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

ECO2 Plastics, Inc. June 30, 2007 Form 10-QSB

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

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

Business - ECO2 Plastics, Inc. (f.k.a. Itec Environmental Group, Inc.) was incorporated under the laws of the State of Delaware in 2000, and formed for the purpose of acquiring certain patented technology and the development of a worldwide market for its usage. In March 2007, the Company changed its name to ECO2 Plastics, Inc.

ECO2 has developed a unique and revolutionary patented process and system, referred to as the ECO2 Environmental System (the "ECO2 Environmental System"). The ECO2 Environmental System cleans post-consumer plastics, without the use of water, at a substantial cost savings versus traditional methods (the "Process"). This Process is licensed from Honeywell FM&T ("Honeywell") and the Department of Energy ("DOE") on an exclusive basis for the life of the patent. Since its inception, ECO2 has invested in the development of the technology and equipment comprising the ECO2 Environmental System, which includes the "Process Patent" issued on August 7, 2007. This included building several scaled up versions of the Prototype ECO2 Environmental System (the "Prototype"), testing of the Prototypes, building a pilot plant, evaluating the product produced by the Prototype and real-time testing. The Company's first full scale production facility was constructed in Riverbank, California and is now producing saleable product and ramping up to full scale operations. ECO2's goal is to build and operate plastic recycling plants (the "ECO2 Plants") in the USA that utilize the ECO2 Environmental System and to expand the ECO2 Environmental System worldwide. ECO2's growth strategy includes organic growth, strategic acquisitions and licensing or partnership agreements, where appropriate.

ECO2 intends to locate its second plant in the greater Los Angeles basin, which is home to over 18.5 million residents. The Company's research indicates that the greater Los Angeles basin generates an enormous amount of plastic containers. The Company has engaged a team of engineers to conduct the preliminary design efforts and has engaged a team of location and logistics specialists to support the Company in the site selection process currently underway.

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

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

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

---

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

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

Stock-based compensation - The Company accounts for all options and warrant grants to employees and consultants in accordance with SFAS 123R, which requires recording an expense over the requisite service period for the fair value of all options or warrants granted employees and consultants.

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

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

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

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

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

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

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

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

---

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

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

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

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

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

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

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

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

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

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

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