,213,395Proceeds
                    from issuance of notes payable
                
                
                1,957,300
                
                
                901,095
                
                
                5,003,858Payments
                    on notes payable
                
                
                (90,353
                )
                
                (51,000
                )
                
                (141,353
                )Payments
                    on notes payable - officers
                
                
                (119,500
                )
                
                
                
                
                (119,500
                )Net
                    cash provided by financing activities
                
                
                4,060,174
                
                
                845,244
                
                
                8,862,235Net
                    increase in cash and cash equivalents
                
                
                26,999
                
                
                5,241
                
                
                32,365Cash
                    and cash equivalents, beginning of period
                
                
                5,366
                
                
                125
                
                
                —Cash
                    and cash equivalents, end of period
                
                $
                32,365
                
                $
                5,366
                
                $
                32,365**Supplemental
                    disclosures of cash flow information:**Cash
                    paid for interest
                
                $
                83,521
                
                $
                —
                
                $
                192,988Cash
                    paid for income taxes
                
                $
                —
                
                $
                1,600
                
                $
                4,000**Supplemental
                    Disclosure of non-cash investing and financing
                    activities**Common
                    stock issued for services
                
                $
                —
                
                $
                757,345
                
                $
                3,558,048Common
                    stock issued for compensation
                
                $
                —
                
                $
                240,500
                
                $
                312,500Common
                    stock issued for debt conversion or settlement
                
                $
                736,399
                
                $
                3,091,408
                
                $
                3,827,807Common
                    stock issued for future legal fees
                
                $
                —
                
                $
                1,177,418
                
                $
                1,177,418Restricted
                    cash loan proceeds into escrow
                
                $
                1,990,000
                
                $
                —
                
                $
                1,990,000Debt
                    discounts
                
                $
                1,520,524
                
                $
                —
                
                $
                1,520,524Deferred
                    stock based consulting
                
                $
                1,425,292
                
                $
                —
                
                $
                1,425,292Deferred
                    debt issue costs
                
                $
                332,200
                
                $
                —
                
                $
                332,200Reclassification
                    of fair value of derivatives to equity
                
                $
                1,489,977
                
                $
                —
                
                $
                1,489,977Reclassification
                    of fair value of warrant to derivative liability
                
                $
                51,152
                
                $
                —
                
                $
                51,152
   See
          accompanying notes to consolidated financial statements.
 
 19
 **ITEC
              Environmental Group, Inc. and Subsidiary**
 **(A
              Development-Stage Company)**
 **Notes
              to Consolidated Financial Statements**
 **December
              31, 2005 and 2004**
  **Note
        1.** **Description
        of Business and Summary of Significant Accounting
        Policies**
  Organization
        and Business - ITEC
        Environmental Group, Inc. (f.k.a. Beechport Capital Corp. (“Beechport”)) was
        organized as a Colorado corporation in January 1989, in order to evaluate,
        structure and complete a merger with or acquisition of prospects consisting
        of
        private companies, partnerships or sole proprietorships. At a special September
        2002 meeting of the shareholders of Beechport, the Company authorized a merger
        of Beechport into its wholly-owned subsidiary, Itec Environmental Group,
        Inc.
        This business combination resulted in the shareholders of Itec owning
        approximately 67% of the issued and outstanding shares of the Company’s common
        stock upon completion of the transaction, and the Company holding 100% of
        Itec’s
        common stock. The transaction was accounted for as a reverse merger, and
        therefore Itec was deemed to be the acquirer, for accounting purposes. This
        transaction is treated as a recapitalization of Itec, with no revaluation
        of
        assets and liabilities. Beechport was a shell corporation at the date of
        the
        exchange, and, therefore the acquisition was recorded under the reverse merger
        guidelines.
  Itec
        Environmental Group, Inc. (“Itec” or the “Company”) was incorporated under the
        laws of the State of Delaware in March 2000. Itec was formed for the purpose
        of
        acquiring certain patented technology and the development of a worldwide
        market
        for its usage. The Company's subsidiary, ECO2 Environmental Systems, Inc.
        (“ECO2”), was incorporated under the laws of the State of Delaware in April
        2000. Unless the context indicates otherwise, all references herein to the
        Company include Itec, its predecessor, Beechport, and its wholly-owned
        subsidiary, ECO2.
 
 The
        Company is primarily engaged in activities to become a worldwide supplier
        of
        recycled plastics using its proprietary process and equipment and to form
        strategic alliances to become the major supplier of recycling equipment outside
        of the United States. The Company has commenced construction of its first
        recycling line at its Riverbank plant and at December 31, 2005 had invested
        approximately $2.9 million in the recycling plant construction in progress
        and
        installation of equipment necessary to achieve plant production and expects
        to
        commence production in 2006.
 
 In
        June
        2005, pursuant to terms of a 4.25% promissory note the Company received into
        an
        escrow account $1,990,000, after deduction of $10,000 for loan fees to the
        lender, from the California Integrated Waste Management Board (the “CIWMB”). The
        CIWMB makes low interest loans to local government agencies and private business
        entities within a Recycling Market Development Zone to increase diversion
        of
        nonhazardous solid waste from landfills and to promote market demand for
        secondary and post consumer materials. Approval for the loan was based on
        the
        Company's projection to build its first Eco2 Environmental System Plant and
        to
        divert post consumer plastic bottles as a result of the loan. Borrowing of
        CIWMB
        funds required, among other things, verification of matching funds, which
        will
        co-fund equipment purchases. In August 2005 the Company received an investment
        and deposited funds sufficient to enable the Company to begin construction
        of
        its first Eco2 Environmental System Plant recycling plant. On October 6,
        2005,
        the Company received notice that the California State Department of
        Conservation, Division of Recycling has issued a conditional loan guarantee
        approval to the Company for $2,498,000, which has not yet been utilized.
        The
        Company had 40 days to obtain a loan at which time the California State
        Department of Conservation, Division of Recycling would make a second review
        prior to making a final determination of the loan guarantee. On December
        2,
        2005, the 40 day period was extended to February 2, 2006 and then on March
        27,
        2006 it was again extended to April 14, 2006. The loan guarantee is not ensured
        until the California State Department of Conservation, Division of Recycling
        Loan Note Guarantee is signed and executed by the California State Department
        of
        Conservation, Division of Recycling. As of May 1, 2006 the Company has not
        obtained a loan.
 
 Business
        risks and uncertainties - The
        Company operates in the evolving field of plastics materials recycling. New
        developments could both significantly and adversely affect existing and emerging
        technologies in the field. The Company's success in developing additional
        marketable products and processes and achieving a competitive position will
        depend on its ability to retain qualified management personnel and to raise
        sufficient capital to meet its operating and development needs. While the
        Company is seeking financing through equity and loans, there can be no assurance
        that the Company will be successful in accomplishing its
        objectives.
  Basis
        of presentation and Going Concern - The
        accompanying consolidated financial statements have been prepared in conformity
        with generally accepted accounting principles, which contemplate continuation
        of
        the Company as a going concern. The Company has reported recurring losses,
        cash
        used by operating activities and has a net working capital deficiency that
        raises substantial doubt about its ability to continue as a going concern.
        The
        Company reported a net loss of $15,324,904 and used cash for operating
        activities of $1,364,227 during the year ended December 31, 2005, and, as
        of
        that date, had a working capital deficiency of $7,388,811 and total
        stockholders' deficiency of $6,474,315, which includes accumulated losses
        from
        March 28, 2000 (inception) to December 31, 2005 of $25,386,404. In addition,
        on
        November 1, 2005 the Company defaulted on the principal and accrued interest
        payment on a $600,000 loan and in December 2005 defaulted on another $600,000
        of
        loans to a group of investors. Demand notices were received by the Company
        in
        April 2006. (See Notes 5 and 9)
  20
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  Company
        management intends to raise additional debt and/or equity financing to fund
        future capital expenditures, 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. In view of these
        matters, continuation as a going concern is dependent upon the Company's
        ability
        to meet its financing requirements, raise additional capital, and the success
        of
        its future operations or completion of a successful business
        combination
  The
        accompanying consolidated financial statements do not include any adjustments
        to
        reflect the possible future effects on the recoverability and classification
        of
        assets or the amounts and classifications of liabilities that may result
        from
        the possible inability of the Company to continue as a going
        concern.
  Use
        of
        estimates in the preparation of financial statements - The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenue and expenses during the reporting period.
        Actual
        results could differ from those estimates. The more significant accounting
        estimates inherent in the preparation of the Company's financial statements
        include estimates as to the depreciable lives of property and equipment,
        valuation of inventory, valuation of equity related instruments and derivatives
        issued, and valuation allowance for deferred income tax
        assets.
  Principles
        of Consolidation **-** The
        consolidated financial statements include the accounts of ITEC Environmental
        Group, Inc. and its wholly-owned subsidiary. All material intercompany balances
        and transactions have been eliminated in consolidation
 
 Cash
        and cash equivalents - The
        Company considers deposits that can be redeemed on demand and investments
        that
        have original maturities of less than three months when purchased to be cash
        equivalents.
  Restricted
        cash in escrow - In
        2005, the Company received cash from the California Integrated Waste Management
        Board pursuant to a $2,000,000 note payable, and received cash from an investor
        fund pursuant to $600,000 notes payable. Funds received from these borrowings
        have been placed in escrow, with draws made by the Company upon satisfaction
        of
        certain conditions, including among others, presentation of invoices for
        purchases of authorized equipment to be financed. These funds have been
        classified as Restricted Cash in Escrow as they are not otherwise available
        for
        use by the Company.
  Allowance
        for doubtful accounts - The
        Company used the allowance method to account for uncollectible accounts
        receivable. The Company provides an allowance for doubtful accounts equal
        to the
        estimated uncollectible amounts, and the allowance estimate is based on a
        review
        of the current status of trade accounts receivable. It is reasonably possible
        that the Company’s estimate of the allowance for doubtful accounts will change.
        During 2005 and 2004, the Company recorded a provision for doubtful accounts
        of
        $ 0 and $311,423, respectively.
 
 Inventory -
        Inventory is comprised of raw materials and recorded at cost determined on
        a
        first-in first-out basis.
  Property
        and equipment -
        Property and equipment are recorded at cost less accumulated depreciation
        and
        amortization. Expenditures for major additions and improvements are capitalized,
        and minor maintenance, repairs and replacements are charged to expense as
        incurred. When property and equipment are retired or otherwise disposed of,
        the
        cost and accumulated depreciation are removed from the accounts and any
        resulting gain or loss is included in the results of operations. Depreciation
        and amortization are provided using the straight-line method over the estimated
        useful lives of the respective assets, which are 3 years for computer equipment
        and software and furniture and fixtures, 5 to 7 years for manufacturing
        equipment and the lesser of estimated useful lives or lease term for leasehold
        improvements.
 
 Assets
        held under capital leases - Assets
        held under capital lease are recorded at the lower of the net present value
        of
        the minimum lease payments or the fair value of the leased asset at the
        inception of the lease. Amortization expense is computed using the straight-line
        method over the shorter of the estimated useful lives of the assets or the
        period of the related lease.
 
 Intangible
        assets - The
        Company has adopted Statement of Financial Accounting Standards No. 142 (“SFAS
        142”), “Goodwill and Other Intangible Assets.” SFAS 142 requires that
        intangibles be tested for impairment on an annual basis and between annual
        tests in certain circumstances. The Company generally determines the fair
        value
        of its intangible assets using the expected present value of future cash
        flows,
        giving consideration to the market comparable approach. The carrying value
        and
        useful lives of intangible assets are based on management’s assessment of
        recoverability. Management periodically evaluates whether certain circumstances
        may affect the estimated useful lives or the recoverability of the unamortized
        balance of intangible assets using both objective and subjective factors.
        Objective factors include management’s best estimates of projected future
        earnings and cash flows and analysis of recent sales and earnings trends.
        Subjective factors include competitive analysis and the Company’s strategic
        focus.
  21
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  Impairment
        of long-lived assets - The
        Company accounts for the impairment and disposition of long-lived assets
        in
        accordance with SFAS No. 144. Long-lived assets are reviewed at least annually
        and whenever indicators of impairment are present and whenever the undiscounted
        cash flows are not sufficient to recover the related asset carrying amount.
 
 Advance
        payments -
        Amounts received in advance of when services are provided or products delivered
        are recorded as accrued liabilities in the accompanying consolidated balance
        sheet.
  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. The Company's management
        and
        its legal counsel assess such contingent liabilities, and such assessment
        inherently involves an exercise of judgment. In assessing loss contingencies
        related to legal proceedings that are pending against the Company or unasserted
        claims that may result in such proceedings, the Company's legal counsel
        evaluates the perceived merits of any legal proceedings or unasserted claims
        as
        well as the perceived merits of the amount of relief sought or expected to
        be
        sought therein. If the assessment of a contingency indicates that it is probable
        that a material loss has been incurred and the amount of the liability can
        be
        estimated, then the estimated liability would be accrued in the Company's
        financial statements. If the assessment indicates that a potentially material
        loss contingency is not probable but is reasonably possible, or is probable
        but
        cannot be estimated, then the nature of the contingent liability, together
        with
        an estimate of the range of possible loss if determinable and material, would
        be
        disclosed.
  Fair
        value of financial instruments - The
        Company measures its financial assets and liabilities in accordance with
        generally accepted accounting principles. For certain of the Company's financial
        instruments, including cash and cash equivalents, accounts payable and accrued
        liabilities, the carrying amounts approximate fair value due to their short
        maturities. The amounts 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 embedded
        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
        an 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 will recognize revenue when there is persuasive evidence of an
        arrangement, the product has been delivered or the services have been provided
        to the customer, the sales price is fixed or determinable, and collectibility
        is
        reasonably assured. The Company will recognize revenues from sales of recycled
        products upon delivery to customers. The Company will recognize revenues
        from
        sales of equipment or systems outside the United States 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 provision for income taxes
        represents the tax payable for the period and change during the period in
        net
        deferred tax assets and liabilities.
  22
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  Research
        and development cost -
        Research and development represent internal costs incurred in connection
        with
        the Company’s development of recycling processes, and such costs are expensed as
        incurred and included in technology development expenses
 
 Stock-based
        compensation -
        Financial Accounting Standards Board Statement No. 123 (Accounting for
        Stock-Based Compensation) encourages, but does not require, companies to
        record
        compensation cost for stock-based employee compensation plans based on the
        fair
        value of options granted. For years prior to 2005, the Company has elected
        to continue to account for stock-based compensation using the intrinsic value
        method prescribed in Accounting Principles Board Opinion No. 25 (Accounting
        for
        Stock Issued to Employees) and related interpretations and to provide additional
        disclosures with respect to the pro forma effects of adoption had the Company
        recorded compensation expense as provided in FAS-123 through December 31,
        2004.
 
 In
        accordance with APB-25, compensation cost for stock options is recognized
        in
        income based on the excess, if any, of the quoted market price of the stock
        at
        the grant date of the award or other measurement date over the amount an
        employee must pay to acquire the stock. Generally, the exercise price for
        stock
        options granted to employees equals or exceeds the fair market value of the
        Company's common stock at the date of grant, thereby resulting in no recognition
        of compensation expense by the Company.
 
 The
        FASB
        released Interpretation No. 44, “Accounting for Certain Transactions Involving
        Stock Compensation.” This Interpretation addresses certain practice issues
        related to APB Opinion No. 25 in regards to options or warrants granted to
        employees and other third-parties. The Company's policies comply with the
        guidance provided by FIN No.44.
  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. The
        Company applied the Modified Prospective Application method for 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 applicable to
        common
        shareholders by the weighted-average number of common shares outstanding
        during
        the period. Diluted net loss per common share is determined using the
        weighted-average number of common shares outstanding during the period, adjusted
        for the dilutive effect of common stock equivalents, consisting of shares
        that
        might be issued upon exercise of common stock options, warrants or convertible
        promissory notes. In periods where losses are reported, the weighted-average
        number of common shares outstanding excludes common stock equivalents, because
        their inclusion would be anti-dilutive. Potentially dilutive securities include
        stock options and warrants, and convertible debt securities. Computations
        of net
        loss per share for the year ended December 31, 2004, exclude 12,121 shares
        relating to common shares issuable upon exercise of outstanding warrants.
        Computations of net loss per share for the year ended December 31, 2005,
        exclude
        6,632,653 shares relating to common shares issuable upon conversion of
        convertible notes payable, 43,567,930 shares issuable upon exercise of
        outstanding warrants and 19,458,403 shares issuable upon exercise of rights
        to
        purchase common stock. These common stock equivalents could have the effect
        of
        decreasing diluted income per share in future periods.
  Concentrations -
        Financial instruments that potentially subject the Company to concentrations
        of
        credit risk consist principally of cash equivalents, restricted cash held
        in
        escrow and trade accounts receivables. At times, amounts of cash or cash
        equivalents in U.S. financial institutions exceed amounts insured by agencies
        of
        the U.S. Government.
 
 The
        Company’s business is reliant on its licensing of technology from Honeywell
        International, Inc. See Note 4 for a discussion of this concentration and
        associated risks.
  Development-stage
        company - The
        Company presents 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, statement of changes in
        stockholder's deficit and cash flows. Activities during the development
        stage include raising capital, research and development and related activities
        to become a worldwidesupplier of recycled plastics and major supplier of
        recycling equipment outside the United States. The Company has commenced
        construction of its first recycling line at its Riverbank plant and at December
        31, 2005 had invested approximately $2.9 million in the recycling plant
        construction in progress and installation of equipment necessary to achieve
        plant production, and expects to commence production in 2006.
  23
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  Reclassifications -
        Certain amounts in the 2004 financial statements have been reclassified to
        conform with the 2005 presentations.
  Recent
        accounting pronouncements - In
        December 2004, the Financial Accounting Standards Board (“FASB”) released a
        revision to Statement of Financial Accounting Standard (“SFAS”) No. 123,
        Accounting for Stock-Based Compensation (“FAS 123R”). FAS 123R addresses the
        accounting for share-based payment transactions in which an enterprise receives
        employee services in exchange for (a) equity instruments of the enterprise
        or
        (b) liabilities that are based on the fair value of the enterprise's equity
        instruments or that may be settled by the issuance of such equity instruments.
        The statement eliminates the ability to account for share-based compensation
        transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees,
        and generally requires instead that such transactions be accounted for using
        a
        fair-value-based method. The Company adopted FAS 123R effective with the
        year
        beginning January 1, 2005.
  In
        December 2004, the Financial Accounting Standards Board issued SFAS No. 151,
        “Inventory Costs, an amendment of ARB No. 43, Chapter 4”, which clarifies the
        accounting for abnormal amounts of idle facility expense, freight, handling
        costs, and charges regardless of whether they meet the criterion of “so
        abnormal” that was originally stated in Accounting Research Bulletin No. 43,
        chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed
        production overheads to conversion costs be based on the normal capacity
        of the
        production facilities. SFAS No. 151 is effective for inventory costs incurred
        during fiscal years beginning after June 15, 2005. Implementation of this
        new
        standard did not have a material impact on its financial position, results
        of
        operations or cash flows.
  In
        December 2004, the Financial Accounting Standards Board Statement issued
        SFAS
        No. 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29”,
        which amends Opinion 29 by eliminating the exception for nonmonetary exchanges
        of similar productive assets and replaces it with a general exception for
        exchanges of nonmonetary assets that do not have commercial substance. A
        nonmonetary exchange has commercial substance if the future cash flows of
        the
        entity are expected to change significantly as a result of the exchange.
        SFAS
        No. 153 is effective for a fiscal year beginning after June 15, 2005, and
        implementation is done prospectively. Implementation of this new standard
        did
        not have a material impact on its financial position, results of operations
        and
        cash flows.
  In
        May
        2005, the FASB issued Statement of Financial Accounting Standards No. 154,
        “Accounting Changes and Error Corrections”, (SFAS 154”). SFAS 154 replaces APB
        Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting
        Changes in Interim Financial Statements,” and changes the requirements for the
        accounting for and reporting of a change in accounting principle. The Company
        is
        required to adopt SFAS 154 in 2007. The Company's results of operations and
        financial condition will only be impacted by SFAS 154 if the Company implements
        changes in accounting principles that are addressed by the standard or correct
        accounting errors in future periods.
 
 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 the Company's financial statements or results of operations
        since it does do not have such awards.
  **Note
        2**  **Inventories**
 
 Inventories
        at December 31, 2005 consist of the following:
 
 Raw
        materials       $67,664
  24
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  Note
        3. Property
        and Equipment
 Property
        and equipment at December 31, 2005 consist of the following:
 
 Manufacturing
                  tools
              
              $
              23,464Office
                  furniture and equipment
              
              
              57,690Recycling
                  plant construction in progress
              
              
              2,864,218Total
                  property and equipment
              
              
              2,945,572Less
                  accumulated depreciation and amortization
              
              
              (139,827
              )Property
                  and equipment, net
              
              $
              2,805,545
  The
        Company has entered into 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 totals
        $24,595 and at December 31, 2005, accumulated amortization was $13,527. Future
        minimum lease payments required under this capital lease agreement are $12,389
        and $8,512 in 2006 and 2007, respectively, including $1,816 representing
        interest.
 
 During
        2005, the Company capitalized $28,644 of interest into construction in
        progress.
 
 During
        2005, equipment with a net book value of $60,932 was impaired and the net
        amount
        was charged to operations as part of general and administrative
        expenses.
 
 Depreciation
        in 2005 and 2004 was $57,004 and $57,007, respectively.
  **Note
        4.** **Technology License**
  In
        2000,
        the Company entered into a five-year patent license agreement ( see amendment
        below) with Honeywell International, Inc. (Honeywell), whereby 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 the terms of the agreement, the Company agreed
        to
        pay a $50,000 non-refundable initial license fee and certain additional minimum
        annual royalties commencing upon delivery of the first equipment to an Itec
        customer. The initial license fee of $50,000 is not creditable toward the
        minimum annual royalty and was paid in three equal installments. The $50,000
        license fee was recorded as an intangible asset and amortized over the initial
        five year term on a straight-line basis. Accumulated amortization at December
        31, 2005 was $50,000, and the net book value was $0. Amortization charged
        to
        operations in 2005 was $5,000 and in 2004 was $10,000.
 
 Honeywell
        may terminate this agreement in the event of a bankruptcy filing or insolvency
        of the Company, an assignment for the benefit of creditors of the Company,
        the
        nationalization of the industry which encompasses any products or services,
        any
        suspension of payments under the terms of the agreement by government
        regulation, the Company's failure to commence manufacture, a substantial
        change
        in ownership of the Company (whether resulting from merger, acquisition,
        consolidation or otherwise), another company or person acquiring control
        of the
        Company, or the existence of a state of war between the United States and
        any
        country where the Company has a license to manufacture products or provide
        services. In addition, if either party to the agreement defaults for any
        reason
        in any of the obligations under the terms of the agreement, the other party
        will
        have the right to terminate the agreement by giving at least 60 days' written
        notice. Among other things, pursuant to terms of the agreement here are no
        rights to sub-license granted and require the Company to observe all applicable
        United States and foreign laws, regulations, rules, and decrees with respect
        to
        the transfer of the proprietary rights and related technical data to foreign
        countries and failure to conform to such laws, regulations, rules and decrees
        may result in criminal liability.
 
 In
        July
        2005, the Company and Honeywell amended certain terms of the license agreement,
        which, among other things, extended the agreement to be in effect for the
        life
        of the patent. Under this amended Agreement, the Company must pay minimum
        royalty amount of $50,000 for the calendar year ending December 31, 2006;
        $100,000 for the calendar year ending December 31, 2007; $200,000 for the
        calendar year ending December 31, 2008 and $300,000 for calendar years ending
        December 31, 2009 and thereafter. The royalty provision was amended whereby
        the
        Company shall pay a royalty rate of $.05 per pound of recycled plastics sold
        in
        the United States which shall be due within 30 days of the close of the previous
        quarter.
  25
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  The
        first
        annual minimum payment was due on March 1, 2006 and was not paid as of the
        date
        of April 28, 2006.
  **Note
        5.** **Notes
        Payable**
  ***Notes
        payable issued prior to 2004*** *-* In 2000,
        the Board authorized the issuance of up to 15% of Itec's common stock to
        various
        investors. An agreement between Itec's President and the investors was used
        which allowed participants in the Italian GPDP Program to make loans based
        on
        Itec common stock. Funds thus generated (approximately $815,000 at March
        31,
        2002) were to be repaid when Itec became a public company. Upon repayment
        of the
        advances, the investors would retain their stock ownership. To comply with
        Italian regulations, Itec's President personally issued shares of Itec's
        common
        stock to the investors. The funds advanced from the investors were deposited
        in
        accounts in Itec’s President's name and the advances were to Itec's President.
        Based upon the substance of the transactions, the transactions have been
        presented as Itec borrowings in the accompanying consolidated balance sheet.
        Itec's President has represented that funds received are assets of Itec and
        Itec
        has assumed the related obligation. In years through December 31, 2004 certain
        amounts were converted to common stock (see Note 6).
 
 In
        2000,
        the Company entered into an agreement with Glenwood Marketing Associates,
        Inc.
        (GMA), whereby GMA agreed to lend $1,100,000 to the Company. From this
        $1,100,000 loan, the Company agreed to pay $200,000 of capital formation
        fees to
        GMA. These fees were expensed in the year incurred. The loan bears interest
        at
        10% per annum payable in monthly interest-only payments for the 36-month
        term of
        the loan. In November 2004, the Company reached an agreement with GMS to
        issue
        545,475 shares of the Company’s common stock in full settlement for $1,226,242
        for the note payable and accrued interest, which was in default and due on
        demand. The carrying value of amounts payable exceeded the fair market value
        of
        common stock transferred by $544,424, and accordingly, a gain from the
        extinguishment of debt of $544,424 was recorded in 2004.
 
 In
        2003,
        the Company borrowed $100,000 for working capital purposes pursuant to a
        Note
        Payable bearing 8% interest annually due and payable in December 2003.
        Subsequently in 2003, this $100,000 Note became part of a new $600,000
        Promissory Note Payable (the “Note”) bearing 8% interest annually due and
        payable in January 2004. Interest is payable at maturity. The Note Unit
        consisted of $600,000 principal amount of 8.0% unsecured Note, due January
        31,
        2004, and a warrant to purchase 6,060 shares of the Company’s common stock at an
        exercise price of $6.60 per share, which such warrant expired in July 2005.
        Total funds received of $600,000 were allocated $6,000 to the warrant and
        $594,000 to the Note. In November 2004, the Company issued 461,150 shares
        of the
        Company’s common stock in full settlement for $638,000 for the note payable and
        accrued interest, which was in default and due on demand. The carrying value
        of
        amounts payable exceeded the fair market value of the common stock transferred
        by $61,591, and accordingly, a gain from extinguishment of debt of $61,591
        was
        recorded in 2004.
 
 Pursuant
        to terms of Business Loan Agreement, Security Agreements, and $2,000,000
        Promissory Note with the California Integrated Waste Management Board (“CIWMB”),
        in June 2005, the Company received into an escrow account $1,990,000, after
        deduction of $10,000 for loan fees paid to CIWMB. The loan fee is recorded
        as a
        debt discount to be amortized over the 10-year loan term. A portion of loan
        funds in the amount of $80,000 is reserved for interest payments on the note.
        Approval for the loan was based on the Company's projection to build its
        first
        Eco2 Environmental System Plant and to divert 15,000 tons of post consumer
        plastic bottles annually as a result of the loan. The promissory note bears
        interest at 4.25% per annum, with interest only monthly payments during the
        first year, commencing in June, and then principal and interest monthly payments
        of $22,548 starting in July 2006 until fully paid in May 2015. The promissory
        note is collateralized by equipment purchased for the recycling plant, a
        secondary security interest in all other machinery and equipment and other
        Company assets, and is guaranteed by the Company's Chief Executive Officer.
        The
        Company is permitted to make draws from cash in escrow upon meeting certain
        conditions, including presentation of equipment invoices, with 75% of each
        invoice to be paid from the CIWMB loan funds, with the remaining 25% being
        paid
        from the Company's working capital. Minimum annual principal payments
        approximate $93,000 in 2006, $192,000 in 2007, $200,000 in 2008, $209,000
        in
        2009, $219,000 in 2010 and $1,087,000 thereafter during 2011 through
        2015.
 
 In
        January 2005, the Company issued for cash a 10% note payable for $50,000
        due in
        July 2005. The proceeds were used for working capital. In June 2005, the
        Company
        issued 2,576,750 shares of its common stock upon conversion of the note payable.
        The Company recorded the excess of estimated fair value of the shares issued
        (based on the $0.115 per share quoted market price on the conversion date)
        of
        $156,140 as an increase in additional paid-in capital and as a loss on
        conversion of notes payable for common stock.
  26
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  In
        April
        2005, the Company issued for cash a 10% note payable for $60,000 due in August
        2005, and convertible into shares of Company common stock at a per share
        price
        of the lesser of approximately $0.02, or 50% of the closing stock price on
        the
        date of conversion. The embedded conversion option qualified as a derivative
        pursuant to SFAS 133 since the conversion price is variable and the ability
        to
        have enough authorized common shares to fulfill its potential obligations
        under
        convertible debt contracts is not under the Company control. The fair value
        of
        the conversion option of $258,643 was computed using a Black-Scholes option
        pricing method with the following assumptions: term of .5 years, volatility
        of
        207%, zero dividends and interest rate of 4.45%. The $258,643 was allocated
        $60,000 to debt discount the maximum to be recorded, and $198,643 to operations
        as a change in fair value of warrants and derivatives. The discount is amortized
        to interest expense over the term of the note. In June 2005, the note was
        converted into 3,029,100 shares of Company common stock in accordance with
        conversion terms and the then fair value liability of $166,669 was reclassified
        to equity. The full amount of the $60,000 debt discount has been amortized
        to
        interest expense as of December 31, 2005.
 
 In
        August
        2005, the Company borrowed $33,400 on a short-term borrowing arrangement.
        The
        proceeds were used for working capital. In August 2005, the Company issued
        1,708,472 shares of its common stock upon conversion of the note payable.
        The
        Company recorded the excess of estimated fair value of the shares issued
        (based
        on the $.23 per share quoted market price on the conversion date) of $359,724
        as
        an increase in additional paid-in capital and as a loss on conversion of
        notes
        payable for common stock.
  In
        June
        2005, the Company issued for cash a 10% note payable for $128,000 due in
        October
        2005, and convertible into shares of Company common stock at the lesser of
        50%
        of the quoted trade price on the conversion date or $0.045 per share. The
        embedded conversion option qualified as a derivative pursuant to SFAS 133
        since
        the conversion price is variable and the ability to have enough authorized
        common shares to fulfill its potential obligations under convertible debt
        contracts is not under the Company control. The fair value of the conversion
        option of $155,729 was computed using a Black-Scholes option pricing method
        with
        the following assumptions: term of .33 years, volatility of 207%, zero dividends
        and interest rate of 4.45%. The $155,729 was allocated $128,000 to debt discount
        the maximum to be recorded, and $27,729 to operations as a change in fair
        value
        of warrants and derivatives. The discount is amortized to interest expense
        over
        the term of the note. The full amount of the $128,000 debt discount was
        amortized to interest expense in 2005. In October 2005, the note was converted
        into 2,937,937 common shares and the then fair value liability of $310,050
        was
        reclassified to equity.
  In
        July
        2005, the Company issued for cash a 10% note payable for $250,000 due in
        October
        2005, and convertible into shares of Company common stock at the lesser of
        50%
        of the quoted trade price on the conversion date or $0.028 per share. The
        embedded conversion option qualified as a derivative pursuant to SFAS 133
        since
        the conversion price is variable and the ability to have enough authorized
        common shares to fulfill its potential obligations under convertible debt
        contracts is not under the Company control. The fair value of the conversion
        option of $441,820 was computed using a Black-Scholes option pricing method
        with
        the following assumptions: term of .33 years, volatility of 207%, zero dividends
        and interest rate of 4.45%. The $441,820 was allocated $250,000 to debt discount
        the maximum to be recorded, and $191,820 to operations as a change in fair
        value
        of warrants and derivatives. The discount is amortized to interest expense
        over
        the term of the note. The full amount of the $250,000 debt discount was
        amortized to interest expense in 2005. In November 2005, the note was converted
        to 9,404,718 shares of Company common stock and the then fair value liability
        of
        $931,829 was reclassified to equity.
 
 In
        July
        2005, the Company issued for cash a 10% note payable for $30,000 due in November
        2005, and convertible into shares of Company common stock at the lesser of
        50%
        of the quoted trade price on the conversion date or $0.035 per share. In
        addition, the Company issued to the lender warrants to purchase 300,000 shares
        of its common stock at a per share price of $0.25 per share. The embedded
        conversion option qualified as a derivative pursuant to SFAS 133 since the
        conversion price is variable and the ability to have enough authorized common
        shares to fulfill its potential obligations under convertible debt contracts
        is
        not under the Company control. The fair value of the conversion option of
        $53,734 was computed using a Black-Scholes option pricing method with the
        following assumptions: term of .33 years, volatility of 207%, zero dividends
        and
        interest rate of 4.45%. The $53,734 was allocated $30,000 to debt discount
        the
        maximum to be recorded, and $23,734 to operations as a change in fair value
        of
        warrants and derivatives. The discount is amortized to interest expense over
        the
        term of the note. The full amount of the $30,000 debt discount was amortized
        into interest expense in 2005. In November 2005, the note was converted to
        885,326 shares of Company common stock and the then fair value liability
        of
        $81,430 was reclassified to equity.
 
 In
        August
        2005, the Company received from The Elevation Fund, LLC (“The Elevation Fund” or
“Lender”) 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 the
        lender was also deferred as a debt discount and amortized to interest expense.
        The bridge notes are collateralized by a second position lien in all Company
        equipment and a blanket lien on all other assets. In April 2006 the Company
        received notice from the Lender that the Company has defaulted on the loan,
        accrued interest and origination fee of $20,000 and legal fees of $15,000
        on
        November 1, 2005 and has notified the Company that interest is accruing at
        the
        default rate of 18% since November 1, 2005 and the origination fee and legal
        fees accrue interest at the default rate of 18% since August 1, 2005. In
        addition, the lender notified the Company that it has declared all amounts
        due
        and payable and intends to exercise any and all remedies provided under the
        loan
        agreement, note and security agreement (including without limitation, collect,
        receive, appropriate and realize upon the Collateral (as such term is defined
        in
        the security agreement) and sell, lease, assign, transfer or otherwise dispose
        of such collateral in accordance with the terms f the security agreement)
        and
        any and all other remedies available at law or equity.
  27
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  Additionally
        in August 2005, the Company received from another investor (“Lender”) cash of
        $100,000 in consideration for (i) a $100,000 Bridge Note, and (ii) Bridge
        Warrants for 1,418,439 shares of Company common stock. The warrant value
        was
        recorded at $65,156 as an increase in additional paid-in capital and as a
        debt
        discount to be amortized to interest expense over the term of the note. The
        full
        amount of the $65,156 debt discount was amortized into interest expense in
        2005.
        In April 2006 the Company received notice from the Lender that the Company
        has
        defaulted on the loan principal balance in December 2005. The notification
        states that interest is accruing at the default rate of 18% since December
        2005
        and declares that all unpaid amounts of principle and interest are immediately
        due and payable with such interest continuing to accrue until the note is
        paid
        in full. In addition the Lender further reserves all other rights pursuant
        to
        the loan agreement and promissory note including the rights to collect all
        costs
        and expenses of collection.
  Bridge
        Notes are convertible in whole or in part into securities offered by the
        Company
        in its $7.5 million private placement offering of Senior Cumulative Debentures
        and Warrants (the “Private Placement”) on the same terms as such securities are
        sold to the other investors in the Private Placement, and in this regard
        the
        Company has granted the lender the right to invest up to the Bridge Notes
        amount
        on the same terms as are offered to other investors in the Private Placement.
        The Company has agreed to prepare and, as soon as practicable, but in no
        event
        later than 75 days following the closing date of the Private Placement (the
        “Filing Deadline”), file with the Securities and Exchange Commission (the “SEC”)
        a registration statement on Form SB-2 covering the resale of all shares of
        common stock underlying the Bridge Warrants, and has further agreed to use
        its
        reasonable best efforts to have such registration statement declared effective
        by the SEC as soon as practicable, but in no event later than the date which
        is
        180 days following the closing date of the Private Placement (the “Effectiveness
        Deadline”). In the event the registration statement required to be filed is not
        filed by the Filing Deadline, the Company shall issue to the lender additional
        cashless warrants to purchase shares of the Company's common stock (“Additional
        Warrants”) in an amount equal to 10% of the number of shares underlying the
        Bridge Warrant issued to the lender for each 30 day period (or a portion
        thereof) during which time such registration statement has not been filed
        with
        the SEC, which Additional Warrants shall be issued on the first day of each
        30
        day period commencing on the Filing Deadline. In addition, in the event the
        registration statement required to be filed is not declared effective by
        the SEC
        by the Effectiveness Deadline, the Company shall issue to the Lender Additional
        Warrants in an amount equal to 10% of the number of shares underlying the
        Warrant issued to the Lender for each 30 day period (or portion thereof)
        during
        which time such registration statement has not been declared effective by
        the
        SEC, which Additional Warrants shall be issued on the first day of each 30
        day
        period and commencing on the Effectiveness Deadline. The exercise price for
        the
        Additional Warrants issued shall be the same as the exercise price of the
        warrants that are issued in the Private Placement. Additionally, pursuant
        to
        terms of the loan agreement relating to the Bridge Notes and Bridge Warrants
        for
        a period of three years following the date of borrowing, the Company shall
        provide to lender with a first right to purchase up to 50% of any equity
        or
        equity linked securities to be issued by the Company, except for certain
        Excluded Securities, as defined, on the same terms as such securities are
        offered to all other parties during such three year period. Due to the
        contingent nature of the conversion rights and related registration rights
        and
        penalties, the Company does not consider this debt convertible until the
        contingency, which is under control of the Company, occurs. At that time
        the
        Company will evaluate whether this debt has an embedded derivative subject
        to
        separate accounting pursuant to SFAS 133 or any beneficial conversion value.
  28
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  In
        August, September and October 2005, the Company received from other investors
        (the “Lenders”) cash of $650,000 in consideration for promissory notes totaling
        $650,000, bearing interest at 10% (18% if there is an event of default),
        due in
        120 days or earlier in certain circumstances (the “Lenders Notes”), and
        convertible into shares of the Company's common stock at a per share price
        of
        the lesser of 75% of (i) $.13, or (ii) the price of the common stock of the
        Company on the Over The Counter Bulletin Board on the day the Lenders elect
        to
        convert. The embedded conversion option qualified as a derivative pursuant
        to
        SFAS 133 since the conversion price is variable and the ability to have enough
        authorized common shares to fulfill its potential obligations under convertible
        debt contracts is not under the Company control. The fair value of the
        conversion options of $832,928 was computed using a Black-Scholes option
        pricing
        method with the following assumptions: term of .33 years, volatility of 207%,
        zero dividends and interest rate of 4.45%. The $797,284 was allocated $635,644
        to debt discount the maximum to be recorded, and $197,284 to operations as
        a
        change in fair value of warrants and derivatives. The discount is amortized
        to
        interest expense over the term of the note The full amount of the $600,000
        debt
        discount was amortized into interest expense in 2005. At December 31, 2005
        the
        fair value liability has been marked down to $159,033 using the Black-Scholes
        option pricing method with the following assumptions: term of .01 years,
        volatility of 207%, zero dividends and interest rate of 4.45%. Changes in
        the
        quoted stock price and the expected term in the Black-Scholes method was
        the
        primary cause of the decrease in value. In April 2006 the Company received
        notice from a representative of some of the lenders representing $500,000
        of
        these notes that the Company has defaulted on the loans principal in 2005.
        The
        notification states that interest is accruing at the default rate of 18%
        since
        December 2005 and declares that all unpaid amounts of principle and interest
        are
        immediately due and payable with such interest continuing to accrue until
        the
        notes are paid in full. In addition the Lender further reserves all other
        rights
        pursuant to the loan agreements and promissory notes including the rights
        to
        collect all costs and expenses of collection.
  The
        weighted average short-term notes payable borrowings were approximately $760,000
        in 2005 with a weighted average stated interest rate of 12.05%.
  Notes
                    payable outstanding at December 31, 2005 consists of the
                    following:Promissory
                    Notes (See above)
                $
                    700,000
                ($700,000
                    in default-see above)Convertible
                    notes payable outstanding at December 31, 2005 consists of the
                    following:Promissory
                    Notes (See above)
                $
                    650,000
                ($500,000
                    in default-see above)Total
                    Notes and Convertible Notes Payable
                $1,350,000
 
 CIWMB
        Note payable outstanding at December 31, 2005 consists of the
        following:
 
 CIWMB
                  Note (See above)
              
              $
              2,000,000Debt
                  discount
              
              
              9,5001,990,500Less
                  Current portion
              
              
              92,794Long
                  term portion
              
              $
              1,897,706
 
 **Note
        6.** **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.
  Reverse
        Stock Split - In December 2004, the Board of Directors authorized a 1-for-165
        reverse stock split to be effective December 20, 2004 to shareholders of
        record,
        and approved to keep the par value of the Common Stock at $0.001 per share.
        As a
        result of reverse stock split, the “Common stock” account was reduced, and the
“Additional paid-in capital” account was increased by the same amount. All share
        and per share data presented in the accompanying consolidated financials
        statements and
        footnotes is adjusted for the reverse stock split.
  29
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  2004
        Transactions
 
 Common
        Stock Issued for Services
 
 The
        Company has an agreement with a related party for legal services whereby
        the
        related party is periodically issued vested non-forfeitable common shares
        of the
        Company and any proceeds from the sale of such shares by the related party
        are
        credited against invoice amounts due to that related party for legal services.
        The agreement has no stated term. Due to the contingent nature of the proceeds
        and the unstated term of the legal service agreement, the fair value of shares
        issued has been expensed when issued in 2005. The related party invoices
        are
        accrued to accounts payable, periodically paid in cash and the accounts payable
        and legal expenses are credited for any proceeds in the period the proceeds
        are
        received by the related party and reported to the Company. In
        2004,
        the Company issued 2,836,263 shares of its common stock to this firm for
        future
        legal and strategic consulting services. At the date of the issuances the
        shares
        had an aggregate market value of $1,177,418, which since the Company had
        not
        received the services yet was reported as a reduction of additional paid-in
        capital at December 31, 2004.
 
 In
        2004,
        the Company issued 990,038 shares of Common Stock, valued at $753,519, in
        lieu
        of cash to consultants in payment for consulting services performed, and
        issued
        149,775 shares of common stock, valued at $240,500, to directors as
        compensation.
 
 Common
        Stock for Debt
 
 In
        2004
        the Company issued 545,475 and 461,150 common shares to two note holders
        in
        settlement of debt (see Note 5).
 
 In
        November 2004, the Company reached an agreement with various creditors and
        vendors to issue 642,849 shares of the Company’s common stock in full settlement
        of amounts due. The aggregate carrying value of amounts payable to these
        creditors and vendors exceeded the fair market value of the common stock
        issued
        by $28,196, and, accordingly, a gain from extinguishment of debt of $28,196
        was
        recorded in 2004.
  2005
        Transactions
 
 Common
        Stock for Services and Settlement
 
 In
        2004,
        Itec executed an agreement with Cornell Capital Partners, LP (“Cornell”) whereby
        the Company issued a 24% note payable for $500,000. The Company put in escrow
        with a law firm 303,030 shares of the Company's common stock (“escrowed shares”)
        and twenty (20) advance notices of not less than $25,000 each. The law firm
        released these advance notices to the holder commencing in April 2004, all
        of
        which were released. At the option of the note holder, interest was payable
        by
        the Company either in common stock or cash. During 2005, the Company issued
        an
        additional 3,000,000 shares of common stock to Cornell for services. Such
        shares
        were valued at $330,000 based on the quoted trading price of $.11 per share
        on
        the grant date. In July 2005, the Company entered into a settlement and release
        agreement with Cornell pursuant to which, among other things, the Company
        paid
        Cornell $90,353 and received 1,342,692 shares of it's common stock back from
        escrow, valued at $120,843, which were the remaining amount of the 3,000,000
        shares issued to Cornell in 2005. All amounts due and payable between the
        companies were considered fully-settled, and the note payable and agreement
        were
        cancelled and terminated. In connection with this settlement, the Company
        recorded a gain on forgiveness of debt of approximately $292,000 during the
        year
        ended December 31, 2005, which includes a decrease in additional paid-in
        capital
        of approximately $121,000, the fair value of shares cancelled.
 
 During
        2005, the Company issued 17,207,634 shares, valued at $2,390,154 based on
        quoted
        trade prices at the respective grant dates ranging from $.07 to $.24 per
        share
        and averaging approximately $.14 per share,, to consultants for services.
        The
        Company also cancelled 8,024 shares previously recorded for consultants in
        2004.
        The value is recognized over the respective terms of the agreements resulting
        in
        a deferred stock based expense of $365,000 at December 31, 2005.
 
 The
        Company has an agreement with a related party for legal services whereby
        the
        related party is periodically issued vested non-forfeitable common shares
        of the
        Company and any proceeds from the sale of such shares by the related party
        are
        credited against invoice amounts due to that related party for legal services.
        The agreement has no stated term. Due to the contingent nature
        of
        the proceeds and the unstated term of the legal service agreement, the fair
        value of shares issued has been expensed when issued in 2005. The related
        party
        invoices are accrued to accounts payable, periodically paid in cash and the
        accounts payable and legal expenses are credited for any proceeds in the
        period
        the proceeds are received by the related party and reported to the Company.
        During the year 2005 the Company issued 9,957,692 common shares pursuant
        to the
        legal services agreement. The shares were valued at the quoted trading prices
        on
        the respective grant dates which ranged from $.09 to $.23 per share or an
        average of approximately $.164 per share, resulting in an expense of $1,635,269.
        The Company also recognized $1,177,418 of stock based legal expenses, relating
        to this same services provider, that had been deferred at December 31, 2004.
        During 2005 the Company applied $436,024 of proceeds received by the legal
        service provider from the sales of their shares to the accounts payable balance.
        Accounts payable to the related party for legal services was $114,860 at
        December 31, 2004.
  30
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  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
        Company issued 2,737,220 shares of its common stock (and certain registration
        rights) to an investment banker as retainer for certain corporate finance
        and
        investment banking services being provided pursuant to the corporate finance
        representation agreement between the parties entered into in May 2005. The
        agreement is for a period of one year, which shall be extended to two years
        upon
        completion of a successful financing. In the event of a consummated transaction,
        the Company will pay the investment banker fees ranging from 2% to 8% of
        amounts
        raised and issued to the investment banker varying amounts of securities
        issued
        in the financing, depending of the type of securities and nature of transaction.
        The shares were valued at $246,350 based on a $.09 quoted trade price on
        the
        grant date. The $246,350 is being deferred and amortized over the 1-year
        term
        resulting in a deferred expense of $143,000 at December 31, 2005
 
 In
        October 2005, the Company issued 744,542 shares of its common stock to an
        investment banker as consideration for services provided pursuant to terms
        of a
        corporate finance representation agreement in connection with Company borrowings
        in August 2005, and recorded deferred debt issue costs asset of $74,466,
        based
        on the $.10 quoted trade price at the grant date. Additionally, the Company
        has
        recorded additional deferred debt issue costs of $135,000 relating to warrants
        issued to the investment banker and another consultant for services provided
        in
        connection with the borrowing transaction. Warrants are for the purchase
        of
        900,000 shares of common stock at a per share price of $0.001 for a term
        of 5
        years (850,000 warrants) and 10 years (50,000 warrants). The full amount
        of the
        $209,454 debt issue costs was amortized into interest expense in
        2005.
 
 During
        2005 the Company amortized $2,094,710 of deferred stock based fees to operations
        relating to legal and consulting services.
  Common
        Stock Issued for Conversion of Debt and Accrued Interest
 
 During
        the year ended December 31, 2005, the Company issued 3,029,100, 2,576,750,
        1,708,472, 885,326, 2,937,937 and 9,404,718 common shares for conversion
        of
        $60,000, $50,000, $33,400, $30,000, $128,000 and $250,000, respectively,
        of
        promissory notes and $13,350 of accrued interest. A $515,864 loss on conversion
        resulted from the conversion of the two non-convertible notes of $50,000
        (2,576,750 shares) and $33,400 (1,708,472 shares) based on the quoted trade
        price on the conversion dates of $.08 and $.23, respectively, per
        share.
  Stock
        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
        of
        1933, 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 of 1933, 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. The
        additional investment rights are exercisable for two of the investors for
        60
        days after the Company notifies the investors that it has extended the due
        dates
        for the Bridge Notes discussed in Note 5. The additional investment rights
        are
        exercisable for one of the investors (the $167,000 investor) for 60 days
        after
        the Company notifies the investors that it has met the Efficiency condition
        (see
        below). The Covenant to adjust requires a decrease in the original purchase
        price if certain “efficiency” conditions, as defined in the agreement are not
        met. The Shares purchase prices are subject to reduction in step to a minimum
        $.11 per share for the $.17 shares and $0.08 per share for the $.14 shares,
        conditional upon when certain recycling volume and purity specifications
        are met
        (the “Efficiency” conditions) .The reduction in purchase price is payable, at
        the investors option, in cash or additional shares of common stock. The $164,571
        maximum redemption values of the above shares were reclassified to temporary
        equity at December 31, 2005. In January 2006 the Company issued additional
        shares at the investors election of 198,810 and 416,666 shares, based on
        a
        reduced purchase price of $.12 (for the $.14 purchase price shares), and
        137,255
        shares for a reduced purchase price of $.15 (for the $.17 purchase price
        shares)
        and the covenant to adjust was amended to eliminate any further adjustments
        to
        the original purchase price. The temporary equity was reclassified to permanent
        equity at that January 2006 date. The investor rights agreement contains
        registration rights on the issued shares and option shares which requires
        the
        Company to prepare and file a registration statement and use its best efforts
        to
        cause such registration statement to become effective and keep it effective
        for
        90 days including filing any required amendments.
  31
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  Stock
        Options
  Stock
        Options - The Company has adopted an incentive stock option plan (the “Plan”)
        under which options granted are intended to qualify as “incentive stock options'
        under Section 422A of the Internal Revenue Code of 1986, as amended. Pursuant
        to
        the Plan, options to purchase up to 275 shares of the Company's common stock
        may
        be granted to employees of the Company. The Plan is administered by the Board
        of
        Directors which is empowered to determine the terms and conditions of each
        option subject to the limitation that the exercise price can not be less
        than
        market value of the common stock on the date of grant (110% of the market
        value
        in the case of options granted to an employee who owns 10% or more of the
        Company's outstanding common stock) and no option can have a term in excess
        of
        10 years (5 years in the case of options granted to an employee who owns
        10% or
        more of the Company's outstanding common stock). As of December 31, 2005,
        no
        Plan options have been granted.
  2005
        Stock Plan - Effective pursuant to resolution of the Board of Directors in
        January 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.
  32
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  Stock
        Warrants
 
 Warrants discussed
        below have been granted at prices that are equal to, or more or less than
        the current fair value of the Company's common stock at the date of grant.
        All
        warrants granted to date have been immediately vested have cashless
        exercise rights and there were no defined terms for any underlying services.
        Therefore they were expensed at the grant date.
  The
        fair
        value of warrants issued during 2005 was estimated using the Black-Scholes
        option-pricing model with the following assumptions: a dividend yield of
        0%;
        expected volatility of 200% to 427%; risk-free interest rates of 3.6 to 4.6%;
        and expected lives of 5 and 10 years. The Black-Scholes option valuation
        model
        was developed for use in estimating the fair value of traded options, which
        have
        no vesting restrictions and are fully transferable. In addition, option
        valuation models require the input of highly subjective assumptions including
        the expected stock price volatility. Because employee stock options have
        characteristics significantly different from those of traded options, and
        because changes in the subjective input assumptions can materially affect
        the
        fair value estimate, in management's opinion, the existing models do not
        necessarily provide a reliable single measure of the fair value of its stock
        warrants. The weighted-average fair value of warrants granted during December
        31, 2005 approximated $0.12.
 
 The
        Company has determined that pursuant to EITF 00-19, all of the Company’s
        warrants granted to non-employees must be classified as liabilities. Since
        the
        Company has issued convertible debt with variable conversion terms, the ability
        to have enough authorized common shares to fulfill its potential obligations
        under convertible debt and warrant contracts is not under the Company control
        and accordingly the criteria for classification as equity instruments under
        EITF
        00-19 is not met. Accordingly as of year end the warrant liability recorded
        is
        $3,445,869 which represents to fair value of outstanding warrants at December
        31, 2005 computed using the Black-Scholes option pricing method with the
        assumptions as discussed above. During 2005 the Company recognized $2,105,301
        of
        expense relating to the change in fair value of the warrants during the year.
        Such amount is included in the accompanying statement of operations as the
        change in fair value liability of warrants and derivatives.
 
 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 19,500,000 shares of common stock
        at
        an exercise price of $0.06 per share.. The estimated fair value of these
        warrants determined utilizing the Black-Scholes valuation model of approximately
        $402,106 and $2,635,000, respectively, was recorded as compensation expense
        since there is no vesting requirement.
 
 In
        2005
        the Company granted to its CFO fully vested, five -year warrants to purchase
        250,000 shares of common stock at an exercise price of $.06 per share and
        fully-vested -five year warrants to purchase 500,000 shares of common stock
        at
        an exercise price of $.06 per share. The estimated fair value of these warrants
        determined utilizing a Black-Scholes valuation model of approximately $28,750
        and $67,500, respectively, was recorded as compensation expense since there
        is
        no vesting requirement.
  In
        2005,
        the Company issued fully-vested, five-year warrants to consultants and advisors
        to purchase 2,500,000 shares of common stock at an exercise price of $0.06
        per
        share. The Company recorded consulting expense of $263,500 related to these
        issuances. Later in 2005, the Company issued fully-vested, five-year warrants
        to
        other 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 $149,700 which was expensed
        as
        consulting fees. Additionally, during 2005, the Company issued fully-vested,
        five-year warrants to consultants and advisors to purchase 1,500,000 shares
        of
        common stock at an exercise price of $0.06 per share. The Company recorded
        consulting and compensation expense of $202,500, which was determined utilizing
        the Black-Scholes valuation model.
  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 $197,200 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.
  33
 **ITEC
            Environmental Group, Inc. and Subsidiary**
 **(A
            Development-Stage Company)**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2005 and 2004**
  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 exercise 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 $416,880 and $19,500
        as a
        debt discount, based on the valuation of the warrants using a Black-Scholes
        option pricing method, which has been fully amortized to interest expense
        as of
        December 31, 2005. (see Note 5)
 
 During
        2005 the Company’s CEO assigned 400,000 of his 19,500,000 warrants exercisable
        at $.06 per share, to consultants. The Black-Scholes computed value of $46,400
        has been expensed and reflected as contributed capital.
 
 In
        2005,
        pursuant to the terms of a common stock purchase agreements (see Stock Issued
        for Cash above), the Company issued additional investment rights (“option
        shares”) to purchase 9,521,429 common shares at $.17 per share, 7,794,117 common
        shares at $.14 per share and 2,142,857common shares at$.14 per share. (total
        of
        19,458,403 additional investment rights common shares) The additional investment
        rights are exercisable for 60 days after the Company notifies the investors
        that
        it has extended the due dates for the Bridge Notes discussed in Note 5. The
        Option Shares exercise prices are subject to reduction to $.11 per share
        for the
        $.17 options and $0.08 per share for the $.14 options, conditional upon when
        certain recycling volume and purity specifications are met (the “Efficiency”
conditions) . The reduction in purchase price is payable, at the investors
        option, in cash or additional shares of common stock. In January 2006 the
        Company reduced the purchase prices to $.12 and $.15 (for the $.14 and $.17
        option, respectively) and the covenant to adjust was amended to eliminate
        further adjustments to the option shares purchase price. The investor rights
        agreement contains registration rights on the issued shares and option shares
        which requires the Company to prepare and file a registration statement and
        use
        its best efforts to cause such registration statement to become effective
        and
        keep it effective for 90 days including filing any required amendments. Since
        this is a best efforts clause and there are no liquidating damages or penalties,
        the option shares qualify as equity pursuant to EITF 00-19 as the Company
        may
        issue unregistered shares upon exercise of the options and there is no cash
        penalty, and other criteria for equity classification are met. However, since
        there is an authorized shares issue derived from the variable conversion
        rate
        convertible debt, theses option shares must be classified as liabilities
        at fair
        value. The fair value at the issuance date was recorded at $1,603,566 with
        a
        charge to operations to change in fair value liability of warrants and
        derivatives of $1,211,666. 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 $467,510 resulting in a warrant liability of $1,136,056
        at
        December 31, 2005.
 
 In
        addition, 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
        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. The consulting shares were
        issued
        in 2005.
  The
        following summarizes activity for stock warrants, not including Additional
        Investment Rights discussed above, all of which are exercisable:
 
 Outstanding
              
              Weighted
                  average
                exercise
                  priceBalance
                  at December 31, 2003
              
              19,394
              
              $
              24.75Granted
              
              -
              
              -Exercised
              
              -
              
              -Expired/Cancelled
              
              
              (7,273
              )
              
              6.60Balance
                  at December 31, 2004
              
              
              12,121
              
              
              29.70Granted
              
              
              43,555,809
              
              
              0.05Exercised
              
              
              -
              
              
              -Expired/Cancelled
              
              
              -
              
              
              -Balance
                  at December 31, 2005
              
              
              43,567,930
              
              $
              0.05
 34
 **ITEC
              Environmental Group, Inc. and Subsidiary**
 **(A
              Development-Stage Company)**
 **Notes
              to Consolidated Financial Statements**
 **December
              31, 2005 and 2004**
  Additional
        information regarding warrants outstanding as of December 31, 2005, is as
        follows:
 
 Range
                  of exercise prices
              
              Shares
              
              Weighted
                  average remaining life
              
              Weighted
                  average
                exercise
                  price$0.001
              
              11,288,439
              
              9.2
                  years
              
              $
              0.001$
                  0.02 - $0.05
              
              760,000
              
              6.8
                  years
              
              $
              0.04$0.06
              
              
              28,707,370
              
              7.9
                  years
              
              $
              0.06$0.09
                  - $0.10
              
              
              1,500,000
              
              4.5
                  years
              
              $
              0.10$0.25
              
              
              300,000
              
              4.5
                  years
              
              $
              0.25$29.70
              
              
              12,121
              
              1.8
                  years
              
              $
              29.7043,567,930
              
              7.9
                  years
              
              $
              0.05
 
 **Note
        7.** **Income
        Taxes**
 
 At
        December 31, 2005, the Company has available approximately $13.2 million
        of net
        operating loss carryforwards available to offset future federal and state
        income
        taxes, which expire through 2025. 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 reduce
        the availability of the tax credits. At December 31, 2005 and 2004, the Company
        has provided a valuation allowance to reduce its net deferred tax asset to
        zero.
 
 Provision
        for income taxes recorded by the Company in prior years represent minimum
        state
        taxes.
 
 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,
        2005:
 
 Deferred
                  tax assetsNet
                  operating loss carryforwards
              
              $
              5,135,000Accrued
                  liabilities due to related parties
              
              
              287,000Total
                  deferred tax assets
              
              
              5,422,000Deferred
                  tax liabilities - property and equipment
              
              
              (13,000
              )Net
                  deferred tax assets before valuation allowance
              
              
              5,409,000Valuation
                  allowance
              
              
              (5,409,000
              )Net
                  deferred tax assets
              
              $
              -
 
 The
        valuation allowance increased by $1,636,000 and $891,000 during 2005 and
        2004,
        respectively.
 
 A
        reconciliation of the provision for income tax expense with the expected
        income
        tax computed by applying the federal statutory income rate to loss before
        provision for income taxes for the years ended December 31, 2005 and 2004
        is as
        follows:
  2005
              
              2004Income
                  tax benefit computed at statutory rate
              
              (34.0%)
              
              (34.0%)State
                  income tax benefit, net of federal benefit in 2005
              
              (1.5%)
              
              (8.8%)Nondeductible
                  stock-based compensation and other
              
              
              25.1%
              
              
              -Valuation
                  allowance
              
              
              10.4%
              
              
              42.8%Effective
                  tax rate
              
              
              0.0%
              
              
              0.0%
 35
 **ITEC
              Environmental Group, Inc. and Subsidiary**
 **(A
              Development-Stage Company)**
 **Notes
              to Consolidated Financial Statements**
 **December
              31, 2005 and 2004**
  **Note
        8.** **Related
        Party Transactions**
  In
        July
        2000, the Company's Board of Directors approved and authorized the Company
        to
        make a loan of $250,000 to the Company's Chief Executive Officer. The loan,
        according to the minutes of the Board meeting, is interest only for ten years
        with the total principal due at the end of ten years. As of December 31,
        2005, a
        balance of $147,973 (unchanged from December 31, 2004) was due.
  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.
  In
        2004,
        the Company received advances totaling $76,100 from its Chief Executive Officer
        primarily to accommodate working capital needs of the Company. Such advances
        are
        unsecured, bear interest at 10% and due on demand. During 2005, $61,500 was
        repaid.
  The
        Company has an agreement with its attorney, who at times during fiscal year
        2005
        was related party principal stockholder and who became a director in 2006,
        for
        legal services whereby the attorney is periodically issued vested,
        non-forfeitable common shares of the Company and any proceeds from the sale
        of
        such shares by the related party are credited against invoice amounts due
        to
        that related party for legal services. The agreement has no stated term.
        Due to
        the contingent nature of the proceeds and the unstated term of the legal
        service
        agreement, the fair values of shares granted are expensed on the grant
        date. Legal fee invoices are accrued to accounts payable, periodically
        paid in cash and the accounts payable and legal expenses are credited for
        any
        proceeds in the period the proceeds are received by the related party and
        reported to the Company. During the year 2005 the Company issued 9,957,692
        common shares pursuant to the legal services agreement. The shares were valued
        at the quoted trading prices on the respective grant dates which ranged from
        $.09 to $.23 per share or an average of approximately $.164 per share, resulting
        in an expense of $1,635,269. The Company also recognized $1,177,418 of stock
        based legal expenses, relating to this same services provider, that had been
        deferred at December 31, 2004. During 2005 the Company applied $436,024 of
        proceeds received by the legal service provider from the sales of their shares
        to the accounts payable balance. Accounts payable to the related party for
        legal
        services was $114,860 at December 31, 2004.
 
 **Note
        9.** **Commitments
        and Contingencies**
  **Legal
        Matters**
 
 As
        more
        fully described in Note 5 in April 2006 the Company received notice from
        a
        Lender (“The Elevation Fund” or “Lender”) that the Company has defaulted on the
        $600,000 loan, accrued interest and origination fee of $20,000 and legal
        fees of
        $15,000 on November 1, 2005 and has notified the Company that interest is
        accruing at the default rate of 18% since November 1, 2005 and the origination
        fee and legal fees accrue interest at the default rate of 18% since August
        1,
        2005. In addition, the lender notified the Company that it has declared all
        amounts due and payable and intends to exercise any and all remedies provided
        under the loan agreement, note and security agreement (including without
        limitation, collect, receive, appropriate and realize upon the Collateral
        (as
        such term is defined in the security agreement) and sell, lease, assign,
        transfer or otherwise dispose of such collateral in accordance with the terms
        f
        the security agreement) and any and all other remedies available at law or
        equity.
 
 As
        more
        fully described in Note 5, in April 2006 the Company received notice from
        a
        lender representing themselves for a $100,000 loan and as representative
        of some
        other lenders representing $500,000 of notes that the Company has defaulted
        on
        the loans principal in 2005. The notification states that interest is accruing
        at the default rate of 18% since December 2005 and declares that all unpaid
        amounts of principle and interest are immediately due and payable with such
        interest continuing to accrue until the notes are paid in full. In addition
        the
        Lender further reserves all other rights pursuant to the loan agreements
        and
        promissory notes including the rights to collect all costs and expenses of
        collection.
 
 **Other
        Commitments and Contingencies**
 
 The
        Company leases space for its recycling plant, research and development and
        offices in Riverbank, California pursuant to a March 2004 lease expiring
        in
        March 2009. Future minimum lease payments under the lease approximate $220,000
        during 2006 through 2008 and $37,000 in 2009.
 36
 **ITEC
              Environmental Group, Inc. and Subsidiary**
 **(A
              Development-Stage Company)**
 **Notes
              to Consolidated Financial Statements**
 **December
              31, 2005 and 2004**
  In
        November 2005, pursuant to an arbitration award, the Company has been ordered
        to
        pay EnvioPlastic Hungary the sum of $150,000, plus fees and costs, for the
        return of a deposit previously paid to the Company. The deposit of $75,000
        has
        previously been reported as deferred revenue, and has been reclassified to
        accrued liabilities at December 31, 2005. The Company has recorded an additional
        accrued liability and expense during 2005 to provide for the full amount
        of the
        award.
  In
        May
        2005, the Company and Rose Waste Systems, Inc., a California corporation
        (“Rose
        Waste”) entered into an Agreement and Plan of Merger (the “Agreement”) pursuant
        to which, among other things, the Company and Rose Waste would merge. In
        accordance with its terms, the Agreement terminated prior to any such merger.
        Rose Waste systems provided construction services to the Company during 2005
        and
        was paid approximately $1,022,000.
 
 In
        May
        2005, the Company and N.I. Industries, Inc. entered into a settlement agreement
        for unpaid rent totaling $118,643. As of December 31, 2005, $43,643 remained
        outstanding and accrued in the accompanying balance sheet.
  **Note
        10.** **Subsequent Events**
 
 In
        January 2006 certain equity investors were granted additional common shares
        under a price reduction clause in their common stock purchase and covenant
        to
        adjust agreements and the additional price reduction clauses were terminated
        (see Note 7).
 
 In
        February 2006, the Company entered into an agreement 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.
 
 In
        February 2006, the Company granted cashless exercise warrants to purchase
        500,000 shares of the Company’s common stock each to two directors (total of
        1,000,000 warrants) of the Company for services at an exercise price of $0.12.
        The warrants expire in 10 years. As there was no stated term of the services,
        it
        was expensed immediately. The directors resigned in February 2006
 
 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.
 
 In
        April
        2006 the Company received notice from certain lenders that they had defaulted
        in
        November and December 2005. These lenders have security interests in the
        Company’s assets (see Note 6).
 
 During
        2006, the Company has received subscriptions and related funds into escrow
        pursuant to a private placement memorandum in which $2.5 million, which can
        be
        increased to $5 million, of bridge financing is to be raised through the
        offering of a minimum of 20 Units for $25,000 per unit. Each Unit consists
        of a
        $25,000 junior secured subordinated convertible debenture, bearing interest
        at
        10% with principal and accrued interest due in 18 months from issuance
        (“maturity date”), convertible immediately and up to the maturity date, into
        shares of the Company’s common stock at a price of $0.0975 per share, and a
        warrant, with a cashless exercise provision, to purchase 75,000 shares of
        restricted common stock of the Company, exercisable for approximately 10
        years
        (expires April 15, 2015) at an exercise price of $0.06 per share. The conversion
        price of the debentures and exercise price of the warrant are subject to
        anti-dilution downward adjustments in the event the Company sells common
        stock
        or securities convertible into common stock at a price below the conversion
        or
        exercise prices, and subject to other adjustments as described below relating
        to
        the registration rights. The security is subordinated only to the security
        interest granted to CIWMB ( see Note 5). The shares underlying the debentures
        and warrants are subject to piggy back registration rights. In addition a
        registration statement must be filed within 30 days after an investor elects
        to
        convert all or any portion of the debenture. If the registration statement
        is
        not filed within that time frame the investor shall be paid 10% of the shares
        of
        common stock into which the debenture converts in additional cashless exercise
        warrants at an exercise price of $.06 per share for each 30 days beyond the
        initial 30 day period. If the registration statement is not effective within
        180
        days after filing, the investor will get paid 10% of the shares of common
        stock
        into which the debenture converts in additional cashless exercise warrants
        at an
        exercise price of $.06 for each 30 days beyond the initial 150 day period.
        Should the Securities and Exchange Commission fail to declare a registration
        statement effective on or before May 1, 2007 or should such registration
        statement thereafter cease to be effective, then the conversion price shall
        decrease by $.03 upon the occurrence of every 30-day period thereafter (or
        part
        thereof) that the registration statement shall not be declared or remain
        effective, provided, however, that in no event shall the aggregate reduction
        in
        conversion price be greater than $.0975. Through April 2006, funds totaling
        approximately $1.1 million have been received into escrow upon subscription
        for
        Units and three prior notes holders converted their notes totaling $150,000
        plus
        accrued interest into the subscription unit. The Company has not closed the
        offering as of May 1, 2006 and the debentures and warrants have not been
        issued.
        The Company believes that the embedded conversion option in the debenture
        qualifies as a derivative under FASB Statement 133 and related interpretations
        since the debenture conversion price is variable, and thus the debenture
        instrument will be separated into a debt instrument and embedded option
        instrument for financial statement purposes and the embedded option instrument
        will be recorded as a liability at fair value to be marked to fair value
        at each
        reporting date through statement of operations as other income or expense.
        Due
        to the authorized shares issue this causes under EITF 00-19, the warrants
        will
        also be classified as a warrant liability to be marked to fair value through
        the
        statement of operations. At the debt issuance dates the total fair value
        liability recorded for the embedded conversion options and warrants was
        $1,831,394.
 
 On
        April
        5, 2006 the Company executed a non-binding letter intent to acquire certain
        assets constituting the operations of two plastics recycling plants and to
        enter
        into a supply agreement with the seller for the seller to supply plastics
        to the
        two operations.





37





**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





On
      May
      23, 2005 (the "Dismissal Date"), Pohl, McNabola, Berg + Company, LLP ("PMB"),
      was dismissed as independent registered public accounting firm of Itec
      Environmental Group, Inc., a Delaware corporation (the "Company") in connection
      with the engagement of Salberg & Company, P.A., as the independent
      registered public accounting firm for the Company (“Salberg”). PMB's reports on
      the Company's 10-KSB and 10-KSB for each of the years ended December 31, 2004
      and 2003, respectively, and all subsequent interim periods up and until the
      Dismissal Date, did not contain an adverse opinion or disclaimer of opinion,
      and
      were not qualified or modified as to uncertainty, audit scope or accounting
      principles, other than reflecting an uncertainty as to the Company's ability
      to
      continue as a going concern.





During
      each of the two (2) years ended December 31, 2004 and 2003, and all subsequent
      interim periods up and until the Dismissal Date, there were no disagreements
      on
      any matter of accounting principles or practices, financial statement
      disclosure, or auditing scope or procedures, which disagreements, if not
      resolved to PMB's satisfaction would have caused them to make reference in
      connection with their opinion to the subject matter of the
      disagreement.





The
      Company requested PMB to furnish a letter addressed to the United States
      Securities and Exchange Commission, stating whether they agree with the
      statements made by the Company in the Current Report on Form 8-K, and, if not,
      stating the respects in which it does not agree. A copy of the letter, dated
      as
      of May 26, 2005, was filed as Exhibit 16.1 to the Current Report on Form 8-K
      filed with the Securities and Exchange Commission on May 27, 2005.





On
      May
      24, 2005, the Company engaged Salberg as its independent registered public
      accounting firm to audit the Company's financial statements. During each of
      the
      two (2) years ended December 31, 2004 and 2003, and all subsequent interim
      periods up and until May 23, 2005, the Company did not consult Salberg on any
      matters described in Item 304(a)(2)(i) of Regulation S-B. During each of the
      two
      (2) years ended December 31, 2004 and 2003, and all subsequent interim periods
      up and until the May 23, 2005, the Company did not consult Salberg on any
      matters described in Item 304(a)(2)(ii) of Regulation S-B.





The
      decision to change accountants was recommended and approved by the Board of
      Directors of the Company on May 17, 2005.




**ITEM
      8A. CONTROLS AND PROCEDURES**





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








38





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





There
      were no changes in the Company's internal control over financial reporting
      that
      occurred during the Company’s last fiscal quarter that has materially affected,
      or is reasonably likely to materially affect, the Company’s internal control
      over financial reporting.




**ITEM
      8B. OTHER INFORMATION**





In
      May
      2005, the Company and its wholly owned subsidiary, Itec Acquisitions, Inc.,
      a
      Delaware corporation (“Merger Sub”) and Rose Waste Systems, Inc., a California
      corporation (“Rose Waste”) entered into an Agreement and Plan of Merger (the
“Agreement”) pursuant to which, Rose Waste would have become a wholly owned
      subsidiary of the Company. Consummation of the merger was conditional upon
      completion of certain closing conditions including, but not limited to, (a)
      Itec
      shall have received (i) no less than $3,000,000 pursuant to the offering of
      its
      securities, and (ii) the $2,000,000 loan from the CIWMB of the State of
      California (the “Financing”) within the one hundred and fifty (150) day period
      following the Effective Time, (b) George Gitschel shall have executed an
      Employment Agreement which shall be agreeable to both Itec and Mr. Gitschel,
      (c)
      George Gitschel and Itec shall have executed and delivered (a) the Pledge
      Agreement and (b) a Letter Agreement acceptable to them in their absolute
      discretion regarding Itec’s obligations (i) to maintain George Gitschel as a
      director and officer of Itec and the Surviving Corporation (ii) to support
      financially, operationally and administratively the Surviving Corporation as
      a
      separate entity, (iii) to permit Rose Waste to pay or distribute to George
      Gitschel as and when he elects Rose Waste cash equal to any unpaid profit
      of Rose Waste as of the Closing Date, and (iv) to permit Rose Waste to sell
      at
      cost to George Gitschel certain investments in other companies made by Rose
      Waste and not germane to its business (“Letter Agreement”), (d) Itec shall have
      adopted the New Itec Option Plan which shall be agreeable to both Itec and
      Mr.
      Gitschel, (e) Mr. George Gitschel shall be satisfied, in his sole and absolute
      discretion, with his due diligence review (including that of his professional
      advisors) of Itec including, but not limited to, their examination of the
      balance sheets, the patents licensed by Itec and the agreements relating thereto
      and the tax returns of Itec, and (f) Mr. George Gitschel shall have been
      appointed the Vice President of Business Development and to the Board of
      Directors of Itec and the Surviving Corporation.




Some
      or
      all of the closing conditions set forth above did not occur and Rose Waste
      and
      the Company have agreed to terminate the proposed merger by the terms of the
      Agreement. George Gitschel has regained control of Rose Waste.








39




**PART
      III**








**ITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH
      SECTION 16(a) OF THE EXCHANGE ACT**





**Directors
      and Executive Officers**





NAME
            AGE
            POSITIONGary
                M. De Laurentiis
            62
            Chairman
                & Chief Executive OfficerLawrence
                A. Krause
            66
            DirectorDavid
                M. Otto
            47
            DirectorFrederick
                Smith, Jr.
            52
            Chief
                Financial Officer


____________________________________




Gary
      M De
      Laurentiis


Chairman
      & CEO





Mr.
      De
      Laurentiis has been our Chairman, President & CEO since founding the Company
      in 1999. Mr. De Laurentiis has been active in the plastics recycling business
      for nearly 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, Canada and California for both local governments and private industry.
      From 1992 to 1995 Mr. De Laurentiis worked directly with the State Government
      in
      Campeche Mexico, living on site for 18 months while directing the entire
      project. In 1996 an Ohio based group recruited Mr. De Laurentiis to open a
      shuttered recycling plant. Year one revenues reached $8MM and $18MM in year
      2.
      Mr. De Laurentiis left the company in 1999 to start Itec. 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, as well as the many regulatory agencies charged with protecting the
      environment who regularly call upon him for advice.





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).








40





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., Avisere, Inc. and Saratoga Capital
      Partners, 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.





Frederick
      W. Smith, Jr.


CFO





Mr.
      Smith
      has been our Chief Financial Officer since May, 2005. Mr. Smith is a licensed
      California Attorney at Law and former accountant. In addition to being our
      Chief
      Financial Officer during the past 12 months, Mr. Smith has been practicing
      law
      in California since 1982. Mr. Smith has 28 years of experience in corporate
      finance, corporate governance, financial reporting, litigation, formation,
      SEC
      regulations, corporate taxation, corporate acquisition, mergers and
      reorganization matters. Mr. Smith earned his BA from California State University
      at Fullerton in 1976. Mr. Smith received his JD from Western State University
      College of Law in 1980.





**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. With the exception of the aforementioned, 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:





Itec
      Environmental Group, Inc.


5300
      Claus Rd.


Riverbank,
      CA. 95367


Attn:
      Gary De Laurentiis








41





**ITEM
      10. EXECUTIVE COMPENSATION**




The
      following tables set forth certain information regarding our CEO and each of
      our
      most highly compensated executive officers whose total annual salary and bonus
      for the fiscal years ending December 31, 2005, 2004 and 2003 exceeded
      $100,000:





SUMMARY
      COMPENSATION TABLE





Annual
                Compensation
            
            Long-term
                CompensationName
            
            Fiscal
                Year
            
            Salary
                $
            
            Bonus
                $
            
            Other
              Annual
                Comp.
            
            Restricted
              Stock
            
            Securities
              Underlying
              Options(#)
            
            LTIP
                Payouts $
            
            All
                Other
              CompensationGary
                M. DeLaurentiis
            
            
            2005
            
            
            84,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            168,000
            (3)CEO
            
            
            2004
            
            
            23,400
            
            
            
            
            $
            31,186
            
            
            
            
            
            
            
            
            
            
            $
            166,200
            (2)2003
            
            
            93,600
            
            
            
            
            $
            21,197
            
            
            
            
            
            
            
            
            
            
            $
            75,000
            (1)Michael
                E. Hofmann
            
            
            2004
            
            
            71,500
            
            
            
            
            $
            1,301CFO
            
            
            2003
            
            
            99,000
            
            
            
            
            
            
            
            $
            72,000Frederick
                W. Smith, Jr
            
            
            2005
            
            
            48,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            96,000
            (3)CFO
            
            
            2004
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            72,000
            (2)




(1)
            Accrued
                compensation from years 2000 and 2001(2)
            Accrued
                compensation from year 2004(3)
            Accrued
                compensation from year 2005





OPTION
      GRANTS IN LAST FISCAL YEAR.





No
      options were granted during the 2005 fiscal year:





AGGREGATED
      OPTION EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
      VALUES.





The
      following table sets out information relating to options exercised by the
      above-referenced officers during the most recent financial year and the value
      of
      unexercised in-the-money options held by such person as of December 31,
      2005:





NAME
            
            
            SHARES
              ACQUIRED
              ONEXERCISE
                (#)
            
            
            VALUE
              REALIZED($)
            
            
            NUMBER
                OF
              UNEXERCISED
                OPTIONS
              AT
              FY-END
                (#) EXERCISABLE/
              UNEXERCISABLE
            
            
            VALUE
                OF UNEXERCISED IN-THE-
              MONEY
                OPTIONS AT FY-END($)
              EXERCISABLE/
              UNEXERCISABLEGary
                M. DeLaurentiis
            
            
            0
            
            
            0
            
            
            
            
            
            $0/$0Frederick
                W. Smith, Jr.Michael
                E.Hofmann
            
            
            0
            
            
            0
            
            
            
            
            
            $0/$0




42


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





The
      following table sets forth certain information regarding the beneficial
      ownership of our common stock as of May 5, 2006:





Title
                of Class
            Name
                and Address of Beneficial Owner
            Amount
                and Nature of Beneficial Ownership
            Percent
                of Class(1)Common,
                $.001 par value
            Gary
                De Laurentiis
              P.O.
                Box 760, 5300 Claus Rd.,
              Riverbank,
                Ca. 95367
            4,457,370(2)
            1%Common,
                $.001 par value
            Lawrence
                A. Krause
              1001
                Bayhill Drive, Suite 170
              San
                Bruno, CA 94066
            200,000
            <1%Common,
                $.001 par value
            David
                M. Otto
              601
                Union Street, Suite 4500
              Seattle,
                WA 98164
            2,761,718(3)
            2%Common,
                $.001 par value
            Frederick
                W. Smith, Jr.
              P.O.
                Box 760, 5300 Claus Rd.,
              Riverbank,
                Ca. 95367
            884,127
            <1%Common,
                $.001 par value
            Directors
                and Officers as a Group
            8,303,215
            <5%





(1)
      Based
      on 134,226,138 shares of Fully Diluted (includes issued and outstanding, and
      assumes the exercise of all warrants, conversion of all convertible promissory
      notes and does not take into account shares forfeited on account of the use
      of
      cashless exercise provisions accompanying a majority of the warrants
      outstanding) common stock issued and outstanding as of March 30, 2005.
      Beneficial ownership is determined in accordance with the rules of the
      Securities and Exchange Commission and generally includes voting or investment
      power with respect to securities. Except as otherwise indicated, we believe
      that
      the beneficial owners of the common stock listed above, based on information
      furnished by such owners, have sole investment and voting power with respect
      to
      such shares, subject to community property laws where applicable.




(2)
      Represents the common stock shares owned and warrants issued to Gary
      De
      Laurentiis, Itec’s Chairman & CEO, pursuant
      to which Mr. De Laurentiis may purchase up to 4,457,370 shares of common stock
      of the Company, exercise price of $.06 per share, for a period of five
      years.




(3)
      Represents the common stock shares owned and a warrant issued to David M.
      Otto ,
      a
      Director,, pursuant
      to which Mr. Otto may purchase up to 1,500,000 shares of common stock of the
      Company, exercise price of $.06 per share, for a period of five
      years.





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





In
      February, 2006, the Company issued a warrant to Jeffrey Chartier ,
      a
      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 exerciseable for a period of ten (10)
      years and may be exercised for cash. The shares underlying the warrant have
      piggy-back registration rights.





43




In
      February, 2006, the Company issued a warrant to George Kanakis ,
      its
      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 exerciseable for a period of ten (10)
      years and may be exercised for cash. The shares underlying the Warrant have
      piggy-back registration rights.





In
      November, 2005, in exchange for services provided to the Company, the Company
      issued (i) a warrant to purchase 1,000,000 shares of the Company’s common stock,
      exercise price of $.06 per share, to David M. Otto, corporate counsel to the
      Company and (ii) a warrant to purchase 500,000 shares of the Company’s common
      stock, exercise price of $.06 per share, to Frederick Smith, Jr., the Company’s
      Chief Financial Officer.





In
      July
      2005, in exchange for services provided by Mr. De Laurentiis to the Company,
      the
      Company issued a Warrant to Gary
      De
      Laurentiis, its Chairman & CEO, 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. The De Laurentiis Warrant
      I is
      exerciseable for a period of ten (10) years and may be exercised for cash or
      via
      a cashless exercise. The shares underlying the De Laurentiis Warrant I have
      piggy-back registration rights.





In
      March
      and April 2005, in exchange for services provided by Mr. De Laurentiis to the
      Company, the Company issued Warrants to Gary
      De
      Laurentiis, its Chairman & CEO, pursuant
      to which Mr. De Laurentiis may purchase up to 2,457,370 and 2,000,000,
      respectively, of shares of common stock of the Company, exercise price of $.06
      per share. The De Laurentiis Warrant II is exerciseable for a period of five
      (5)
      years and may be exercised for cash or via a cashless exercise. The shares
      underlying the De Laurentiis Warrant II have piggy-back registration
      rights.





In
      March
      2005, the Board of Directors of the Company approved the following: (i) Audit
      and Finance Committee Charter ,
      (ii)
      Code of Ethics, (iii) Compensation
      and Nominating Committee Charter and (iv) Policy
      Governing Director Nominations and Security Holder-Board
      Communications.





**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 2005. Pohl,
      McNabola, Berg + Company, LLP served
      as
      our independent certified public accountants for the fiscal year
      2004.





During
      the fiscal years ended December 31, 2005 and 2004, fees in connection with
      services rendered by Salberg
      & Company, P.A. and Pohl, McNabola, Berg + Company, LLP ,
      respectively, are as set forth below:





Fee
                Category
            
            Fiscal
                2004
            
            Fiscal
                2005Audit
                Fees
            
            $
            37,500
            
            $
            95,000Audit-Related
                Fees
            
            
            28,410
            
            
            8,400Tax
                Fees
            
            
            3,500All
                Other FeesTotal
            
            $
            69,410
            
            $
            103,400








44




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.





Audit-related
      fees consisted of fees for consulting services and includes $5,000 paid to
      the
      former auditors to re-issue their opinion.





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 auditors 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 auditor 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.







45





**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 May 16, 2006.







RegistrantITEC
                ENVIRONMENTAL GROUP, INC.By:
            
            /s/
                Gary M. De LaurentiisGary
                M. De LaurentiisChairman
                & CEO




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 May__, 2006.




Signature
            Title/s/
                Gary M. De Laurentiis
              
              Gary
                M. De Laurentiis
            Chairman
                and CEO/s/
                Frederick W. Smith
              
              Frederick
                W. Smith
            Chief
                Financial Officer/s/
                Lawrence A. Krause
              
              Lawrence
                A. Krause
            Director/s/
                David M. Otto
              David
                M. Otto
            Director








46





**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(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
            
            Attached4.3
            
            Form
                of Common Stock Purchase Warrant issued to George Kanakis
            
            Attached4.4
            
            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, 2004




47




10.2
            
            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, 200510.7
            
            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, 2005




48




10.15
            
            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,
                200510.28
            
            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, 2005




49




10.29
            
            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, 200514
            
            Code
                of Ethics
            
            Incorporated
                by reference to Exhibit 14 to the 10-4SB filed by the Company on
                April 15,
                200523.1
            
            Consent
                of Salberg & Company, P.A.
            
            Attached23.2
            
            Consent
                of Pohl, McNabola, Berg + Company, LLP
            
            Attached23.3
            
            Consent
              of Henry Schiffer
            
            Attached31.1
            
            Certification
                of CEO pursuant to Section302
                of the Sarbanes-Oxley Act
            
            Attached31.2
            
            Certification
                of CFO pursuant to Section302
                of the Sarbanes-Oxley Act
            
            Attached32
            
            Certification
                of CEO and CFO pursuantto
                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








50