esph_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-K

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þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____________ to _____________

Commission file number: 000-25663

	Ecosphere Technologies, Inc.
	(Exact name of registrant as specified in its charter)

Delaware		20-3502861
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)

3515 S.E. Lionel Terrace, Stuart, Florida		34997
(Address of Principal Executive Office)		(Zip Code)

Registrant’s telephone number, including area code: (772) 287-4846

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes o No þ

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2009, was approximately $45,600,000.

The number of shares outstanding of the registrant’s common stock, as of March 29, 2010, was 123,708,277.

INDEX

		Page
Part I.

Item 1.	Business.	1
Item 1A.	Risk Factors.	11
Item 1B.	Unresolved Staff Comments.	12
Item 2.	Properties.	12
Item 3.	Legal Proceedings.	12
Item 4.	Submission of Matters to a Vote of Security Holders.	12

Part II.

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	13
Item 6.	Selected Financial Data.	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	32
Item 8.	Financial Statements and Supplementary Data.	33
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	33
Item 9A.	Controls and Procedures.	33
Item 9A(T)	Controls and Procedures.	33
Item 9B.	Other Information.	34

Part III.

Item 10.	Directors, Executive Officers and Corporate Governance.	35
Item 11.	Executive Compensation.	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	47
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	49
Item 14.	Principal Accounting Fees and Services.	50

Part IV.

Item 15.	Exhibits, FinancialSstatement Schedules.	52
SIGNATURES		54

PART I

ITEM 1. BUSINESS.

Ecosphere Technologies, Inc. (“Ecosphere” or the “Company”) is a diversified engineering, technology development and manufacturing company dedicated to identifying, creating, building and marketing innovative technology solutions that provide for responsible, sustainable stewardship of the world’s natural resources. Companies that use our patented technologies are able to improve their financial metrics while also reducing their ecological and environmental footprint. Ecosphere's business model has been to invent, develop, license and sell green technologies to creative companies willing to respond to changing industry requirements.

Presently, the Company is using its patented Ecosphere Ozonix® technology to assist gas and oil companies:

●	in treating water used to fracture natural gas wells in an environmentally friendly manner;

●	in eliminating the use of chemicals to treat bacteria and reduce scaling in the fracturing process;

●	in eliminating the need to dispose of contaminated water which flows back after fracturing wells, which reduces environmental regulatory issues; and

●	improving the efficiency and productivity of natural gas wells.

Ecosphere is the first company in the world that provides energy exploration companies with an onsite, chemically free method to kill bacteria and reduce scaling during fracturing and flowback operations.

To drill for natural gas in unconventional shale plays, a well must be hydraulically fractured or “fraced” to stimulate the flow of natural gas from the reservoir. An energy company will use between 3,000,000 and 5,000,000 gallons of clean water for each well that they frac. Hydraulic fracturing is used to create additional permeability in a producing formation to allow gas to flow more easily to the wellbore. In order to produce natural gas from shale, the wells must be injected with large volumes of clean water, frac sand, and frac fluids, to drive the gas to the surface. The conventional method of creating frac fluid was to treat pond water with chemicals and additives, such as biocides and scale inhibitors which eliminate aerobic and anaerobic bacteria from the pond water. The chemicals, besides being expensive, create problems down the wellbore including scaling and corrosion which reduce well productivity.

Once the frac flowback and produced water resurfaces, operators are forced to deal with the wastewater. This wastewater is typically contaminated with salts, heavy metals and hydrocarbons. The conventional methods of handling the frac flowback were to dispose of the water either with deep hole injection wells or in evaporation ponds. These methods require extensive trucking of the water which is expensive and wasteful. Many of the leading drilling companies are turning to recycling their frac flowback and produced waters in order to reduce water consumption, control their costs for clean water, and reduce their environmental impact. The Ecosphere Ozonix® technology is the right solution and is positioned to meet the growing demand.

The Scope of the Ecosphere Ozonix® Process

Beyond the oil and gas drilling business, the patented Ecosphere Ozonix® technology provides solutions for treating wastewater in the energy business and in many other industries as illustrated below:

Ecosphere Ozonix® and the Oil and Gas Industry

The Company’s patented Ecosphere Ozonix® process is designed to treat frac flowback and produced waters with highly concentrated ozone, electro precipitation, and ultrasonic transducers. The Ecosphere Ozonix® technology combines ozone, hydrodynamic cavitation, acoustic cavitation, and electro-chemical decomposition in a reaction vessel to cost-effectively treat contaminated water without adding chemicals. Since late 2007, we have tested our Ecosphere Ozonix® process on a variety of industrial wastewaters. Ecosphere’s initial use of this technology is to create a “closed loop” system providing a chemical-free total water management solution to exploration and production companies drilling for natural gas in unconventional shale plays.

EcosFrac™ and EcosBrine™

Our EcosFrac™ and EcosBrine™ systems use hydrodynamic and acoustic cavitations to create nano-sized bubbles that create hydroxyl radicals to oxidize organics and heavy metals in industrial wastewaters. The process results in the creation of EcosBrine™ fracturing fluid. EcosBrine™ is a clean high chloride floatback water that is blended at the frac site with surface water. The EcosBrine™ frac fluid has a negative scaling index that does not allow bacteria to re-grow and helps to keep micro pores open, which increases gas production. When the EcosBrine™ is added to pond, flowback or produced water, it creates a very effective fracturing solution. The EcosBrine™ frac fluid can be reused on the front end of the frac site (mixed with the chemical free frac liquid and friction reducers) to create completions fluid going down hole.

Our EcosFrac™ units are housed in conventional trailers so they can be moved from wellsite to wellsite as needed by drillers. We continue to refine our technology in order to reduce the footprint and improve efficiency at lower costs.

We have created the EcosFrac™, a chemical free method to destroy aerobic and anaerobic bacteria (which create scaling and corrosion) at the frac site, which works in the following way:

●	Surface water (and EcosBrine™ water if the energy company uses it) is put through an EcosFrac™ tank, undergoing a chemical free process whereby divalent cations as well as aerobic and anaerobic bacteria are removed.

●	The completions solution, which is chemical free, is then pumped through the pumper trucks and into the well head. This eliminates the need to purchase expensive and environmentally unfriendly biocides and scale inhibitors to mix with completions fluid.

Our EcosFrac™ technology is currently operating in the Fayetteville Shale under a long-term agreement with Southwestern Energy Production Company (“Southwestern Energy”).

Our EcosBrine™ units treat frac flowback water at the wellsite. The resulting brine, which is saltwater without chemicals and sediment, can be used by mixing it with surface water in the fracturing process or it can be stored in a surface pond. Using our EcosBrine™ technology eliminates the cost and environmental problems in storing, transporting and disposing of flowback water. Newfield Exploration Co. ("Newfield") is currently using our EcosBrine™ technology in the Woodford Shale in Oklahoma.

Our customers can save hundreds of thousands of dollars on chemicals per hydraulic fracture. In addition to the cost savings, this fracture solution significantly enhances well productivity. This has helped us turn a waste product into a valuable asset.

Ecosphere Energy Services, LLC

Ecosphere has issued an exclusive worldwide license, solely for the energy field of use for the Ecosphere Ozonix® technology, to Ecosphere Energy Services, LLC, or EES, a majority-owned subsidiary. EES is currently providing onsite water processing services to oil and gas companies in various states including Arkansas and Oklahoma. EES has signed long-term agreements with two natural gas production companies: Southwestern Energy and Newfield . Also EES has performed paid pilot programs for BP American Production Company ("BP") and will soon perform pilots with a Newfield/Cabot joint venture and Petrohawk.

Ecosphere is the managing member of EES and Ecosphere officers and employees devote the bulk of their time to the EES business. The only exceptions are public company reporting, investor relations and manufacturing. Ecosphere retained all manufacturing rights with respect to the Ecosphere Ozonix® technology. All EES employees are supervised by Ecosphere as the managing member, although EES has its own senior management team.

We manufactured and began testing the prototype of the EcosFrac™ tank in the first quarter of 2009. In July 2009, the Company entered into a Master Service Agreement with two subsidiaries of Southwestern Energy and received a work order under this agreement for the deployment of EcosFrac™ tanks to pre-treat water used to fracture natural gas wells in the Fayetteville Shale. Under the work order, EES is providing the services for a minimum two-year period with three one-year extension options. In addition, the work order includes the option to purchase the EcosFrac™ units at preset prices based upon the date the option is exercised, plus an ongoing license fee for each barrel of water processed thereafter. The Company delivered the Ecos Frac™ units in November, and December 2009 and January 2010. This Agreement and the work order demonstrate that the EcosFrac™ tank will be an important part of our product line to service the oil and gas industry.

The patented Ecosphere Ozonix® technology process is an advanced oxidation process that we have developed to treat industrial wastewater. Since late 2007, we have tested the Ecosphere Ozonix® process on a variety of industrial wastewaters. We feel one of the most promising applications for our technology is in the natural gas exploration business to help the energy companies recycle frac flowback and produced waters. In June 2009, the Company entered into a Master Service Agreement with BP to provide environmental water recycling services. In August 2009, the Company received two work orders from BP for pilot projects in Wyoming and one work order for a pilot in Oklahoma.

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

In July 2009, the Corporation Commission of Oklahoma approved a permit application by Newfield to build and operate a water recycling plant utilizing the Ecosphere Ozonix® technology water treatment system for two years. The permit allows Newfield to process frac flowback water into freshwater and brine utilizing the Ecosphere Ozonix® technology system and to release the treated flowback onto the ground.

In April 2010, we expect to begin four paid pilots for other major energy exploration companies.

Water and Energy

The two most important resources for the world are water and energy. Water and energy are two highly interconnected sectors: energy is needed throughout the water system, to supply water to its various users. Water is also essential to producing energy. At present, water cools electric power plants, flows through the turbines at hydroelectric dams, irrigates crops used to produce biofuels, and is pumped underground to crack open rock formations and force oil and gas to producing wells. The role of water in the energy sector is increasingly critical as many future sources of fossil fuels, including oil sands and unconventional natural gas, are water intensive to produce. Other energy sources that may be useful for combating climate change, such as carbon capture and storage, biofuels, and nuclear power, also require large volumes of water. It is estimated that agriculture uses 70% of all freshwater withdrawals and energy uses only 8% of freshwater withdrawals. However, growing populations and growing demand from other industries will likely squeeze energy’s already thin share of water, especially in those parts of the world experiencing water scarcity. When constraints on water resources are coupled with pressures to reduce greenhouse gas emissions, the challenges for new energy projects grow exponentially. Therefore, there is a burgeoning demand for finding and implementing solutions that reduce water use and increase water recycling.

In March 2010, the United Nations released a report that called for turning unsanitary wastewater into an environmentally safe economic resource. According to the report, 90% of wastewater discharged daily in developing countries is untreated contributing to the deaths of 2.2 million people a year, but with the proper management this wastewater can be an essential resource for supporting livelihoods. The report also points to the abundant Green Economy opportunities for turning a mounting challenge into an opportunity with multiple benefits and noted that a solution may involve water recycling systems.

Growth in Unconventional Gas (Shale Plays)

Until recently, unconventional sources accounted for a small portion of gas production in the U.S. The term unconventional gas is used to describe deposits of natural gas found in relatively impermeable rock formations. Over the past decade, while U.S. conventional production was declining, technological advances were reducing the cost of extracting unconventional gas, especially shale gas. According to a Wall Street Journal article “The Unconventional Gas Revolution”, the result was an unconventional gas boom and a surge in U.S. production, particularly from shales, beginning in 2007. On a global basis, unconventional gas represents a potentially recoverable resource equal to or even exceeding the conventional gas reserves in the world.

Our Strategy

We currently operate in the Fayetteville Shale and the Woodfield Shale. Our short-term plan is to expand our geographic reach from our existing operations and begin operations in the other five major shales in North America, the Haynesville Shale, the Barnett Shale, the Horn River Shale, the Marcellus Shale and the Montney Shale. Offshore drilling has accounted for approximately one-quarter of total U.S. natural gas production over the past two decades and almost 30% of total U.S. oil production in recent years. We are currently building a unit that utilizes the Ecosphere Ozonix® technology to treat flowback water from offshore drilling. We expect EES will enter this field in 2010.

Our Markets

Our potential markets include all major shale plays in the U.S. Currently, our technology is being utilized in the following shale plays: (i) the Fayetteville Shale in Arkansas, and (ii) the Woodford Shale in Southern Oklahoma. Southwestern Energy is the largest gas producer in the Fayetteville Shale. Currently, we are operating EcosFrac™ units in the Fayetteville Shale and an EcsoBrine™ unit in the Woodford Shale and expect to use an additional EcosBrine™ unit in a pilot program in the Marcellus Shale.

Water costs per well

Based on industry estimates, gas drillers spend approximately $224,000 buying, transporting (from water source and to disposal pond), and storing water for a frac and spend $500,000 moving water around a frac. This does not include the cost of chemicals-$120,000. In total, a gas driller spends between $5-$7 million to drill and complete a well. Therefore, approximately 10% of the well costs are water-related and we are focused on reducing these costs.

The Ecosphere Ozonix® process reduces well completion costs by recycling 25,000 barrels of water per well. It reduces the use of trucks to transport water from the well site and reduces the use of injection wells. As a result, the carbon footprint is reduced.

Favorable Environment

There is a large “green” movement in the U.S. for identifying, developing and using cleaner and more eco-friendly sources of energy. President Barack Obama’s stated objective is to transform the entire U.S. economy onto a greener path. He links energy and climate change to national security, citing the nation’s dependence on fossil fuels, and foreign oil imports in particular, as a dangerous and urgent threat. President Obama has said that energy is a high priority for his administration. With respect to the clean energy, President Obama stated his intention is to provide an additional $1 billion per year to help manufacturers re-tool to adopt clean technologies and make clean technology products. The Ecosphere Ozonix® process reduces well completion costs by recycling flowback water. It reduces the use of trucks to transport water from the well site and reduces the use of injection wells. As a result, the carbon footprint is reduced.

According to Ross Smith Energy, if President Obama succeeds in implementing the energy policy he espoused during the election campaign, the winners look to be renewable energy, energy efficiency technology, natural gas and plug-in hybrid vehicles. On December 7, 2009, the U.S. Patent and Trademark Office announced its pilot program to expedite the examination of patent applications directed to certain green technology inventions. Secretary of Commerce Gary Locke indicated that the pilot program was limited to the first 3,000 of the “most promising inventions.” In March 2010, Ecosphere was provided with Notice of Allowance for two of its patent applications under this pilot program. The patents are directed to the Ecosphere Ozonix® processes.

Competition

We have been unable to identify any other company in the world that, at the wellsite, can provide exploration and production companies with clean, bacteria-free frac fluid at high volume without the use of chemicals. Because most drilling companies are using chemicals in their completions solutions, Ecosphere’s primary competitors/substitutes (on the front end) are the major chemical companies that manufacture and sell the chemicals to the drillers going down hole, such as Nalco (a division of Dow Chemical) and Champion.

The energy companies use a myriad of different approaches to dealing with frac flowback waters. The primary method of dealing with these waters throughout the U.S. is hauling them to permitted underground injection sites. In some cases vapor distillation technology is being used to treat frac flowback and produced waters at a disposal facility. We treat the frac flowback and produced waters at the wellsite. We believe our Ecosphere Ozonix® technology is a more cost effective alternative that energy companies will prefer due to our pricing structure and the mobility of our solution.

Because of environmental concerns about the use of chemicals, large oil and gas service companies are seeking solutions. Bloomberg recently reported that the two largest oilfield contractors are each testing new chemical free technologies. The same article quoted an executive of Southwestern Energy referring to its testing of our Ecosphere Ozonix® technology.

Our competitive advantages include cost and the ability to recycle much higher volumes of wastewater. The footprint of the Ecosphere Ozonix® mobile water treatment units is considerably smaller than a systam a competitor uses to treat the same volumes of frac flowback waters. Unlike our competitor's process, the Ecosphere Ozonix® process does not need a particular water temperature or pH level, with expansion capability to receive continuous water flow for treatment at high volume. Our process provides an enhanced stream of clean water at the site. Our competitors, including chemical companies, however, have substantially greater financial, management, engineering, technical, sales, and marketing resources than we currently have.

Manufacturing

We manufacture and assemble our EcosFrac™ and EcosBrine™ units at our headquarters in Stuart, Florida using a network of selected original equipment manufacturers to supply us some components.We manufacture the critical and proprietary components of the Ecosphere Ozonix® process in-house. Our engineering staff continues to improve our products at this manufacturing facility.

Sales and Marketing

We rely on our officers for the coordination of our sales and marketing efforts. Management uses our website, www.ecospheretech.com, and search engine optimization marketing programs to bring customers to our website to learn about our technologies. We have developed a marketing and communications strategy with our website design team to place our company information and ads on various oil and gas industry websites. Additionally, EES has its own president and chief operating officer who play an important role in sales and marketing.

Government Regulation and Environmental Laws

In 2004, Congress exempted hydraulic fracturing from the Safe Drinking Water Act, or the SDWA. Recently, proposals have been made to revisit the environmental exemption for hydraulic fracturing under the SDWA or to enact separate federal legislation or legislation at the state and local government levels that would regulate hydraulic fracturing. Both the United States House of Representatives and Senate are considering the Fracturing Responsibility and Awareness of Chemicals Act, or the FRAC Act, and a number of states are looking to more closely regulate hydraulic fracturing. The FRAC Act would require companies to gain approval from the U.S. Environmental Protection Agency (“EPA”) before using hydraulic fracturing to enhance production of oil and natural gas wells. The bill would also require companies to make public the chemicals they use in fracturing. In all, 48 House members have signed on as co-sponsors of the FRAC Act. It is unclear how much support the proposal will get in Congress or the White House. In March 2010, the EPA announced it was studying the effects of fracturing on water supplies and the environment.

We believe that governmental regulations that regulate hydraulic fracturing will benefit Ecosphere and lead companies to use our environmental friendly and cost-effective technologies. If the exemption for hydraulic fracturing is removed from the SDWA, or if the FRAC Act or other legislation is enacted at the federal, state or local level, any restrictions on the use of hydraulic fracturing contained in any such legislation could have a positive and significant impact on our financial condition and results of operations. On the other hand, if drilling is materially reduced, it would have a material adverse effect on the Company's operations.

On December 15, 2009, the EPA officially published its findings that emissions of carbon dioxide, methane and other “greenhouse gases” present an endangerment to human health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings by the EPA allow the agency to proceed with the adoption and implementation of regulations that would restrict emissions of greenhouse gases under existing provisions of the Clean Air Act. The EPA has proposed two sets of regulations that would require a reduction in emissions of greenhouse gases from motor vehicles and these regulations, if finalized, could lead to the imposition of greenhouse gas emission limitations in Clean Air Act permits for certain stationary sources. In addition, on September 22, 2009, the EPA issued a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the United States beginning in 2011 for emissions occurring in 2010.

Congress has been considering various bills that would establish an economy-wide cap-and-trade program to reduce U.S. emissions of greenhouse gases, including carbon dioxide and methane. Such a program, if enacted, could require phased reductions in greenhouse gas emissions.

Enactment of EPA Regulations and new cap-and-trade legislation could increase costs of energy companies and result in reduced demand for natural gas and oil as prices rise. Additionally, oil and gas drillers may face difficulties in expanding their drilling operations. Because EES’ Ozonix® technology is being used by gas drillers in unconventional sources such as shale plays, the drilling operations produce much more hydrocarbons than production from conventional sources. On the other hand, future EPA Regulations or future legislation may encourage the use of natural gas, which is much cleaner than oil. This in turn would encourage natural gas production, which may increase the need for EES’ services and technology.

Other Ecosphere Ozonix® Technology Applications

We intend to market the Ecosphere Ozonix® technology wherever there are large streams of industrial wastewater that need innovative solutions to clean, recycle or completely eliminate the wastewater. To date, Ecosphere is focused on hydraulic fracing as part of the onshore natural gas drilling process. Our potential markets include all industries around the world that use chemicals to treat water. We are focused on developing strategic partnerships to deploy our technology in a wide variety of global industrial and municipal wastewater applications. The Ecosphere Ozonix® technology has a broad spectrum of applications in a multitude of industry segments. There is an inherent “uniqueness” of the Ecosphere Ozonix® technology when compared to traditional technologies that it either replaces or is combined with to offer improved operational efficiencies and cost savings. In addition to our current onshore and planned offshore gas and oil operations, the following offers a very broad overview of some segments of industries where thousands of potential clients exist. These primary applications include, but are not limited to:

●	Beyond oil and gas drilling, our patented technology has applications in other parts of the energy business including conventional and nuclear power plants and coal mining operations.

●

Mining Minerals – Water-pollution problems caused by mining include acid mine drainage, metal contamination and increased sediment levels in streams. The EPA estimates that there are more than 600,000 mines, most of which are abandoned, have polluted over 180,000 acres of reservoirs and lakes, and 12,000 miles of streams. Without remediation and reclamation of these mines, they will continue to discharge toxic metals in water and sediment.

●

Municipal Wastewater – Wastewater discharged into municipal wastewater systems travels to local wastewater treatment plants where it is treated before being discharged into the environment. According to the U.S. Census, in 2000, there were 15,591 wastewater treatment facilities in the U.S. with a total capacity of 42.225 billion gallons per day.

●	Commercial Wastewater – Diminishing quality water supplies, increasing water purchase costs and strict environmental standards are forcing industries to target increased water-efficiency and reuse.

●

Agricultural Wastewater – As reported by the EPA, agriculture nonpoint source pollution is the leading source of water quality impacts on surveyed rivers and lakes as surveyed in the 2000 National Water Quality Inventory provided to Congress. Agriculture is a highly intensified industry in many parts of the world, producing a range of wastewaters including sediment and nutrient runoffs, pesticides and animal wastes requiring a variety of treatment technologies. The disposal of many of these wastes can pose serious health problems.

Other Technologies

The Company has successfully demonstrated the ability to develop and monetize its technologies. In 2007, the Company sold its ship stripping technology, resulting in a net gain on sale of intellectual property and related assets of approximately $5.3 million.

In addition to the Ecosphere Ozonix® technology, the Company presently owns several other technologies that are completed and available for global marketing. Among these technologies is our clean tech Ecos LifeLink. We completed the design and engineering for our clean tech mobile micro-utility system in late 2006 and expect to construct a prototype as resources become available. This new clean tech Ecos LifeLink™ unit will provide power, telecommunications and clean water in remote regions of the world without using any fossil fuel.

Research and Development

We have spent $97,389 and $1,090 on research and development in 2009 and 2008, respectively.

Employees

As of March 26, 2009, we had 63 total employees of which, 2 were part time. This includes 27 EES employees. None of our employees are covered by a collective bargaining agreement. We believe that our relationships with our employees are good.

Corporate History

We were formed as a Florida corporation in 1998. In 2006, we reincorporated in Delaware.

Intellectual Property

In addition to the two new green tech patents used in gas and oil drilling, Ecosphere holds an extensive patent portfolio of clean technologies. Our two new patents were filed as patent applications in December 2009 and we received notice of allowance of the patents on March 16, 2010. This accelerated process occurred as part of the Obama Administration’s Green Technology Fast Track program that began December 1, 2009. Our intellectual property portfolio includes registered and pending patents, trademarks, copyrights and trade secrets. Our material intellectual property was invented by our founder and Chief Executive Officer, Mr. Dennis McGuire, and assigned to us. Our Senior Vice President of Engineering, Mr. Sanjeev Jahkete, was the co-inventor with Mr. McGuire of our two new green tech patents. We believe our intellectual property portfolio will act as a barrier to entry for other competitors who may seek to provide competing technology.

●

U.S. Patent (awaiting assignment of patent number) - The Ecosphere Ozonix® process for enhanced water treatment for reclamation of waste fluids.

●

U.S. Patent (awaiting assignment of patent number) - The Ecos Frac™ tank, real-time processing of water for hydraulic fracture treatments using a transportable frac tank.

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

●

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

●

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

●

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

●

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

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

ITEM 1A. RISK FACTORS.

Not applicable to smaller reporting companies. To see our principal risk factors see Item 7. “Managements Discussions and Analysis or Financial Condition and Results of Operations”

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

Ecosphere leases three buildings in Stuart, Florida comprising an aggregate of 15,700 square feet of space. Our aggregate monthly rent is $13,354. One building houses the corporate offices, and the second building provides warehouse, manufacturing and testing space and the third adjacent building provides additional warehouse space. The lease on the corporate office expires on September 30, 2010, and the lease on the warehouse and manufacturing building expires on August 31, 2011. If we do not renew these leases we believe there is an abundance of office and manufacturing space available in the Stuart, Florida area.

EES leases a building in Conway, Arkansas, comprising approximately 7,500 square feet of space which comprises our administrative offices and equipment maintenance facility for our operations in Arkansas. The aggregate monthly rent is $4,200. The lease on the building expires on October 31, 2012.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, we are involved in litigation in the ordinary course of business. We are not presently a party to any material litigation.

ITEM 4. (REMOVED AND RESERVED).

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is quoted on the Over-the-Counter Bulletin Board, or the Bulletin Board under the symbol “ESPH”. The following table provides the high and low bid price information for our common stock for the periods indicated as reported by the Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. We have approximately 1,437 holders of record of our common stock.

		Bid Prices
Year	Quarter Ended	High	Low
		($)	($)
2009	March 31	0.35	0.14
	June 30	0.52	0.13
	September 30	0.52	0.31
	December 31	0.49	0.33

2008	March 31	0.25	0.10
	June 30	0.62	0.11
	September 30	0.78	0.36
	December 31	0.68	0.26

Dividend Policy

We have not paid any cash dividends on our common stock and do not plan to pay any such dividends in the foreseeable future. Our Board of Directors, or Board, will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements, and general business conditions.

Recent Sales of Unregistered Securities

In addition to those unregistered securities previously disclosed in reports filed with the Securities and Exchange Commission, or the SEC, we have sold securities without registration under the Securities Act of 1933, or the Securities Act, in reliance upon the exemption provided in Section 4(2) and Rule 506 thereunder as described below. Unless stated, all securities are shares of common stock.

Name of Class	Date Sold	No. of Securities	Reason for Issuance
Holder of Convertible Debentures	October 8, 2009	629,554	Conversion of convertible debenture
Holder of Convertible Debentures	October 8, 2009	944	In lieu of cash interest
Debt holder	October 16, 2009	20,000	Extension of debt
Debt holder	October 16, 2009	7,500	Satisfaction of debt
Warrant Holder	October 26, 2009	112,500 five-year warrants exercisable at $0.25 per share	In connection with a new convertible note
Series B holder	November 23, 2009	16,700	Conversion of Series B Preferred Stock
Consultants	December 22, 2009	100,000 five-year warrants exercisable at $0.43 per share	Consulting services
Employee	December 22, 2009	50,000 five-year stock options exercisable at $0.43 per share	Service as employee

ITEM 6. SELECTED FINANCIAL DATA.

Not applicable for smaller reporting companies.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions, which are subject to risk, uncertainties and other factors. Actual results may differ materially because of the factors discussed in the subsection titled “Risk Factors” which are located at the end of this Item 7.

Company Overview

At present, Ecosphere is focusing its efforts on EES, its 52.6% owned subsidiary. EES is engaged in operating high volume mobile water filtration equipment to treat energy exploration related wastewaters. EES is successfully providing water recycling services to major energy exploration companies utilizing our patented Ecosphere Ozonix® technology. The commercial viability of this technology is demonstrated by the multi-year Agreements the Company has been able to secure. These Agreements proved the technology was commercially viable and led to the development of additional applications of our technologies which will allow energy companies to optimize the revenues generated from a wellsite.

2009 Highlights

2009 was a transformational year for the Company as it developed and commercialized its Ecosphere Ozonix® technology. Highlights include:

●	In July 2009, the Corporation Commission of Oklahoma approved a permit application by Newfield to build and operate a water recycling plant utilizing the Ecosphere Ozonix® water treatment system to treat frac flowback water for two years.

●	In July 2009, the Company entered into a Master Service Agreement with two subsidiaries of Southwestern Energy and received a work order for the deployment of EcosFrac™ Tanks to pretreat water used to fracture natural gas wells in the Fayetteville Shale.

●	The Master Service Agreement and work order demonstrate that the EcosFrac™ tank will be an important part of our product line to service the oil and gas industry.

●	In August 2009, the EES entered into an agreement to process frac flowback water in the Woodford shale in Oklahoma. The term of the agreement is one year with the option for two additional years.

●	Ecosphere manufactured and EES delivered the majority of the EcosFrac™ tanks to Southwestern Energy in 2009 and the balance of the units in the first few days of 2010.

●	EES completed two pilots for BP in Wyoming and one in Oklahoma.

●	Ecosphere completed two significant financings related to EES as detailed below.

In July 2009, the Company finalized a series of agreements with Clean Water Partners LLC (“CWP”), an affiliate of Bledsoe Capital Group (“Bledsoe”). Under the agreements, CWP became a 33% owner of EES in exchange for up to $10 million as described below. As the then owner of the remaining 67% of EES, the Company controlled a majority of the Board of Directors of EES and controls and manages its daily operations. A supermajority vote is required for major matters, including the sale of EES.

The Company contributed to EES the assets and liabilities of EES, Inc., which included $3.1 million of debt due to Bledsoe. CWP contributed $2.5 million in cash plus $1.0 million in loan advances due from the Company. In exchange for payment of $1.5 million and forgiveness of the $1.0 million of loan advances, the Company granted EES an exclusive license for all of its Ecosphere Ozonix® technology relating to the recycling of water in the field of use which is energy. This includes its core water recycling Ecosphere Ozonix® processes and technology, its EcosFrac™ technology and its associated EcosBrine™ fluid. In addition, the Company will receive a priority distribution of the first $2.5 million of CWP’s share of EES profits. An additional $4 million is due to the Company upon achievement of a significant event relating to EES, such as the sale of EES. See Note 19 of the accompanying notes to the consolidated financial statements for a summary of the transaction.

In addition to owning the right to a majority of the profits and other distributions of EES, the Company will receive 100% of the first $7,575,000 of the profits of EES with 33% of those profits representing the $2.5 million priority distribution described above.

In November 2009, EES received $7.5 million from Fidelity National Financial in exchange for a 19% equity interest in EES. In addition, in October 2009, EES received $350,000 from the Chairman of EES in exchange for a promissory note convertible into a 1% equity interest in EES. Also in November 2009, the Chairman converted his note into a 1% equity interest in EES. EES paid a finder’s fee equal to a 1.5% equity interest in EES to the Chairman of EES. Following the transaction, the Company owns 52.6% of EES and continues to be the managing member of EES.

CRITICAL ACCOUNTING ESTIMATES

In response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has selected its more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Company’s financial condition. These accounting estimates are discussed below. These estimates involve certain assumptions that if incorrect could create a material adverse impact on the Company’s results of operations and financial condition. Some of the estimates are based upon the intellectual property and related assets and inventory which were sold and are included as a matter of explaining the historical results of operations.

Revenue Recognition

Revenue from sales of equipment is recognized when products are delivered to and accepted by the customer, economic risk of loss has passed to the customer, price is fixed or determinable, collection is probable, and any future obligations of the Company are insignificant. Revenue from the Ecosphere Ozonix® water-filtration contracts is earned based upon the volume of water processed plus additional contractual period based charges and is recognized in the period the service is provided. Payments received in advance of the performance of services or of the delivery of goods are deferred as liabilities until the services are performed or the goods are delivered. Revenue from the sale of intellectual property and related assets is recognized as a gain from the sale of intellectual property and related assets, an operating item, when payment has been received and ownership of the patents and related assets has been transferred to the buyer and is recorded net of any carrying value and selling costs. Equipment or inventory sold in connection with the sale of intellectual property is recognized as a wash sale with no resulting gain or loss. The Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs as cost of revenues.

Stock-Based Compensation

The Company follows the provisions of ASC 718-20-10 Compensation – Stock Compensation which establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under ASC 718-20-10, we recognize an expense for the fair value of our outstanding stock options as they vest, whether held by employees or others.

We estimate the fair value of each stock option at the grant date by using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 12 to our consolidated financial statements contained in this report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options.

Fair Value of Liabilities for Warrant and Embedded Conversion Option Derivative Instruments

We estimate the fair value of each warrant and embedded conversion option at the issuance date and at each subsequent reporting date by using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 1 to our consolidated financial statements contained in this report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our warrants and embedded conversion options have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such warrants and embedded conversion options.

Comparison of the Year ended December 31, 2009 with the Year ended December 31, 2008

The following table sets forth a modified version of our Consolidated Statements of Operations that is used in the following discussions of our results of operations:

	For the Years Ended December 31,
							Change
	2009			2008			$			%

Revenues	$	1,760,129		$	247,202		$	1,512,927		612	%
Cost of revenues		924,789			163,169			761,620		467	%
Gross profit (loss)		835,340			84,033			751,307		894	%
Operating expenses
Salaries and employee benefits		6,833,304			3,255,835			3,577,469		110	%
Administrative and selling		1,211,662			1,314,418			(102,756	)	-8	%
Professional fees		1,162,772			1,227,810			(65,038	)	-5	%
Depreciation and amortization		686,309			259,642			426,667		164	%
Research and development		97,389			24,951			72,438		290	%
Total selling general and administrative		9,991,436			6,082,656			3,908,780		64	%
Restructuring charge		548,090			-			548,090		100	%
Asset impairment		-			6,601			(6,601	)	-100	%
Total oerating expenses		10,539,526			6,089,257			4,450,269		73	%
Loss from operations		(9,704,186	)		(6,005,224	)		(3,698,962	)	62	%
Other income (expense):
Other income (expense)		1,758			(12,599	)		14,357		114	%
Gain (loss) on conversion		(716,783	)		(256,271	)		(460,512	)	-180	%
Interest expense		(5,184,747	)		(5,419,562	)		234,815		4	%
Change in fair value of derivative instruments		(3,446,612	)		-			(3,446,612	)	-100	%
Total other income (expense)		(9,346,384	)		(5,688,432	)		(3,657,952	)	64	%
Net loss		(19,050,570	)		(11,693,656	)		(7,356,914	)	-63	%
Preferred stock dividends		118,750			138,250			19,500		-14	%
Net income (loss) applicable to common stock		(19,169,320	)		(11,831,906	)		(7,337,414	)	-62	%
Net loss applicable to noncontrolling interest of consolidated subsidiary		743,417			-			743,417		100	%
Net loss applicable to Ecosphere Technologies common stock	$	(18,425,903	)	$	(11,831,906	)	$	(6,593,997	)	-56	%

RESULTS OF OPERATIONS

Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008

The Company’s net loss increased $6,593,997 during the year ended December 31, 2009 when compared to the year ended December 31, 2008. The primary reasons for this increase was an increase in operating expenses of $4,450,269, plus an increase in the fair value of the liabilities for derivative instruments of $3,446,612 caused by the increase in the market price of the Company’s common stock from $0.31 per share at January 1, 2008 to $0.47 per share at December 31, 2009, and an increase of $460,512 in losses on conversion related to the conversion of interest on convertible notes into shares of the Company’ common stock at contractual conversion rates that were considerably lower than the fair market value of the Company’s common stock on the dates of conversion. These negative influences on earnings were partially offset by an increase in gross profit of $751,307 which was the result of the Company manufacturing and deploying revenue generating equipment in the field, plus a decrease in interest expense of $234,815 which resulted from our ability to convert or repay a significant portion of our outstanding debt during the year ended December 31, 2009.

Revenues

The Company generated revenue of $1,760,129 during the year ended December 31, 2009, an increase of $1,512,927 or 612% over our revenue of $247,202 for the year ended December 31, 2008. The increase was the result of revenue generated from the processing of frac flowback water in the Woodford Shale in Oklahoma, treating a variety oil and gas exploration flowback water for three separate oil and gas exploration companies through pilot projects in Wyoming, Utah and Arkansas and through the deployment of our EcosFrac™ units in Arkansas to treat water prior to its use in fracturing natural gas wells. During the year ended December 31, 2008, the Company had completed its first water filtration unit utilizing the Ecosphere Ozonix® water filtration technology and was using it in a pilot program in Texas. Future revenues are expected to increase as they will include revenue related to the Southwestern Energy contract which began in November 2009.

Operating Expenses

Operating expenses for the year ended December 31, 2009 were $10,539,526 as compared to $6,089,257 for the year ended December 31, 2008, an increase of $4,450,269 or 73%. The increase was primarily caused by an increase of non-cash compensation related to the vesting of employee options and restricted stock of approximately $2,340,000, an increase of approximately $1.2 million of salary and wage expense related to the staffing of our manufacturing plant and the deployment of staff to supervise and operate our equipment in the field, an increase in depreciation and amortization of $426,667 which resulted from our investment in and deployment of equipment to generate revenue and a restructuring charge of $548,090 which resulted from our decision to close our New York office. These increases were partially offset by reductions in administrative and selling expenses of $102,000 and professional fees of $65,000. Future operating expenses are expected to increase related to the operating expenses associated with the Southwestern Energy contract which began in November 2009.

Loss From Operations

Loss from operations for the year ended December 31, 2009 was $9,704,186 compared to a loss of $6,005,224 for the year ended December 31, 2008, an increase of $3,698,962 or 64%. The increase in the loss from operations in 2009 versus 2008 was due to the increases in operating expenses identified above which were partially offset by the additional gross profit earned in 2009.

Interest Expense

Interest expense was $5,184,747 for the year ended December 31, 2009 as compared to $5,419,562 for the year ended December 31, 2008, a decrease of $234,815 or 4%. Of the 2009 amounts, approximately $4,125,000 related to the accretion of the discounts and amortization of debt issue costs related to the Company’s notes payable (non-cash), $325,000 related to debt discounts related to notes that were converted into common stock and approximately $832,000 related to actual and accrued interest associated with the notes and debentures payable.

Of the 2008 amounts, approximately $4,794,000 related to the accretion of the discounts related to the issuance of warrants or common stock in connection with note offerings and the beneficial conversion features of convertible notes. Additionally, there were $229,750 of cash payments, $118,225 of interest payments in the form of issuance of shares of the Company’s common stock and approximately $254,000 of additional accrued interest associated with notes payable.

Loss on Conversion

Loss on conversion for the year ended December 31, 2009 was $716,783 as compared to a loss of $256,271 for the year ended December 31, 2008. In 2009, the Company issued 229,340 shares of common stock with a fair market value of $99,163 based upon the quoted market prices for the Company’s common stock on the dates of conversion that ranged from $0.19 to $0.49 per share to repay interest on convertible debentures that amounted to $37,600. In addition, the Company issued 2,158,000 shares of common stock with a fair market value of $975,720 based upon the quoted market prices for the Company’s common stock on the dates of conversion that ranged from $0.42 to $0.49 per share to repay interest on convertible debentures that amounted to $320,200. In 2008, the Company paid a finder’s fee of $87,500 owed to its then Chairman and Co-CEO by issuing 450,000 shares of common stock with a fair market value of $288,000 on the date of conversion, resulting in a loss on conversion of $200,500. The Company issued 250,000 and 200,000 shares to charities chosen by the Chairman in 2008 and 2009, respectively.

Change in Fair Value of Derivative Instruments

The change in fair value of derivative instruments resulted in other expense of approximately $3,446,612 for the year ended December 31, 2009. This change resulted from an increase in the fair value of the liability for embedded conversion option derivative instruments of $1,682,882 and an increase in the fair value of the liability for warrant derivative instruments of $1,763,730. These increases in derivative liabilities were primarily caused by an increase in the trading price of the Company’s common stock from $0.31 per share as of January 1, 2009 to $0.47 per share as of December 31, 2009. This change from 2008 was caused by the Company’s adoption of ASC 815-40 in January 2009. (See Note 1 of the accompanying Notes to Consolidated Financial Statements). Absent a significant change in the number of warrant and embedded conversion option derivative instruments outstanding, future increases or decreases in the market price of the Company’s common stock will have a negative or positive impact, respectively, on the Company’s net income.

Preferred Stock Dividends

Preferred stock dividends were $118,750 for the year ended December 31, 2009 and $138,250 for the year ended December 31, 2008. The dividends reflect Company obligations to preferred shareholders that have not been paid and decreased from 2008 because the holders of 69 shares of Series B Preferred stock chose to convert their preferred stock into 57,615 shares of common stock.

Noncontrolling Interest of Consolidated Subsidiary

The noncontrolling interest of consolidated subsidiary was $743,417 for the period from inception, July 16, 2009, through December 31, 2009. This amount represents the amount of the losses of EES for the period from inception, July 16, 2009, through December 31, 2009, which have been allocated to the noncontrolling equity members of the subsidiary. Per the LLC operating agreement, the amount allocated represented the entire loss for EES for the period from inception July 16, 2009 through December 31, 2009.

Net Loss Applicable to Common Stock of Ecosphere Technologies, Inc.

Net loss applicable to common stock of Ecosphere Technologies, Inc. was $18,425,903 for the year ended December 31, 2009, compared to a net loss applicable to common stock of $11,831,906 for the year ended December 31, 2008. Net loss per common share was $0.19 for the year ended December 31, 2009 as compared to a net loss per common share of $0.16 for the year ended December 31, 2008. The weighted average number of shares outstanding was 99,627,077 and 73,158,831for the years ended December 31, 2009 and 2008, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $4,342,143 for the year ended December 31, 2009, compared to $4,379,171 for the year ended December 31, 2008. This decrease in cash used relates to the significantly higher non-cash expenses during the year ended December 31, 2009. The net loss of $18.4 million was offset by non-cash expenses of $10.3 million, plus an increase in the fair value of the liability for derivative instruments of $3.4 million, an increase in accounts payable of $750,000, an increase in the restructuring reserve of $198,000 and an increase in deferred revenue of $672,000. These were partially offset by an increase in accounts receivable of $578,000, a decrease in accrued expenses of $106,000 and the allocation of the EES net loss to the noncontrolling equity members of $743,417.

The Company's net cash used in investing activities was $6,822,165 for the year ended December 31, 2009 compared to net cash used in investing activities of $1,655,290 for the year ended December 31, 2008. In 2009 the Company invested approximately $5.1 million in equipment components to build EcosFrac™ units. The units are being used to process water to be used in fracturing natural gas wells in the Arkansas under a minimum two year agreement. In addition, the Company invested approximately $725,000 in equipment components associated with the building of the first EcosBrine™ unit, the second generation Ecosphere Ozonix® unit for processing frac flowback water and invested and additional $184,000 in equipment and vehicles to support the manufacturing and field operations. In addition, $425,000 of the proceeds from the November 2009 equity transactions were held in escrow to provide funds for certain convertible notes that were secured by EES assets. Subsequent to December 31, 2009, the holders of the secured convertible notes elected to convert the notes into shares of the Company’s common stock and the funds were released to the Company. In 2008, the Company invested in equipment components of $319,975 for the building the third Ecosphere Ozonix® unit and the initial EcosFrac™ unit and capitalized the cost of building the first two EcosBrine™ units, $1,585,315. These expenditures in 2008 were partially offset by proceeds of $250,000 from the Company’s sale of its 5% investment in Chariot Robotics, LLC in January 2008.

The Company’s net cash provided by financing activities was $11,792,032 for the year ended December 31, 2009 compared to net cash provided by financing activities of $6,166,327 for the year ended December 31, 2008. During the year ended December 31, 2009, the Company received $700,000 in exchange for warrants and new secured convertible notes, $45,500 for a new original issue discount note, $80,000 from related parties and $466,055 from the exercise of options and warrants. In addition, EES received $2.5 million in cash and $1.0 in the form of debt forgiveness equity interest and received an additional $7,850,000 from investors in exchange for a 21.5% equity interest. These receipts were partially offset by repayments of $800,565, $51,407 and $38,890 for notes payable and insurance financings, related party debt and capital leases, respectively. In 2008 the proceeds resulted from the issuance of new convertible notes of $5,627,500, proceeds from the issuance of convertible notes with related parties of $1,080,000 and proceeds from the exercise of warrants of $189,300 which were partially offset by repayments of notes due to related parties, notes and insurance financings and capital leases of $347,445, $390,646 and $34,238, respectively.

The Company manufactures the equipment which is purchased and utilized by EES. The costs incurred by the Company in manufacturing the equipment include component, labor and overhead related to the manufacturing process. EES reimburses the Company for these costs plus pays a fixed profit, which is eliminated in consolidation. Based upon the contractual minimum revenue of the Southwestern Energy Agreement, the EcosFrac™ units are anticipated to and have begun generating monthly revenue sufficient to produce positive cash flow to EES in 2010. The Company receives a monthly management fee from EES for the cost of management and overhead related to the manufacturing facility.

It is anticipated that the combination of the management fee and distributions from EES plus the reimbursement of costs to build additional equipment for EES, will be sufficient to support the working capital needs of the Company for at least the next 12 months.

This is based upon a number of key assumptions:

●	Continued generation of revenue by EES from our existing long term Agreements;

●	A new EES long-term Agreement from an existing or new customer through which Ecosphere generates manufacturing profits;

●	Favorable financing terms to enable Ecosphere to finance the manufacturing of new units needed for a new long-term Agreement;

●	New paid pilots throughout the 12 months;

●	Conversion of debt, as described below;

●	2010 distributions of profits and priority distributions from EES.

As of December 31, 2009, the Company had approximately $2.4 million of secured convertible original issue discount notes (“Notes”) with varying maturities over the next 11 months. These notes are all convertible at $0.36 per share. As of March 29, 2010, holders of Notes with an aggregate principal amount of $1,787,726 have converted their Notes into 4,965,904 shares of the Company’s common stock. If the remaining holders of these Notes do not elect to convert their debt into common stock of the Company or are not agreeable to extend the terms of their Notes, the Company may be required to seek additional equity or debt financing. If this occurs, there can be no assurances that the Company’s present cash flow will be sufficient to meet current and future obligations.

The Company anticipates the need for an additional $25 - $30 million in financing over the next twelve months in order to fund the building of additional EcosFrac™ and EcosBrine™ units to meet the growing demand for our services. Assuming we receive a significant long-term agreement from a customer, which agreement we are currently discussing. Management is currently exploring several financing alternatives including both debt and equity financing. However there can be no assurances that these alternatives will come to fruition or that if the Company needs to raise capital for working capital purposes, it will be successful.

The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern. There are no assurances that the Company will be able to achieve and sustain profitable operations or continue as a going concern.

RELATED PERSON TRANSACTIONS

For information on related party transactions and their financial impact, see Note 18 to the consolidated financial statements.

RESEARCH AND DEVELOPMENT

In accordance with ASC 730-10 – Research and Development expenditures for research and development of the Company's products are expensed when incurred, and are included in operating expenses. The Company recognized research and development costs of $97,389 and $1,090 for the years ended December 31, 2009 and 2008, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the SEC have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become non-authoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the year ended December 31, 2009.

As a result of the Company’s implementation of the Codification during the year ended December 31, 2009, previous references to new accounting standards and literature are no longer applicable. The current financial statements will provide reference to the new guidance only.

In May 2009, the FASB issued guidance on subsequent events. This guidance does not result in significant changes in the subsequent events that an entity reports in its financial statements. The guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This guidance was effective for the Company in the second quarter of 2009, and the required disclosure has been included in the consolidated financial statements. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

On January 1, 2009, the Company adopted new guidance and as a result evaluates its 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 GAAP. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (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 GAAP are reclassified to liability at the fair value of the instrument on the reclassification date. See Change in Accounting Principle for the impact of this guidance on the Company’s consolidated financial statements.

In May 2008, the FASB issued guidance which identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued guidance that requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The guidance will result in companies recognizing higher interest expense in the statement of operations due to amortization of the discount that results from separating the liability and equity components. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Through December 31, 2009, there was no impact of adopting this guidance on the Company’s consolidated financial statements.

In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under GAAP. This guidance was effective for fiscal years beginning after December 15, 2008. Through December 31, 2009, there was no impact of this guidance on the Company’s consolidated financial statements.

In March 2008, the FASB issued guidance that amends and expands the disclosure requirement for derivative instruments and hedging activities. It requires enhanced disclosure about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under GAAP, and (iii) how derivative instruments and related hedge items affect an entity’s financial position, financial performance, and cash flows. This guidance is effective for the Company as of January 1, 2009. Through December 31, 2009, there was no impact of this guidance on the Company’s consolidated financial statements.

On January 1, 2008, the Company adopted guidance that defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements. In February 2008, the Financial Accounting Standards Board (“FASB”) issued further guidance, which delays the effective date of this guidance for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Excluded from the scope of the guidance are certain leasing transactions accounted for under GAAP. The exclusion does not apply to fair value measurements of assets and liabilities recorded as a result of a lease transaction but measured pursuant to other pronouncements within the scope of this guidance. The Company adopted this guidance in the third quarter and has since that time presented the disclosure required by the guidance.

Forward Looking Statements

The statements in this report relating to the other applications for our Ecosphere Ozonix® technology, our estimates of demand for solutions that reduce water use and increase recycling, the impact of future government laws and regulations relating to fracturing on gas drilling, our belief our intellectual property portfolio will act as a barrier to competition, EES’ expansion in 2010 to supplying its Ecosphere Ozonix® technology to offshore drilling, our working capital needs over the next 12 months including the various assumptions we are relying upon, our future financing needs and the completion of any financings are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally, words such as “expects,” “anticipates,” “intends,” “believes,” “will” and similar words are used to identify forward-looking statements.

The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are the condition of the credit and financial markets, the effects of the global recession, our negative working capital and other factors contained in the Risk Factors that follow. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors and our other filings with the SEC.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors before deciding whether to invest in Ecosphere. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the risk factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline, and you might lose all or part of your investment.

Risk Factors Relating to Our Company

Our ability to continue as a going concern is in doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.

We incurred net losses applicable to common stock of approximately $18.4 million in 2009 and $11.8 million in 2008. We have a significant working capital deficiency, and have not reached a profitable level of operations, all of which raise doubt about our ability to continue as a growing concern. Our continued existence is dependent upon generating working capital. Working capital limitations continue to impinge on our day-to-day operations, thus contributing to continued operating losses.

If we do not generate positive cash flow and earnings or raise additional debt or equity capital, we will need to raise additional debt on equity and may not be successful.

At December 31, 2009, we had a working capital deficit of approximately $11.8 million and total indebtedness of $5.9 million. We presently have negative working capital and minimal cash although we generate revenue from our operations. Although we anticipate that over the next 12 months we will generate working capital, that assumption is based upon continuation of current revenues from our existing long-term agreements at the same rate, revenues from new customers including planned paid pilots, manufacturing profits from new units needed by EES, and EES conducting profitable operations in order to provide distributions to the Company. Because we are not currently generating positive cash flow or if we do not generate working capital over the next 12 months, we may need to sell debt or equity securities in the future. Because of the continuing decline in the economy in the United States and overseas, the substantial reduction in available credit and the severe decline in the stock market and our stock price, we maybe hampered in our ability to raise the necessary working capital. If we do not raise the necessary working capital, we may not be able to remain operational or we may have to scale back our operations.

If the current prices of natural gas remain at current low levels, energy companies may reduce their drilling operations in shale deposits, which could adversely affect the attractiveness of our Ecosphere Ozonix® business.

In early 2008, with high prices for natural gas, energy companies began profitably drilling in shale areas. These operations rely on enormous supplies of clean water. Much of the water used in drilling gas wells in shale areas flows back in a polluted state creating an opportunity for our Ecosphere Ozonix® business. Horizontal drilling in shale areas is very expensive; however, if prices for natural gas are high this expense can be justified. If current prices continue to decline, horizontal drilling may not be cost-effective and may adversely affected our Ecosphere Ozonix® business.

If we are unable to generate material service revenue, it will have an adverse effect upon our future results of operations.

We are presently relying upon revenue from our Ozonix® systems. While our revenue year-over-year is increasing, we still have negative cash flow. If we are unable to deploy additional Ecosphere Ozonix® systems, we will not derive material service revenue. In that event, our future results of operations and financial condition will be adversely affected. Like any new technology, repeat orders from a customer provide credibility for a technology and encourage other customers to consider using the technology. Until we receive a repeat order for the sale or long-term use of a material number of Ecosphere Ozonix® units, we expect that we will have negative cash flow.

If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.

The severe recession, freezing of the global credit markets and the decline in the stock market may adversely affect our ability to raise capital. Because we have not reported profitable operations to date on an annual basis if we fail to generate substantial revenue, we may need to raise working capital. If adequate additional financing is not available on reasonable terms or at all, we may not be able to undertake expansion, and we will have to modify our business plan accordingly.

Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments may dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.

Because our Ecosphere Ozonix® systems are designed to provide a solution which competes with existing methods; we are likely to face resistance to change, which could impede our ability to commercialize this business.

Our Ecosphere Ozonix® systems are designed to provide a solution to environmental challenges created by contaminated water. Specifically, we believe it can provide a solution to the disposal of wastewater in the oil and gas, marine, coal and other industries. Currently, large and well capitalized companies provide services in these areas. These competitors have strong relationships with their customers’ personnel, and there is a natural reluctance for businesses to change to new technologies. This reluctance is increased when potential customers make significant capital investments in competing technologies. Because of these obstacles, we may face substantial barriers to commercializing our business.

Because we commercialized our Ecosphere Ozonix® business in 2009, it is subject to all of the risks inherent in a new business.

Our Ecosphere Ozonix® business is brand new and is subject to a number of risks, including:

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Our ability to convince customers to use our services;

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Our ability to finance the units;

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Our ability to operate units that are built; and

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Our ability to manage the operations of our Ecosphere Ozonix® systems at multiple locations.

If we do not achieve broad market acceptance of our clean technology products, we may not be successful.

Although all of our products and services serve existing needs, our delivery of these products and services is unique and subject to broad market acceptance. As is typical of any new product or service, the demand for, and market acceptance of, these products and services are highly uncertain. We cannot assure you that any of our products and services will be commercialized on a widespread basis. The commercial acceptance of our products and services may be affected by a number of factors, including the willingness of operators in the natural gas industry and in other industries to use the Ecosphere Ozonix® system for wastewater.

If the markets for our products and services fail to develop on a meaningful basis, if they develop more slowly than we anticipate or if our products and services fail to achieve sufficient market acceptance, our business and future results of operations could be adversely affected.

If chemical companies engage in predatory pricing, we may lose customers, which could materially and adversely affect us.

In the gas drilling business, energy companies traditionally have used chemicals to clean the water used to fracture wells by destroying bacteria and metal residues. The chemical companies represent our most significant competitive factor. The chemical companies who supply chemicals to gas drillers may, in order to maintain their business relationship with drillers drastically reduce their price and seek to undercut the pricing at which we can realistically charge for our services. While predatory pricing that is designed to drive us out of business may be illegal under the United States anti-trust and other laws, we may lose customers as a result of any future predatory pricing and be required to file lawsuits against any companies who engage in such improper tactics. Any such litigation may be very expensive which will further impact us and affect their financial condition. As a result, predatory pricing by chemical companies could materially and adversely affect us.

Our growth strategy reflected in our business plan may not be achievable or may not result in profitability.

Our growth strategy reflected in our business plan may not be able to be implemented at all or rapidly enough for us to achieve profitability. Our growth strategy is dependent on several factors, such as our ability to respond to the technological needs of our customers and others in the markets in which we compete and a degree of market acceptance of our products and services. We cannot assure you the potential customers we intend to target will purchase our products or services in the future or that if they do, our revenues and profit margins will be sufficient to achieve profitability.

Because of the severity of the global economic recession, our customers may delay in paying us or not pay as at all. This would have a material adverse effect in our future operating results and financial condition.

One of the effects of the severe global economic recession is that businesses are tending to maintain their cash reserves and delay paying their creditors whenever possible. As a trade creditor, we lack the leverage which secured lenders and providers of essential services have. If the economy continues to deteriorate, we may find that our oil and gas customer and our future customers may delay in paying us. This could result in a number of adverse effects upon us including increasing our borrowing costs, reducing our profit margins, severely impacting liquidity and reducing our ability to grow our business which could have a material adverse affect on Ecosphere.

Because our operating results have and may continue to fluctuate dramatically, particularly from quarter to quarter, investors should not rely upon our results in any given quarter as being part of a trend.

In the past, our quarterly operating results fluctuated and may continue to do so in the future as a result of a number of factors, including the following:

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Our receipt of orders from existing and new customers;

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The availability of components from our suppliers for Ecosphere Ozonix® systems;

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Operating results from our Ecosphere Ozonix® units and the announcement of future agreements for our Ecosphere Ozonix® units;

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Our raising necessary working capital and any associated costs which will be charged as expenses to our future results of operations;

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Our continuing to develop new technologies;

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Pricing pressures;

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General economic and political conditions;

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Our sales of assets similar to the October 2007 sale of the intellectual property and related assets of our ship stripping technology;

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Our ability to develop a working prototype of our Ecos LifeLink and market it in third world countries; and

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Our sales or licensing of our technologies in inventory.

As a result of these and other factors, we have experienced, and may continue to experience, fluctuations in revenues and operating results. As a consequence, it is possible that fluctuations in our future operating results may cause the price of our common stock to fall.

If we cannot manage our growth effectively, we may not become profitable.

Businesses which grow rapidly often have difficulty managing their growth. We have been growing rapidly. If this growth continues, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost.

Because we are pursuing a strategy of developing markets for our products internationally which subject us to risks frequently associated with international operations, we may sustain large losses if we cannot deal with these risks.

Our business plan includes seeking to develop market opportunities overseas including third world countries where the market for our new Ecosphere Ozonix® process is much larger than in the United States. If we are able to successfully develop international markets, we would be subject to a number of risks, including:

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Changes in laws or regulations resulting in more burdensome governmental controls, tariffs, restrictions, embargoes or export license requirements;

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Laws which require that local citizens or residents own a majority of a business;

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Difficulties in obtaining required export licenses;

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Volatility in currency exchange rates;

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Political and economic instability;

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Extended payment terms beyond those customarily offered in the United States;

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Difficulties in managing distributors or representatives outside the United States; and

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Potentially adverse tax consequences.

If we cannot manage these risks, we may sustain large losses.

Because our business model is centered on partnering with third parties, we will not be able to control key aspects of the commercialization of our business, which can adversely affect our future results of operations.

We are not, and do not intend to, actively commercialize our Ecosphere Ozonix® technology or expand outside of the energy business overseas. Rather, in order to reduce operating costs, we intend to focus on licensing our intellectual property to third-party operators. By doing so, we lose the power to control day-to-day operations. If these third parties do not exploit the licenses effectively, our ability to penetrate markets and our future revenue will be adversely affected.

If we lose the services of key personnel, it could adversely affect our business.

Our future success is dependent upon our Chief Executive Officer and President, Dennis McGuire. Mr. McGuire has played a significant role in inventing and developing our technologies has also provided the necessary drive and vision. The loss of the services of Mr. McGuire could have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that he will remain with us in the future due to circumstances either within or outside of our control. We do not have any key man life insurance covering the life of Mr. McGuire.

If we are unable to protect our proprietary technology, our business could be harmed.

Our intellectual property including our patents is our key asset. In addition to our existing patents, we have filed United States patent applications covering certain technologies. If one or more patents are not issued by the United States, the value of our other technologies could be materially reduced. Competitors may also be able to design around our patents and to compete effectively with us. The cost to prosecute infringements of our intellectual property or the cost to defend our products against patent infringement or other intellectual property litigation by others could be substantial. We cannot assure you that:

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Pending and future patent applications will result in issued patents;

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Patents we own or which are licensed by us will not be challenged by competitors;

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The patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage; and

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We will be successful in defending against future patent infringement claims asserted against our products.

Risks Related to Our Common Stock

Because the market for our common stock is limited, persons who purchase our common stock may not be able to resell their shares at or above the purchase price paid by them.

Our common stock trades on the Bulletin Board which is not a liquid market. Until 2010 there was only a limited public market for our common stock. We cannot assure you that an active public market for our common stock will continue in the future. If an active market for our common stock is not sustained, the price may continue to decline.

Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the Bulletin Board has been substantially less than $5.00 per share and therefore we are currently considered a “penny stock” according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.

These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.

Due to factors beyond our control, our stock price may be volatile.

Any of the following factors could affect the market price of our common stock:

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Our failure to generate increasing revenues;

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Short selling activities;

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Our failure to achieve and maintain profitability;

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Actual or anticipated variations in our quarterly results of operations;

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Announcements by us or our competitors of significant contracts, new products, acquisitions, commercial relationships, joint ventures or capital commitments;

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The loss of major customers or product or component suppliers;

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The loss of significant business relationships;

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Our failure to meet financial analysts’ performance expectations;

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Changes in earnings estimates and recommendations by financial analysts; or

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Changes in market valuations of similar companies.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.

We may issue preferred stock without the approval of our shareholders, which could make it more difficult for a third party to acquire us and could depress our stock price.

Our Board may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per share. This could permit our Board to issue preferred stock to investors who support our management and give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock. This could make it more difficult for shareholders to sell their common stock. This could also cause the market price of our common stock shares to drop significantly, even if our business is performing well.

If the holders of our outstanding warrants and options exercise their securities into common stock, we will issue up to 85,427,727 shares , which will materially dilute the voting power of our currently outstanding common stock and possibly change control of Ecosphere.

As of March 29, 2010, we have 123,708,277 shares of our common stock outstanding. We have 30,749,114 warrants to purchase shares of common stock and 48,081,197 stock options. If the holders of the securities described in this risk factor exercise their securities into common stock, it will materially dilute the voting power of our outstanding common stock and may change the control of our company.

An investment in Ecosphere will be diluted in the future as a result of the issuance of additional securities, the exercise of options or warrants or the conversion of outstanding preferred stock.

In order to raise additional capital to fund its strategic plan, we may issue additional shares of common stock or securities convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to investors. We cannot assure you that we will be successful in raising additional capital.

Because our management and employees do not solely by virtue of their ownership of our common stock control Ecosphere, it is possible that third parties could obtain control and change the direction of our business.

Our officers, directors and one employee own 9,152,681 shares of our common stock or 7% of the shares actually outstanding. By including shares of common stock which are issuable upon exercise of outstanding options and warrants held by them, they beneficially own 33,753,921 shares or 22.8%. If all of our equity equivalents are exercised, we would have 209,598,510 shares outstanding. For that reason, a third party could obtain control of Ecosphere and change the direction of our business.

Since we intend to retain any earnings for development of our business for the foreseeable future, you will likely not receive any dividends for the foreseeable future.

We have not and do not intend to pay any dividends in the foreseeable future, as we intend to retain any earnings for development and expansion of our business operations. As long as our three-year senior convertible debentures remain outstanding, we cannot pay any dividends. As a result, you will not receive any dividends on your investment for an indefinite period of time.

Because almost all of our outstanding shares are freely tradable, sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.

As of the date of this report, we had outstanding 123,708,277 shares of common stock of which our directors and executive officers own approximately 2.3 million shares which are subject to the limitations of Rule 144 under the Securities Act. Most of the remaining outstanding shares, including a substantial amount of shares issuable upon exercise of options, are and will be freely tradable.

In general, Rule 144 provides that any non-affiliate of Ecosphere, who has held restricted common stock for at least six-months, is entitled to sell their restricted stock freely, provided that we stay current in our SEC filings. After one year, a non-affiliate may sell without any restrictions.

An affiliate of Ecosphere may sell after six months with the following restrictions:

(i)	we are current in our filings,

(ii)	certain manner of sale provisions,

(iii)

filing of Form 144, and

Because almost all of our outstanding shares are freely tradable and a number of shares held by our affiliates may be freely sold (subject to Rule 144 limitation), sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.

Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.

It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we acquire additional capital.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable for smaller reporting companies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See pages F-1 through F-51.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES.

Not applicable.

ITEM 9A(T). CONTROLS AND PROCEDURES.

Disclosure Controls

We carried out an evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934, or the Exchange Act, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a–15(e). Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in an issuer's reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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

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

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.

This report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we engaged our independent registered public accounting firm to perform an audit on our internal control over financial reporting pursuant to the rules of the SEC that permit us to provide only management’s report in this report.

Changes in Internal Control Over Financial Reporting

During our most recent fiscal quarter, there has not been any change in our internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f) that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The following is a list of our directors. All directors serve one-year terms or until each of their successors are duly qualified and elected.

Name	Age
Charles Vinick	63	Chairman of the Board
Joe Allbaugh	57	Director
Gene Davis	56	Director
Michael Donn, Sr.	62	Director
D. Stephen Keating	54	Director
George Sterner	69	Director
Thomas Wolfe	62	Director

Charles Vinick was appointed a director in August 2006 and has served as the Chairman of the Board since December 22, 2009. He serves as Director of Business Development and Government Relations for Dehlsen Associates, a renewable energy technology development firm in Carpinteria, Carlifornia. Mr. Vinick has more than 25 years of experience directing and managing non-profit organizations and programs. From June 2005 through August 2007, he was the President and Chief Executive Officer of the Alliance to Protect Nantucket Sound. He served as Chief Executive Officer of the Foundation for Santa Barbara City College from June 2004 through May 2005 and as Vice President of Fritz Institute from October 2003 to April 2004. Mr. Vinick was Executive Vice President of the Ocean Futures Society from its founding in 1998 through September 2003. Including the Ocean Futures Society, Mr. Vinick has previously held executive positions for over 20 years with organizations headed by Jacques or Jean-Michel Cousteau. Mr. Vinick was selected as a director due to his long relationship with the Cousteau family, his commitment to the environment, and his business experience and judgment.

Joe Allbaugh was appointed a director in October 2005. Mr. Allbaugh has been the managing member of The Allbaugh Company LLC, a strategic consulting firm, since approximately March 2003. From September 2006 to May 15, 2007, Mr. Allbaugh was the president of our subsidiary, Ecosphere Systems. Mr. Allbaugh was Director of the Federal Emergency Management Agency, Inc. from February 2001 to March 2003, and in 1999 was made the National Campaign Manager of Bush-Cheney 2000. In addition, Mr. Allbaugh was Chief of Staff to President George W. Bush from 1995 through 1999 when he was Governor of Texas. Mr. Allbaugh was selected as a director because his relationships could potentially assist us in growing our business and he had administrative experience managing large organizations.

Gene Davis was appointed a director in August 2008. Since 2008, Mr. Davis has been employed as Vice President/General Manager of the Denver Region for NFR Energy, LLC, an independent oil and gas production company headquartered in Houston, TX. He manages the staff and producing assets of the company in Colorado, Utah, North Dakota and Montana. From December 2004 to March 2008, Mr. Davis was the Geological and Geophysical Manager for the Western Business Unit of Forest Oil Corp. where he evaluated and implemented drilling programs. From July 2004 until December 2004, Mr. Davis was a Project Geologist for EOG Resources Inc. From September 2000 to July 2004, he was an Exploration Geologist for Chi Energy, Inc. Mr. Davis has over 28 years of executive geoscience and asset management, successful exploratory and development geology and geophysics experience. Mr. Davis was selected as a director because of his extensive experience in the energy business and his ability to provide valuable insight to our management.

Michael Donn, Sr. was appointed a director in March 2005 and was appointed our Chief Operating Officer on March 27, 2008. Mr. Donn has held a number of senior executive positions with us since January 2000. As part of his duties, Mr. Donn set up and coordinated our relief effort in Waveland, Mississippi following Hurricane Katrina. Mr. Donn was the Project Manager for Ecosphere’s EPA Verification testing of its Water Filtration System. From November 2006 until January 29, 2010, Mr. Donn was a director of GelTech Solutions, Inc. He also served on the Audit Committee of GelTech. From 1994 to 2000, he served as President of the Miami-Dade County Fire Fighters Association, a 1,700-member employee association for which he previously served as Vice President and Treasurer beginning in 1982. His responsibilities included negotiating, lobbying at the local, state and national levels and head of the business operations for the Association. He was also Chairman of the Insurance Trust. Following Hurricane Andrew, Mr. Donn coordinated the fire fighter relief efforts for the Miami-Dade fire fighters. He is the brother of our Senior Vice President of Administration, Jacqueline McGuire, and the brother-in-law of our President and Chief Executive Officer, Dennis McGuire. Mr. Donn was selected as a director because of his administrative experience with the firefighters union and has remained as a director as a representative of management.

D. Stephen Keating was appointed a director in August 2008. Since December 2008, Mr. Keating has served as the Vice President of Taxes at Crocs, Inc. Mr. Keating served as the Vice President of the Worldwide Taxes for CA, Inc. from 1988 through June 2008. Mr. Keating was the senior officer responsible for the worldwide tax, which included tax planning and strategy, tax accounting and day-to-day supervision for the U.S. and international tax departments. At CA, Inc., Mr. Keating was involved with approximately 100 mergers, acquisitions and divestitures. Additional responsibilities included negotiating with the IRS and various countries tax authorities on audit issues and APA reports. Mr. Keating was selected as a director due to his extensive executive experience and his accounting and tax knowledge.

Vice-Admiral George Sterner, USN, (Retired) was appointed a director in March 2002. Vice-Admiral Sterner was our Chairman of the Board from March 2005 until March 1, 2008. Vice-Admiral Sterner was Vice President, Strategic Pursuits for Raytheon Company until his retirement in late 2005. His naval career spanned 36 years and included command of two nuclear submarines. Prior to his retirement from the United States Navy in 1998 he commanded the Naval Sea Systems Command where he had oversight of the design, construction and life cycle support of all Navy ships. Vice-Admiral Sterner was selected as a director due to his achievements with the United States Navy, together with his executive, administrative and organizational skills.

Thomas Wolfe was appointed a director in August 2008. Since July 2008, Mr. Wolfe has been the Vice President of Software at Toray Membrane. From December 2006 through July 2008, Mr. Wolfe was the Chief Technology Officer and Senior Vice President of R&D of Open Energy Corporation. In 1998, Mr. Wolfe founded WaterEye Corporation where he served as its President and Chief Executive Officer and until WaterEye was acquired by Open Energy in December 2006. Mr. Wolfe has over 25 years’ experience in the chemical process industries, with particular experience in power, water and wastewater treatment technologies. Mr. Wolfe is one of the pioneers in the reverse osmosis field and has made many contributions to the development and advancement of reverse osmosis membrane technology and wastewater evaporation technology dating back to the early 1970’s. He has participated at all levels in some of the largest membrane and evaporator installations in the world and has hands on experience with a wide variety of evaporator configurations including vapor recompression, steam driven single and multiple effect systems, as well as direct contact and submerged combustion processes. Mr. Wolfe developed much of the software currently in use today for reverse osmosis membrane performance prediction and computational chemistry for recovery determination and scale control.

Mr. Wolfe has authored more than 20 technical articles and papers in his various fields of involvement and is a member of the American Chemical Society and the American Water Works Association. Mr. Wolfe was selected as a director because of his expertise with water and water recycling.

Executive Officers

The following is a list of our executive officers. The executive officers are elected by our Board.

Name	Age
Dennis McGuire	59	Chief Executive Officer and President
Adrian Goldfarb	52	Chief Financial Officer
Michael Donn, Sr.	62	Chief Operating Officer
Jacqueline McGuire	47	Senior Vice President of Administration and Secretary

Dennis McGuire is our Chief Executive Officer and President. Mr. McGuire was appointed President and Chief Executive Officer of Ecosphere on September 28, 2005. From November 12, 2008 until August 1, 2009, Mr. McGuire was the Chief Technology Officer of Ecosphere. From June 17, 2008 until November 12, 2008, Mr. McGuire was the Co-Chief Executive Officer of Ecosphere, sharing the role with Mr. Patrick Haskell. Mr. McGuire was a founder of Ecosphere together with his wife Jacqueline. He also is the inventor of all of our intellectual property. From 2000 through October 3, 2003, he served as our Chief Technology Officer and Director of Sales, and served as a consultant from October 3, 2003 until he became an employee on October 1, 2005. Mr. McGuire was appointed our Chief Technology Officer in April 2005, which post he held until August 2, 2005, when he became Executive Vice President of Business Development and Technology.

Adrian Goldfarb has been our Chief Financial Officer since February 11, 2008. From December 2007 Mr. Goldfarb was the President of WSR Consulting, Inc. (“WSR”), a consulting services company that currently provides accounting and operational management to us. From February 11, 2008 through December 20, 2008, WSR also provided Chief Financial Officer service to us and Mr. Goldfarb was a consultant. Since December 20, 2008, he has been a full-time employee. From June 2002 to December 2007, Mr. Goldfarb was on the Board of Directors of MOWIS GmbH, a Weather Technology Media company. He also was interim Chief Financial Officer where he led the management team in securing seed capital, government grants and loans and bank guarantees. Mr. Goldfarb has more than 25 years’ experience in a number of different technology companies, including IBM and a subsidiary of Fujitsu.

See above for Mr. Donn’s biography.

Jacqueline McGuire has been our Senior Vice President of Administration since January 2001 and Secretary since our founding in 1998. She and her husband Dennis, our Chief Executive Officer, were two of our founders.

Key Employees.

The following is a list of key employees of Ecosphere and EES.

Name	Age	Position(s)
Sanjeev Jahkete	41	Senior Vice President of Engineering
Aaron Horn	31	President of EES
Robert Cathey	33	Chief Operating Officer of EES

Sanjeev Jahkete has served as our Senior Vice President of Engineering since 2008 and has been employed with Ecosphere since 2004. Mr. Jahkete co-invented the Ecosphere Ozonix® process with our founder, Dennis McGuire. Mr. Jahkete served as a team leader for Ecosphere’s EPA Verification testing of its water filtration system. Mr. Jahkete led Ecosphere’s deployment of the water filtration system in Waveland, Mississippi following Hurricane Katrina.

Aaron Horn has served as the President of EES since August 2009. From May 2008 to August 2009, Mr. Horn served as an Operational Engineer for Newfield in the Woodford Shale with a special emphasis on water management. Mr. Horn has served on several industry water committees and authored an Society of Petroleum Engineers paper on water management in Shale Plays. Mr. Horn graduated from the U.S. Military Academy with a degree in engineering. He then served in the U.S. Army from 2001 through 2007, rising in rank from 2nd Lieutenant in 2001 to Captain in 2005.

Robert Cathey has served as the Chief Operating Officer and Senior Vice President and Chief Operating Officer of EES since July 2009. Mr. Cathey joined Ecosphere in December 2008 as our Vice President, Natural Gas Field Operations. He worked for Carrier Sales and Distribution from April 2007 to December 2008 as Operations Manager for their North Texas and Oklahoma business units. After graduating the U.S. Military Academy at West Point with a degree in American Legal Systems / Systems Engineer, Mr. Cathey served in the U.S. Army from June 2001 through April 2007, rising in rank from Knight Platoon Leader (Reconnaissance) in 2001 to Battalion Assistant Operations Officer in 2007.

Corporate Governance

Board Responsibilities and Structure

The Board oversees, counsels, and directs management in the long-term interest of Ecosphere and its shareholders. The Board’s responsibilities include establishing broad corporate policies and reviewing the overall performance of Ecosphere. The Board is not, however, involved in the operating details on a day-to-day basis.

Board Committees and Charters

The Board and its Committees meet throughout the year and act by written consent from time-to-time as appropriate. The Board delegates various responsibilities and authority to different Board Committees. Committees regularly report on their activities and actions to the Board. The Board currently has and appoints the members of: the Audit Committee and the Compensation Committee. The Audit Committee has a written charter approved by the Board.

The following table identifies the independent and non-independent current Board and Committee members:

Name	Independent	Audit	Compensation
Joe Allbaugh	P		P