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UNITED STATES

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2011

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: 333-91436

ECOLOGY COATINGS, INC.

(Exact name of registrant as specified in its charter)

Nevada	26-0014658
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

24663 Mound Road, Warren, MI  48091

(Address of principal executive offices) (Zip Code)

(586) 486-5308

(Registrant’s telephone number)

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

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, $0.001 par value	OTCQB
(Title of class)	(Name of exchange on which registered)

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

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes o No x

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

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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     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 of this Form 10-K.  □

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.

Large accelerated filer  □                       Accelerated filer  □

Non-accelerated filer  □                         Smaller reporting company  x

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

As of March 31, 2011, approximately 1,625,677 shares of our common stock, par value $0.001 per share, were held by non-affiliates, which had a market value of approximately $260,108 based on the available OTCQB closing price of $.15 per share on December 8, 2011.

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 30, 2011, the number of shares of common stock of the registrant outstanding was 16,158,506 and the number of shares of convertible preferred stock outstanding was 1,988.

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FORM 10-K

ECOLOGY COATINGS, INC.

SEPTEMBER 30, 2011

TABLE OF CONTENTS

	PART I	Page
ITEM 1	Description of Business	5
ITEM 1A.	Risk Factors	10
ITEM 1B.	Unresolved Staff Comments	17
ITEM 2.	Properties	17
ITEM 3.	Legal Proceedings	17
ITEM 4.	[Removed and Reserved]	18
	PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
ITEM 6.	Selected Financial Data	20
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	25
ITEM 8.	Financial Statements and Supplementary Data	25
ITEM 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	25
ITEM 9A.	Controls and Procedures	25
ITEM 9B.	Other Information	26
	PART III
ITEM 10.	Directors, Executive Officers, and Corporate Governance	26
ITEM 11.	Executive Compensation	30
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	36
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	38
ITEM 14.	Principal Accountant Fees and Services	40
ITEM 15.	Exhibits and Financial Statement Schedules	41
	Signature Page	44

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PART I

Except for statements of historical fact, the information presented herein constitutes forward-looking statements. These forward-looking statements generally can be identified by phrases such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “foresees,” “intends,” “plans,” or other words of similar import.  Similarly, statements herein that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, but are not limited to, our ability to: successfully commercialize our technology; generate revenues and achieve profitability in an intensely competitive industry; compete in products and prices with substantially larger  and better capitalized competitors; secure, maintain and enforce a strong intellectual property portfolio; attract additional capital sufficient to finance our working capital requirements, as well as any investment of plant, property and equipment; develop a sales and marketing infrastructure; identify and maintain relationships with third party suppliers who can provide us a reliable source of raw materials; acquire, develop, or identify for our own use, a manufacturing capability; attract and retain talented individuals; continue operations during periods of uncertain general economic or market conditions, and; other events, factors and risks previously and from time to time disclosed in our filings with the Securities and Exchange Commission, including, specifically, the “Risk Factors” enumerated herein.

Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on our forward-looking statements, which speak only as of the date of this report.  Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

“Ecology”, “we”, “us”, or “our” refer to Ecology Coatings, Inc. and its wholly-owned subsidiary, Ecology Coatings, Inc., a California corporation.

ITEM 1.   DESCRIPTION OF BUSINESS

Ecology Coatings, Inc. (“Ecology-CA”) was originally incorporated in California on March 12, 1990.  OCIS Corp. (“OCIS”) was incorporated in Nevada on February 6, 2002.  OCIS completed a merger with Ecology-CA on July 27, 2007 (the “Merger”).  In the Merger, OCIS issued approximately 6,106,137 shares of common stock to the Ecology-CA stockholders.  In this transaction, OCIS changed its name from OCIS Corporation to Ecology Coatings, Inc. and our ticker symbol on the OTC Bulletin Board association changed to “ECOC.”  As a result of the merger, we became a Nevada corporation and Ecology-CA became a wholly owned subsidiary.

Company Overview

We develop “clean tech”, EcoBloc™ enabled, ultra-violet (“UV”) curable coatings that are designed to drive efficiencies, reduce energy consumption, create new performance characteristics and virtually eliminate pollutants in the manufacturing sector.  We create proprietary coatings with unique performance and environmental attributes by leveraging our platform of integrated clean technology products that reduce overall energy consumption.

Our patent and intellectual property activities to date include:

● seven patents covering elements of our technology from the United States Patent and Trademark Office (“USPTO”)

● five European validations of European patent EP 1723180

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● one PCT international patent application

● three trademarks issued by the USPTO – “EZ Recoat™”, “Ecology Coatings™” and “Liquid Nanotechnology™”

● 200+ proprietary coatings formulations.

We continue to work independently on further developing our clean technology products. Our target markets include electronics, steel, construction, automotive and trucking, paper and packaging products and original equipment manufacturers (“OEMs”).  Our business model contemplates both licensing and direct sales strategies.  We intend to license our technology to industry leaders in our target markets, through which products will be sold to end users.  We plan to use direct sales teams and third party agents in certain target markets, such as OEMs, and third party distributors in broad product markets, such as paper products, to develop our product sales.

Business in General

We have focused on developing products that support inexpensive mass production utilization of protective coatings that are cured under UV light. Some of our coatings include nano-particles for improved performance.  We believe that our coatings represent a paradigm shift in coatings technology.   We have strived for technological breakthroughs.  We have developed over 200 individual coating formulations that we believe address the limitations of traditional coatings.  The USPTO has issued seven patents and has allowed a eighth covering many of these formulations as well as their application.  Additionally, we have taken actions so that the formulations that are not currently patent protected are protected as trade secrets.

Nearly every manufactured product has a protective coating on it, including metal, plastic, glass or electronic products.  These coatings are important for providing protection, such as scratch and abrasion resistance, as well as for enabling added durability and maintenance of the overall aesthetic appearance of the product.  Coatings that use water or organic carriers remain the standard in the large OEM coatings market.  However, the use of traditional, carrier-based coatings continues to burden manufacturers with cost, performance, and environmental health and safety disadvantages.

Our coatings are 100% solids and UV curable.  They contain almost no volatile carriers and are generally comprised of polymers that react to UV light, all of which becomes part of the final coating bound to the substrate.  Thus, our coatings are environmentally sustainable.  Traditional coatings, such as paint, are composed of a solid resin and a carrier, such as an organic solvent or water, used to adjust the viscosity to allow application.  Thus, during the curing process the carrier evaporates either by application of heat or air-drying, both of which require time to complete the process.  Moreover, the evaporation of the carrier can generate environmentally harmful airborne emissions.

Our Solution - Clean Technology

Our 100% solids UV-cured clean technology addresses limitations of conventional coatings and provides unique performance combinations.  We have developed over 200 specific individual coating formulations that address the limitations of traditional carrier-based coatings. Our coatings cure in less than a minute after application without the use of heat.  This changes the manufacturing dynamic in six ways.  First, some of our coatings are bio-based using components that are generally recognized as safe for human consumption allowing them to come in direct contact with food.  Second, the use of UV curing eliminates the need for thermal heating equipment and/or drying space, allowing manufacturers to use less floor space.  Third, the elimination of thermal heating from the manufacturing process produces dramatic energy cost savings.  Fourth, the use of 100% solids results in fewer harmful airborne emissions being released during production or application. Fifth, in metal applications, UV curing eliminates the bottleneck effect and makes product disassembly unnecessary, increasing the speed with which coated products are produced.    Sixth, a crucial advantage of our products is that they are more cost effective than conventional coatings.  Our 100% solid coatings offer increased efficiency and result in minimal wasted product - if a manufacturer needs one mil of dry film thickness, it need only apply and cure one mil of our coating.

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Cleantech Products

Paper & Film – Our paper, film and packaging coatings provide:

· The substitution of lower cost paper instead of expensive and non-recyclable plastic.  EcoQuick™ coated paper can replace polymer laminates on paper, labels and packaging.

· High speed curing – seconds, not minutes- compatible with high speed print operations e.g. 400 feet per minute for use on flexographic, digital and gravure printed labels and packaging.

· Barrier protection – revolutionary thin film properties with tremendous resistance to water, gas and chemical barriers and low oxygen transmission.

· Nanotechnology-enhanced formulations provide coating performance including superior adhesion and abrasion resistance.

Metals - Our metal coatings provide:

· The UV curing process uses 80 percent less energy, reduces manufacturing floor space needs by up to 80 percent, and eliminates curing bottlenecks.

· High speed curing – seconds compared to minutes for heat-cured solvent-based and powder coatings.

· Barrier protection –Unique thin film properties such as water and chemical resistance, and low oxygen transmission reducing corrosion.

· EcoBloc™ enhanced formulations provide unique coating performance including superior adhesion to difficult-to-adhere-to metals with improved scratch resistance.

· Increases manufacturing productivity since UV curing uses no heat; so complex products containing metal parts with rubber gaskets do not need to be disassembled prior to the coating and curing.

· Reduces and/or eliminates EPA compliance burden and cost.

Plastics - Our coatings have improved hardness and abrasion resistance over conventional carrier-based coatings.  The coatings are also noteworthy for their ability to achieve either optical clarity or accept pigments.  Based on laboratory tests, we believe our formulations offer excellent adhesion to many common plastics, such as polycarbonate.

Glass - Our UV curable glass coatings product has achieved solid optical clarity in both high and low viscosity formulations that have significant thermal conductivity.  The product also offers adhesion between separate glass products that is less breakable than a single layer product.  Potential applications for this technology include electronics and visible light consumer products.

Electronics - Our coatings do not contain water or organic solvents that may damage delicate electronic components.  Moreover, these coatings are also UV curable and may be applied and cured without thermal shock to the substrate. We believe this technology also offers potential for various electronics applications, including RFIDs

Medical - We have successfully developed a flexible, urethane based coating used to bond metal and plastic parts for use on a cardiovascular device.

License Arrangements

We have not yet been successful in generating substantial licensing or sales revenue and our coatings have been incorporated into only a few manufacturers’ products.  Many of our potential customers require extensive performance tests of our technology which can take several years to complete.   In addition, some potential customers are concerned about our long-term financial viability.  Licenses signed with DuPont in 2004 and Red Spot in 2005 have not generated any royalties.  We signed a non-exclusive license with BASF Coatings GmbH in November 2011 for the use of four of our patents worldwide. BASF Coatings GmbH has the right to sub-license its rights in these patents.  We are unable to make predictions regarding the timing and size of any future royalty payments and/or product sales.  

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Marketing Strategy

Our target markets include paper, film and packaging, electronics, automotive and trucking, health care and OEMs.  Our business model contemplates both a licensing strategy and direct sales strategy.  We intend to license our technology to industry leaders in the electronics, steel, construction, automotive and medical applications markets, through which our product will be sold to end users.  We plan to use direct sales teams in certain target markets, such as OEMs, and third party distributors in broad product markets, such as paper products, to develop our product sales. Thus, our key promotional activities may include:

• Attendance and technical presentations at industry trade shows and conventions;

• Internal and external sales forces, with a force of industry-specific sales people who will identify, call upon and build ongoing relationships with key purchasers and targeted industries;

• Fostering joint development agreements and other research arrangements with industry leaders and third party consortiums;

• Print advertising in journals with specialized industry focus;

• Web advertising, including supportive search engines and Web site registration with appropriate sourcing entities;

• Public relations, industry-specific venues, as well as general media, to create awareness of us and our products. This will include membership in appropriate trade organizations; and

• Brand identification through trade names associated with us and our products.

Sales Strategy

To date, we have conducted all of our business development and sales efforts through our senior management team who are active in other roles.  In fiscal year 201l, we added two salespeople and one product development person to our staff.  We intend to build dedicated sales, marketing, and business development teams to sell our products.  Our initial focus will be either the direct sales of our products to end users and/or the formation of joint venture arrangements with established market participants through which our products will be sold.  We also intend to engage in strategic licensing activities targeted at key markets.  Eventually, we hope to also use strategic external sales forces who can extend the reach of our marketing efforts.

Our sales cycle is often longer than one year.   The sales process begins with the identification of potential customers in selected markets. If the customer is interested, the customer will generally send application samples to us for initial analysis and testing.  We then coat the application samples using our product. Provided we are able to demonstrate the efficacy of our product on the application sample to the customer, the customer will then perform extended durability tests.  In most cases, we are unable to exert any control or influence over the durability test. Upon conclusion of the durability test, we plan to work with the customer while it decides whether to purchase our product.   We did not generate any significant sales revenues in fiscal year 2011.

In some cases, the potential customer will have to modify its coating production line to add UV curing to replace its thermal curing equipment.  We plan to work with the customer to assist in the transition of its traditional coating operations to our technology.  We expect that the customer’s resistance to change, costs, access to capital, and payback on investment will be factors in its decision to adopt our technology.

Fiscal Year 2012 Goals

     Our fiscal year 2012 goals are to generate new sources of revenue from licensing and product sales and to raise additional capital.

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Competition

The industrial coatings industry is extremely competitive.  There are several hundred sources in the United States of conventional paints and coatings for general metal use, including major sources such as Akzo Nobel, PPG, Sherwin-Williams and Valspar, who also offer UV coatings primarily for flooring, graphics, paper and container lithography applications.  Direct competition comes from a variety of UV-cure producers such as Allied Photochemical, Rad-Cure (Altana Chemie), BASF, Red Spot (Fujikura), R&D Coatings, Northwest (Ashland),  DSM Desotech, Prime and other small sources.  Although certain of these competitors offer 100% solids products, our product technology is unique as demonstrated by our patents and trade secrets.

Competitive factors in this industry include ease of use, quality, versatility, reliability, and cost.  Our primary competitors include companies with substantially greater financial, technological, marketing, personnel and research and development resources than we currently have.  We might not be able to compete successfully in this market.  Further, existing and new companies may enter the industrial coatings markets in the future.

Intellectual Property

Our ability to compete effectively will depend on our success in protecting our proprietary technology, both in the United States and abroad.  Our patent and intellectual property activities to date include:

· Seven patents covering elements of our technology from the United States Patent and Trademark Office (“USPTO”)

· Five European validations of European patent EP 1723180.

· One PCT international patent application

· Three trademarks issued by the USPTO – “EZ Recoat™”, “Ecology Coatings™” and “Liquid Nanotechnology™”

· 200+ coatings formulations.

The USPTO has issued all patents to Sally J.W. Ramsey, our founder and Vice President for New Product Development, which she irrevocably assigned to us.

We have taken actions to protect our formulations under trade secret laws.

It is possible that no additional patents relating to our existing technology will be issued from the United States or any foreign patent offices, or that we will not receive any patents in the future based on our continued development of our technology, or that our patent protection within and/or outside of the United States will not be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.   In addition to seeking patent protection, we will rely on trade secrets, know-how and continuing technological advancement to seek to achieve and thereafter maintain a competitive advantage.  Although we have entered into or intend to enter into confidentiality agreements with our employees, consultants, advisors, and other third parties that we are engaged with, we cannot be certain that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how.  Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.

Research and Development

Most of our efforts are focused on inventive research to discover new ways to coat substrates using UV curing.  Those efforts resulted in a variety of new UV cured coatings and patents and patent applications to protect those inventions.  Since 2007 most of our commercialization efforts are related to the application of our cumulative expertise to a different array of substrates for specific customer applications.  By working closely with potential customers, we believe we position ourselves to better understand their needs and increase the likelihood they will use our technology and speed the adoption of our technology in the marketplace.  During this process, our initial customers and we are each responsible for costs incurred in the development process.

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For fiscal years 2011 and 2010 we spent approximately $169,000 and $80,000 on research and development, respectively.  This includes contracted research, salary expenses of Sally Ramsey, our Vice President of New Product Development, laboratory expenses, equipment purchases, and raw materials. During these fiscal years, we did not undertake any customer-sponsored research and development.

Manufacturing

We presently have a limited manufacturing capacity. We currently have no contracts in place for the manufacturing of our products.   The raw materials used in our coatings are liquids and we do not believe such materials have any negative environmental impact.  Our business is subject to different federal, state, local and foreign governmental regulations related to the use, storage, discharge and disposal of hazardous substances.  We must conduct our business in compliance with these regulations.  Any changes in such regulations or any change in our business that requires us to use hazardous materials, could force us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations.  Increasing public attention has been focused on the environmental impact of manufacturing operations.  While we have not experienced any adverse effects on our operations from environmental regulations, and our products are designed to have no adverse impact on the environment, our business and results of operations could suffer if for any reason we are unable to comply with present or future environmental regulations.

Our principal raw materials suppliers are Cytec Industries, Inc., Chem-Materials Co., Hanse Chemie, Nyacol, Sartomer Company, Inc., Rahn USA Corp. and GMZ, Inc.

Employees

As of September 30, 2011, we had seven full-time employees and one part-time employee.  As of that date, we had employment agreements with four of our employees.

ITEM 1A.  RISK FACTORS

Prospective and existing investors should carefully consider the following risk factors in evaluating our business.  The factors listed below represent the known material risks that we believe could cause our business results to differ from the statements contained herein.

We have generated minimal revenue and have a history of significant operating losses

We are a company that has failed to generate significant revenue.  We had an accumulated deficit of $28,774,419 as of September 30, 2011. $17,711,292 of this amount was due to non-cash items, including options expense, the issuance of warrants, beneficial conversion provisions associated with issuance of preferred stock and certain debt, preferred stock dividends, and stock issued to pay for services, payables, and debt extensions.  We have a limited operating history upon which investors may rely to evaluate our prospects.  Such prospects must be considered in light of the problems, expenses, delays and complications associated with a business that seeks to generate more significant revenue.  We have generated nominal revenue to date and have incurred significant operating losses.  Our operating losses have resulted principally from costs incurred in connection with our capital raising efforts and becoming a public company through a merger, promotion of our products, and from salaries and general and administrative costs.  We have maintained minimal cash reserves since October 2008 and have relied primarily on additional investment from Fairmount Five, LLC (“Fairmount Five”), Equity 11, Ltd. (“Equity 11”),  Stromback Acquisition Corporation (“SAC”) and John Bonner as well as small amounts of debt.  The Equity 11 and SAC investment agreements are no longer effective. We have an agreement in place with Fairmount Five, LLC (“Fairmount Five”) for investment of $2,400,000. As of September 30, 2011, we had used $1,865,000 of this amount. We will need to raise additional capital in fiscal year 2012 in order to continue to fund our operations.

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We have entered the emerging business of cleantech coatings, which carries significant developmental and commercial risk

We have expended in excess of $1,500,000 to develop our EcoBloc™ enabled and other products.  We expect to continue expending significant sums in pursuit of further development of our technology. Such research and development involves a high degree of risk as to whether a commercially viable product will result.

We expect to continue to generate operating losses and experience negative cash flow and it is uncertain whether we will achieve future profitability

We expect to continue to incur operating losses.  Our ability to commence revenue generating operations and achieve profitability will depend on our products functioning as intended, the market acceptance of our liquid nano-technology™ products and our capacity to develop, introduce and bring additional products to market.  We cannot be certain that we will ever generate significant sales or achieve profitability.  The extent of future losses and the time required to achieve profitability, if ever, cannot be predicted at this point.

Our auditors have expressed a going concern opinion

We have incurred losses, primarily as a result of our inception stage, general and administrative, and pre-production expenses and our limited amount of revenue.  Accordingly, we have received a report from our independent auditors included in our annual report that includes an explanatory paragraph describing their substantial doubt about our ability to continue as a going concern.

We need additional financing in the spring of 2012 to continue our operations.

As of September 30, 2011, we were in default on approximately $517,500 in principal of short term debt, plus  $365,789 in accrued interest.  Our past capital raising activities have not been sufficient to fund our working capital, operational and debt requirements and we will need to raise additional funds in fiscal year 2012 through private or public financings to continue our operations. Such financing could include equity financing, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to make acquisitions and borrow from other sources.

During our last fiscal year ended September 30, 2011, we relied on the sale of convertible preferred securities and the issuance of debt to fund our operations.  We raised $1,865,000 from the sale of Convertible Preferred Series C shares during the twelve months ended September 30, 2011.  We raised $292,000 from the issuance of debt, of which $220,000 was converted into and included in the issuance of the Convertible Preferred Series shares discussed above.  After September 30, 2011, we had only $655,000 in additional funds available to us under our investment agreement with Fairmount Five.  At our current rate of cash use, such funds will last only until March 2012.

We are dependent on key personnel

Our success will be largely dependent upon the efforts of our executive officers.  The loss of the services of our executive officers could have a material adverse effect on our business and prospects.  We cannot be certain that we will be able to retain the services of such individuals in the future.  Our research and development efforts are dependent upon a single executive, Sally Ramsey, with whom we have entered into an employment agreement which expires on January1, 2012.  We are working on an extension of Ms. Ramsey’s employment agreement but there is no guarantee that an agreement will be reached.  Our success will be dependent upon our ability to hire and retain qualified technical, research, management, sales, marketing, operations, and financial personnel.  We will compete with other companies with greater financial and other resources for such personnel.  Although we have not to date experienced difficulty in attracting qualified personnel, we cannot be certain that we will be able to retain our present personnel or acquire additional qualified personnel as and when needed.  On September 21, 2009, we entered into new employment agreements with our Chief Executive Officer, Chief Operating Officer, and General Counsel and entered into an amendment to Ms. Ramsey’s employment agreement.  On May 17, 2010, we entered into a new employment agreement with our VP, General Counsel and Secretary.

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We rely on computer systems for financial reporting and other operations and any disruptions in our systems would adversely affect us

We rely on computer systems to support our financial reporting capabilities and other operations. As with any computer systems, unforeseen issues may arise that could affect our ability to receive adequate, accurate and timely financial information, which in turn could inhibit effective and timely decisions. Furthermore, it is possible that our information systems could experience a complete or partial shutdown. If such a shutdown occurred, it could impact our ability to report our financial results in a timely manner or to otherwise operate our business.  In this regard, our financial data in our accounting software (QuickBooks) became corrupted and unusable in late June 2009 and the backup system for our computer systems failed to back up the data. This resulted in a delay in our ability to complete our financial statements for the June 30, 2009 quarter and to file our Form 10-Q with the SEC for such period. 

We are operating in both mature and developing markets and there is a risk that we may not achieve acceptance of our technology and products in these markets

We researched the markets for our products using our own personnel rather than third parties.  We have conducted limited test marketing and, thus, have relatively little information on which to estimate our levels of sales, the amount of revenue our planned operations will generate and our operating and other expenses.  We cannot be certain that we will be successful in our efforts to market our products or to develop our markets in the manner we contemplate.

Certain markets, such as electronics and specialty packaging, are developing and rapidly evolving and are characterized by an increasing number of market entrants who have developed or are developing a wide variety of products and technologies, a number of which offer certain of the features that our products offer.  Because of these factors, demand and market acceptance for new products may be difficult.  In mature markets, such as automotive or general industrial, we may encounter resistance by our potential customers in changing to our technology because of the capital investments they have made in their present production or manufacturing facilities.  Thus, we cannot be certain that our technology and products will become widely accepted. We do not know our future growth rate, if any, and size of these markets. If a substantial market fails to develop, develops more slowly than expected, becomes saturated with competitors or if our products do not achieve market acceptance, our business, operating results and financial condition will be materially adversely affected.

Our technology is also intended to be marketed and licensed to component or device manufacturers for inclusion in the products they market and sell as an embedded solution.  As with other new products and technologies designed to enhance or replace existing products or technologies or change product designs, these potential partners may be reluctant to adopt our coating solution into their production or manufacturing facilities unless our technology and products are proven to be both reliable and available at a competitive price and the cost-benefit analysis is favorable to the particular industry.  Even assuming acceptance of our technology, our potential customers may be required to redesign their production or manufacturing facilities to effectively use our  coatings.  The time and costs necessary for such redesign could delay or prevent market acceptance of our technology and products.  A lack of, or delay in, market acceptance of our products would adversely affect our operations.  We do not know if we will be able to market our technology and products successfully or that any of our technology or products will be accepted in the marketplace.

We expect that our products will have a long sales cycle

The sale of our coatings and the license of our technology will be subject to budget constraints and resistance to change with respect to long-established production techniques and processes, which could result in a significant reduction or delay in our anticipated revenues.  We cannot assure investors that such customers will have the necessary funds to purchase our technology and products even though they may want to do so.  Further, even if such customers have the necessary funds, we may experience delays and relatively long sales cycles due to their internal-decision making policies and procedures and resistance to change.

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Our target markets are characterized by new products and rapid technological change

The target markets for our products are characterized by rapidly changing technology and frequent new product introductions.  Our success will depend on our ability to enhance our planned technologies and products and to introduce new products and technologies to meet changing customer requirements.  We intend to devote significant resources toward the development of our solutions.  We are not certain that we will successfully complete the development of these technologies and related products in a timely fashion or that our current or future products will satisfy the needs of the coatings market.   We do not know if technologies developed by others will adversely affect our competitive position or render our products or technologies non-competitive or obsolete.

There is a significant amount of competition in our market

The industrial coatings market is extremely competitive.  Our competitors include Akzo Nobel, PPG, Sherwin-Williams and Valspar, BASF, Allied Photochemical, Rad-Cure (Altana Chemie), Red Spot (Fujikura), R&D Coatings, Northwest (Ashland), DSM Desotech, Prime.  Competitive factors our products face include ease of use, quality, portability, versatility, reliability, accuracy, cost, switching costs and other factors.  Our primary competitors include companies with substantially greater financial, technological, marketing, personnel and research and development resources than we currently have.  There are direct competitors who have competitive technology and products for many of our products.  New companies will likely enter our markets in the future.  Although we believe that our products are distinguishable from those of our competitors on the basis of their technological features and functionality at an attractive value proposition, we may not be able to penetrate any of our anticipated competitors’ portions of the market.  Many of our anticipated competitors have existing relationships with manufacturers that may impede our ability to market our technology to potential customers and build market share.  We do not know that we will be able to compete successfully against currently anticipated or future competitors or that competitive pressures will not have a material adverse effect on our business, operating results and financial condition.

We have limited marketing capability

We have limited marketing capabilities and resources.   We will have to undertake significant efforts and expenditures to create awareness of, and demand for, our technology and products.  Our ability to penetrate the market and build our customer base will be substantially dependent on our marketing efforts, including our ability to establish strategic marketing arrangements with OEMs and suppliers.  We cannot be certain that we will be able to enter into any such arrangements or if entered into that they will be successful.  Our failure to successfully develop our marketing capabilities, both internally and through third-party alliances, would have a material adverse effect on our business, operating results and financial condition.  Even if developed, such marketing capabilities may not lead to sales of our technologies and products.

We have limited manufacturing capacity

We have limited manufacturing capacity for our products.  In order to execute our contemplated direct sales strategy, we will need to either: (i) acquire existing manufacturing capacity; (ii) develop a manufacturing capacity “in-house”; and/or (iii) identify suitable third parties with whom we can contract for the manufacture of our products.  To either acquire existing manufacturing capacity or to develop such capacity, significant capital or outsourcing will be required.   We may not be able to raise the necessary capital to acquire existing manufacturing capacity or to develop such capacity.  We cannot be certain that such arrangements, if consummated, would be suitable to meet our needs.

We are dependent on manufacturers and suppliers

We purchase, and intend to continue to purchase, all of the raw materials for our products from a limited number of manufacturers and suppliers.

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We do not intend to directly manufacture any of the chemicals or other raw materials used in our products.  Our reliance on outside manufacturers and suppliers is expected to continue and involves several risks, including limited control over the availability of raw materials, delivery schedules, pricing and product quality.  We may experience delays, additional expenses and lost sales if we are required to locate and qualify alternative manufacturers and suppliers.

A few of the raw materials for our products are produced by a small number of specialized manufacturers.  While we believe that there are alternative sources of supply, if, for any reason, we are precluded from obtaining such materials from such manufacturers, we may experience long delays in product delivery due to the difficulty and complexity involved in producing the required materials and we may also be required to pay higher costs for our materials.

We are uncertain of our ability to protect our technology through patents

Our ability to compete effectively will depend on our success in protecting our proprietary coatings, both in the United States and abroad.  We have filed for patent protection in the United States and certain other countries to cover a number of aspects of our coatings.  The U.S. Patent Office (“USPTO”) has issued seven patents to us.  

We do not know if any additional patents relating to our existing technology will be issued from the United States or any foreign patent offices, that we will receive any additional patents in the future based on our continued development of our technology, or that our patent protection within and/or outside of the United States will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.

We do not know if any of our current or future patents will be enforceable to prevent others from developing and marketing competitive products or methods.  If we bring an infringement action relating to any of our patents, it may require the diversion of substantial funds from our operations and may require management to expend efforts that might otherwise be devoted to our operations.  Furthermore, we may not be successful in enforcing our patent rights.

Further, patent infringement claims in the United States or in other countries will likely be asserted against us by competitors or others, and if asserted, we may not be successful in defending against such claims.  If one of our products is adjudged to infringe patents of others with the likely consequence of a damage award, we may be enjoined from using and selling such product or be required to obtain a royalty-bearing license, if available on acceptable terms.  Alternatively, in the event a license is not offered, we might be required, if possible, to redesign those aspects of the product held to infringe so as to avoid infringement liability.  Any redesign efforts undertaken by us might be expensive, could delay the introduction or the re-introduction of our products into certain markets, or may be so significant as to be impractical.

We are uncertain of our ability to protect our proprietary technology and information

In addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement in special formulations to achieve and thereafter maintain a competitive advantage.  Although we have entered into confidentiality and employment agreements with employees, consultants, certain potential customers and advisors, we cannot be certain that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how.  Moreover, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.

Risks related to our license arrangements

We have licensing agreements with three competitors - BASF, DuPont and Red Spot - regarding their use of our technology for specific formulations for designated applications.  The DuPont license, signed in 2004, and the Red Spot license, signed in 2005, have not generated any ongoing royalty payments thus far and are unlikely to do so in the future.  The BASF license, signed in 2011, is dependent on BASF marketing products with our coatings and has not yet generated any royalties.

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We may be precluded from registering our trademark registrations in other countries

We have received approval of “EcoQuick”, “EZ Recoat™”, “Liquid Nanotechnology™”, “Ecology Coatings™” as trademarks in connection with our proposed business and marketing activities in the United States.  Although we intend to pursue the registration of our marks in the United States and other countries, prior registrations and/or uses of one or more of such marks, or a confusingly similar mark, may exist in one or more of such countries, in which case we might be precluded from registering and/or using such mark in certain countries.

There are economic and general risks relating to our business

The success of our activities is subject to risks inherent in business generally, including demand for products and services; general economic conditions; changes in taxes and tax laws; and changes in governmental regulations and policies.  For example, difficulties in obtaining credit and financing and the slowdown in the U.S. automotive industry have made it more difficult to market our technology to that industry.

Our stock price has been volatile and the future market price for our common stock is likely to continue to be volatile. Further, the limited market for our shares may make it difficult for our investors to sell our common stock for a positive return on investment

The public market for our common stock has historically been very volatile. During fiscal year 2011, our low and high market prices of our stock were $0.01 per share (December 1, 2010) and $.51 per share (September 1, 2011).  Any future market prices for our shares are likely to continue to be very volatile. This price volatility may make it more difficult for our shareholders to sell our shares when desired.  We do not know of any one particular factor that has caused volatility in our stock price.  However, the stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies.  Broad market factors and the investing public’s negative perception of our business may reduce our stock price, regardless of our operating performance. Further, the volume of our traded shares and the market for our common stock is very limited.  During the past fiscal year, there have been several days where no shares of our stock have traded.  A larger market for our shares may never develop or be maintained. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price.  As a result, this may make it very difficult for our shareholder to sell our common stock.

Control by key stockholders

As of September 30, 2011, Fairmount Five, Richard D. Stromback, Douglas Stromback, Deanna Stromback, Sally J.W. Ramsey, and Equity 11 held shares representing approximately 83.9%.   In addition, pursuant to the investment agreement we entered into with Fairmount Five, Fairmount Five has the right to appoint two of the seven members of our Board of Directors.  Additionally, Fairmount Five has the right to appoint our Chief Executive Officer.  The stock ownership and governance rights of such parties constitute effective voting control over all matters requiring stockholder approval.  These voting and other control rights mean that our other stockholders will have only limited rights to participate in our management.  The rights of our controlling stockholders may also have the effect of delaying or preventing a change in our control and may otherwise decrease the value of the shares and voting securities owned by other stockholders.

Our common stock is considered a “penny stock,” any investment in our shares is considered to be a high-risk investment and is subject to restrictions on marketability

Our common stock is considered a “penny stock” because it is traded on the OTCQB and it trades for less than $5.00 per share. The OTCQB is generally regarded as a less efficient trading market than the NASDAQ Capital or Global Markets or the New York Stock Exchange.

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The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.”  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market.  The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account.  In addition, the penny stock rules require that, prior to effecting a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.  These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.

Since our common stock will be subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus the ability of our shareholders to sell our common stock in the secondary market in the future.

We have never paid cash dividends and have no plans to do so in the future

To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future.  We intend to retain future earnings, if any, to provide funds for the operation of our business.  Our investment agreement with Fairmount Five prevents the payment of any dividends to our common stockholders without the prior approval of Fairmount Five.  Dividends for the Preferred Series A, Preferred Series B and Preferred Series C shares held by Equity 11, SAC, Fairmount Five and John Bonner have not been paid in cash.  Thus far, the dividends have been paid through the issuance of additional preferred shares.

The issuance and exercise of additional options, warrants, and convertible securities and/or certain investments may dilute the ownership interest of our stockholders

As of September 30, 2011, we had granted options to purchase 5,351,180 shares of our common stock under our 2007 Stock Option and Restricted Stock Plan (the “2007 Plan).  As of September 30, 2011, we had issued warrants to purchase 906,580shares of our common stock. As of September 30, 2011, Fairmount Five, Equity 11, John Bonner and SAC purchased Preferred Series C, Preferred Series A, and Preferred Series B shares and have been issued additional Preferred Series B and C as dividends that are convertible into 28,537,501 common shares.  

In addition, at our 2011 annual shareholder meeting, our shareholders approved a 1-for-5 reverse stock split which reduced by a factor of five the number of shares held by each our shareholders.  The reverse stock split was a condition of our obtaining additional investment from Fairmount Five.  Any future investment we obtain will likely dilute the ownership interests of our existing shareholders.

To the extent that our outstanding stock options and warrants are exercised, Preferred Series A, Preferred Series B and Preferred Series C shares and promissory notes are converted to common stock and/or we secure additional future investment, dilution to the ownership interests of our stockholders will occur.

We have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock

Our Articles of Incorporation authorize the issuance of 90,000,000 shares of common stock and 10,000,000 shares of preferred stock.  The issuance of common stock and preferred stock can be authorized by our Board of Directors without stockholder approval which will dilute the ownership interests of our stockholders.  Such dilution is likely since we need to secure additional funds in fiscal year 2012 to continue operations.

Indemnification of officers and directors

Our Articles of Incorporation and Bylaws contain broad indemnification and liability limiting provisions regarding our officers, directors and employees, including the limitation of liability for certain violations of fiduciary duties.  In addition, we maintain Directors and Officers liability insurance.  Our shareholders will have only limited recourse against such directors and officers.

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Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of our company under Nevada law or otherwise, we have been advised that the opinion of the Securities and Exchange Commission is that such indemnification is against public policy as expressed in the Securities Act and may, therefore, be unenforceable.

Sales of our stock by Equity 11 may drive the price of our stock down

Our common stock is “thinly” traded as it has very low daily trading volume.  On some trading days, no shares of our stock are sold.  In addition, we have filed a registration statement for a portion of the shares held by Equity 11 and may file additional registration statements for Equity 11’s and Fairmount Five’s shares as the SEC rules may permit.  Once registered, these shares may be sold on the OTCQB.  Future sales of a substantial number of shares by Equity 11 or Fairmount Five will likely put a downward pressure on the price of our stock.

Short Selling may drive the price of our stock down

Short selling is the practice of selling securities that have been borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale and the repurchase, as the short seller will pay less to buy the securities than the short seller received on selling them. Conversely, the short seller will make a loss if the price of the security rises.  The ability of Equity 11 to sell a substantial number of shares if a registration statement ever becomes effective and the downward pressure on the price of our common stock that may result may encourage short selling of our common stock by third parties.  Such short selling will cause additional downward pressure on the price of our stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable to us since we are not an accelerated filer, a large accelerated filer or a well-known seasoned issuer under SEC rules.

ITEM 2. PROPERTIES

Our executive office consists of approximately 800 square feet and is located at 24663 Mound Road, Warren, MI  48091.  The lease commenced on June 17, 2010 and continued through December 17, 2010 at an average rate of $1,000 per month.  We entered a new lease on these premises in May 2011 that continues through 2012 that calls for monthly rent payments of $1,000 as well as payment of the entire building’s utilities. The lessor, J.M. Land Company, is wholly owned by James Juliano, the Chairman of our Board of Directors.  We believe this space is adequate for our current needs and that suitable additional space is available on reasonable terms if required.

We also lease approximately 3,600 square feet of laboratory space at 1238 Brittain Road, Akron, Ohio 44310.  We use this facility for manufacturing, storing and testing of our products.  We are currently leasing this property on a month-to-month basis and the monthly rent is $1,200.

Management believes that our existing facilities are adequate for our current needs. We are considering upgrading our laboratory space and we believe suitable additional space will be available on reasonable terms if required.  Management also believes that our facilities are adequately insured.

ITEM 3.  LEGAL PROCEEDINGS

On October 26, 2010, Mitch Shaheen, one of our note holders, filed suit in the United States District Court for the Eastern District of Michigan seeking repayment of principal, interest and attorney fees for amounts under promissory notes we issued to him in the original principal amount of $250,000 with 25% interest.  As of September 30, 2011, Mr. Shaheen claims he is owed approximately $590,000.  We have filed an answer in the case and have been engaged in discussions to resolve his suit.

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ITEM 4. [Removed and Reserved]

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PART II

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

Market Prices

Our common stock, par value $.001 per share (the “Common Stock”), is currently quoted on the OTCQB under the symbol “ECOC”. The high/low market prices of our common stock were as follows for the periods below, as reported on www.OTCQB.com. The quotations below reflect inter-dealer bid prices without retail markup, markdown, or commission and may not represent actual transactions.

	High Close	Low Close
Fiscal Year Ended September 30, 2011
1st Quarter	$.09	$.01
2nd Quarter	$.08	$.04
3rd Quarter	$.20	$.10
4th Quarter	$.51	$.02
Fiscal Year Ended September 30, 2010
1st Quarter	$.49	$.21
2nd Quarter	$.28	$.15
3rd Quarter	$.18	$.09
4th Quarter	$.09	$.04

As of September 30, 2011, we had approximately 400 shareholders of record of our common stock.  As of that date, Fairmount Five held 29,310,411 shares of our common stock if it converted all of its preferred shares into common shares.  We have agreed to register common shares to be converted by Fairmount Five from its convertible preferred shares pursuant to our Convertible Preferred Securities Agreement with Fairmount Five.  On October 6, 2011, John Bonner converted all of his convertible preferred shares into 2,024,284 of our common shares.  The sale of all or a significant portion of the shares held by our large shareholders (Fairmount Five, John Bonner, Richard Stromback, Doug Stromback, Deanna Stromback, SAC and Equity 11) could have a material negative effect on the price of our common stock.

Dividends

To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future.  We intend to retain future earnings, if any, to provide funds for the operation of our business.  Our Convertible Preferred Securities Purchase Agreement with Fairmount Five prevents the payment of any dividends to our common stockholders without the prior approval of Fairmount Five.  We have paid dividends due Fairmount Five, Equity 11, John Bonner and SAC on their preferred shares by issuing additional preferred shares in lieu of cash.

Securities Authorized For Issuance Under Equity Compensation Plans

Our shareholders approved the 2007 Stock Option Plan and authorized 4,500,000 common shares to be reserved for options exercised under the plan.  In fiscal year 2008, our Board of Directors authorized an additional 1,000,000 common shares to be reserved for exercises under the plan. On February 7, 2011, our shareholders ratified and approved 5,500,000 common shares to be reserved for exercises under the plan. The following table sets forth certain information as of September 30, 2011, concerning outstanding options and rights to purchase common stock granted to participants in all of our equity compensation plans and the number of shares of common stock remaining available for issuance under such equity compensation plans.

	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders	5,351,180	$.79	148,820

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Recent Issuances of Unregistered Securities

Set forth below is a description of all of our sales of unregistered securities during the fiscal year ended September 30, 2011.  All sales were made to “accredited investors” as such term is defined in Regulation D promulgated under the Securities Act of 1933, as amended (the “Act”). All such sales were exempt from registration under Section 4(2) of the Act, as transactions not involving a public offering. We did not pay any commissions to third parties in connection with the sales.

		Number of		Conversion
Issued to	Issue Date	Preferred Shares	Price	Price (1)
Fairmount Five	2/28/2011	350	$ 1,000	$           0.06
John Bonner	3/3/2011	120	1,000	0.06
Fairmount Five	3/4/2011	475	1,000	0.06
Fairmount Five	3/9/2011	220	1,000	0.06
Fairmount Five	4/12/2011	100	1,000	0.06
Fairmount Five	5/9/2011	100	1,000	0.06
Fairmount Five	5/31/2011	100	1,000	0.06
Fairmount Dividend	6/1/2011	14	1,000	0.06
Bonner Dividend	6/1/2011	2	1,000	0.06
Fairmount Five	6/29/2011	100	1,000	0.06
Fairmount Five	7/26/2011	100	1,000	0.06
Fairmount Five	8/26/2011	100	1,000	0.06
Fairmount Five	9/23/2011	100	1,000	0.06

(1)   Each share is convertible into shares of common stock at $.06 per share.

ITEM 6  SELECTED FINANCIAL DATA

Not applicable since we are a smaller reporting company as defined under the applicable SEC rules.

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

Except for statements of historical fact, the information presented herein constitutes forward-looking statements. These forward-looking statements generally can be identified by phrases such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “foresees,” “intends,” “plans,” or other words of similar import.  Similarly, statements herein that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, but are not limited to, our ability to: successfully commercialize our technology; generate revenues and achieve profitability in an intensely competitive industry; compete in products and prices with substantially larger  and better capitalized competitors; secure, maintain and enforce a strong intellectual property portfolio; attract immediate additional capital sufficient to finance our working capital requirements, as well as any investment of plant, property and equipment; develop a sales and marketing infrastructure; identify and maintain relationships with third party suppliers who can provide us a reliable source of raw materials; acquire, develop, or identify for our own use, a manufacturing capability; attract and retain talented individuals; continue operations during periods of uncertain general economic or market conditions, and; other events, factors and risks previously and from time to time disclosed in our filings with the Securities and Exchange Commission, including, specifically, the “Risk Factors” enumerated herein.

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Overview

We develop ultra-violet curable coatings that are designed to drive efficiencies and clean processes in manufacturing.  We create proprietary coatings with unique performance attributes.  In certain applications, we integrate nano-material technologies.  We develop high-value, high-performance coatings for applications in the specialty packaging, automotive, general industrial, electronics and medical areas.  Our target markets include the electronics, steel, construction, automotive and trucking, paper products, film packaging and OEMs.  We plan to use direct sales teams in certain target markets, such as OEMs, and third party distributors in broad product markets, such as paper and packaging products, to develop our product sales.

Operating Results

Years Ended September 30, 2011 and 2010

Results From Operations

Revenues Product sales generated revenues of $3,190 for the fiscal year ended September 30, 2011. We had $14,860 in revenue for the fiscal year ended September 30, 2010.  The decrease was due to slower than anticipated adoption of our coatings by new customers.

Officer Salaries and Fringe Benefits.   The increase of approximately $18,000 in such expenses for the year ended September 30, 2011 compared to the year ended September 30, 2010 is due primarily to an increase in medical insurance premiums.

Professional Fees. Thedecrease of approximately $216,000 in these expenses for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 is the result of:

·   The elimination of consulting contracts that cost approximately $221,000 in the fiscal year ended September 30, 2010.

·   A decrease of approximately $25,000 in reimbursed expenses to consultants.

·   These decreases were partially offset by an increase in legal fees of approximately $29,000 associated with advice to our Board of Directors regarding additional investment, our 2011 shareholder meeting, and our reverse stock split.

Other General and Administrative Expenses. The increase of approximately $185,000 in these expenses for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 reflects:

·   An increase of approximately $310,000 in non-cash compensation option expense associated with the issuance of employee options in April 2011.

·   Approximately $68,000 in salary and benefits paid to new sales and laboratory employees starting in April 2011.

·   $20,000 paid in directors fees in 2011.

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 These increases were partially offset by a $221,000 reduction in expenses associated with the abandonment of patents that were written off in 2010.

Operating Losses. The decreased Operating Loss of approximately $2,000 between the reporting periods is explained in the discussion above.

 Income from Forgiveness of Accounts Payable. The income in this category resulted from the settlement of amounts owed to several vendors and note holders at a discount of approximately 75%. The figure for fiscal year ended September 30, 2011 represents an increase of approximately $666,000 over the fiscal year ended September 30, 2010.

Interest Expense. The decrease of approximately $14,000 for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 is the result of a reduction in average debt outstanding for fiscal year 2011 through repayment and settlements.

Income Tax Provision.  No provision for income tax benefit from net operating losses has been made for the years ended September 30, 2011 and 2010 as we have fully reserved the asset associated with operating loss carry forwards until realization is more likely than not.

Net Loss.  The decrease in the Net Loss of approximately $682,000 for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 is explained in the foregoing discussions of the various expense and income categories.

Basic and Diluted Loss per Share. The change in basic and diluted net loss per share for the fiscal year ended September 30, 2011 reflects the decreased Net Loss discussed above as well as the increase in average shares outstanding of approximately 3,156,000 for fiscal year 2011.

Liquidity and Capital Resources

Current and Expected Liquidity

Cash as of September 30, 2011 and September 30, 2010 totaled $71,784 and $2,814, respectively.  The increase reflects cash used in operations of $1,593,182, cash used to purchase fixed and intangible assets of $38,745, and cash used to pay off debt of $236,103.  This usage was offset by borrowings of $292,000 and the issuance of $1,865,000 in convertible preferred stock.  Included in the issuance of convertible preferred shares was the conversion of $220,000 of debt.  Thus, net proceeds from the issuance of convertible preferred stock were $1,645,000.

We are a company that has failed to generate significant revenues as yet and have incurred an accumulated deficit of ($28,774,419).  $17,771,292 of this amount is due to non-cash items, including options expense, the issuance of warrants, preferred stock dividends paid with preferred stock, beneficial conversion provisions associated with issuances of preferred stock and certain debt, and stock issued to pay for services, payables, and debt extensions.  We have incurred losses primarily as a result of general and administrative expenses, salaries and benefits, professional fees, and interest expense.  Since our inception, we have generated very little revenue.  We have received an unqualified audit report from our independent auditors that includes an explanatory paragraph describing their substantial doubt about our ability to continue as a going concern.

We expect to continue using substantial amounts of cash to: (i) develop and protect our intellectual property, (ii) further develop and commercialize our products, and (iii) fund ongoing salaries, professional fees, and general administrative expenses.  Our cash requirements may vary materially from those now planned depending on numerous factors, including the status of our marketing efforts, our business development activities, the results of future research and development, competition and our ability to generate revenue.

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On February 28, 2011, we entered into agreements with Fairmount Five ($2,400,000) and John Bonner ($120,000) to sell them our Convertible Preferred Shares, Series C.  In fiscal year 2011, we sold $1,865,000 of such Series C shares leaving an additional $655,000 to sell to Fairmount Five in fiscal year 2012.

Historically, we have financed operations primarily through the issuance of debt and the sale of equity securities.  In the near future, as additional capital is needed, we expect to rely primarily on the sale of convertible preferred securities.

Past Due Notes Payable

As of September 30, 2011, we had notes payable to five separate parties on which we owed approximately $517,500 in principal, plus $365,789 in accrued interest.  These notes do not contain any restrictive covenants with respect to the issuance of additional debt or equity securities by us.  The notes and the accrued interest totaling were due prior to September 30, 2011 and their holders have demanded payment.    

Other Unsecured Notes Payable

As of September 30, 2011, we had notes payable to Equity 11, an entity controlled by Jim Juliano who is the Chairman of our Board of Directors, on which we owed $35,952 in principal and accrued interest. Also as of September 30, 2011, we had a note payable to Nirta Enterprises, an entity controlled by Joe Nirta who is a member of our Board of Directors, on which we owed $25,806 in principal and accrued interest. On November 3, 2011, the Equity 11 notes were converted into 71,556 shares of our common stock (with a conversion price of $.50/share) and the Nirta Enterprises note was converted into 51,830 shares of our common stock (with a conversion price of $.50/share).

Secured Notes Payable

As of September 30, 2010, we had a note payable to John M. (“Pete”) Salpietra who is a member of our board of directors on which we owed $636,366 in principal and accrued interest. It is secured by a first lien on all of our intellectual property.

On September 30, 2011, we had 14,158,506 common shares issued and outstanding and 1,938 convertible preferred shares issued and outstanding.  These preferred shares and accumulated and unpaid dividends can be converted into a total of 28,537,501 shares of our common stock.  As of September 30, 2011, options and warrants to purchase up to 6,257,760 shares of common stock had been granted.  Additionally, some of our outstanding notes and accrued interest may be converted into shares of common stock in order to conserve cash.           

Capital Commitments

Contractual
Obligations	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
Notes Payable	$	1,150,332	$	1,150,332	$	-	$	-	$	-
Interest on notes payable		405,274		405,274		-		-		-
Contractual Service Agreements		433,333		433,333		-		-		-
Office Leases		14,000		14,000		-		-		-
Equipment Leases		-		-		-		-		-
Total Contractual Obligations	$	2,002,939	$	2,002,939	$	-	$	-	$	-

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Off-Balance Sheet Arrangements

Our off-balance sheet contractual service agreements include services provided by vendors and services by our employees under employment agreements.  Vendor services include investor and public relations services, legal services and business and revenue generation consulting services.  

We have a lease for our headquarters in Warren, MI.  The space for our laboratory in Akron, OH is not currently subject to a written lease – we lease that space on a month to month basis.  A summary of our Warren, MI office lease is summarized in the table below:

Contract Service Provider	Purpose	Monthly Amount	Expiration		Less Than 1 Year	1-3 Years	4-5 Years	After 5 Years	Total
J.M. Land Company	Warren, MI Headquarters	$	4/17/12	$14,000					$14,000

See also Notes to the Consolidated Financial Statements in this report. The details of such arrangements are found in Note 5 – Commitments and Contingencies.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles. Preparation of the statements in accordance with these principles requires that we make estimates, using available data and our judgment, for such things as valuing assets, accruing liabilities and estimating expenses. The following is a discussion of the most critical estimates that we must make when preparing our financial statements.

Revenue Recognition.  Revenues from licensing contracts are recorded ratably over the life of the contract. Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely. Revenues from product sales are recognized upon shipment of product.

Income Taxes and Deferred Income Taxes.  We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income taxes are provided for temporary differences in the bases of assets and liabilities as reported for financial statement purposes and income tax purposes and for the future use of net operating losses. We have recorded a valuation allowance against our net deferred income tax asset. The valuation allowance reduces deferred income tax assets to an amount that represents management’s best estimate of the amount of such deferred income tax assets that more likely than not will be realized.

Income from forgiveness of payables and Debt.   Income from the forgiveness of payables and/or debt is recognized when all of the conditions associated with the forgiveness have been met.

Property and Equipment.  Property and equipment is stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the following useful lives:

Computer equipment	3-10 years
Furniture and fixtures	3-7 years
Test equipment	5-7 years
Software	3 years

Repairs and maintenance costs are charged to operations as incurred. Betterments or renewals are capitalized as incurred.

We review long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset with future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

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Patents.  It is our policy to capitalize costs associated with securing a patent. Costs consist of legal and filing fees. Once a patent is issued, it is amortized on a straight-line basis over its estimated useful life. For purposes of the preparation of the audited, consolidated financial statements found elsewhere in this report, we have recorded amortization expense associated with the patents based on an eight year useful life.

Stock-Based Compensation.  We have a stock incentive plan that provides for the issuance of stock options, restricted stock and other awards to employees and service providers. We calculate compensation expense in accordance with GAAP using a Black-Scholes option pricing model. In so doing, we estimate certain key assumptions used in the model. We believe the estimates we use, which are presented in Note 7 of Notes to the Consolidated Financial Statements, are appropriate and reasonable.

Recent Accounting Pronouncements

We evaluate all accounting pronouncements issued by the Financial Accounting Standards Board during each reporting period to assess their impact on and applicability to our accounting practices and our financial reporting and disclosures.

We have reviewed all accounting pronouncements issued by the Financial Accounting Standards Board since we last issued financial statements as part of our 10-Q filed on  August 15, 2011 and have determined that none of them have a material effect on the consolidated financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable since we are a smaller reporting company under the applicable SEC rules.

ITEM 8  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements are included following the signature page to this Form 10-K commencing on page 40.

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

None.

ITEM 9A  CONTROALS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

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Management’s Report on Internal Control over Financial Reporting

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) or Rule 15d-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of September 30, 2011 because we lack effective monitoring of financial controls and lack segregation of duties in financial reporting due to the small size of our financial staff (1 person).

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2011, we did not make any changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B  OTHER INFORMATION

None.

PART III

ITEM 10  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth as of September 30, 2011, the name, age, and position of each executive officer and director and the term of office of each such person.

Name	Age	Position
James Juliano	58	Chairman
Joe Nirta	48	Director
James Orchard	61	Director
Sally Ramsey	58	Director and Vice President – New Product Development
Nick DeMiro	45	Director
John M. (“Pete”) Salpietra	57	Director
Bob Crockett	53	Chief Executive Officer
F. Thomas Krotine	70	Vice President – Business Development
Daniel V. Iannotti	56	Vice President, General Counsel & Secretary
Kevin Stolz	48	CFO, Controller and Chief Accounting Officer

As of September 30, 2011, our Bylaws authorized up to seven directors but only six members were currently serving. Fairmount Five has the right to elect two of the directors to our Board of Directors and they are Messrs. Juliano and Nirta.   Each Director serves for a term of one year and until his or her successor is duly elected and qualified. Each officer serves at the pleasure of the Board of Directors subject to any applicable employment agreements.

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Set forth below is certain biographical information regarding each of our directors and officers as of September 30, 2011.

James Juliano.  Mr. Juliano joined our Board of Directors on June 29, 2010 as one of the Board appointments made by Equity 11.  Mr. Juliano is a Fairmount Five and  Equity 11 shareholder and, since 1981, the President and Founder of Michigan-based Omega Development Corporation, a full service general contracting services company with clients such as Best Buy, Discount Tire, Babies R Us, CVS Drugs and the University of Michigan. Mr. Juliano has extensive experience in creating and evaluating investment proposals, including acting as the lead investor for investment groups. His ability to attract investment is a valuable and important skill to us.

Joseph Nirta.  On October 20, 2008, Joseph Nirta joined our Board of Directors as one of the Board appointments made by Equity 11.  Mr. Nirta was the co-founder of BondExchange LLC and BondDesk Group LLC. The electronic bond trading platform created by Mr. Nirta revolutionized the online bond trading market. Nirta served as Bond Desk Group’s chief information officer and a board member since 1999. He has a Bachelor of Mathematics in Computer Science from the University of Waterloo, Waterloo, Ontario, and is a Certified Oracle DBA.  Mr. Nirta’s prior experience in the operation and sale of a startup company is especially valuable to us.

James Orchard. Mr. Orchard was elected to our Board on September 13, 2010.  Mr. Orchard is the Co-CEO of Mark IV LLC a privately held, leading global diversified manufacturer of highly engineered systems and components for vehicles, transportation infrastructure and equipment. Mr. Orchard has an extensive background in the automotive industry where he held the positions of COO of Noble International and President of Faurecia, a global supplier the automotive industry.  Mr. Orchard holds a B.S. in Marketing and Business Operations from Indiana University. Mr. Orchard was nominated to serve on our Board of Directors due to his extensive business, operational and financial experience.

Sally Ramsey. Ms. Ramseyfounded our company in 1990 and serves as VP - New Product Development.  She was elected to our Board on September 13, 2010.   She was nominated to serve on our Board of Directors since she is the creator of substantially all of the Company’s intellectual property. From 1990 to the present, Ms. Ramsey served as Vice President of Ecology-California and from 1990 to November 2006 served as Secretary.  As of July 27, 2007, Ms. Ramsey was elected our Vice President of New Product Development.  Ms. Ramsey is a graduate of the Bronx School of Science and holds a B.S. in Chemistry with honors from Hiram College. Ms. Ramsey is

Nick DeMiro. Mr. DeMiro was elected to our Board of Directors on March 24, 2011.  He was nominated to serve on our Board of Directors due to his financial and operational expertise.  Since 2006, Mr. DeMiro has been the President of Mayco International, LLC, a privately held, global leader in automotive design, engineering, tooling, and manufacturing of plastic systems and modules.  Mr. DeMiro has 8 years of active and reserve military service as an Aviation Officer in the U.S. Army.  Mr. DeMiro holds a B.S. in Mechanical Engineering from the United States Military Academy, West Point and an M.S. in Systems Management from the University of Southern California.

John M. (“Pete”) Salpietra.  Mr. Salpietra was elected to our Board of Directors on March 24, 2011.  He was nominated to serve on our Board of Directors due to financial and operational expertise.  Mr. Salpietra co-founded Val-Tec Plastics, a manufacturer of plastic injection molds, in 2005 and is a shareholder.  In addition, since 2005, Mr. Salpietra has been the majority owner and managing partner of Moose Ridge Golf Course in South Lyon, MI.  Mr. Salpietra retired from C.H. Robinson Company in 2005 as its National Vice President.  Mr. Salpietra attended Youngstown State University (1972-1976).  Mr. Salpietra founded the Salpietra Family Charitable Foundation in 2007 and has funded an endowed scholarship at Youngstown State University. 

Robert G. Crockett.  Mr. Crockett joined us as our Chief Executive Officer on September 15, 2008.  From 2007 to September, 2008, Mr. Crockett served in Advanced Sales Development for JCIM L.L.C., a an automotive plastics supplier and joint venture between Johnson Controls Inc. and private equity.  In 2007, Mr. Crockett served as President – Exterior Painted Products for Plastech, a privately held plastic component supplier.  From 2004 to 2006, he also served as Vice President of Plastech as part of the executive team acquired from LDM Technologies Inc.  From 1997 through 2004, Mr. Crockett served as Director for LDM Technologies Inc., a privately held automotive exterior and interior supplier.  From 1996 to 1997, he was a Vice President at the Becker Group, a privately held automotive interior supplier.  Mr. Crockett holds a B.S. in Business from Central Michigan University.

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F. Thomas Krotine.  Since October 30, 2006, Mr. Krotine has served as our President and from October 30, 2006 until August 15, 2007, he served as our Chief Executive Officer.  From August 15, 2007 to April 2011, he also served as the Chief Operating Officer.  From April 2011, he served as our Vice President – Business Development.  Mr. Krotine is an industry veteran with extensive coatings industry and materials-based experience.  From 2001 to 2006, Mr. Krotine was a Principal of TBD Associates, a technology and business development consulting company.   From 1996 to 2001, he served as Chairman of CV Materials, a privately-held a supplier of porcelain enamel materials and coatings.  Prior to his role at CV Materials, from 1992 to 1996 he was the Manager of TK Holdings, a private company which he formed to acquire equity holdings in small-to-medium-sized manufacturing companies.  From 1990 to 1992, he served as a Vice President at Valspar, a publicly-held coatings company, where he managed Valspar’s North American powder coating business.  From 1980 to 1990, he served as Senior Vice President at Sherwin-Williams Company, a publicly-held paint and coatings concern, where he was responsible for technology management and corporate environmental and health compliance.  Mr. Krotine holds a B.A., an M.S. and a Ph.D. in Metallurgy and Materials Science from Case Western Reserve University in Cleveland, Ohio.

Daniel V. Iannotti.  Mr. Iannotti served as our General Counsel and Secretary from August 11, 2008 to March 23, 2010 and rejoined us on May 17, 2010.  From 2004 to 2008, Mr. Iannotti served as a Principal of TheGeneralCounsel.com.  From 2003 to 2004, he served as the General Counsel and Secretary of Origen Financial, LLC.  During his career, Mr. Iannotti previously served as general counsel for three publically held companies including Prodigy Communications, Hoover’s, Inc. and Origen Financial.  He also spent several years as a staff attorney for Ameritech, now AT&T.  Mr. Iannotti holds a BA and MBA from Michigan State University. He received his Juris Doctor degree, cum laude, from the Wayne State University Law School, where he was an editor of the Wayne Law Review.  Iannotti is licensed to practice law in Michigan and Illinois.

Kevin Stolz.  Mr. Stolz became our Controller and Chief Accounting Officer on February 1, 2007 and our Chief Financial Officer on March 26, 2009.  From 1999 until 2007, Mr. Stolz was the principal of Kevin Stolz and Associates, Ltd., a Troy, Michigan-based management consulting firm specializing in providing financial and operations consulting services.  From 1985 to 1987, Mr. Stolz worked as an auditor at Coopers & Lybrand, a public accounting firm, and from 1988 to 1992 he worked in commercial lending at JP Morgan/Chase.  From 1997 to 1999, he was the Vice President of Manufacturing of Unique Fabricating, Inc. a privately held Detroit automotive supplier; from 1996 to 1997, a Controller at Broner Glove and Safety, Inc. a privately held wholesale distributor, and; from 1992 to 1995 the Director of Operations for Virtual Services, Inc., a privately held computer services firm.  Mr. Stolz has an M.B.A. from the University of Notre Dame and a B.B.A. in Accounting from the University of Portland.

Composition of the Board of Directors.  Since the adoption of the Sarbanes-Oxley Act in July 2002, there has been a growing public and regulatory focus on the independence of directors. Additional requirements relating to independence are imposed by the Sarbanes-Oxley Act with respect to members of the Audit Committee. The Board has established procedures consistent with the Sarbanes-Oxley Act of 2002, and the Securities and Exchange Commission. Our Board of Directors has determined that Messrs. Orchard and DeMiro are “independent” members of the Board.

During the fiscal year ended September 30, 2011, the Board of Directors held 9 meetings. During fiscal year 2011, all members of the Board of Directors attended at least 75% of all the meetings that such director was eligible to attend.

Board’s Leadership Structure and Role in Risk Oversight; Audit Committee.  The Board comprises six directors, two of whom the Board has determined are “independent” - James Orchard and Nick DeMiro. The Board has designated James Juliano as Chairman. Our Board’s leadership structure involves an Audit Committee and a Compensation Committee.  Our Audit Committee is comprised of Messrs. DeMiro (Chair), Juliano and Orchard.  Our Compensation Committee is comprised of Messrs. DeMiro, Salpietra and Orchard.  Nick DeMiro is the Audit Committee Chairman and has been designated by our Board of Directors as a “financial expert”.  With input from management, our entire Board is involved in risk oversight for our business, including risk identification and the evaluation of our need for insurance to reduce our risk exposure.

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons holding more than 10% of a registered class of the equity securities of the Company to file with the SEC and to provide us with initial reports of ownership, reports of changes in ownership and annual reports of ownership of common stock and other equity securities of the Company. Based solely on a review of the reports furnished to us, or written representations from reporting persons that all reportable transaction were reported, we believe that during the fiscal year ended 2011, our officers, directors and greater than ten percent owners timely filed all reports they were required to file under Section 16(a).

Code of Ethics

We have adopted a Code of Ethics that applies to all directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  Our Code of Ethics is posted on our website at:  http://www.ecologycoatings.com/profiles/investor/Governance.asp?BzID=1672. We intend to disclose future amendments to certain provisions of the Code of Ethics, or waiver of such provisions granted to executive officers and directors, on our website within four business days following the date of such amendment or waiver.

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ITEM 11. EXECUTIVE COMPENSATION

We seek to have compensation programs for our Named Executive Officers that achieve a variety of goals, including to:

•  attract and retain talented and experienced executives in the coatings industry;

•  motivate and fairly reward executives whose knowledge, skills and performance are critical to our success; and

•  provide fair and competitive compensation.

The Board’s Compensation Committee is comprised of Messrs. DeMiro, Salpietra and Orchard.  In determining executive compensation for fiscal 2011, the Compensation Committee continued its process to focus more on pay-for-performance objectives, to attempt to better link pay and performance, and to assure that its compensation practices are competitive with those in the industry and consistent with our ability to pay such compensation. The Chief Executive Officer, as he did for fiscal 2009 and fiscal 2010, assisted the Board of Directors in determining compensation for the other Named Executive Officers.

Overview.  Total compensation paid to our executive officers is divided among two principal components, salaries and stock option awards.

Base Salary.  We pay our executives a base salary, which we review and adjust consistent with our level of working capital. We believe that a competitive base salary is a necessary element of any compensation program. Base salaries are established based on the individual position, responsibility, experience, skills, historic salary levels and the executive’s performance during the prior year. We are also seeking over a period of years to align base compensation levels comparable to our competitors and other companies similarly situated. We do not view base salaries as primarily serving our objective of paying for performance.

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		Current
		Annual
Name	Title	Salary
Robert G. Crockett	CEO	$200,000(1)
Daniel Iannotti	VP, General Counsel	$100,000
Sally Ramsey	VP-New Product Development	$100,000(2)
Tom Krotine	VP-Business Development	$100,000(3)
Kevin Stolz	CFO	$42,000(4)

(1)   Beginning on May 15, 2010 and continuing through April 30, 2011, Mr. Crockett deferred $6,666.67 of his monthly salary.As of 9/30/11, Mr. Crockett had deferred $40,000 of his salary.

(2)   Ms. Ramsey’s salary was increased from $60,000 on May 1, 2011 to $100,000.

(3)   Mr. Krotine’s salary increased from $65,000 to $100,000 on May 1, 2011.

(4)   Mr. Stolz’s salary has been  $42,000 per year since September 1, 2009.

Equity Compensation.  We believe that restricted stock awards and stock options are an important long-term incentive for our executive officers and employees and align officer interests with those of our stockholders. We review our equity compensation plan annually.

We do not have any formal plan or obligation that requires us to grant equity compensation to any executive officer on specified dates. The authority to make equity grants to our executive officers rests with our Board of Directors. The Board of Directors considers the input of our chief executive officer in setting the compensation of our other executive officers, including in the determination of appropriate levels of equity grants.

Severance and Change-in-Control Benefits.  Three of our executives have employment agreements – Messrs. Crockett, and Iannotti and Ms. Ramsey as described below.

On January 1, 2007, we entered into an employment agreement with Sally J.W. Ramsey, Vice President New Product Development, which expires on January 1, 2012. We are currently working on an extension of Ms. Ramsey’s employment agreement.  The agreement may be terminated prior to the end of the term for cause. If Ms. Ramsey’s employment is terminated without cause or for “good reason,” as defined in the agreement, she is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause.  Upon expiration, the agreement calls for automatic one-year renewals until terminated by either party with thirty days written notice.   On December 15, 2008, we amended the agreement to reduce Ms. Ramsey’s annual base salary to $60,000 and on May 18, 2011, we increased her annual base salary to $100,000.   On September 21, 2009, we entered into a second amendment to the employment agreement with Ms. Ramsey that amended her employment agreement to provide for an annual salary of $75,000 effective November 1, 2009.  Additionally, on April 22, 2011, she forfeited all previously issued stock options and received options to purchase 2.1 million shares of our common stock at a price of $0.20 per share. The options vested upon issuance and expire on April 22, 2021.

On September 21, 2009, we entered into an employment agreement with Robert G. Crockett, our CEO. Mr. Crockett has served as our CEO since September 15, 2008. The agreement may be terminated prior to the end of the term for cause. If Mr. Crockett’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause. The agreement expires on September 21, 2012. Mr. Crockett will receive an annual base salary of $200,000. The Board of Directors may review Mr. Crockett’s salary to determine what, if any, increases should be made thereto. In addition, the vesting for Mr. Crockett’s previously awarded stock options was adjusted so that 22,000 stock options were to vest 12 months, 18 months and 24 months, respectively, from Mr. Crockett’s initial date of employment (September 15, 2008).  Mr. Crockett was also granted stock options to purchase 670,000 shares of our common stock, one-quarter of which were to vest at 30, 36, 42 and 48 months from Mr. Crockett’s initial date of employment with us (September 15, 2008) with an exercise price of $2.55 per share. On April 22, 2011, Mr. Crockett forfeited previously issued stock options and he received options to purchase 1.8 million shares of our common stock at a price of $.20 per share. The options vest in 600,000 share tranches on each of the first three anniversaries of the date of issuance.  The agreement may be terminated prior to the end of the term for cause. If Mr. Crockett’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause.

On September 21, 2009, we entered into an employment agreement with Daniel V. Iannotti, our Vice President, General Counsel & Secretary.  On March 23, 2010, Mr. Iannotti resigned his position and the original employment agreement was terminated. On May 17, 2010, we re-hired Daniel Iannotti as our Vice President, General Counsel & Secretary and on that date we entered into a new employment agreement with Mr. Iannotti. The agreement may be terminated prior to the end of the term for cause. If Mr. Iannotti’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause. Under his new employment agreement, Mr. Iannotti will receive an annual base salary of $100,000. The Compensation Committee of the Board of Directors may review Mr. Iannotti’s salary to determine what, if any, increases should be made thereto.  In addition, the vesting for Mr. Iannotti’s previously awarded stock options was adjusted so that 22,000 stock options were to vest 12 months, 18 months and 24 months, respectively, from Mr. Iannotti’s initial date of employment (August 11, 2008).  Mr. Iannotti was also granted stock options to purchase 14,000 shares of our common stock, one-quarter of which shall vest at 30, 36, 42 and 48 months from Mr. Iannotti’s initial date of employment with us (August 11, 2008) with an exercise price of $2.55 per share. April 22, 2011, Mr. Iannotti forfeited previously issued stock options and received options to purchase 300,000 shares of our common stock at a price of $.20 per share.  The options vest in 100,000 share tranches on each of the first three anniversaries of the date of issuance. The agreement may be terminated prior to the end of the term for cause. If Mr. Iannotti’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause.

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Non-Compete and Confidentiality Restrictions.  Each of the employment agreements of Ms. Ramsey and Messrs. Crockett and Iannotti has a provision that restricts each employee from using our confidential information for two years after severance or termination and restricts use of our trade secrets for as long as they qualify as trade secrets under applicable law.  Ms. Ramsey’s employment agreement has a two year restriction upon her severance or termination that prevents her from working, directly or indirectly, for any of our competitors, soliciting business from our customers or soliciting employment of our employees.  The employment agreements for Messrs. Crockett and Iannotti have a one year restriction upon their severance or termination that prevents each of them from working, directly or indirectly, for any of our competitors soliciting business from our customers or soliciting employment of our employees.

Share Retention

We do not have a share retention policy or share ownership guidelines for executive officers.

Regulatory Considerations

We account for the equity compensation expense for our employees under the rules of FASB Accounting Standard Codification 718, “Compensation — Stock Compensation,” or ASC 718.

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THE COMPENSATION COMMITTEE REPORT

Three members of our Board of Directors have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on this review and these discussions, the Board has recommended  that the Compensation Discussion and Analysis be included in this Report.

Submitted by,

Nick DeMiro, Director

James Orchard, Director

John M. (“Pete”) Salpietra, Director

COMPENSATION COMMITTEE/BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION

Our Board is currently comprised of six members. Only one member – Sally Ramsey - is an employee or a current or former officer. Ms. Ramsey does not participate in compensation decisions as a member of the Board of Directors or Compensation Committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our Board of Directors or our Compensation Committee.

SUMMARY COMPENSATIONTABLE

The following table contains information about compensation earned (bonus) or received (all other categories of compensation) by the named executive officers for the last three fiscal years.

											All Other
	Fiscal		Salary		Bonus		Stock Awards		Option Awards		Compensation		Total
Name and Principal Position	Year		($)		($)		($)		($)(1)		($)(2)		($)
Robert G. Crockett		2011		$200,000		-0-				$352,920		$11,298		$564,218
CEO		2010		$200,000		-0-		-0-		$-0-		$22,023		$22,023
		2009		$200,000		-0-		-0-		$411,867		$21,261		$633,128
Daniel V. Iannotti		2011		$100,000		-0-		-0-		$58,820		$11,364		$170,184
VP, General Counsel & Secretary		2010		$105,875		-0-		-0-		$-0-		$17,388		$123,263
		2009		$115,000		-0-		-0-		$280,264		$17,015		$412,279
Sally Ramsey		2011		$85,417		-0-		-0-		$411,740		$11,364		$508,521
Vice President New Product Development		2010		$73,750		-0-		-0-		-0-		$17,388		$91,588
		2009		$89,167		-0-		-0-		-0-		$17,265		$106,432
F. Thomas Krotine		2011		$79,583		-0-		-0-		$58,820		$5,296		$138,999
Vice President Business Development		2010		$63,583		-0-		-0-		-0-		$6,170		$69,753
		2009		$50,667		-0-		-0-		$104,288		$8,873		$163,828
Kevin P. Stolz		2011		$42,000		-0-		-0-		$9,803		$14,205		$66,008
Chief Financial Officer		2010		$42,000		-0-		-0-		-0-		$12,698		$54,698
		2009		$67,667		-0-		-0-		$18,304		$22,438		$108,409

(1)	Represents the grant date fair value of the award, calculated in accordance with ASC 718. A summary of the assumptions made in the valuation of these awards is provided under Notes 1 and 7 to our financial statements.
(2)	Represents medical insurance premiums paid on behalf of the executives shown as well as health care deductible reimbursements.

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GRANTS OF PLAN BASED AWARDS

The following Named Executive Officers received stock options or restricted stock awards during fiscal year 2011 as follows:

Name  (a)	Grant Date  (b)	Estimated Future Payouts Under Non-Equity Incentive Plan Awards			Estimated Future Payouts Under Equity Incentive Plan Awards			All Other Stock Awards: Number of Shares of Stocks or Units  (#) (i)	All Other Option Awards: Number of Securities Underlying Options (#)  (j)	Exercise or Base Price of Option Awards ($/Share) (k)	Grant Date Fair Value of Stock and Option Awards (l)
		Threshold ($)  (c)	Target ($) (d)	Max. ($) (e)	Threshold (#) (f)	Target (#) (g)	Max (#)  (h)
Robert Crockett	4/28/11								1,800,000	.20	$352,920
Daniel Iannotti	4/28/11								300,000	.20	$58,820
Kevin Stolz	4/28/11								50,000	.20	$9,803
Sally Ramsey	4/28/11								2,100,000	.20	$411,740
Thomas Krotine	4/28/11								300,000	.20	$58,820

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table provides information on exercisable and unexercisable options and unvested stock awards held by the Named Executive Officers on September 30, 2011.

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	Option Awards								Stock Awards
	Number of		Number of
	Securities		Securities
	Underlying		Underlying								Market Value of
	Unexercised		Unexercised						Number of Shares or		Shares or Units of
	Options		Options		Option				Units of Stock That		Stock That
	(#)		(#)		Exercise Price		Option		Have Not Vested		Have Not Vested
Name	Exercisable		Unexercisable		($)		Expiration Date		(#)		($)(1)
Robert G. Crockett		-0-		600,000		.20		4/28/21		-		-
		-0-		600,000		.20		4/28/21		-		-
		-0-		600,000		.20		4/28/21		-		-
Daniel Iannotti		-0-		100,000		.20		4/28/21		-		-
		-0-		100,000		.20		4/28/21		-		-
		-0-		100,000		.20		4/28/21		-		-
Sally Ramsey		2,100,000		0		.20		4/28/21
F. Thomas Krotine		-0-		100,000		.20		4/28/21		-		-
		-0-		100,000		.20		4/28/21		-		-
		-0-		100,000		.20		4/28/21		-		-
Kevin P. Stolz		-0-		16,667		.20		4/28/21
		-0-		16,667		.20		4/28/21
		-0-		16,666		.20		4/28/21

STOCK OPTION EXERCISES AND VESTING OF RESTRICTED STOCK AWARDS

The following table provides information on stock option exercises and vesting of restricted stock awards of Named Executive Officers during the fiscal year ended September 30, 2011:

	Option Awards				Stock Awards
	Number of		Value		Number of		Value
	Shares		Realized		Shares		Realized
	Acquired		On		Acquired		on
	on Exercise		Exercise		on		Vesting
Name	(#)		($)		Vesting (#)		($)
Robert Crockett		-		-		-		-
Daniel Iannotti		-		-		-		-
Sally Ramsey		-		-		-		-
F. Thomas Krotine		-		-		-		-
Kevin P. Stolz		-		-		-		-

35

Employment and Consulting Agreements

Three of our executives have employment agreements – Messrs. Crockett and Iannotti and Ms. Ramsey. Each was discussed above under “Compensation Discussion & Analysis”.

DIRECTOR COMPENSATION

All of our non-employee directors (i.e. other than Ms. Ramsey) received a one-time stock option award to acquire 100,000 shares of our common stock at the inception of their service.  The following summarizes stock option awards and compensation to our directors as of September 30, 2011:

Name	Fees Earned or Paid in Cash ($)(1)	Stock Awards	Option Awards ($) (1)	Non-Equity Incentive Plan compensation ($)	Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total Compensation ($)
James Juliano	$20,000	-	$3,921	-	-	-	$ 23,921
Joseph Nirta	-	$ 3,921	-	-	-	-	$3,921
James Orchard	-	-	$19,607	-	-	-	$19,607
Nick DeMiro(2)	-	-	$19,607	-	-	-	$19,607
John Salpietra(3)	-	-	$3,921	-	-	-	$3,921

(1)   Represents the grant date fair value of the award, calculated in accordance with ASC 718.  A summary of the assumptions made in the valuation of these awards is provided under Note A to our financial statements.

(2)   On March 24, 2011, Mr. DeMiro was appointed as a member of our Board of Directors.  

(3)   On March 24, 2011, Mr. Salpietra was appointed as a member of our Board of Directors.

I

ITEM 12  SECURITY OWENERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Beneficial Owners

At September 30, 2011, 46,685,292 shares of our common stock, $.001 par value per share, were issued and beneficially outstanding. The following table sets forth information as of September 30, 2011 with respect to beneficial ownership of our common stock by (i) each director and executive officer acting in the capacity as such on September 30, 2011 including any person holding the position of CEO or CFO at any time during the fiscal year of 2010, (ii) each person known by us to own beneficially more than five percent of our outstanding common stock, and (iii) all directors and executive officers as a group. This table has been prepared based on 46,685,292 shares of common stock beneficially outstanding on September 30, 2011. Unless otherwise indicated, the address of each such person is c/o Ecology Coatings, Inc., 24663 Mound Road, Warren, MI  48091. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated.

36

	Amount and
	Nature
	of Beneficial
Name and Address of Beneficial Owner(1)	Ownership		Percentage
James Juliano/Fairmount Five/Equity 11, Ltd.(2)		34,269,620		73.4%
24663 Mound Road Warren, MI  48091
Sally Ramsey(3)		2,700,000		5.8%
1238 Brittain Road Akron, OH  44310
Richard Stromback(4)		2,361,381		5.1%
1050 Northover Bloomfield Hills, MI  48304
John Bonner 43230 Garfield Rd Ste 160 Clinton Township, MI 48038		2,024,284		4.3%
Doug Stromback		600,000		1.3%
2000 Delaware Redford, MI  48240
Deanna Stromback		600,000		1.3%
2000 Delaware Redford, MI  48240
Joseph Nirta(2)		-0-
5600 Orion Road Rochester, MI  48306
James Orchard		-0-
24663 Mound Road Warren, MI  48091
Nick DeMiro		-0-
24663 Mound Road Warren, MI  48091
John M. (“Pete”) Salpietra
24663 Mound Road
Warren, MI 48091
Robert Crockett		-0-
24663 Mound Road Warren, MI  48091
F. Thomas Krotine		2,000		*
1238 Brittain Road Akron, OH  44310
Daniel Iannotti
24663 Mound Road Warren, MI  48091
Kevin Stolz
24663 Mound Road Warren, MI  48091
All executive officers and directors as a group (10 persons)		42,557,285		91.2%

37

*Less than 1%

(1) Any shares of common stock that any person named above has the right to acquire within 60 days of November 30, 2011, are deemed to be outstanding for purposes of calculating the ownership percentage of such person, but are not deemed to be outstanding for purposes of calculating the beneficial ownership percentage of any other person not named in the table above.  Both Mr. Juliano and Mr. Nirta are shareholders of Equity 11 and Fairmount Five.

(2) Represents common shares, warrants to purchase shares of our common stock and stock options.  The warrants are for the purchase of shares of our common stock at $3.75 per share. The options are for the purchase of shares of our common stock at $4.50 per share.  The warrants were issued in conjunction with the purchase of convertible preferred shares between July 28, 2008 and March 26, 2009 and expire five years after issuance.

(3)  Represents shares of common stock and options to acquire shares of our common stock.

(4)  Represents shares of common stock, shares of our common stock from conversion of convertible preferred shares and options to acquire shares of our common stock.

(5)  Represents common shares.

ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE

We anticipate that transactions with officers, directors and affiliates will be approved by a majority of the Board of Directors, including a majority of the disinterested members of the Board of Directors, and will be made on terms no less favorable to the Company than could be obtained from unaffiliated third parties.

We had the following unsecured notes payable to Equity 11 as of September 30, 2011.  All of the notes had an interest rate of 5% and were convertible into shares of our common stock.  All of these notes were converted on November 3, 2011 into shares of our common stock at a conversion price of $.50 per share.

Outstanding Principal Balance on 9/30/2011	Outstanding Principal Balance on 9/30/2010	Accrued Interest on 9/30/2011	Accrued Interest on 9/30/2010
$7,716	$7,716	$913	$494
$6,500	$6,500	$699	$350
$3,600	$3,600	$343	$152
$3,516	$3,516	$282	$98
$5,000	$5,000	$387	$125
$6,500	$6,500	$496	$157

We had an unsecured note payable to Nirta Enterprises, LLC. This note bears interest at five percent 5% per annum and is convertible under certain conditions.  The note was payable in full on June 30, 2010 and is in default.  Nirta Enterprises, LLC is wholly owned by Joseph Nirta, a member of our Board of Directors.  As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $24,000 and $24,000, respectively. Accrued interest of $1,806 and $555 was outstanding as of September 30, 2011 and September 30, 2010, respectively.  On November 3, 2011, this note was converted into shares of our common stock at a conversion price of $.50 per share.

38

We have a secured note payable to John Salpietra, a member of our Board of Directors. This note bears interest at 4.75% per annum, is secured by a lien on our intellectual property, and is convertible into shares of our common stock at $.06 per share. On December 15, 2011, the parties agreed to extend the due date to December 4, 2012. As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $600,000 and $528,000, respectively. Accrued interest of $36,366 and $7,294 was outstanding as of September 30, 2011 and September 30, 2010, respectively.

Effective May 1, 2011, we entered into a lease with J.M. Land Co. for the office space in Warren, Michigan. J.M. Land Co. is owned by James Juliano. We pay monthly rent of $1,000, and the gas and electric utilities which historically averaged approximately $1,000 per month.   See also Note 5 - Commitments and Contingencies - Lease Agreements.

Both James Juliano and Joseph Nirta are stockholders of Equity 11.  Equity 11 was the holder of our Series A and B convertible preferred shares which have been converted into 3,401,315 shares of our common stock.  Messrs. Juliano, Nirta and Salpietra are members of Fairmount Five which held 1,549 shares of our Series C convertible preferred shares and 3,500,000 shares of our common stock as of September 30, 2011.

39

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

During fiscal 2011 and 2010, UHY LLP provided various audit, audit related and non-audit services to us as follows:

	For the Year Ended September 30,
	2011	2010
Audit Fees	$61,900	$	61,900
Audit Related Fees	-0-		11,500
Tax Fees	14,385		3,450
All Other Fees	-0-		-0-
Total Fees	$76,285	$	76,450

Audit Fees.  Audit Fees consists of fees for professional services rendered by our principal accountants for the contemporaneous audit of our annual financial statements and the review of quarterly financial statements or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.

Audit Related Fees.  Audit Related Fees consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.”

Tax Fees and All Other Fees.  Tax Fees and All Other Fees Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit Fees,” “Audit-Related Fees” and “Tax Fees” above.

The firm of UHY LLP acts as our principal independent registered public accounting firm.  UHY LLP personnel work under the direct control of UHY LLP partners and are leased from wholly-owned subsidiaries of UHY Advisors, Inc. in an alternative practice structure.

The Board has approved the engagement of UHY LLP as our independent registered public accounting firm. The Board requires our independent registered public accounting firm to advise the Board in advance of the independent registered public accounting firm’s intent to provide any professional services to us other than services provided in connection with an audit or a review of our financial statements. The Board shall approve, in advance, any non-audit services to be provided to us by our independent registered public accounting firm.

Exchange Act rules generally require any engagement by a public company of an accountant to provide audit or non-audit services to be pre-approved by the audit committee of that company. This pre-approval requirement is waived with respect to the provision of services other than audit, review or attest services if certain conditions as set forth in Rule 2-01(c)(7) under the Exchange Act are met. All of the audit-related and tax services described above were pre-approved by our Board of Directors and, therefore, were not provided pursuant to a waiver of the pre-approval requirements set forth in such rule.

40

ITEM 15.  EXHIBITS

(a)   Financial Statements

41

(b)   Exhibits

Exhibit Number	Description
2.1	Agreement and Plan of Merger entered into effective as of April 30, 2007, by and among OCIS Corp., a Nevada corporation, OCIS-EC, INC., a Nevada corporation and a wholly-owned subsidiary of OCIS, Jeff W. Holmes, R. Kirk Blosch and Brent W. Schlesinger and ECOLOGY COATINGS, INC., a California corporation, and Richard D. Stromback, Deanna Stromback and Douglas Stromback. (1)
3.2	Amended and Restated Articles of Incorporation of Ecology Coatings, Inc., a Nevada corporation.(1)
3.3*	By-laws.
4.1	Form of Common Stock Certificate. (1)
10.1		Promissory Note between Ecology Coatings, Inc., a California corporation, and Richard D. Stromback, dated November 13, 2003. (1)
10.2		Promissory Note between Ecology Coatings, Inc., a California corporation, and Deanna Stromback, dated December 15, 2003. (1)
10.3		Promissory Note between Ecology Coatings, Inc., a California corporation, and Douglas Stromback, dated August 10, 2004. (1)
10.4		Employment Agreement between Ecology Coatings, Inc., a California corporation and Sally J.W. Ramsey dated January 1, 2007. (1)
10.5		License Agreement with E.I. Du Pont De Nemours and Ecology Coatings, Inc., a California corporation, dated November 8, 2004. (1)
10.6		License Agreement between Ecology Coatings, Inc., a California corporation and Red Spot Paint & Varnish Co., Inc., dated May 6, 2005. (1)
10.7		Lease for laboratory space located at 1238 Brittain Road, Akron, Ohio  44310. (1)
10.8		2007 Stock Option and Restricted Stock Plan. (1)
10.9		Form of Stock Option Agreement.  (1)
10.10		Allonge to Promissory Note dated November 13, 2003 made in favor of Richard D. Stromback dated February 6, 2008. (2)
10.11		Allonge to Promissory Note dated December 15, 2003 made in favor of Deanna. Stromback dated February 6, 2008. (2)
10.12		Allonge to Promissory Note dated August 10, 2004 made in favor of Douglas Stromback dated February 6, 2008. (2)
10.13		Promissory Note made in favor of Mitch Shaheen dated June 18, 2008. (3)
10.14		Promissory Note made in favor of Mitch Shaheen dated July 10, 2008. (4)
10.15		Extension of Promissory Note made in favor of Richard D. Stromback dated July 10, 2008. (3)
10.16		Warrant W-6. (5)
10.17		Warrant W-8. (6)
10.18		Warrant W-9. (7)
10.19		Warrant W-10. (8)
10.20		Warrant W-11. (9)
10.21		Warrant W-12. (10)
10.22		First Amendment to Employment Agreement of Sally J.W. Ramsey dated December 15, 2008. (11)
10.23		Employment Agreement with Robert G. Crockett dated September 21, 2009. (12)
10.24		Second Amendment of Employment Agreement with Sally J.W. Ramsey dated September 15, 2009. (12)
10.25		Promissory note dated May 11, 2010 in favor of John Salpietra (13)
10.26		Employment Agreement with Daniel Iannotti dated May 17, 2010 (14)
10.27		Headquarters Lease with Omega Development Corporation dated June 17, 2010 (15)
10.28		Extension of Salpietra Promissory Note Due Date dated October 15, 2010 (16)
10.29		Salpietra Note extension dated January 18, 2011 (17)
10.30		Fairmount Five Convertible Preferred Securities Agreement dated March 9, 2011 (18)
10.31		John Bonner Convertible Preferred Securities Agreement dated March 11, 2011 (18)
10.32	Extension of Salpietra Promissory Note dated December 4, 2011(19)
10.33	BASF License Agreement.(20)
21.1	List of subsidiaries. (2)
23.1*	Consent of UHY LLP, an independent registered public accounting firm for incorporation of audit opinion by reference into Form S-8.
31.1*	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of the Chief Executive Officer and Chief Financial Officer Certifications pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	The following financial information from the Ecology Coatings, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) CONSOLIDATED BALANCE SHEETS – ASSETS; (ii) CONSOLIDATED BALANCE SHEETS – LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT); (iii) CONSOLIDATED STATEMENTS OF OPERATIONS; (iv) STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT); (v) CONSOLIDATED STATEMENTS OF CASH FLOWS; and (vi) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

42

*           Filed herewith.

(1) Incorporated by reference from our Form 8-K filed with the SEC on July 30, 2007.

(2) Incorporated by reference from our Form 8-K filed with the SEC on February 12, 2008.

(3) Incorporated by reference from our Form 8-K filed with the SEC on June 24, 2008.

(4) Incorporated by reference from our Form 8-K filed with the SEC on July 17, 2008.

(5) Incorporated by reference from our Form 8-K filed with the SEC on January 23, 2009.

(6) Incorporated by reference from our Form 8-K filed with the SEC on February 18, 2009.

(7) Incorporated by reference from our Form 8-K filed with the SEC on February 27, 2009.

(8) Incorporated by reference from our Form 8-K filed with the SEC on March 10, 2009.

(9) Incorporated by reference from our Form 8-K filed with the SEC on March 27, 2009.

(10) Incorporated by reference from our Form 8-K/A filed with the SEC on April 16, 2009.

(11) Incorporated by reference from our Amendment No. 2 to S-1 registration statement filed with the SEC on October 20, 2009.

(12) Incorporated by reference from our Form 8-K filed with the SEC on September 23, 2009.

(13) Incorporation by reference from our Form 8-K filed with the SEC on May 17, 2010.

(14) Incorporation by reference from our Form 8-K filed with the SEC on May 21, 2010.

(15) Incorporation by reference from our Form 8-K filed with the SEC on September 2, 2010.

(16) Incorporation by reference from our Form 8-K filed with the SEC on October 18, 2010.

(17) Incorporation by reference from our Form 8-K filed with the SEC on January 24, 2011.

(18) Incorporation by reference from our Form 8-K filed with the SEC on March 14, 2011.

(19) Incorporation by reference from our Form 8-K filed with the SEC on December 16, 2011

(20) Incorporation by reference from our Form 8-K filed with the SEC on November 29, 2011.

43

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, thisth day of December, 2011.

Date:	December 16 , 2011	ECOLOGY COATINGS, INC.
		Registrant)
		By: /s/ Robert G. Crockett
		Robert G. Crockett
		Its:  Chief Executive Officer
		(Authorized Officer)
		By:  /s/ Kevin Stolz
		Kevin Stolz
		Its:  Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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

Signatures	Title	Date
/s/ Robert G. Crockett Robert G. Crockett	Chief Executive Officer (Principal Executive Officer)	December 16 , 2011
/s/Kevin P. Stolz Kevin P. Stolz	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	December 16  , 2011
/s/ James Juliano James Juliano	Director	December 16  , 2011
/s/ Sally Ramsey Sally Ramsey	Director & Vice President – New Product Development	December 16 , 2011
/s/ Joseph Nirta Joseph Nirta	Director	December 16  , 2011
/s/ James Orchard James Orchard	Director	December 16  , 2011
/s/ Nick DeMiro Nick DeMiro	Director	December 16 , 2011
/s/ John M. (“Pete”) Salpietra John M. (“Pete”) Salpietra	Director	December 16 , 2011

44

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Ecology Coatings, Inc.

We have audited the accompanying consolidated balance sheets of Ecology Coatings, Inc. and Subsidiary (the “Company”) as of September 30, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ecology Coatings, Inc. and Subsidiary as of September 30, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 9 to the consolidated financial statements, the Company’s recurring losses, negative cash flow from operations and net working capital deficiency raise substantial doubt about its ability to continue as a going concern.  Management’s plans as to these matters are also discussed in Note 9.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ UHY LLP

Farmington Hills, Michigan

December 16, 2011

45

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
ASSETS
	September 30, 2011		September 30, 2010
Current assets
Cash	$	71,784	$	2,814
Prepaid expenses		30,137		30,337
Current Assets		101,921		33,151
Property and equipment
Computer equipment		31,650		30,111
Furniture and fixtures		22,803		21,027
Test equipment		40,598		11,096
Signs		213		213
Software		6,057		6,057
Video		48,177		48,177
Property and equipment		149,498		116,681
Accumulated depreciation		(89,837)		(74,756)
Plant and equipment, net		59,661		41,925
Other
Patents-net		198,915		211,845
Trademarks-net		8,899		7,014
Other assets		207,814		218,859
Total Assets	$	369,396	$	293,935

The accompanying notes to the consolidated financial statements are an integral part of these balance sheets.

46

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' DEFICIT
	September 30, 2011			September 30, 2010
Current liabilities
Accounts payable	$	27,945	$		989,459
Accounts payable - related party		-			242,730
Credit card payable		-			114,622
Accrued liabilities		217,951			71,500
Interest payable		405,274			398,191
Notes payable		250,000			582,300
Notes payable - related party		900,332			828,332
Preferred dividends payable		31,566			60,618
Total current liabilities		1,833,068			3,287,752
Commitments and Contingencies (Note 5)
Stockholders' Deficit
Preferred stock - 10,000,000 $.001 par value shares authorized; 1,938 and 3,657 shares issued and outstanding as of September 30, 2011 and September 30, 2010, respectively		7			4
Common stock - 90,000,000 $.001 par value shares authorized; 14,158,506 and 32,910,684 issued and outstanding as of September 30, 2011 and September 30, 2010, respectively		14,159			32,934
Additional paid-in capital		27,296,580			22,738,182
Accumulated Deficit		(28,774,419)			(25,764,937)
Total Stockholders' Deficit		(1,463,673)			(2,993,817)
Total Liabilities and Stockholders'
Deficit	$	369,396		$	293,935

The accompanying notes to the consolidated financial statements are an integral part of these balance sheets.

47

ECOLOGY COATINGS, INC. AND SUBSIDIARY

Consolidated Statements of Operations

	For the Year Ended	For the Year Ended
	September 30, 2011	September 30, 2010
Revenues	$3,190	$         14,860
Officer salaries and fringe benefits	570,718	552,800
Professional fees	217,799	434,121
Other general and administrative expense	1,102,536	917,412
Total general and administrative expenses	1,891,053	1,904,333
Operating loss	(1,887,863)	(1,889,473)
Other income (expenses)
Income from forgiveness of payables and debt	872,861	206,983
Other non-operating income	1,268	-
Interest expense	(204,917)	(218,570)
Total other income (expenses),net	669,212	(11,587)
Net loss	$(1,218,651)	$(1,901,060)
Preferred dividend – beneficial
conversion features	(1,698,334)	(988,544)
Preferred dividends – stock dividends	(92,497)	(186,516)
Net loss available to common shareholders	(3,009,482)	(3,076,120)
Basic and diluted net loss per share	$(0.31)	$(0.47)
Basic and diluted weighted average
shares outstanding	9,738,194	6,582,137

The accompanying notes to the consolidated financial statements are an integral part of these statements.

48

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Statement of Changes in Stockholders’ Equity (Deficit) for the Years Ended September 30, 2011 and 2010
									Additional					Total
									Paid In		Accumulated			Stockholders'
	Common Stock				Preferred Stock				Capital		Deficit			Equity
	Shares		Amount		Shares		Amount							(Deficit)
Balance at September 30, 2009		32,835,684	$	32,859		3,002	$	2	$	20,645,299	$	(22,688,817	)	$	(2,010,657)
Issuance of preferred stock						491		2		490,998					491,000
Beneficial conversion feature on preferred stock										988,544		(988,544)			-
Stock option expense										427,308					427,308
Stock issued for services		75,000		75						22,425					22,500
Preferred dividends						164		-		163,608		(186,516)			(22,908)
Net Loss												(1,901,060)			(1,901,060)
Balance at September 30, 2010		32,910,684	$	32,934		3,657	$	4		22,738,182		(25,764,937)			(2,993,817)
Adjustment for 5 for 1 reverse split		(26,328,547)		(39,957)						39,957					-
Issuance of preferred stock						1,865		1		1,864,999					1,865,000
Beneficial conversion feature on preferred stock										1,698,334		(1,698,334)			-
Stock option expense										730,243					730,243
Stock issued for payables		675,000		675						113,825					114,500
Conversion of preferred shares		6,901,369		20,507		(3,706)		(3)		(20,504)					-
Preferred dividends						122		-		121,549		(92,497)			29,052
Net Loss												(1,218,651)			(1,218,651)
Balance at September 30, 2011		14,158,506	$	14,159		1,938	$	2		27,296,585		(28,774,419)			(1,463,673)

The accompanying notes to the consolidated financial statements are an integral part of these statements.

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ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
	For the	For the
	Year Ended	Year Ended
	September 30, 2011	September 30, 2010
OPERATING ACTIVITIES
Net  loss	$(1,218,651)	$(1,901,060)
Adjustments to reconcile net loss
to net cash used in operating activities:
Income from forgiveness of payables and debt	(872,861)	(206,983)
Depreciation and amortization	34,179	45,248
Stock option expense	730,243	427,308
Issuance of stock for payables, services	114,500	22,500
Loss from patent abandonment	-	222,112
Changes in Asset and Liabilities
Prepaid expenses	200	(28,937)
Accounts payable	(511,608)	(168,021)
Accrued liabilities	146,451	(4,584)
Credit card payable	(22,719)	-
Interest payable	7,083	209,140
Net Cash Used In Operating Activities	(1,593,182)	(1,047,235)
INVESTING ACTIVITIES
Purchase of  property and equipment	(32,817)	(1,400)
Increase in patents and trademarks	(8,928)	(9,968)
Net Cash Used in Investing Activities	(38,745)	(11,368)
FINANCING ACTIVITIES
Bank overdraft	-	(200)
Repayment of debt	(236,103)	-
Proceeds from issuance of debt	292,000	570,616
Proceeds from issuance of convertible preferred stock	1,645,000	491,000
Net Cash Provided By Financing Activities	1,700,897	1,061,416
Net Change in Cash	68,970	2,814
CASH AT BEGINNING
BEGINNING OF PERIOD	2,814	-
CASH AT END
OF PERIOD	$71,784	$               2,814

The accompanying notes to the consolidated financial statements are an integral part of these financial statements.

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ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
	For the	For the
	Year Ended	Year Ended
	September 30, 2011	September 30, 2010
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid	$         193,897	$            26,534
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES

 Debt converted into preferred shares $         220,000 $             2,500

 The accompanying notes to the consolidated financial statements are an integral part of these financial statements.

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ECOLOGY COATINGS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  

SEPTEMBER 30, 2011 AND SEPTEMBER 30, 2010

Note 1 — Summary of Significant Accounting Policies

Description of the Company.   We were originally incorporated on March 12, 1990 in California (“Ecology-CA”).  Our current entity was incorporated in Nevada on February 6, 2002 as OCIS Corp. (“OCIS”).  OCIS completed a merger with Ecology-CA on July 26, 2007 (the “Merger”). In the Merger, OCIS changed its name from OCIS Corporation to Ecology Coatings, Inc.  We develop EcoBloc™ enabled, ultra-violet curable coatings that are designed to drive efficiencies and clean processes in manufacturing.  We create proprietary coatings with unique performance and environmental attributes by leveraging our platform of integrated nano-material technologies that reduce overall energy consumption and offer a marked decrease in drying time. Ecology’s target markets consist of electronics, automotive and trucking, paper products and original equipment manufacturers (“OEMs”).

Reclassifications.  Reclassifications have been made to the prior year financial statements to conform with the current year presentation.

Basis of Presentation. On February 7, 2011, our shareholders approved a 1-for-5 reverse stock split.  In accordance with U.S. Generally Accepted Accounting Principles, we have restated all share and per share related information to conform to this reverse split for all periods presented. This includes information related to stock options, warrants, and convertible preferred shares. See Note 6.

Principles of Consolidation.   The consolidated financial statements include all of our accounts and the accounts of our wholly owned subsidiary Ecology-CA.  All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates.   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition.   Revenues from licensing contracts are recorded ratable over the life of the contract.  Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely.

Income from forgiveness of payables and Debt.   Income from the forgiveness of payables and/or debt is recognized when all of the conditions associated with the forgiveness have been met. During the year ended September 30, 2011, we recognized $872,861 in income from forgiveness of payables and debt. We also reached a settlement with a law firm to whom we owed approximately $340,000.  In exchange for a cash payment of $30,000 and the issuance of 650,000 shares of our common stock, the firm released its claim subject to two conditions. The first condition was amended on December 2, 2011 and now provides that we will issue an additional 25,000 shares of our common stock and pay amounts due as of December 2, 2011. The second condition requires that if we file bankruptcy on or before December 29, 2011, the entire amount of the payable not yet settled—approximately $178,000 – could be filed as a bankruptcy claim. The amount of the payable not yet settled - $178,000 - is reflected in the accrued liabilities figure on our balance sheet dated September 30, 2011.

Loss Per Share. Basic loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of shares of common stock outstanding during the period.  Diluted loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of shares of common stock and potentially dilutive securities outstanding during the period.  Potentially dilutive shares consist of the incremental common shares issuable upon the exercise of stock options and warrants and the conversion of convertible debt and convertible preferred stock. Potentially dilutive shares are excluded from the weighted average number of shares if their effect is anti-dilutive.  None of the stock options or warrants outstanding or stock associated with the convertible debt or with the convertible preferred shares during each of the periods presented was included in the computation of diluted loss per share as they were anti-dilutive.  As of September 30, 2011 and September 30, 2010, there were 34,795,261 and 5,306,820 potentially dilutive shares outstanding, respectively.  

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Property and Equipment.   Property and equipment is stated at cost less accumulated depreciation.  Depreciation is recorded using the straight-line method over the following useful lives:

Computer equipment	3-10 years
Furniture and fixtures	3-7 years
Test equipment	5-7 years
Signs	7 years
Software	3 years
Marketing and Promotional Video	3 years

Repairs and maintenance costs are charged to operations as incurred. Betterments or renewals are capitalized as incurred.

Patents.   It is our policy to capitalize costs associated with securing a patent.  Costs consist of legal and filing fees.  Once a patent is issued, it will be amortized on a straight-line basis over its estimated useful life.  Seven patents were issued as of September 30, 2011 and are being amortized over 8 years.

        Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Stock-Based Compensation.   Employee and director stock-based compensation expense is measured utilizing the fair-value method with expense charged to earnings over the vesting period on a straight-line basis.

We account for stock options granted to non-employees under the fair-value method with stock-based compensation expense being charged to earnings on the earlier of the date services are performed or a performance commitment exists.

Expense Categories.   Salaries and Fringe Benefits of $570,718 and $552,800 for the years ended September 30 , 2011 and 2010, respectively, include wages paid to and insurance benefits for our officers.  Professional fees of $217,799 and $434,121 for the years ended September 30, 2011 and 2010, respectively, include amounts paid to attorneys, accountants, and consultants, as well as any stock based compensation expense for those services.  

Recent Accounting Pronouncements

We have reviewed all Accounting Standards Updates issued by the Financial Accounting Standards Board since we last issued financial statements as part of our Form 10-Q filed on August 15, 2011 and have determined none of them would have a material effect on the consolidated financial statements upon adoption.

Note 2 — Concentrations

For the year ended September 30, 2011 and 2010, we had revenues of $3,190 and $14,860, respectively. One customer accounted for all of our revenues for the years ended September 30, 2011 and 2010.  As of September 30, 2011 and 2010, $0 was due from this customer.

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Note 3 — Related Party Transactions

We have borrowed funds for our operations from certain major stockholders, directors and officers as disclosed below.

We have an unsecured note payable due to Deanna Stromback, a principal shareholder and former director and sister of our former Chairman, Rich Stromback, which bears interest at 4% per annum with principal and interest due on December 31, 2009.  As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $110,500.  The accrued interest on the note was $23,491 and $18,263 as of September 30, 2011 and September 30, 2010, respectively.  The note is currently in default and carries conversion rights that allow the holder to convert all or part of the outstanding balance into shares of our common stock upon mutually agreeable terms and conversion price.

We have an unsecured note payable due to Doug Stromback, a principal shareholder and former director and brother of our former Chairman, Rich Stromback, which bears interest at 4% per annum with principal and interest due on December 31, 2009.  As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $133,000.  The accrued interest on the note was $28,281 and $21,988 as of September 30, 2011 and September 30, 2010, respectively.  The note is currently in default and carries conversion rights that allow the holder to convert all or part of the outstanding balance into shares of our common stock upon mutually agreeable terms and conversion price.

We have an unsecured note payable to Equity 11, Ltd. (“Equity 11”) which is controlled by James Juliano, our Chairman. This note bears interest at 5% per annum and is convertible under certain conditions. It is due within 15 days of demand by the holder. As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $7,716.  Accrued interest of $913 and $494 was outstanding of September 30, 2011 and September 30, 2010, respectively.   This note was converted into shares of our common stock at a conversion price of $.50 per share on November 3, 2011.  See Note 10 – Subsequent Events.

We have an unsecured note payable to Equity 11. This note bears interest at 5% per annum and is convertible under certain conditions. It is due within 15 days of demand by the holder. As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $6,500.  Accrued interest of $699 and $350 was outstanding of September 30, 2011 and September 30, 2010, respectively.  This note was converted into shares of our common stock at a conversion price of $.50 per share on November 3, 2011.  See Note 10 – Subsequent Events.

We have an unsecured note payable to Equity 11. This note bears interest at 5% per annum and is convertible under certain conditions. It is due within 15 days of demand by the holder. As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $3,600. Accrued interest of $343 and $152 was outstanding of September 30, 2011 and September 30, 2010, respectively.  This note was converted into shares of our common stock at a conversion price of $.50 per share on November 3, 2011.  See Note 10 – Subsequent Events.

We have an unsecured note payable to Equity 11. This note bears interest at 5% per annum and is convertible under certain conditions. It is due within 15 days of demand by the holder. As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $3,516. Accrued interest of $282 and $98 was outstanding of September 30, 2011 and September 30, 2010, respectively.  This note was converted into shares of our common stock at a conversion price of $.50 per share on November 3, 2011.  See Note 10 – Subsequent Events.

We have an unsecured note payable to Equity 11. This note bears interest at 5% per annum and is convertible under certain conditions. It is due within 15 days of demand by the holder. As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $5,000. Accrued interest of $387 and $125 was outstanding as of September 30, 2011 and September 30, 2010, respectively.  This note was converted into shares of our common stock at a conversion price of $.50 per share on November 3, 2011.  See Note 10 – Subsequent Events.

We have an unsecured note payable to Equity 11. This note bears interest at 5% per annum and is convertible under certain conditions. It is due within 15 days of demand by the holder. As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $6,500. Accrued interest of $496 and $157 was outstanding as of September 30, 2011 and September 30, 2010, respectively.  This note was converted into shares of our common stock at a conversion price of $.50 per share on November 3, 2011.  See Note 10 – Subsequent Events.

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We have an unsecured note payable to Nirta Enterprises, LLC. This note bears interest at five percent 5% per annum and is convertible under certain conditions.  The note was payable in full on September 30, 2010 and is in default.  Nirta Enterprises, LLC is wholly owned by Joseph Nirta, a member of our Board of Directors.  As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $24,000. Accrued interest of $1,806 and $555 was outstanding as of September 30, 2011 and September 30, 2010, respectively.  This note was converted into shares of our common stock at a conversion price of $.50 per share on November 3, 2011.  See Note 10 – Subsequent Events.

We have a secured note payable to John Salpietra, a member of our Board of Directors. This note bears interest at 4.75% per annum, is secured by a lien on our intellectual property, and is convertible into shares of our common stock at $.06 per share. On December 15, 2011, the parties agreed to extend the due date to December 4, 2012. As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $600,000 and $528,000, respectively. Accrued interest of $36,366 and $7,294 was outstanding as of September 30, 2011 and September 30, 2010, respectively.

On March 30, 2011, we paid $74,862 to James Juliano to reimburse him for legal fees that he paid on our behalf for counsel to our Board of Directors, shareholder communications, negotiating our new investment agreement, and for negotiations with two note holders.

On September 2, 2010, we entered into a lease with Omega Development Corporation for office space for our headquarters located in Warren, Michigan.  Omega Development Corporation is owned by James Juliano.  The lease was effective June 17, 2010 with a term ending December 17, 2010.  Effective May 1, 2011, we entered into a lease with J.M. Land Co. for the same office space. J.M. Land Co. is owned by James Juliano. We pay monthly rent of $1,000, and the gas and electric utilities which has historically averaged approximately $1,000 per month.   See also Note 5—Commitments and Contingencies—Lease Agreements.  

On April 22, 2011, our Board of Directors approved compensation for our Chairman, James Juliano, of $4,000 per month. We paid $20,000 in director fees to Mr. Juliano for the year ended September 30, 2011.  We did not pay any director fees to Mr. Juliano for the year ended September 30, 2010.

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Note 4 — Notes Payable

We have the following notes:

	September 30, 2011	September 30, 2010
George Resta Note:  Subordinated note payable, 25% per annum, unsecured, principal and interest was due June 30, 2008; the Company extended the maturity for 30 days, to July 30, 2008 in exchange for warrants to purchase 3,000 shares of the Company’s common stock at $8.75 per share. Additionally, the Company granted the note holder warrants to purchase 2,500 shares of the Company’s common stock at $8.75 per share. The note, together with accrued interest of $29,067 then owing, was settled on March 4, 2011.	$-		$38,743
Investment Hunter, LLC Note:  Subordinated note payable, 25% per annum, unsecured, principal and interest was due June 30, 2008; the Company extended the maturity for 30 days, to July 30, 2008 in exchange for warrants to purchase 3,000 shares of the Company’s common stock at $8.75 per share. Additionally, the Company granted the note holder warrants to purchase 25,000 shares of the Company’s common stock at $8.75 per share. The note, together with accrued interest of $164,830 was settled on March 4, 2011	-		293,557
Mitchell Shaheen Note:  Subordinated note payable, 25% per annum, unsecured, principal and interest was due July 18, 2008. Additionally, the Company issued a warrant to purchase 20,000 shares of the Company’s common stock at a price equal to $3.75 per share (the “Warrant”). The Warrant is exercisable immediately and carries a ten (10) year term. The Holder may convert all or part of the then-outstanding Note balance into shares at $2.50 per share. If applicable, the Company has agreed to include the Conversion Shares in its first registration statement filed with the Securities and Exchange Commission. Demand for repayment was made on August 27, 2008. Accrued interest of $183,776 and $127,653 was outstanding as of September 30, 2011 and September 30, 2010, respectively. This note is currently in default.	150,000		150,000
Mitchell Shaheen Note:  Subordinated note payable, 25% per annum, unsecured, principal and interest was due August 10, 2008. Additionally, the Company issued a warrant to purchase 20,000 shares of the Company’s common stock at a price equal to $2.50 per share (the “Warrant”). The Warrant is exercisable immediately and carries a ten (10) year term. The Holder may convert all or part of the then-outstanding Note balance into shares at $2.50 per share. If applicable, the Company has agreed to include the Conversion Shares in its first registration statement filed with the Securities and Exchange Commission. Demand for repayment was made on August 27, 2008. Accrued interest of $125,850 and $87,878 was outstanding as of September 30, 2011 and September 30, 2010, respectively. This note is currently in default.	100,000		100,000
	$250,000		$582,300

$250,000 and $582,300 of the notes payable in the foregoing table were in default as of September 30, 2011 and September 30, 2010, respectively.  

 Note 5 — Commitments and Contingencies

Consulting Agreements.

On September 17, 2008, we entered into an agreement with RJS Consulting LLC (“RJS”), an entity owned by our former chairman of the Board of Directors, Richard Stromback, under which RJS would provide advice and consultation to us regarding strategic planning, business and financial matters, and revenue generation.  The agreement expired on September 17, 2011 and called for monthly payments of $16,000, commissions on licensing revenues equal to 15% of said revenues, commissions on product sales equal to 3% of said sales, $1,000 per month to pay for office rent reimbursement, expenses associated with RJS’s participation in certain conferences, information technology expenses incurred by the consultant in the performance of duties relating to the Company, and certain legal fees incurred by Richard Stromback during his tenure as our Chief Executive Officer. Stromback did not perform any services under this agreement. We therefore stopped accruing amounts due under this agreement and wrote off the amount previously due in fiscal year 2010.

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On September 17, 2008, we entered into an agreement with DAS Ventures LLC (“DAS”) under which DAS would act as a consultant to us.  DAS Ventures, LLC is wholly owned by Doug Stromback, a principal shareholder and former director and brother of Rich Stromback.   Under this agreement, DAS was to provide business development services for which it would receive commissions on licensing revenues equal to 15% of revenues and commissions on product sales equal to 3% of said sales and reimbursement for information technology expenses incurred by the consultant in the performance of duties relating to the Company. This agreement expired on September 17, 2011.  We did not record any expense for this agreement during either fiscal year 2011 or 2010.

Employment Agreements.

On January 1, 2007, we entered into an employment agreement with Sally J.W. Ramsey who is our founder and serves as VP of New Product Development. The agreement expires on January 1, 2012.   She was paid an annual base salary of $180,000 in 2007.  From January 1, 2008 through December 15, 2008, she received an annual base salary of $200,000. On December 15, 2008, we amended the agreement to reduce Ms. Ramsey’s annual base salary to $60,000 and on September 21, 2009 her annual salary was increased to $75,000.  On May 18, 2011, we increased her annual base salary to $100,000. Additionally, on April 22, 2011, she forfeited previously issued stock options and received options to purchase 2.1 million shares of our common stock at a price of $0.20 per share. The options vested upon issuance and expire on April 22, 2021.

On September 21, 2009, we entered into an employment agreement with Robert G. Crockett, our CEO. Mr. Crockett has served as our CEO since September 15, 2008. The agreement expires on September 21, 2012. Mr. Crockett receives an annual base salary of $200,000.  On April 22, 2011, Mr. Crockett forfeited previously issued stock options and  he received options to purchase 1.8 million shares of our common stock at a price of $.20 per share.  The agreement may be terminated prior to the end of the term for cause. If Mr. Crockett’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause. As of September 30, 2011, Mr. Crockett had deferred $40,000 of his salary since May 2010.

On September 21, 2009, we entered into an employment agreement with Daniel V. Iannotti, our Vice President, General Counsel & Secretary. Mr. Iannotti served as our Vice President, General Counsel from August 11, 2008 until March 23, 2010 and rejoined us on May 17, 2010. His employment agreement expires on September 17, 2012. Mr. Iannotti receives an annual base salary of $100,000. On April 22, 2011, Mr. Iannotti forfeited previously issued stock options and received options to purchase 300,000 shares of our common stock at a price of $.20 per share.  The agreement may be terminated prior to the end of the term for cause. If Mr. Iannotti’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause.

Contingencies.

On November 18, 2009, Investment Hunter, LLC, one of our note holders, filed suit in the Supreme Court of New York for repayment of $360,920 plus 25% interest, attorneys’ fees and costs.  We have previously made payments totaling $300,000 to Investment Hunter.  On March 15, 2010, the Court found in favor of Investment Hunter, LLC and awarded it $367,000 plus interest from the date of the lawsuit. A judgment against us in the amount of $367,000 plus interest was entered on August 4, 2010.  We had accrued $440,267 including interest relating to this note, as of December 31, 2010. We settled this lawsuit on March 4, 2011 for less than the amount we had accrued.

On December 15, 2009, McLarty Associates LLC, one of our prior consultants, filed suit in the Superior Court in Washington, D.C. against us seeking an additional $150,000 from us under our consulting agreement.  We had previously paid McLarty Associates $210,000 and issued 18,000 shares of common stock. On August 5, 2010, the court granted McLarty’s motion for summary judgment and on August 6, 2010 the court entered a judgment against us in the amount of $150,000. The amount was included in accounts payable on our balance sheet as of September 30, 2010.  We settled this lawsuit on February 28, 2011 for less than the amount we had accrued.

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 On September 12, 2010, Thomson Reuter (Markets), LLC filed suit in the 37thJudicial District Court in Warren, Michigan for nonpayment of services provided in the amount of $20,297 plus interest.  We settled this lawsuit on February 28, 2011.  We settled this lawsuit on March 23, 2011 for less than the amount we had accrued.

On October 26, 2010, Mitch Shaheen, one of our note holders, filed suit in the United States District Court for the Eastern District of Michigan seeking repayment of principal, 25% interest and attorneys’ fees for amounts under promissory notes we issued to him in the original principal amount of $250,000.  Our position is that a settlement was reached by the parties.  We have filed an answer and have been engaged in discussions to resolve his suit. We have recorded a liability of $559,626 on our balance sheet including interest relating to this note as of September 30, 2011.

On October 26, 2010, Semple, Marchal & Cooper, LLP, our former auditor, filed suit in the Superior Court of the County of Maricopa Arizona for nonpayment of professional fees in the amount of $37,882 plus interest.  We had accrued $61,845 in our accounts payable as of December 31, 2010 for this vendor. We settled this lawsuit on February 28, 2011.  We settled this lawsuit on January 15, 2011 for less than the amount we had accrued.

Lease Commitments.

a.

We lease office and lab facilities in Akron, OH on a month-to-month basis for $1,200 per month.  Rent expense for the three months ended June 30, 2011 and 2010 was $18,600 and $21,000, respectively. Rent expense for the six months ended June 30, 2011 and 2010 was $9,000 and $10,800, respectively.

b.

Effective May 1, 2011, we entered into a lease with J.M. Land Company for office space for our headquarters located in Warren, Michigan.  The lease was effective May 1, 2011 and expires on April 30, 2012.  This lease replaces the earlier lease agreement on the same premises.   Monthly rent is $1,000 and  we pay the gas and electric utilities for our headquarters building which has historically averaged approximately $1,000 per month.  Rent and utilitiesexpenses for the year ended September 30, 2011 totaled $13,121.

Minimum future rental payments under the above operating leases as of September 30, 2011 are as follows:

Year Ending September 30,	Amount
2012	$14,000
TOTAL:	$14,000

Note 6 — Equity

Warrants.   On December 16, 2006, we issued warrants to Trimax, LLC to purchase 100,000 shares of our stock at $10.00 per share.  On November 11, 2008, the exercise price of the warrants was changed to $4.50 per share.  The warrants vested on December 17, 2007. As of September 30, 2011, the remaining life of the warrants is 5.2 years.

On February 6, 2008, we issued warrants to Hayden Capital  to purchase 52,500 shares of our common stock at the lower of $10.00 per share or at the average price per share at which we sell our debt and/or equity in our next private or public offering.  The warrants vested upon issuance.  As of September 30, 2011, the remaining life of the warrants is 6.2 years.

On March 1, 2008, we issued warrants to George Resta to purchase 2,500 shares of our common stock at the lower of $10.00 per share or at the average price per share at which we sell our debt and/or equity in our next private or public offering.  The warrants vested upon issuance.  As of September 30, 2011, the remaining life of the warrants is 6.2 years.

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On March 1, 2008, we issued warrants to Investment Hunter, LLC to purchase 25,000 shares of our common stock at the lower of $10.00 per share or at the average price per share at which we sell our debt and/or equity in our next private or public offering.  The warrants vested upon issuance.  As of September 30, 2011, the remaining life of the warrants is 6.2 years.

On June 9, 2008, we issued warrants to Hayden Capital to purchase 42,000 shares of our common stock at the lower of $10.00 per share or at the average price per share at which we sell our debt and/or equity in our next private or public offering.  The warrants vested upon issuance.  As of September 30, 2011, the remaining life of the warrants is 6.5 years.

On June 21, 2008, we issued warrants to Mitchell Shaheen to purchase 20,000 shares of our common stock at $3.75 per share.  The warrants vested upon issuance. As of September 30, 2011, the remaining life of the warrants is 6.5 years.

On July 14, 2008, we issued warrants to Mitchell Shaheen to purchase 20,000 shares of our common stock at $2.50 per share.  The warrants vested upon issuance.  As of September 30, 2011, the remaining life of the warrants is 6.5 years.

On July 14, 2008, we issued warrants to George Resta to purchase 3,000 shares of our common stock at $8.75 per share. The warrants vested upon issuance.  As of September 30, 2011, the remaining life of the warrants is 6.5 years.

On July 14, 2008, we issued warrants to Investment Hunter, LLC to purchase 3,000 shares of our common stock at $8.75 per share. The warrants vested upon issuance.  As of September 30, 2011, the remaining life of the warrants is 6.5 years.

We issued the following immediately vested warrants to Equity 11 in conjunction with Equity 11’s purchases of our convertible preferred stock:

	Strike	Date	Expiration
Number	Price	Issued	Date
20,000	$3.75	July 28, 2008	July 28, 2018
1,000	$3.75	August 20, 2008	August 20, 2018
5,000	$3.75	August 27, 2008	August 27, 2018
100,000	$3.75	August 29, 2008	August 29, 2018
75,000	$3.75	September 26, 2008	September 26, 2018
9,400	$3.75	January 23, 2009	January 23, 2014
3,000	$3.75	February 10, 2009	February 10, 2014
2,500	$3.75	February 18, 2009	February 18, 2014
4,000	$3.75	February 26, 2009	February 26, 2014
2,300	$3.75	March 10, 2009	March 10, 2014
8,000	$3.75	March 26, 2009	March 26, 2014
2,150	$3.75	April 14, 2009	April 14, 2014
3,350	$3.75	April 29, 2009	April 29, 2014

On November 11, 2008, we issued warrants to purchase 400,000 shares of our common stock at $2.50 per share to Trimax. The warrants vested upon issuance.  The remaining life of the warrants is 7.2 years.

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Shares.  

On August 28, 2008, we entered into an agreement with Equity 11 to issue up to $5,000,000 in convertible preferred securities.  The securities accrue cumulative dividends at 5% per annum and the entire amount then outstanding is convertible at the option of the investor into shares of our common stock at $2.50 per share.  The preferred securities carry “as converted” voting rights.  As of December 1, 2010, we had issued 2,623 of these convertible preferred shares.  The shares were converted into 1,049,200 common shares on December 22, 2010. Each convertible preferred security sold under this agreement had warrants (100 warrants for each $1,000 convertible preferred share sold) attached to it.  The warrants are immediately exercisable, expire in five years, and entitle the investor to purchase one share of our common stock at $3.75 per share for each warrant issued.  The table above identifies warrants issued in conjunction with Equity 11’s additional purchases of our 5% convertible preferred stock through December 31, 2010.  On December 1, 2010, we issued 62 shares of convertible preferred stock in lieu of dividends. These shares were converted into 24,800 shares of common stock on December 22, 2010.

On May 15, 2009, we entered into an agreement with Equity 11 to issue convertible preferred securities at $1,000 per share. The securities accrue cumulative dividends at 5% per annum and the entire amount then outstanding is convertible at the option of the investor into shares of our common stock at a price equal to 20% of the average closing price of our common shares for the five trading days immediately preceding the date of issuance. The preferred securities carry “as converted” voting rights.  As of December 31, 2010, we had issued 872 of these convertible preferred securities. These shares were converted into 2,352,115 common shares on December 22, 2010.  Included in this converted shares figure were 200,000 common shares resulting from the issuance of 20 shares of convertible preferred stock on December 1, 2010 in lieu of cash dividends.  On June 1, 2011, we issued 10 shares of convertible preferred stock, Series B, in settlement of a partial dividend owing to Equity 11.  These shares are convertible into 482,786 shares of our common stock.

On September 30, 2009, Ecology Coatings, Inc. and Stromback Acquisition Corporation  (SAC), entered into a Securities Purchase Agreement for the issuance and sale of our 5.0% Cumulative Convertible Preferred Shares, Series B at a purchase price of $1,000 per share.  SAC is owned by Richard Stromback, a former member of our Board of Directors.  Until April 1, 2010, SAC had the right to purchase up to 3,000 Convertible Preferred Shares.  The Convertible Preferred Shares have a liquidation preference of $1,000 per share.  SAC may convert the Convertible Preferred Shares into our common stock at a conversion price that is seventy seven percent (77%) of the average closing price of our common stock on the OTCQB marketplace for the five trading days prior to each investment.  The Convertible Preferred Shares will pay cumulative cash dividends at a rate of 5% per annum, subject to declaration by our Board of Directors, on December 1 and June 1 of each year.  We have agreed to provide piggyback registration rights for common stock converted by SAC under a Registration Rights Agreement.  One investment of $240,000 was made under this agreement, on October 1, 2009. Per the terms of the agreement and at Mr. Stromback’s direction, we paid $120,000 to him on that date in settlement of past payables owed to him directly or to RJS Ventures, LLC, a company controlled by him.  As of June 30, 2011, we had issued 258 of these Preferred Series B shares. These shares are convertible into 223,353 of our common shares.

In the event of a voluntary or involuntary dissolution, liquidation or winding up, Equity 11 and SAC will be entitled to be paid a liquidation preference equal to the stated value of the convertible preferred shares ($1,000 per share), plus accrued and unpaid dividends and any other payments that may be due on such shares, before any distribution of assets may be made to holders of our common stock.

On March 1, 2011, we issued 25,000 shares of our common stock to Quarles and Brady, a law firm to whom we owed approximately $143,000. These shares, along with a cash payment, were accepted in full settlement of the amounts then owing.

On March 1, 2011, we issued 650,000 shares of our common stock to Wilson Sonsini Goodrich & Rosati P.C., a law firm to whom we owed approximately $340,000. They accepted these shares, along with a cash payment, in full settlement of the amounts then owing subject to the conditions discussed in Note 1 (“Summary of Accounting Policies”) above.

On March 9, 2011 and March 11, 2011, respectively, we entered into agreements with Fairmount Five, LLC and John Bonner to sell a minimum of an aggregate of 2,520 of our 5.0% Cumulative Convertible Preferred Shares, Series C at a purchase price of $1,000 per share. The securities accrue cumulative dividends at 5% per annum and the entire amount then outstanding is convertible at the option of the investors into shares of our common stock at $.06 per share.  The preferred securities carry “as converted” voting rights. In the event of a voluntary or involuntary dissolution, liquidation or winding up, the holders of these shares will be entitled to be paid a liquidation preference equal to the stated value of the convertible preferred shares ($1,000 per share), plus accrued and unpaid dividends and any other payments that may be due on such shares, before any distribution of assets may be made to holders of our common stock. The initial closing of the sale of our Convertible Preferred Shares occurred on March 9, 2011. Fairmount Five acquired 1,045 Convertible Preferred Shares at an aggregate purchase price of $1,045,000. 

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On March 9, 2011, we issued James Juliano 100 of our 5.0% Cumulative Convertible Preferred Shares, Series C, in settlement of a note for $100,000 and the accrued interest thereon that we had previously issued on December 22, 2010.

On March 9, 2011, we issued John Salpietra  120 of our 5.0% Cumulative Convertible Preferred Shares, Series C, in settlement of a note for $120,000 and the accrued interest thereon that we had previously issued on February 14, 2011.  These shares are convertible into 2,000,000 of our common shares.

On April 12, 2011, we sold 100 of our convertible preferred shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On May 9, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On May 31, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On June 1, 2011, we issued 15 shares of our convertible preferred shares, Series C, to Fairmount Five as a dividend in lieu of cash.  These shares are convertible into 1,666,667 of our common shares.

On June 29, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On July 26, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On August 26, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On September 14, 2011, Fairmount Five converted 180 of our Convertible Preferred Shares, Series C, into 3,000,000 shares of our common stock.

On September 23, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On September 28, 2011, Fairmount Five converted 30 of our Convertible Preferred Shares, Series C, into 500,000 shares of our common stock.

Note 7 — Stock Options

Stock Option Plan.   On May 9, 2007, we adopted a stock option plan and reserved 900,000 shares for the issuance of stock options or for awards of restricted stock. On December 2, 2008, our Board of Directors authorized the addition of 200,000 shares of our common stock to the 2007 Plan.  On February 7, 2011, our shareholders voted to add 4,400,000 shares of our common stock to the stock option plan. All prior grants of options were included under this plan.  The plan provides for incentive stock options, nonqualified stock options, rights to restricted stock and stock appreciation rights.  Eligible recipients are employees, directors, and consultants.  Only employees are eligible for incentive stock options.

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The vesting terms are set by the Board of Directors. All options expire 10 years after issuance.

We did not grant any non-statutory options outside the plan during the year ended September 30, 2011.

	Weighted Average Exercise Price Per Share	Number of Options	Weighted Average (Remaining) Contractual Term	Aggregate Fair Value
Outstanding as of September 30, 2009	$5.65	1,026,224	9.2	$4,569,065
Granted	$.30	60,000	9.9	$16,055
Exercised	$    -	-	-	-
Forfeited	$    -	-	-	-
Outstanding as of September 30, 2010	$5.25	1,086,224	7.9	$4,585,120
Exercisable	$6.05	796,328	6.8	$4,336,532
Granted	$.20	4,860,000	9.5	952,855
Exercised	$-	-	-	-
Forfeited	$4.32	595,044	-	1,388,212
Outstanding as of September 30, 2011	$.79	5,351,180	9.3	4,149,763
Exercisable	$1.40	2,588,180	9.0	3,656,002

The options are subject to various vesting periods between June 26, 2007 and April 22, 2014.   The options expire on various dates between March 1, 2017 and April 22, 2021. Additionally, the options had no intrinsic value as of September 30, 2011 and September 30, 2010.  Intrinsic value arises when the exercise price is lower than the trading price on the date of grant.

In calculating the compensation related to employee/consultants and directors stock option grants, the fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model and the following assumptions for 2011 and 2010:

	2011	2010
Dividend	None	None
Expected volatility	260%	83.2%-230.8%
Risk free interest rate	1.03%	0.26%-0.31%
Expected life	3 years	3-5 years

For options issued prior to June 2010, the expected volatility was derived utilizing the price history of another publicly traded nanotechnology company.  This company was selected due to the fact that it is widely traded and is in the same equity sector as us. Beginning with options granted after June 2010, we began to use our stock to calculate the expected volatility. We made this change because we believe that the options granted in September 2010 will be exercised within three years, thus our trading history should be used.

The risk free interest rate figures shown above contain the range of such figures used in the Black-Scholes calculation.  The specific rate used was dependent upon the date of the option grant.

Based upon the above assumptions and the weighted average $0.79 exercise price, the options outstanding at September 30, 2011 had a total unrecognized compensation cost of $395,093 which will be recognized over the remaining weighted average vesting period of 2.4 years. Option costs of $730,243 were recorded as an expense for the year ended September 30, 2011, all of which was recorded as compensation expense.  

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Note 8 -- Income Taxes

         We have incurred losses since operations commenced in 1990.  We have a net operating loss carry forward for income tax purposes of approximately $13,135,140. The total loss carry forward expiring on September 30, 2031 is $1,265,9090, expiring on September 30, 2030 is $1,428,285, expiring on September 30, 2029 is $2,093,526, expiring on September 30, 2028 is $3,959,334, expiring on September 30, 2027 is $3,513,085, expiring on September 30, 2026 is $426,697, expiring on September 30, 2025 is $203,978, expiring on September 30, 2024 is $198,988, expiring on September 30, 2023 is $25,597 and expiring on September 30, 2022 is $19,741.  We changed its year-end to September 30th from February 28th effective in fiscal 2006.  Additionally, utilization of net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code.  These and other deferred tax assets are fully reserved by a valuation allowance as management has determined that it is more likely than not that the deferred tax assets will not be realized.

         Deferred income taxes arise from timing differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.

         The principal sources of timing differences are different accrual versus cash accounting methods used for financial accounting and tax purposes; the timing of the utilization of the net operating losses, and different book versus tax depreciation methods.

Tax Rate Reconciliation	2011	2010
Income tax expense (benefit) at the statutory rate	(414,341)	(646,360)
Compensation and BCF expense	248,283	145,285
Other permanent differences, net	(4,182)	13,830
Valuation Allowance	170,240	487,246
	$              -	$           -
The States in which we currently operate did not have a corporate income tax in effect as of
September 30, 2011 and 2010.

As of September 30, 2011and 2010, the deferred tax asset based on a 34% tax bracket consists of the following:

	2011	2010
Assets:
Federal loss carry forwards	$4,465,948	$      4,035,538
Cash basis accounting differences	138,024	403,322
Liability:
Depreciation timing differences	15,245	10,117
Deferred tax asset	4,619,217	4,448,977
Valuation  allowance	(4,619,217)	(4,448,977)
Net deferred tax asset	$                     -	$                    -

The tax benefit from net operating losses and differences in timing differ from the federal statutory rate primarily due to the $170,240 change in the deferred tax asset valuation allowance from September 30, 2010.  As of September 30, 2011 and 2010, the Company had no unrecognized tax benefits due to uncertain tax positions.

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Note 9 – Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  For the years ended September 30, 2011 and 2010, we incurred net losses of ($1,218,651) and ($1,901,060), respectively.  As of September 30, 2011 and September 30, 2010, we had working capital deficits of ($1,463,672) and ($2,993,817), respectively, and negative cash flows. These factors, and negative cash flows, raise substantial doubt the Company's ability to continue as a going concern.

Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to obtain additional financing or refinancing as may be required, to develop commercially viable products and processes, and ultimately to establish profitable operations.  We have financed operations primarily through the issuance of equity securities and debt and through some limited operating revenues.  Until we are able to generate positive operating cash flows, additional funds will be required to support our operations.  We will need to acquire additional funding in fiscal year 2012 to continue our operations.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Note 10 — Subsequent Events

We evaluated subsequent events for potential recognition and/or disclosure subsequent to the date of the balance sheet. The following was noted for disclosure:

On October 6, 2011, John Bonner converted all of his shares of his Convertible Preferred Shares, Series C, into 2,024,284 shares of our common stock.

On October 24, 2011, we issued 100 Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 shares of our common stock.

On November 3, 2011, we reached an agreement with Equity 11 and Nirta Enterprises to convert the outstanding principal and accrued interest of all notes owing to them into shares of our common stock at $.50 per share.  The principal totaled $56,832 and the accrued interest totaled $5,214.

On December 2, 2011, we entered into an amendment of our settlement agreement with Wilson Sonsini Goodrich & Rosati P.C. where we agreed to issue an additional 25,000 of our common shares and pay outstanding amounts owed in exchange for the elimination of payments to this firm of royalties we might receive under our BASF license agreement and a reduction in certain patent fees in the future.

On December 15, 2011, we reached an agreement to extend the due date on the $600,000 promissory note held by John M. Salpietra to December 4, 2012.

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