UNITED
STATES




Securities
and Exchange Commission


Washington,
D.C. 20549




Form 10-KSB


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




For
the fiscal year ended September 30, 2008


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




For
the transition period from to




Commission
file number: 333-91436




Logo


ECOLOGY
COATINGS, INC.


(Name of
small business issuer in its charter)


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




2701
Cambridge Court, Suite 100, Auburn Hills, MI  48326




(Address
of principal executive offices) (Zip Code)




(248) 370-9900




(Issuer’s
telephone number)




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




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


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




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




Yes oNo þ




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 þNo o




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. þ







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




State
issuer’s revenues for its most recent fiscal year:
$25,092




As of
November 21, 2008, approximately 12,940,684 shares of the Company’s common
stock, par value $0.001 per share, were held by non-affiliates, which had a
market value of approximately $12,940,684 based on available OTCBB quote of the
average between the bid and ask price of $1.00 per share.




State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: The number of shares of common stock of the
registrant outstanding as of November 21, 2008 was 32,233,600.




Documents
Incorporated by Reference: None.




Transitional
Small Business Disclosure Format (check one): Yes oNo þ











FORM
10-KSB


ECOLOGY
COATINGS, INC.


SEPTEMBER
30, 2008




TABLE
OF CONTENTS


Page





PART IITEM 1. Description of Business
              1ITEM 2. Description of
Property
              10ITEM 3. Legal Proceedings
              10ITEM 4. Submission of Matters to a Vote of
      Security Holders
              10PART IIITEM 5. Market for Common Equity, Related
      Stockholder Matters and Small Business Issuer Purchases of Equity
      Securities
              11ITEM 6. Management’s Discussion and Analysis or Plan of
      Operation
              11ITEM 7. Financial Statements
              15ITEM 8. Changes In and Disagreements with
      Accountants on Accounting and Financial Disclosure
              15ITEM 8A. Controls and
      Procedures
              15ITEM 8B.  Other
Information
              17PART IIIITEM 9. Directors, Executive Officers,
      Promoters, Control Persons, and Corporate Governance; Compliance with
      Section 16(a) of the Exchange Act
              18ITEM 10. Executive Compensation
              19ITEM 11. Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
              24ITEM 12. Certain Relationships and Related
      Transactions, and Director Independence
              24ITEM 13. Exhibits
              25ITEM 14. Principal Accountant Fees and
      Services
              26Signature Page
              28





PART
I




Except
for statements of historical fact, the information presented herein constitutes
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally can be
identified by phrases such as, Ecology Coatings (the “Company”), by and through
its management, “anticipates,” “believes,” “estimates,” “expects,” “forecasts,”
“foresees,” “intends,” “plans,” “strengthens” or other words of similar import.
 Similarly, statements herein that describe the Company’s 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 the actual
results, performance or achievements of the Company 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,
the Company’s ability to: successfully commercialize its 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 consistently provide us a
reliable source of raw materials; acquire, develop, or identify for our own use,
a manufacturing capacity; attract and retain talented individuals; continue
operations during periods of adverse changes in 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 “Cautionary Factors that May Affect Future Results”
enumerated herein beginning on page 7.






Although
we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. You should not place undue reliance on these 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.






In this
Report, “Ecology”, “the Company”, “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
30,530,684 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 exchange 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”, nanotechnology-enabled, ultra-violet (“UV”)curable
coatings that are designed to drive efficiencies, reduce energy consumption 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 and offer a marked decrease in drying
time.




Our
patent and intellectual property activities to date include:




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




·
            another
      patent (our 7th)  granted
      but not yet issued by the USPTO




·
            twenty-two
      pending patent applications in foreign
countries




·
            three
      ICT international patent
applications




·
            three
      trademarks issued by the USPTO – “EZ RecoatTM”, “Ecology CoatingsTM” and
      “Liquid NanotechnologyTM”.




We
continue to work independently on developing our clean technology products
further. In addition, we collaborate with industry leaders to develop
proprietary coatings for a variety of metal, paper and plastic-based
applications. Our target markets include the electronics, steel, construction,
automotive and trucking, paper 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 leverage nano-particle clean technology
and are cured under ultra-violet (“UV”) light. We believe that the use of our
“Liquid NanotechnologyTM” coatings represent a paradigm shift in coatings
technology. While our competitors have focused their efforts on improving the
industry-standard, thermal-cured powder-coat, water-borne and solvent-based
coatings, we have strived for technological breakthroughs. We have developed
over 200 individual coating formulations that address the limitations of
traditional coatings. The USPTO has issued six patents and have allowed a
seventh covering many of these formulations as well as their application.
Additionally, the formulations that are not currently patent protected are
protected as trade secrets.




Nearly
every manufactured product has a protective coating on it, whether metal,
plastic, glass or an electronic product. 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
Liquid NanotechnologyTM 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. Traditional coatings, such as paint, are composed of a solid resin
and a carrier, such as an organic solvent or water, that are 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
Liquid NanotechnologyTM coatings offer a number of performance and user benefits
over traditional coatings. We believe that our 100% solids, UV-cured industrial
products represent the coatings industry’s cutting edge in overall performance,
offering bottom line value and environmental advantages to users because
they:







•
            
            Cure
      faster, usually in less than a minute;•
            
            Use
      less floor space, thereby improving operating
  efficiency;•
            
            Use
      dramatically less energy;•
            
            Reduce
      production compliance burdens with the Environmental Protection Agency
      because they contain fewer toxic chemicals;•
            
            Provide
      improved coating performance; and•
            
            Boost
      manufacturing productivity by increasing process
    throughput.




Conventional
Coatings




Many
conventional coatings used today require 20 or more minutes of drying time
(either air dried or forced thermal drying). In the case of air drying, a
process bottleneck can occur, causing reduced  production rates. In
the case of thermally induced drying, protective coats can only be applied to
materials able to withstand certain levels of heat. This requires the
disassembly of many manufactured parts before they can be coated and further
increases the time needed for the coating process to be completed. In either
case, the manufacturing process is characterized by inefficiency, slower
production rates, higher energy costs, increased product costs, and greater
floor space requirements.




There are
other disadvantages with conventional coatings. In some cases, much of the
applied coating evaporates into the air (solvent based carrier), while only a
fraction of the coating actually remains as a dry coating film. In addition,
overspray coatings are difficult to reuse or reclaim, and water-borne systems
tend to promote corrosion and flash-rusting. Not only is this an inefficient use
of the coating, it is also responsible for the emission of many harmful airborne
toxins.




Our Solution - Clean
Technology




Liquid
NanotechnologyTM, our 100% solids UV-cured industrial coatings clean technology,
addresses all of the issues noted above and provides unique performance
combinations. We have developed over 200 specific individual coating
formulations that address the limitations of traditional carrier-based coatings.
Many of these patent and/or trade-secret protected. Our coatings cure in less
than a minute after application without the use of heat. This changes the
manufacturing dynamic in four ways. First, UV curing eliminates the bottleneck
effect and makes product disassembly unnecessary, increasing the speed with
which coated products are produced. 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. Finally, the use of
100% solids results in fewer harmful airborne emissions being released during
production or application.




Our clean
technology coatings have other advantages. Indeed, 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.




Clean Tech
Offerings




Plastics-  Our Liquid NanotechnologyTM 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.




Metals-  Our coatings adhere well to most metal surfaces. Moreover,
our coatings are able to accept pigmentation with a UV curable solution.
Applications include automotive parts and products that incorporate metal along
with seals or other rubber parts. Because our coatings are UV curable, metals
paired with rubber parts will not require disassembly prior to
finishing.




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.




Paper
-  Our paper product coating provides a water barrier rather than a
repellant to water, allowing the paper to be waterproof while still being
writable and printable. It does not deform under heat. Potential applications of
this coating include packaging and labels.  Additionally, a study by a
major university supports that our paper coating inhibits the growth of
toxic black mold on wallboard.


1




Electronics-  Our coatings do not contain either 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 offers potential for various electronics
applications.




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




DuPont. On
November 8, 2004, we licensed our platform automotive technology to DuPont.
This non-exclusive license covers all of DuPont’s automotive metal coating
activities in North America. The license is for a term of fifteen
(15) years, terminating on November 8, 2019. The license provides for
royalty payments at a stated percentage of net sales. To date, we have not
received any royalty payments pursuant to this license and we cannot predict
when we will, if ever.




Red Spot Paint &
Varnish. On May 6, 2005, we granted Red Spot Paint & Varnish an
exclusive license to manufacture and sell one of our proprietary products for
use on 22 gallon metal propane tanks. The duration of this license is fifteen
years, terminating on May 6, 2020. Upon consummation of the license, Red
Spot made a one-time payment of $125,000 to us. All of our revenue in 2007 and
2008 was from this one customer. The license also provides for royalty payments
at a stated percentage of net sales. To date, we have not received any royalty
payments pursuant to this license and we cannot predict when we will, if
ever.




Medical Device
Company. On February 3, 2001, we granted a medical device company a
license to use one of our proprietary products on a cardiovascular application.
All terms of this license are subject to a confidentiality agreement. The
duration of this agreement is unlimited except upon breach of the agreement by
either party. The medical device company paid us a one time licensing fee of
$70,000 and thereafter we will not receive future revenues under this
agreement.




We are
unable to make predictions regarding the timing and size of any future royalty
payments. With respect to these licenses, we believe that any royalties depend,
in large part, on the licensee’s ability to market, produce and sell products
incorporating our proprietary technology. We cannot predict when we will receive
any royalty revenue from these licenses, if ever.




Marketing
Strategy




Our
target markets include the electronics, automotive and trucking, paper and
packaging products and original equipment manufacturers. 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;•
            
            Direct
      sales, 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. 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.




Our sales
cycle is often longer than one year and we do not expect to generate significant
sales revenues in the fiscal year 2009. 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.




In many
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.




Goals




Our
goals, given sufficient capital, are to:


•
            
            Secure
      a suitable facility and build an enhanced research laboratory and
      prototype coatings line;•
            
            Expand
      current research initiatives and intellectual property
      protection;•
            
            Expand
      our in-house sales and sales channel business development
      team;•
            
            Pursue
      independent, third party review of our technology through independent
      testing and evaluation;•
            
            Secure
      new sources of revenue.




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), 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.




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. There can be no assurance that we will be able
to compete successfully in this market. Further, there can be no assurance that
existing and new companies will not enter the industrial coatings markets in the
future.


2




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:




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




·
            another
      patent (our 7th)  granted
      but not yet issued by the USPTO




·
            twenty-two
      pending patent applications in foreign countries. One patent has been
      allowed in China.




·
            three
      ICT international patent
applications




·
            three
      trademarks issued by the USPTO – “EZ RecoatTM”, “Ecology CoatingsTM” and
      “Liquid NanotechnologyTM”.




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.




In
addition, we have developed over 200 individual coating formulations. We have
taken steps to protect such formulations under trade secret laws.




No
assurance can be given that 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 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. With the exception of the patent allowed in China, action with
respect to our foreign patents has been limited to translation of the patent
applications. There can be no assurance that any further patents will be granted
in any other foreign countries.




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, no assurance can be given 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, no assurance
can be given that others will not 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 research and development efforts are related to the application of our
coatings to specific substrates and for specific applications. We spent
approximately $8,000 on contracted research and development in 2008. We did not
incur any outside research and development costs in 2007. Additionally, Sally
Ramsey, our Vice President of New Product Development, spent approximately 80%
of her work time in research and development activities in both fiscal years
2007 and 2008. The majority of the research being performed is done in
conjunction with various industry participants with whom we are in discussions.
Such research is primarily application-specific. In addition, we are able, on a
limited basis, to perform independent research for the purpose of expanding our
technology portfolio.




Manufacturing




We
presently have a limited manufacturing capacity. We currently have no contracts
in place for the manufacturing of our products.




Employees


3




As of
September 30, 2008, we had six full-time employees.  As of that date,
we had employment agreements with four of our employees. As of December 12,
2008, two of our employees had employment agreements with us.




CAUTIONARY
FACTORS THAT MAY AFFECT FUTURE RESULTS




Prospective
and existing investors should carefully consider the following risk factors in
evaluating our business. The factors listed below represent certain important
factors that we believe could cause our business results to differ from these
forward looking statements. These factors are not intended to represent a
complete list of the general or specific risks that may affect us. It should be
recognized that other risks may be significant, presently or in the future, and
the risks set forth below may affect us to a greater extent than
indicated.




Risks Related to the
Company




We
are largely an inception stage company and have a history of operating
losses




We are
largely an inception stage company and had an accumulated deficit of $14,909,206
as of September 30, 2008. 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 will need to raise
additional capital in January 2009 in order to continue to fund our operations.
Operating losses have resulted principally from costs incurred in the
preparation of our private placement memorandum, preparing our company for the
Merger, promotion of our products, and from salaries and general and
administrative costs. We have generated nominal revenue to date.




We
have entered the emerging business of nanotechnology, which carries significant
developmental




and
commercial risk




We have
expended in excess of  $1,000,000 to develop our
nanotechnology-enabled products. We expect to continue expending such sums in
pursuit of further development of our technology. Such research and development
involves a high degree of risk with significant uncertainty 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-technologyTM
products and our capacity to develop, introduce and bring additional products to
market. There can be no assurance that we will ever generate significant sales
or achieve profitability. Accordingly, 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 that
includes an explanatory paragraph describing their substantial doubt about our
ability to continue as a going concern.




We
will need additional financing in January, 2009




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, and the results of future research and development and competition.
We believe that our past capital raising activities may not be sufficient to
fund our working and other capital requirements. We will need to raise
additional funds through private or public financings in January 2009. 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. In addition, such


4


securities
may contain rights, preferences or privileges senior to those of the rights of
our current shareholders. During our last fiscal year, we relied on short term
debt financing, most of which carried a 25% interest rate.  As of
September 30, 2008, we were in default on approximately $1,012,000 in short term
debt, including accrued interest, and raised only $2,010,000 from the issuance
of Convertible Preferred Shares to Equity 11 (“Equity 11”).  We do not
currently have any commitments for additional financing. There can be no
assurance that additional funds will be available on terms attractive to us or
at all. If adequate funds are not available, we may be required to curtail our
pre-production, sales and research and development activities and/or otherwise
materially reduce our operations. Our inability to raise adequate funds could
have a material adverse effect on our business, results of operations and
financial condition.




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. There can be no assurance that we will be
able to retain the services of such individuals in the future. Our research and
development efforts are largely dependent upon a single executive. 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, there can be no assurance that we will be able
to retain our present personnel or acquire additional qualified personnel as and
when needed. We do not have employment agreements with our General Counsel or
our Chief Executive Officer.




Risks Related to our
Business




We
are operating in both mature and developing markets, and there is uncertainty as
to 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. There can be no assurance 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 are subject to a
high level of uncertainty. 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, there can be no assurance
that our technology and products will become widely accepted. It is also
difficult to predict with any assurance the 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
Liquid NanotechnologyTM 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 Liquid NanotechnologyTM products would
adversely affect our
operations. There can be no assurance that 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.


5






We
expect that our products will have a long sales cycle




One of
our target markets is the original equipment manufacturer (OEM) market. OEMs
traditionally have substantial capital investments in their plant and equipment,
including the coating portion of the production process. In this market, the
sale of our coating technology will be subject to budget constraints and
resistance to change of 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 reticence to change.




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 Liquid NanotechnologyTM
solutions. There can be no assurance 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. There can also be no assurance that Liquid NanotechnologyTM products and
technologies developed by others will not 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. 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. Further, there can be no assurance that
new companies will not enter our markets in the future. Although we believe that
our products will be distinguishable from those of our competitors on the basis
of their technological features and functionality at an attractive value
proposition, there can be no assurance that we will be able to penetrate any of
our anticipated competitors’ portions of the market. Many of our anticipated
competitors may have existing relationships with manufacturers that may impede
our ability to market our technology to potential customers and build market
share. There can be no assurance 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. In order to achieve market
penetration 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. No assurance can be given 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. Further,
there can be no assurance that, if developed, such marketing capabilities will
lead to sales of our technologies and products.




We
have limited manufacturing capacity




We have
limited manufacturing capacity for our products. In order to fully execute our
contemplated direct sales strategy, we will need to either: (i) acquire
existing manufacturing capacity; (ii) develop manufacturing capacity


6




“in-house”;
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. There are no assurances that we can raise the necessary capital to
acquire existing manufacturing capacity or to develop such capacity. Moreover,
we have not identified potential third parties with whom we could contract for
the manufacture of our coatings. There can be no guarantee 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. 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 very 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 Liquid NanotechnologyTM, 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 Liquid NanotechnologyTM. The U.S.
Patent Office (“USPTO”) has issued six patents to us. We have five applications
still pending before the USPTO and twenty-two patent applications pending in
other countries, plus three pending ICT international patent
applications.




No
assurance can be given that 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.




There can
be no assurance that 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, there can be no assurance that we will be successful in enforcing
our patent rights.




Further,
there can be no assurance that patent infringement claims in the United States
or in other countries will not be asserted against us by a competitor or others,
or if asserted, that we will 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 some of our employees,
consultants, certain potential customers and advisors, no assurance can be given
that such agreements will be honored or that we will be


7




able to
effectively protect our rights to our unpatented trade secrets and know-how.
Moreover, no assurance can be given that others will not 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 DuPont and Red Spot Paint & Varnish regarding
their use of our technology for specific formulations for designated
applications. The DuPont license provides multiple formulas for use on metal
parts in the North American automotive market. To date, this license has not
generated any ongoing royalty payments.  We also have a licensing
agreement with Red Spot that provides formulations for specific tank coatings.
Such licenses are renewable provided the parties are in compliance with the
agreements. Although these licenses provide for royalties based upon net sales
of our UV-cured coating formulations, there can be no assurance that Red Spot or
DuPont will aggressively market products with our coatings and thus entitle us
to receive royalties at any level.




We
have not completed our trademark registrations




We have
received approval of “EZ RecoatTM”, “Liquid NanotechnologyTM”, “Ecology CoatingsTM”
as trademarks in connection with our proposed business and marketing activities.
Although we intend to pursue the registration of our marks in the United States
and other countries, there can be no assurance that prior registrations and/or
uses of one or more of such marks, or a confusingly similar mark, does not 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 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 recent slowdown
in the U.S. automotive industry have made it more difficult to market our
technology to that industry.




Risk Related to our Common
Stock




Our
stock prices have 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
will likely make our price more volatile. This 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 2008, our low and high market prices of our stock were $.51 (August
18, 2008) and $3.65 (January 7, 2008). 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 shareholders to sell our common
stock.




Control
by key stockholders




As of
September 30, 2008, our largest stockholders, Richard D. Stromback, Douglas
Stromback, and Deanna Stromback, who are the brother and sister of Richard D.
Stromback, respectively, and Sally J.W.


8




Ramsey
held shares representing approximately 78.3% of the voting power of our
outstanding capital stock. In addition, pursuant to the Securities Purchase
Agreement we entered into with Equity 11, Equity 11 has the right to effectively
control our Board of Directors with the right to appoint three of the five
members of our Board of Directors.  Additionally, Equity 11 has the
right to appoint our Chief Executive Officer.  The stock ownership and
governance rights constitute effective voting control in 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.
These rights 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 listed on the OTC
Bulletin Board and it trades for less than $5.00 per share. The OTC Bulletin
Board is generally regarded as a less efficient trading market than the NASDAQ
Capital or Global Markets or the New York Stock Exchange.




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 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 operations of
our business. Our Securities Purchase Agreement with Equity 11, Ltd. prevents
the payment of any dividends to our common stockholders without prior approval
of Equity 11, Ltd.




The
issuance of options and warrants may dilute the ownership interest of our
stockholders




As of
September 30, 2008, we had granted options to purchase 4,642,210 shares of our
common stock under our 2007 Stock Option and Restricted Stock Plan (the “2007
Plan”). We originally reserved a total of 4,500,000 shares of common stock under
our 2007 Plan. On December 2, 2008, the Board of Directors authorized an
additional 1,000,000 shares of common stock for the 2007 Plan. Under the
Securities Purchases Agreement that we entered into with Equity 11, Equity 11
can purchase up to $5,000,000 in convertible preferred shares at $1,000 per
preferred share. The preferred shares are convertible into 10,000,000 shares of
our common stock at $.50 per common share. As of September 30, 2008, Equity 11
had purchased $2,010,000 in convertible preferred shares, potentially
convertible into 4,020,000 shares of our common stock. If Equity 11 were to
purchase the remaining $2,990,000 in convertible preferred stock, these
additional shares would be convertible into 5,980,000 shares of our common
stock. The same Securities Purchase Agreement awards 500 warrants for each
convertible preferred share issued. These warrants entitle Equity 11 to purchase
one share of our common stock at $.75 per common share for each warrant. As of
September 30, 2008, we had issued warrants to purchase 2,345,000 shares of our
common stock.  This figure included 1,005,000


9




warrants
issued to Equity 11.  If Equity 11 purchases the remaining $2,990,000
in Convertible Preferred Shares it is entitled to under the Securities Purchase
Agreement, an additional 1,495,000 warrants to purchase shares of our common
stock at $.75 per common share will be issued.   Since September
30, 2008, we have issued an additional 100,000 options and an additional
2,000,000 warrants. In addition, holders of our convertible notes had the right
to convert the outstanding principal and interest on these notes into 1,024,010
of our shares at September 30, 2008.  To the extent that our outstanding
stock options and warrants are exercised, Convertible Preferred Shares are
converted to common stock,  and convertible notes are converted into common
shares, 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 common stock and preferred
stock can be issued by our Board of Directors without stockholder approval. Any
future issuances of our common stock or preferred stock could further dilute the
percentage ownership of our Company held by existing stockholders.




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 directors and
officers.




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.




ITEM 2. DESCRIPTION OF PROPERTY




Our
executive office consists of approximately 1,600 square feet and is located at
2701 Cambridge Court, Suite 100, Auburn Hills,
MI  48326.  The lease commenced on September 1, 2008
and continues through September 30, 2010 at an average rate of $2,997 per
month. The lessor, Seven Industries, Inc., is wholly owned by J.B. Smith, a
Director of the Company and the managing partner of Equity 11, Ltd.




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 product. We are currently leasing this property on a month-to-month basis
and the monthly rent is $1,800.




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




ITEM 3. LEGAL PROCEEDINGS





None




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




No
matters were submitted to a vote of our shareholders during the fourth quarter
of the fiscal year ended September 30, 2008.





10


PART
II


ITEM
      5.
            
            MARKET FOR THE COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
      SECURITIES




Market
Prices




Our
common stock, par value $.001 per share (the “Common Stock”), is currently
quoted on the OTC Bulletin Board under the symbol “ECOC”. The high/low market
prices of our common stock were as follows for the periods below, as reported on
http://finance.google.com.The quotations below reflect inter-dealer bid prices without retail
markup, markdown, or commission and may not represent actual transactions.
Additionally, our Merger with OCIS was consummated on July 27, 2007. Therefore,
the quotations below for the first three quarters shown for the fiscal year
ended September 30, 2007 reflect quotations prior to the completion of the
reverse merger.


High
      Bid
                  
                  Low
      BidFiscal
      Year Ended September 30, 20081st
      Quarter
                  
                  
                  3.15
                  
                  
                  
                  1.012nd
      Quarter
                  
                  
                  3.65
                  
                  
                  
                  1.013rd
      Quarter
                  
                  
                  2.05
                  
                  
                  
                  .524th
      Quarter
                  
                  
                  2.50
                  
                  
                  
                  .51Fiscal
      Year Ended September 30, 20071st
      Quarter
                  
                  
                  3.50
                  
                  
                  
                  2.502nd
      Quarter
                  
                  
                  3.40
                  
                  
                  
                  3.403rd
      Quarter
                  
                  
                  5.00
                  
                  
                  
                  1.904th
      Quarter
                  
                  
                  5.00
                  
                  
                  
                  2.35




As of
September 30, 2008, we had approximately 72 shareholders of record of our
common stock.




Dividends




We have
not paid any cash dividends on our common stock since our inception and do not
anticipate paying any cash dividends in the foreseeable future.  Our
Securities Purchase Agreement with Equity 11, Ltd. prevents payment of any
dividends to our common stockholders without prior approval of Equity 11,
Ltd.  We plan to retain our earnings, if any, to provide funds for the
expansion of our business. Our Board of Directors will determine future dividend
policy based upon conditions at that time, including our earnings and financial
condition, capital requirements and other relevant factors.







Securities
Authorized for Issuance Under Equity Compensation Plans




The
following table sets forth certain information regarding our equity compensation
plans as of September 30, 2008.


No.
      of securities tobe
      issuedupon
      exercise of
                
                Weighted
      average
                
                No.
      of securitiesoutstanding
                
                exercise
      price of
                
                remaining
      availableoptions,
                
                outstanding
                
                for
      future issuancewarrants
                
                options,
      warrants
                
                under
      equityPlan
      category
                
                and
      rights
                
                and
      rights
                
                compensation
      plansEquity
      compensation plans approved by stockholders
                
                
                4,642,210
                
                
                $
                1.83
                
                
                
                857,790Equity
      compensation plans not approved by stockholders
                
                
                -0-
                
                
                $
                -0-
                
                
                
                -0-Total
                
                
                4,642,210
                
                
                
                1.83
                
                
                
                857,790




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, 2008. 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. Unless indicated, we did not pay any commissions to third
parties in connection with the sales.




Issuance of warrants in
relation to new debt




All
issuances of warrants in relation to new debt made from October 1, 2007 through
September 30, 2008 were previously included on a Current Report on Form 8-K.
Specifically, these issuances were disclosed on Current Reports on Form 8-K on
February 12, 2008; March 20, 2008; June 11, 2008; June 24, 2008, and July 17,
2008.




Other issuances of stock and
warrants




On August
28, 2008, we entered into a Securities Purchase Agreement with Equity 11 and
issued 1,260 shares of 5% Convertible Preferred Shares at a price of $1,000 per
share.  Under the Securities Purchase Agreement, Equity 11 may
purchase up to $5,000,000 of 5% Convertible Preferred Shares.  In
addition, Equity 11 will be issued warrants for each purchase of Convertible
Preferred Shares to purchase up to 2,500,000 shares of our common stock at
$.75 per share.  As of September 30, 2008, Equity 11 had purchased
2,010 shares of 5% Convertible Preferred Shares and had been issued warrants to
purchase 1,005,000 shares.




From
October 1, 2007 through September 30, 2008, we issued approximately 1,456,000
options to employees and consultants under our Stock Option and Restricted Stock
Plan. The options have varying exercise prices and restriction periods and will
expire approximately ten years from the date of issuance.







ITEM
      6.
            
            MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION




Except
for statements of historical fact, the information presented herein constitutes
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally can be
identified by phrases such as, Ecology Coatings (the “Company”), by and through
its management, “anticipates,” “believes,” “estimates,” “expects,” “forecasts,”
“foresees,” “intends,” “plans,” “strengthens” or other words of similar import.
 Similarly, statements herein that describe the Company’s 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 the actual
results, performance or achievements of the Company 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,
the Company’s ability to: successfully commercialize its 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 consistently provide us a
reliable source of raw materials; acquire, develop, or identify for our own use,
a manufacturing capacity; attract and retain talented individuals; continue
operations during periods of adverse changes in 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 “Cautionary Factors that May Affect Future Results”
enumerated herein.






Overview


11


We
develop nano-enabled, ultra-violet curable coatings that are designed to drive
efficiencies and clean processes in manufacturing. We create proprietary
coatings with unique performance attributes by leveraging our platform of
integrated nano-material technologies. We collaborate with industry leaders to
develop high-value, high-performance coatings for applications in the specialty
paper, automotive, general industrial, electronic and medical areas. Our target
markets include the electronics, steel, construction, automotive and trucking,
paper products 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 products, to develop our product sales.




Operating
Results




Years
Ended September 30, 2008 and 2007




Results
From Operations




Revenuesfor the years ended September 30, 2008 and 2007, were $25,092 and
$41,668, respectively. Substantially all of our revenues for the year ended
September 30, 2008 and all of our revenues for the year ended
September 30, 2007 derived from our licensing agreement with Red Spot.
These revenues stem from the amortization of the initial payment of $125,000 by
Red Spot to the Company in May 2005 and not from any subsequent
transactions.




Salaries and
Fringe Benefitsfor the years ended September 30, 2008 and 2007 were
$2,006,776 and $1,409,840, respectively. The increase in such expenses for the
year ended September 30, 2008 is the result of higher headcount as we had
seven employees for most of 2008, five of which were hired at various times
throughout 2007 and were therefore not being paid for all of 2007.  As
a result, salaries increased by approximately $280,000 in 2008. Additionally,
all of the employees were awarded initial or additional option grants in late
2007 or early in 2008. The value of these option grants is amortized over the
vesting period associated with the options. The amortized amount in 2008 was
approximately $228,000 higher than in 2007. Finally, benefit costs increased by
approximately $44,000 over 2007 as a result of the increase in the number of
employees and the start of benefit programs for all of the additional
employees.




Professional Feesfor the years ended September 30, 2008 and 2007 were $2,735,360 and
$2,583,927, respectively. An increase our options expense associated with a full
year of amortization of option grants made to consultants of approximately
$330,000, an increase in investor relations services of approximately $120,000,
an increase in lobbying expense of approximately $92,000, and a $35,000 fee for
a patent valuation were offset by reductions in legal, accounting, and public
relations expenses totaling approximately $425,000. The reduction in legal,
accounting, and public relations expenses is a result of
our  relatively heavy use of these services in 2007 while we were
preparing for a private placement of our stock and a reverse
merger.




Other General and
Administrative Expensesfor the years ended September 30, 2008 and
2007 were $637,668 and $463,199, respectively. The increase in such expenses for
the year ended September 30, 2008 is due to increases in liability and
medical insurance costs, as well as increases in depreciation and amortization
expense.




Operating Lossesfor the years ended September 30, 2008 and 2007 were ($5,354,712)
and ($4,415,298), respectively. The increased loss between the periods is
explained by the increases in the expense categories discussed
above.




Interest Incomefor the years ended September 30, 2008 and 2007 was $5,784 and
$20,940, respectively. The decrease resulted from a reduction in our average
investable cash balances between and 2007 and 2008.




Interest
Expense for the years ended September 30, 2008 and 2007 was
$1,421,394 and $256,512, respectively. These amounts reflect interest accrued on
convertible notes payable to third parties as well as notes payable to related
parties. We borrowed $1,300,000 on convertible notes payable in varying
increments between February 1, 2008 and July 11, 2008. These notes bear
interest at 25% per annum and had warrants attached. The value of the warrants
of approximately $1,200,000 was amortized over the life of the notes into
interest expense.


12




Income Tax
Provision.  No provision for income tax benefit from net
operating losses has been made for the years ended September 30, 2008 and
2007 as we have fully reserved the asset until realization is more reasonably
assured.




Net Lossfor the years ended September 30, 2008 and 2007 was ($6,770,322) and
($4,650,870), respectively. The increase in the loss results primarily from the
increase in Salaries and Fringe Benefits, Professional Fees, General and
Administrative Expenses and Interest Expense discussed above.




Basic and Diluted
Loss per Share for the years ended September 30, 2008 and 2007 was
($.21) and ($.16), respectively. This change reflects the increased Net Loss
discussed above partially offset by the increase in weighted average shares
outstanding during the year ended September 30, 2008.




Liquidity and Capital
Resources




Current
and Expected Liquidity




Cash and
cash equivalents as of September 30, 2008 and 2007 totaled $974,276 and
$808,163, respectively. The increase includes proceeds from debt of $1,300,000
and proceeds from the sale of convertible preferred stock of $2,010,000. These
amounts were largely offset by cash used in operations of approximately
$2,336,000, debt payments of approximately $592,000, the purchase of fixed
assets for approximately $77,000, and investment in intangible assets (patents
and trademarks) of approximately $139,000. We have taken steps to reduce our
expected cash outlays for the 2009 fiscal year. These steps include a headcount
reduction of one, reduced salaries for four of our employees, and a reduction in
the use of certain professional services. The headcount and salary reductions
will yield an annualized savings of approximately $715,000.




We are an
early stage company and have incurred an accumulated deficit of ($14,909,206).
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. Accordingly, we have
received a 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; (iii) purchase and acquire captive installations with our
customers, and; (iv) 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 revenues




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.




As of
September 30, 2008 we had convertible notes payable to four separate
parties with on which we owed approximately $1,012,000 in principal and accrued
interest. These convertible notes do not contain any restrictive covenants with
respect to the issuance of additional debt or equity securities by the Company.
The notes and the accrued interest were due prior to September 30, 2008 and
their holders demanded payment. Since September 30, 2008, we have paid off one
of the notes together with accrued interest for a total of approximately
$115,000. Additionally, we have made payments of $320,000 against the principal
and accrued interest owing to two of the other note holders. We have reached
agreement to make combined monthly payments of $110,000 against the remaining
principal and interest balance on these notes until such time as they are paid
off (March of 2009). We have not yet reached an agreement with the fourth note
holder to whom we owed approximately $266,000 in principal and accrued interest
as of September 30, 2008. There can be no assurance that we will reach such an
agreement with the note holder. Additionally, we have notes owing to
shareholders totaling $243,500 plus accrued interest as of September 30,
2008. These notes are due and payable on December 31, 2008. None of the
debt is subject to restrictive covenants. All of the debt is
unsecured.




We will
need to raise additional funds in January 2009. At present, we do not have any
binding commitments for additional financing. On August 28, 2008, we entered
into a Securities Purchase Agreement with Equity 11, Ltd.


13




for
potential financing of up to $5,000,000 through the sale of our convertible
preferred stock. To date, we have sold $2,010,000 of these securities. The Cash
and cash equivalents amount of $974,276 on our balance sheet at September 30,
2008 reflects these transactions. There can be no assurances that any further
sales of these securities will take place. If are unable to obtain financing
under this arrangement, we would seek to negotiate with other parties for debt
or equity financing, pursue additional bridge financing, and negotiate with
creditors for a reduction and/or extension of debt and other obligations through
the issuance of stock. At this point, we cannot assess the likelihood of
achieving these objectives. If we are unable to achieve these objectives, we may
be forced to cease our business, sell all or part of our assets, and/or seek
protection under applicable bankruptcy laws.




On
September 30, 2008, we had 32,210,684 common shares issued and outstanding.
2,010 in convertible preferred shares were also outstanding at that date. These
preferred shares can be converted into 4,020,000 of our common stock. As of that
same date, options and warrants to purchase up to 6,987,210 shares of common
stock had been granted. Additionally, approximately $1,012,000 in convertible
notes and accrued interest were outstanding that could be converted into
1,024,010 shares of common stock.




Capital
Commitments


ContractualObligations
                    
                    Total
                    
                    
                    Less
      Than 1 Year
                    
                    
                    1-3
      Years
                    
                    
                    4-5
      Years
                    
                    
                    After
      5 YearsNotes
      Payable
                    
                    $
                    1,137,604
                    
                    
                    $
                    1,137,604
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Interest
      on notes payable
                    
                    
                    133,332
                    
                    
                    
                    133,332
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Contractual
      Service Agreements
                    
                    
                    1,675,139
                    
                    
                    
                    1,162,389
                    
                    
                    
                    512,750
                    
                    
                    
                    —
                    
                    
                    
                    —Office
      Leases
                    
                    
                    71,933
                    
                    
                    
                    34,699
                    
                    
                    
                    37,234Equipment
      Leases
                    
                    
                    21,332
                    
                    
                    
                    7,890
                    
                    
                    
                    13,442
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      Contractual Obligations
                    
                    $
                    3,039,340
                    
                    
                    $
                    2,475,914
                    
                    
                    $
                    563,426
                    
                    
                    $
                    —
                    
                    
                    $
                    —




Off-Balance Sheet
Arrangements




See Notes
to Financial Consolidated Financial Statements in this Form 10-KSB beginning on
page F-1. The details of such arrangements are found in Note 5 – Commitments and
Contingencies and Note 10 – Subsequent Events.




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 what we feel are 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.




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.




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 yearsFurniture
      and fixtures
              3-7 yearsTest
      equipment
              5-7 yearsSoftware
              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 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.




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 Form 10-KSB, 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 under SFAS 123(R) 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




In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS
159”). SFAS 159 allows companies to choose to measure many financial instruments
and certain other items at fair value. This statement is effective as of the
beginning of an entity’s first fiscal year beginning after November 15,
2007, although earlier adoption is permitted. SFAS 159 will become effective for
us beginning with fiscal 2009. We are currently evaluating what effects the
adoption of SFAS 159 will have on our future results of operations and financial
condition.




In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141(R) (revised 2007), “Business Combinations” (SFAS 141(R)) and
No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51” (SFAS 160). SFAS 141(R) will significantly change
how business acquisitions are accounted for and will impact financial statements
both on the acquisition date and in subsequent periods. SFAS 160 will change the
accounting and reporting for minority interests, which will be re-characterized
as non-controlling interests and classified as a component of equity. SFAS
141(R) and SFAS 160 are effective for both public and private companies for
fiscal years beginning on or after December 15, 2008 (October 1, 2009
for us). Early adoption is prohibited for both standards. SFAS 141(R) will be
applied prospectively. SFAS 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements of SFAS 160 shall be applied prospectively. The adoption of
SFAS 160 would have no impact on our financial position or results of
operations. Management is in the process of evaluating SFAS 141(R) and
determining what effect, if any, it may have on our financial position and
results of operations going forward.




In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133”. This statement changes the disclosure requirements for derivative
instruments and hedging activities. SFAS 161 will become effective for us
beginning in the three months ending March 31, 2009. The adoption of this
pronouncement would have had no impact on our results or financial position as
of September 30, 2008.




In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles
(GAAP) in the United States (the GAAP hierarchy). SFAS 162 will not have an
impact on our financial statements.


14




In
May 2008, the FASB issued SFAS No. 163, “Accounting for Financial
Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.”
The scope of SFAS 163 is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, SFAS 163 does not apply
to financial guarantee contracts issued by enterprises excluded from the scope
of Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). SFAS 163 also does
not apply to financial guarantee insurance contracts that are derivative
instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” SFAS 163 will
not have an impact on our financial statements.







ITEM
      7.
            
            FINANCIAL
STATEMENTS




Our
financial statements are included following the signature page to this Form
10-KSB commencing on page F-1.







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




None.


ITEM
      8A.
            
            CONTROLS AND
  PROCEDURES





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures were effective at September 30, 2008 to ensure that information
we are required to disclose in reports that we file or submit under the
Securities Exchange Act of 1934 (i) is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms, and (ii) is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.





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), and
for the assessment of the effectiveness of internal control over financial
reporting. As defined by the Securities and Exchange Commission, internal
control over financial reporting is a process designed by, or under the
supervision of, our principal executive officer and principal financial officer
and effected by our Board, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the consolidated financial statements in accordance with U.S.
generally accepted accounting principles.





Our
internal control over financial reporting is supported by policies and
procedures that:(1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the our transactions and dispositions of
our assets; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of the consolidated financial statements in
accordance with U.S. generally accepted accounting principles, and that our
receipts and expenditures of are being made only in accordance with
authorizations of our management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the
consolidated financial statements.


15


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.





Management’s
Report on Internal Control over Financial Reporting





Management
assessed our internal control over financial reporting as of September 30, 2008,
the end of our fiscal year. Management based its assessment on criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Management’s
assessment included an evaluation of the design of our internal control over
financial reporting and testing of the operational effectiveness of those
controls.





Based on
this assessment, management has concluded that as of September 30, 2008, our
internal


control
over financial reporting was effective to provide reasonable assurance regarding
the reliability of


financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our report
was not subject to attestation by our registered public accounting firm pursuant
to temporary rules of the Securities and Exchange


Commission
that permit the company to provide only Management’s report in this annual
report.





Management
is aware that we have a lack of segregation of certain duties due to the small
number of employees with responsibility for general administrative and financial
matters. This constitutes a deficiency in financial controls. However, at this
time, management has decided that considering the employees involved and the
control procedures in place, the risks associated with such lack of segregation
of duties are insignificant and the potential benefits of adding additional
employees to clearly segregate duties do not justify the expenses associated
with such increases. Management will periodically reevaluate this situation. If
the volume of business increases and sufficient capital is secured, it is our
intention to further increase staffing to mitigate the current lack of
segregation of duties within the general, administrative and financial
functions.




A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.




Changes in Internal Control over
Financial Reporting




Effective
July of 2008, we consolidated substantially all of the accounting and
bookkeeping duties into the responsibilities of the Controller. This resulted in
a deepening of the lack of segregation of certain duties.However, at the time,
management decided that, considering the employees involved and the control
procedures in place, the risks associated with such lack of segregation of
duties were insignificant compared with the cost savings associated with this
change. Management will periodically reevaluate this situation. If the volume of
business increases and sufficient capital is secured, it is our intention to
further increase staffing to mitigate the current lack of segregation of duties
within the general, administrative and financial functions.




During
the three months ended September 30, 2008, there were no changes in our internal
controls over financial reporting identified in connection with the evaluation
required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was
conducted during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting except as described above.







ITEM
      8B.
            
            OTHER
INFORMATION




None.


16


PART III


ITEM
      9.
            
            DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL
      PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE
      EXCHANGE ACT




The
following table sets forth as of September 30, 2008, the name, age, and
position of each Executive Officer and Director and the term of office of each
Director of the Company and significant employees.


Name
                    Age
                    PositionRichard
      D. Stromback
                    39
                    ChairmanJ.B.
      Smith
                    38
                    DirectorRocco
      DelMonaco, Jr.
                    55
                    DirectorRobert
      G. Crockett
                    50
                    Chief
      Executive OfficerF.
      Thomas Krotine
                    67
                    President
      and Chief Operating OfficerDavid
      W. Morgan
                    49
                    Vice
      President, Chief Financial Officer and TreasurerDaniel
      V. Iannotti
                    52
                    Vice
      President, General Counsel & SecretaryKevin
      Stolz
                    45
                    Controller
      and Chief Accounting OfficerSally
      J.W. Ramsey
                    55
                    Vice
      President – New Product
Development


Mr. Smith
is one of the three Directors appointed by Equity 11.  Each other
Director of the Company serves for a term of one year and until his successor is
duly elected and qualified. Each officer serves at the pleasure of the Board of
Directors subject to any applicable employment agreements.




Set forth
below is certain biographical information regarding each of the Company’s
current executive officers, directors and significant employees as of
September 30, 2008.




Richard D.
Stromback.Mr. Stromback has served as the Chairman of the
Board of Directors of the Company since March 1, 2004.  From Mach 1,
2004 until October 30, 2006 and from August 15, 2007 until September 15, 2008,
Mr. Stromback also served as our Chief Executive Officer.  From 1997
to 2003, Mr. Stromback was the CEO of Web Group, a privately-held IT
staffing firm founded by Mr. Stromback in 1997. Mr. Stromback holds a
B.A. from Brandon University in Canada.




J.B.
Smith.  Mr. Smith currently is the Managing Partner for Equity
11, Ltd. Equity 11’s portfolio companies employ the largest collection of former
federal law enforcement agents in the private sector. Smith is also currently
serving as Chairman of Isekurity, the nation’s leader in identity theft
solutions and holds a bachelor’s degree in Administration of Justice from The
Pennsylvania State University. Smith has served as a member of Stealth
Investigations LLC since 2003, and has been a partner in Sky Blue Ventures since
2004. Also known as the creator of the “Philanthropic
InvestmentSM,” Smith is a partner in WM
Reign, Ltd., an investment model solely dedicated to helping finance churches
and Christian causes by utilizing Smith’s “Philanthropic
InvestmentSM” concept.




Rocco DelMonaco,
Jr.  Mr. DelMonaco became a Director on September 15, 2008, and
is our only independent Director.  Mr. DelMonaco. has been the Vice
President Security for Georgetown University since 2007.  From 2005 to
2007, Mr. DelMonaco was an Assistant Executive Director of ManTech Security and
Mission Assurance Corporation.  From 2004 to 2005, Mr. DelMonaco was
the Acting Director with the Department of Homeland Security, Incident
Management Division.  From 2002 to 2004, Mr. DelMonaco was a Special
Agent in Charge- Liaison Division with the Department of Homeland Security,
Federal Air Marshall Service.  From 1980 to 2002, Mr. DelMonaco was a
Supervisory Special Agent with the United States Secret Service.  Mr.
DelMonaco received his BA from the University of Miami and his Masters of Public
Administration from Pepperdine University.


17




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 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.




F. Thomas
Krotine.Since October 30, 2006, Mr. Krotine has served as the
President of the Company and from October 30, 2006 until August 15, 2007, he
served as our  Chief Executive Officer. From August 15, 2007 to the
present, he has also served as the Chief Operating Officer.  Mr.
Krotine is an industry veteran with over 35 years of coatings industry
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.




David W.
Morgan.On May 21, 2007 Mr. Morgan became  the Chief
Financial Officer and Treasurer of the Company. Prior to joining us,
Mr. Morgan has 26 years of broad financial and operating experience in
the telecommunications and information technology services industries, including
13 years of experience as a Director, Vice President and CFO. From 2006 to
2007, Mr. Morgan had served as the President and Chief Executive Officer of
D. W. Morgan & Company LLC, a private investor relations consulting practice
in Bloomfield Hills, Michigan. From 2002 to 2006, he was Vice President —
Finance & Business Development, Chief Financial Officer and Treasurer of
Techteam Global, Inc., a publicly-held provider of information technology and
business process outsourcing support services. From 2001 to 2002,
Mr. Morgan was the Vice President, Chief Financial Officer, Treasurer and
Secretary of Entivity, Inc., a privately-held visualization and control software
company. From 1998 to 2001, he was the Vice President, Chief Financial Officer
and Treasurer of Clover Technologies, Inc., an international data, video and
structured cabling systems integration company and a subsidiary of AT&T.
Mr. Morgan holds a B.A. from the University of Michigan, Ann
Arbor.




Daniel V.
Iannotti.  Mr. Iannotti became our General Counsel and
Secretary on August 11, 2008. 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, 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.   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.




Sally Judith Weine Ramsey.Ms. Ramsey our founder. From
1990 to the present, Ms. Ramsey served as Vice President of Ecology-CA and from
1990 to November 2006 served as Secretary. From 1990 to November 2003,
she served as a director of Ecology-CA. 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.







Directors appointed after September
30, 2008





On
October 20, 2008, Joseph Nirta was elected as a Director.  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.




Committees
of the Board of Directors




Audit
Committee




Our Audit
Committee appoints the Company’s independent auditors, reviews audit reports and
plans, accounting policies, financial statements, internal controls, audit fees,
and certain other expenses and oversees our accounting and financial reporting
process. Specific responsibilities include selecting, hiring and terminating our
independent auditors; evaluating the qualifications, independence and
performance of our independent auditors; approving the audit and non-audit
services to be performed by our auditors; reviewing the design, implementation,
adequacy and effectiveness of our internal controls and critical accounting
policies; overseeing and monitoring the integrity of our financial statements
and our compliance with legal and regulatory requirements as they relate to
financial statements or accounting matters; reviewing any earnings announcements
and other public announcements regarding our results of operations, in
conjunction with management and our public auditors; and preparing the report
that the Securities and Exchange Commission will require in our annual proxy
statement.  On October 18, 2007, the Audit Committee adopted a
written charter.




Until
July 13, 2008, the Audit Committee was comprised of two Directors, Mr. Campion
and Mr. Liebig, each of whom was independent, as defined by the rules and
regulations of the Securities and Exchange
Commission.  Mr. Campion was the Chairman of the Committee and
the Board of Directors determined that Mr. Campion qualified as an “audit
committee financial expert,” as defined under the rules and regulations of the
Securities and Exchange Commission, and is independent as noted
above.




From July
13, 2008 until July 24, 2008, the Audit Committee was comprised solely of Mr.
Liebig. Since July 24, 2008, we have not had an elected Audit
Committee.  Since that date, the entire Board has acted on any matter
requiring Audit Committee approval.




Compensation
Committee




Our
Compensation Committee assists our Board of Directors in determining the
development plans and compensation of our officers, directors and employees.
Specific responsibilities include approving the compensation and benefits of our
executive officers; reviewing the performance objectives and actual performance
of our officers; administering our stock option and other equity compensation
plans; and reviewing and discussing with management the compensation discussion
and analysis that the Securities and Exchange Commission regulations will
require in our future Form 10-Ks and proxy statements.  On
October 18, 2007 the Board of Directors adopted a written
charter.




Until
July 13, 2008, our Compensation Committee was comprised of two Directors, Mr.
Campion and Mr. Liebig, whom the Board considered to be independent under the
rules of the Securities and Exchange Commission. Mr. Liebig was the
Chairman of the Committee.  From July 13, 2008 until July 24, 2008,
Mr. Liebig was the sole member of the Compensation Committee.  Since
that date, our sole independent Board member, Rocco DelMonaco, Jr., has approved
all compensation matters involving our executives.




Advisory
Board




On May 1, 2007, we formed an Advisory Board of experts in the industries we
serve. The Advisory Board is currently made up of one person, Dr. William
F. Coyro, Jr.




Dr. William
F. Coyro, Jr.Dr. Coyro serves as chairman of Ecology Coatings’ Business Advisory
Board. He is a 1969 graduate of the University of Detroit with a Doctorate
degree in Dental Surgery (DDS). He attended the University of Michigan where he
earned a B.S. in Chemistry. After graduation, he was a Lieutenant and dentist in
the U.S. Navy from 1970 until 1972. After leaving the Navy in 1972, he was a
dentist in private practice, an investor, and a financier. Dr. Coyro
founded TechTeam Global, Inc., in 1979. Dr. Coyro was the President and CEO
of TechTeam Global until 2006, and also served as Chairman of the Board of
Directors until 1997.




Section 16(a)
Beneficial Ownership Reporting Compliance




Section 16(a)
of the Securities Act of 1934, as amended, requires the Company’s Directors and
Executive Officers, and persons who own more than ten percent (10%) of a
registered class of the Company’s equity securities, to file with the Securities
and Exchange Commission (“SEC”) initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the Company.
Officers, Directors and greater than ten percent (10%) shareholders are required
by SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.




To the
Company’s knowledge, based solely on a review of such materials as are required
by the Securities and Exchange Commission, no officer, director or beneficial
holder of more than ten percent of the Company’s issued and outstanding shares
of Common Stock failed to file in a timely manner with the Securities and
Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934, as amended, during the
fiscal year ended September 30, 2008.




Code
of Ethics




We have
adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. A copy of our Code of Ethics may be
obtained without charge by sending a written request to us at 2701 Cambridge
Court, Suite 100, Auburn Hills, MI 48326, Attn: Investor Relations.




ITEM 10. EXECUTIVE COMPENSATION




The table
below sets forth all cash compensation paid or proposed to be paid by the
Company to the chief executive officer and the most highly compensated executive
officers, and key employees for services rendered in all capacities to the
Company during fiscal years ended September 30, 2008 and 2007.




Summary
Compensation Table


Change
      inPensionValue
      andNon-Equity
                
                NonqualifiedIncentive
                
                DeferredStock
                
                Option
                Plan
                
                Compensation
                All
      OtherYear
                
                Salary
                
                Bonus
                
                Awards
                
                Awards
                Compensation
                
                Earnings
                Compensation
                TotalName
      (a)
                
                (b)
                
                ($)
      (c)
                
                ($)
      (d)
                
                ($)
      (e)
                
                ($)
      (f) (1)
                ($)
      (g)
                
                ($)
      (h)
                ($)
      (i)
                ($) (j)Richard
      D. Stromback,
                
                
                2008
                
                
                $
                305,789
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                $
                -0-
                
                $
                -0-
                $
                -0-
                
                $
                305,789Chairman
      & CEO (2)
                
                
                2007
                
                
                $
                348,333
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                15,399
                
                $
                -0-
                
                $
                -0-
                $
                -0-
                
                $
                363,732Robert
      G. Crockett, CEO (3)
                
                
                2008
                
                
                $
                8,333
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                254,701
                
                $
                -0-
                
                $
                -0-
                $
                1,297
                (5)
                $
                263,0342007
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                $
                -0-
                
                $
                -0-
                $
                -0-
                
                $
                -0-Sally
      J.W. Ramsey,
                
                
                2008
                
                
                $
                195,833
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                $
                -0-
                
                $
                -0-
                $
                12,564
                (5)
                $
                208,397Vice
      President - New
                
                
                2007
                
                
                $
                157,146
                
                
                $
                6,667
                
                
                $
                -0-
                
                
                $
                335,442
                
                $
                -0-
                
                $
                -0-
                $
                10,081
                (5)
                $
                509,336Product
      Development (4)F.
      Thomas Krotine
                
                
                2008
                
                
                $
                160,000
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                $
                -0-
                $
                -0-
                
                $
                7,342
                (5)
                $
                167,342President
      and COO, Director
                
                
                2007
                
                
                $
                155,248
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                16,545
                
                $
                -0-
                $
                -0-
                
                $
                -10,341
                (5)(7)
                $
                182,134David
      W. Morgan
                
                
                2008
                
                
                $
                210,000
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                180,367
                (6)
                $
                -0-
                $
                -0-
                
                $
                27,687
                (5)(7)
                $
                418,054Vice
      President, CFO and Treasurer
                
                
                2007
                
                
                $
                60,000
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                469,786
                
                $
                -0-
                $
                -0-
                
                $
                6,189
                (5)(7)
                $
                535,975





(1)
            
            See
      Note 7 in the Consolidated Financial Statements included in the Form
      10-KSB for a discussion of the assumptions underlying the value of the
      compensation disclosed in this column.(2)
            
            Mr. Stromback
      resigned as CEO of the Company on September 15, 2008. Effective October 1,
      2008, he was engaged by the Company as a consultant through an entity
      named RJS Consulting, LLC.(3)
            
            Mr.
      Crockett began employment with the Company as CEO on September 17, 2008.
      His annual salary is $200,000. He was awarded 330,000  options
      on that date, the value of which is disclosed in Option Awards in this
      table.(4)
            
            Ms. Ramsey
      and the Company entered into an employment agreement on January 1,
      2007. Pursuant to such employment contract, she will receive a salary of
      $180,000 for the calendar year 2007, a salary of $200,000 for the calendar
      years 2008 through 2011, and a salary of $220,000 for calendar year 2012.
      Ms. Ramsey was awarded options to purchase 450,000 shares of common
      stock that vest over five years.(5)
            
            These
      amounts reflect health insurance for all persons shown.(6)
            
            The
      pricing on Mr. Morgan’s 2007 option grant was reset from $2 per share to
      $1.05 per share on September 17, 2008. This represents the value of the
      reset option.(7)
            
            Reflects
      automobile allowances paid to Messrs. Morgan and
  Krotine.





Compensation
Policy. The Company’s executive compensation plan is based on attracting
and retaining qualified professionals who possess the skills and leadership
necessary to enable our Company to achieve earnings and profitability growth. We
must, therefore, create incentives for these executives to achieve both company
and individual performance objectives through the use of performance-based
compensation programs.




No one
component is considered by itself, but all forms of the compensation package are
considered in total. Wherever possible, objective measurements will be utilized
to quantify performance, but many subjective factors still come into play when
determining performance.




Compensation
Components




With the
Company still in its inception stage, the main elements of our compensation
package consist of base salary, stock options, and bonus.




Base Salary. The base salary for each executive officer is reviewed and compared to
the prior year, with considerations given for increase. Base salary
adjustments will be based on both individual and Company performance and will
include both objective and subjective criteria specific to each executive’s role
and responsibility with the Company.  No increases were given to
executives from 2007 to 2008.




Stock
Options.  Stock option awards are determined by the Board of
Directors based on several factors, some of which include responsibilities
incumbent with the role of each executive to the Company, tenure with the
Company, as well as Company performance, such as shipment of product at certain
thresholds. The vesting period of said options is also tied, in some instances,
to Company performance directly related to certain executive’s responsibilities
with the Company.


18


Bonuses.  To date, bonuses have been granted on a limited
basis, with these bonuses related to meeting certain performance criteria that
are directly related to areas within the executive’s responsibilities with the
Company, such as production of product and sales of product to customers. As the
Company continues to evolve, more defined bonus programs are expected to be
created to attract and retain our employees at all levels. No bonuses were
granted in 2008.




Other.  At
this time, the Company has no profit sharing plan in place for employees.
However, this is another area of consideration to add such a plan to provide yet
another level of compensation to our compensation plan. The Company reimburses
all or a portion of health insurance costs for its employees.




Mr. Stromback
earned a base salary of $305,789 during 2008. He received no other compensation
for 2008. He was employed under an employment agreement effective January 1,
2008. He resigned his position as CEO on September 15, 2008. Effective October
1, 2008, Mr. Stromback signed a consulting contract with the Company that
expires on September 11, 2011. The contract calls for monthly payments of
$16,000, a monthly office expense reimbursement of $1,000, and payment for Mr.
Stromback’s attendance at certain events. During 2007, Mr. Stromback earned
a base salary of $348,333. These earnings, coupled with $15,399 in stock options
awarded to him as a director, brought his total compensation to
$363,732. The options grant him the right to purchase 10,000 shares of the
Company’s common stock at $2 per share. They vested on April 1, 2008, and expire
on February 1, 2017.




Mr.
Crockett was named the Company’s CEO on September 15, 2008. He receives a base
salary of $200,000 and health care benefits. Additionally, he was awarded
330,000 options to purchase shares of the Company’s common stock at $1.05 per
share. The options vest in 110,000 option increments over a thirty month period,
with the first tranche becoming exercisable on March 15, 2010, the middle
tranche becoming exercisable on September 15, 2010, and the final tranche
becoming exercisable on March 15, 2011. The options expire on September 11,
2018. He earned $8,333 in base salary in 2008 and the aforementioned options
were valued at $254,701. Additionally, the Company paid $1,297 in medical
insurance premiums on his behalf, bringing his total 2008 compensation to
$263,034.




Ms. Ramsey
earned a base salary of $195,833. Additionally, the Company paid health
insurance premiums of $12,564 on her behalf. Her total compensation for 2008 was
$208,397. She is employed under an agreement dated January 1, 2007. The
employment agreement is for a term of five years from January 1, 2007
through January 1, 2012. Her salary for the first year is $180,000, then
$200,000 for years two through four, and finally $220,000 for year five. Ms.
Ramsey earned a base salary of $157,146 during 2007 along with a bonus of $6,667
for performance criteria she met during the year. These earnings, coupled with
the $335,442 of stock options and $10,081 in company-paid health insurance
premiums, brought her total compensation to $509,336 for 2007. On January 1,
2007, Ms. Ramsey was granted options to purchase 450,000 shares of the Company’s
common stock at $2 per share. The options vest in tranches of 150,000 each on
January 1st of
2010, 2011, and 2012 and expire on January 1, 2017.




Mr. Krotine
earned a base salary of $160,000 during 2008. In addition, the Company paid
$7,342 in medical insurance premiums on his behalf, bringing his total
compensation for 2008 to $167,342. He earned a base salary of $155,248 during
2007. These earnings, coupled with the $16,545 of stock options and $5,277 in
company-paid health insurance premiums and $5,064 an auto allowance, brought his
total compensation to $182,134 for 2007. On November 1, 2006, he was awarded
options to purchase 321,217 shares of the Company’s common stock at $2 per
share. 80,237 of these options vested on November 1, 2007 and the remaining
240,980 vested on November 1, 2008. These options expire on November 1, 2016. He
was also awarded 10,000 options on February 1, 2007 for service as a director.
These options have an exercise price of $2 per share, vested on April 1, 2008,
and expire on February 1, 2017. He was employed under an employment agreement
that expired on November 1, 2008.




Mr. Morgan
earned a base salary of $210,000 during 2008, was paid a car allowance of
$6,088, and received company-paid medical benefits of $21,599. The foregoing was
in accordance with a two year employment agreement by and between the Company
and Mr. Morgan signed on May 21, 2007. Additionally, on September 15, 2008, the
price on 300,000 options to purchase shares of the Company’s common stock at $2
per share was reset to $1.05 per share. The value of this action was $180,637,
bringing his total compensation for 2008 to $418,054. The stock options were
originally awarded on May 21, 2007. 75,000 of the options became exercisable on
May 21, 2008 and the remaining 225,000 will become exercisable
on May 21, 2009. All of the options expire on May 21, 2017. Mr. Morgan earned a
base salary of $60,00 during 2007. These earnings, coupled with the $469,786 of
stock options, $2,164 for an automobile allowance and $4,025 for health
insurance, brought his total compensation to $535,975 for
2007.


19




Outstanding
Equity Awards at Fiscal Year-End


Option
      Awards
                            Stock
      AwardsEquity
                            EquityIncentive
                            IncentiveEquity
                            
                            
                            
                            
                            
                            
                            
                            
                            Number
                            
                            Plan
                            PlanIncentive
                            
                            
                            
                            
                            
                            
                            
                            
                            of
                            Market
                            Awards:
                            Awards:Plan
                            
                            
                            
                            
                            
                            
                            
                            
                            Shares
                            Value of
                            Number
      of
                            Market
      orNumber
      of
                            
                            Number
      of
                            Awards:
                            
                            
                            
                            
                            
                            
                            
                            
                            or
      Units
                            Shares or
                            Unearned
                            Payout
      ValueSecurities
                            
                            Securities
                            Number
      of
                            
                            
                            
                            
                            
                            
                            
                            
                            of
                            Units
      of
                            Shares,
                            of
      UnearnedUnderlying
                            
                            Underlying
                            Securities
                            
                            
                            
                            
                            
                            
                            
                            
                            Stock
                            Stock
                            Units
      or
                            Shares,
      UnitsUnexercised
                            
                            Unexercised
                            Underlying
                            
                            
                            
                            
                            
                            
                            
                            
                            That
                            That
                            Other
                            or OtherOptions
                            
                            Options
                            Unexercised
                            
                            Option
                            
                            Option
                            Have
                            Have
                            Rights That
                            Rights
      That(#)
                            
                            (#)
                            Unearned
                            
                            Exercise
                            
                            Expiration
                            Not
                            Not
                            Have
      Not
                            Have
      NotExercisable
                            
                            Unexercisable
                            Options
      (#)
                            
                            Price
                            
                            Date
                            Vested
                            Vested
                            Vested
                            VestedName
      (a)
                            
                            (b)
                            
                            (c)
                            (d)
                            
                            ($)
      (e)
                            
                            (f)
                            (#)
      (g)
                            ($)
      (h)
                            (#)
      (i)
                            ($)
      (j)Richard
      D. Stromback
                            
                            
                            10,000
                            
                            
                            
                            0
                            
                            
                            
                            
                            2.00
                            
                            
                            
                            3/01/2017Sally
      J.W. Ramsey
                            
                            
                            0
                            
                            
                            
                            450,000
                            
                            
                            
                            
                            2.00
                            
                            
                            
                            1/01/2017F.
      Thomas Krotine
                            
                            
                            80,237
                            
                            
                            
                            240,980
                            
                            
                            
                            
                            2.00
                            
                            
                            
                            11/01/201610,000
                            
                            
                            
                            0
                            
                            
                            
                            
                            2.00
                            
                            
                            
                            3/01/2017David
      W. Morgan
                            
                            
                            75,000
                            
                            
                            
                            225,000
                            
                            
                            
                            
                            1.05
                            
                            
                            
                            5/21/2017Robert
      G. Crockett
                            
                            
                            0
                            
                            
                            
                            330,000
                            
                            
                            
                            
                            1.05
                            
                            
                            
                            9/15/2017J.B.
      Smith
                            
                            
                            0
                            
                            
                            
                            100,000
                            
                            
                            
                            
                            1.05
                            
                            
                            
                            9/17/2018Rocco
      DelMonaco
                            
                            
                            0
                            
                            
                            
                            100,000
                            
                            
                            
                            
                            1.05
                            
                            
                            
                            9/17/2018




Mr. Stromback
was granted 10,000 options under the 2007 Stock Option Plan for serving as a
director. All options are priced at $2.00 per share and expire in ten
(10) years. None of the options vested at time of issuance and all 10,000
options vested on April 1, 2008.




Ms. Ramsey
was granted 450,000 options under the 2007 Stock Option Plan. All options are
priced at $2.00 per share and expire in ten (10) years. None of the options
vested at the time of issuance. On January 1, 2010, 150,000 options will
vest, 150,000 options will vest on January 1, 2011, and 150,000 options
will vest on January 1, 2012.




Mr. Krotine
was granted 331,217 options under the 2007 Stock Option Plan. All options are
priced at $2.00 per share and expire in ten (10) years. None of the options
vested at the time of issuance. On November 1, 2007, 80,237 options vested
and 240,980 options will vest on November 1, 2008. Mr. Krotine received
10,000 options as part of the 2007 Stock Option Plan for service as a director,
which vested on April 1, 2008. These options have an exercise price of
$2.00 per share and expire ten (10) years from the date of
issuance.




Mr. Morgan
was granted 300,000 options under the 2007 Stock Option Plan. All options were
priced at $2.00 per share at date of grant and expire in ten (10) years.
The pricing on the options was reset to $1.05 per share on September 15, 2008.
None of the options vested at time of issuance, 75,000 options became
exercisable on May 21, 2008, and 225,000 options will vest on May 21,
2009.


20




Mr.
Crockett was awarded 330,000 options to purchase shares of the Company’s common
stock at $1.05 per share. None of the options were exercisable at issuance. The
options vest in 110,000 option increments over a thirty month period, with the
first tranche becoming exercisable on March 15, 2010, the middle tranche
becoming exercisable on September 15, 2010, and the tranche becoming exercisable
on March 15, 2011. The options expire on September 17, 2018.




Mr. Smith
was awarded 100,000 options to purchase shares of the Company’s common stock at
$1.05 per share. None of the options were exercisable at issuance. The options
vest on September 15, 2009 and expire on September 15, 2018.  These
options are personal to Mr. Smith and do not include convertible preferred
shares and warrants issued to Equity 11.  Mr. Smith is the managing
partner of Equity 11.




Mr.
DelMonaco was awarded 100,000 options to purchase shares of the Company’s common
stock at $1.05 per share. None of the options were exercisable at issuance. The
options vest on September 15, 2009 and expire on September 15,
2018.




At the
end of 2008, all of the 4,500,000 options available under the 2007 Plan had been
granted. On December 2, 2008, the Board of Directors authorized the addition of
another 1,000,000 shares to the 2007 Plan. The table above indicates options
granted under the Plan to certain executives in fiscal 2007. The balance of the
options under the 2007 Plan was granted to consultants, other employees of the
Company, and past and current directors.  In 2008, 1,456,000 options
were granted under the 2007 Plan.




Stock
Option Plans




Our Board
of Directors adopted the 2007 Stock Option and Restricted Stock Plan (the “2007
Plan”) on May 9, 2007 and the shareholders approved the Plan on
June 4, 2007. The 2007 Plan authorized us to issue up to 4,500,000 shares
of our common stock for issuance upon exercise of options and grant of
restricted stock awards. On December 2, 2008, the Board of Directors authorized
the addition of another 1,000,000 shares to the 2007 Plan. We issued 590,000
options under the Plan to our directors, officers and employees, all of which
are subject to vesting provisions. The balance of the options issued under the
plan during the fiscal year ended September 30, 2008 was issued to
consultants.




The Plan
authorizes us to grant (i) to key employees incentive stock options and
non-qualified stock options and restricted stock awards and (ii) to
non-employee directors and consultants non-qualified stock options and
restricted stock. Our Compensation Committee will administer the Plans by making
recommendations to the board or determinations regarding the persons to whom
options or restricted stock should be granted and the amount, terms, conditions
and restrictions of the awards.




The Plan
allows for the grant of incentive stock options, non-qualified stock options and
restricted stock awards. Incentive stock options granted under the Plan must
have an exercise price at least equal to one hundred percent (100%) of the fair
market value of the common stock as of the date of grant. Incentive stock
options granted to any person who owns, immediately after the grant, stock
possessing more than ten percent (10%) of the combined voting power of all
classes of our stock, or of any parent or subsidiary corporation, must have an
exercise price at least equal to one hundred ten percent (110%) of the fair
market value of the common stock on the date of grant. Non-statutory stock
options may have exercise prices as determined by our Compensation Committee. To
date, no incentive stock options have been granted under the Plan.




The
Compensation Committee is also authorized to grant restricted stock awards under
the Plan. A restricted stock award is a grant of shares of the common stock that
is subject to restrictions on transferability, risk of forfeiture and other
restrictions and that may be forfeited in the event of certain terminations of
employment or service prior to the end of a restricted period specified by the
Compensation Committee.







Compensation
of Directors




J.B.
Smith and Rocco DelMonaco were appointed to the Company’s Board of Directors on
September 17, 2008. Each received options to purchase 100,000 shares of the
Company’s common stock for $1.05 per share. The options become exercisable on
September 17, 2009 and expire on September 17, 2018.


21




During
2008, three officers, Mr. Stromback, CEO, Mr. Krotine, COO, and Mr. Morgan, CFO,
served on the Board of Directors. They did not receive any compensation for this
service. Mr. Krotine and Mr. Morgan resigned as directors on September 15,
2008.




In 2008,
neither Mr. Liebig nor Mr. Campion received any compensation as directors. Mr.
Campion resigned on July 13, 2008. Mr. Liebig resigned on July 24, 2008. In
2007, the Mr. Liebig, a non-employee director, was granted 25,000 options
for agreeing to serve on the Board of Directors in 2007, including on the Audit
and Compensation Committees, and 75,000 options for agreeing to serve on the
Board of Directors prior to the Company purchasing director and officer
liability insurance. Mr. Campion was paid $20,000 in cash and was granted
100,000 options for agreeing to serve as a member of the board in 2007. The
non-employee directors are reimbursed for their out-of-pocket costs in attending
the meetings of the Board of Directors.







Director
Compensation


Change inPension
      ValueandFees
                
                
                
                
                
                
                
                
                
                
                
                
                
                NonqualifiedEarned
                
                
                
                
                
                
                
                
                
                Non-Equity
                
                DeferredOr
      Paid
                
                Stock
                
                Option
                
                Incentive
      Plan
                
                Compensation
                
                All
      Otherin
      Cash
                
                Awards
                
                Awards
                
                Compensation
                
                Earnings
                
                Compensation
                
                TotalName
      (a)
                
                ($)(b)
                
                ($)(c)
                
                ($)(d)
                
                ($)(e)
                
                ($)(f)
                
                ($)(g)
                
                ($)(h)Richard
      D. Stromback
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                (1)
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-J.B.
      Smith
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                76,971
                (2)
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                76,971Rocco
      DelMonaco
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                76,971
                (3)
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                76,971David
      Morgan
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                (4)
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-F.
      Thomas Krotine
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                (5)
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-Robert
      W. Liebig
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                (6)
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-Donald
      Campion
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                (7)
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-
                
                
                $
                -0-





(1)
            
            Mr. Stromback
      had 10,000 outstanding option awards at fiscal year end
    2008.(2)
            
            Mr.
      Smith had 100,000 outstanding option awards at fiscal year end
      2008.(3)
            
            Mr.
      DelMonaco had 100,000 outstanding option awards at fiscal year end
      2008.(4)
            
            Mr.
      Morgan had 300,000 outstanding option awards at fiscal year end
      2008.(5)
            
            Mr. Krotine
      had 10,000 outstanding option awards at fiscal year end
    2008.(6)
            
            Mr. Liebig
      had 100,000 outstanding option awards at fiscal year end 2008. He resigned
      on July 24, 2008.(7)
            
            Mr. Campion
      had 100,000 outstanding option awards at fiscal year end 2008. He resigned
      on July 13, 2008.




Mr.
Stromback did not receive any compensation in 2008 for serving as
Chairman.




Mr.
Smith, a non-employee director, received 100,000 options in 2008 for serving as
a director. All of his compensation is disclosed in the Director Compensation
Table.


22




Mr.
DelMonaco, a non-employee director, received 100,000 options in 2008 for serving
as a director. All of his compensation is disclosed in the Director Compensation
Table.




Mr.
Krotine did not receive any compensation in 2008 for serving on the Board of
Directors.




Mr.
Morgan resigned as a director on September 15, 2008. He did not receive any
compensation in 2008 for serving on the Board of Directors.




Mr.
Liebig, a non-employee director, did not receive any compensation in 2008 for
serving as a director. He resigned on July 24, 2008.




Mr.
Campion, a non-employee director, did not receive any compensation in 2008 for
serving as a director.




Employment
Contracts; Termination of Employment and Change-in-Control
Arrangements




Effective
November 1, 2006, we entered into an employment agreement with F.
Thomas Krotine, under which he serves as the President and Chief Executive
Officer of the Company. Under the terms of the agreement, he also serves as a
member of the Board of Directors. If Mr. Krotine’s employment under his
agreement is terminated for any reason, he must resign as a member of the Board
of Directors. The term of Mr. Krotine’s agreement was two years. In each
capacity, Mr. Krotine reports to the Chairman of the Board of
Directors.  This Agreement lapsed on October 31, 2008.




Pursuant
to an agreement effective May 21, 2007, David W. Morgan serves as the
Vice President, Chief Financial Officer, and Treasurer of the Company. On
December 3, 2008, the Company terminated the employment agreement with David
Morgan, its Chief Financial Officer. Mr. Morgan continues to be employed by the
Company in the capacity of Chief Financial Officer as an at-will
employee.  He reports to the Chief Executive
Officer.




Kevin Stolz
serves as Controller and Chief Accounting Officer under an agreement with the
Company effective February 1, 2007. The agreement was executed on February
1, 2008 and expires on January 31, 2010. He reports to the Chief Executive
Officer.




Sally
J.W. Ramsey serves as the Director of Research and Development and New Product
Development. Her employment agreement is for a term of five years from
January 1, 2007 through January 1, 2012. Her salary for the first year
is $180,000, then $200,000 for years two through four, and finally $220,000 for
year five.  She reports to the Chief Executive Officer.




Mr.
Stolz’s and Ms. Ramsey’s agreements are renewable for one year at the Company’s
option unless either party gives written notice to the other party that it does
not wish to extend the agreement. The agreements may be terminated prior to the
end of the term by the Company for cause, good reason, or
upon thirty days written notice given to the other party. If the
executive’s employment is terminated without cause or for “good reason,” as
defined in their employment agreements, the executive is entitled to the amount
of salary that would have been paid over the balance of the term of the
agreement and will receive it over such period. Further, upon a change in
control other than with Equity 11, the Company must pay the executive’s annual
salary that would be payable for a twenty-four month period and any
declared and accrued, but as of then unpaid, bonus or stock options grant, shall
be deemed to be vested.




On August
27, 2008, the terms of the employment agreements of Messrs. Stromback, Krotine,
Morgan, Stolz were amended so the Equity 11 transaction was not a “change in
control” under the terms of those employment agreements.





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




The
following table sets forth, as of November 21, 2008, certain information
regarding the beneficial ownership of the Company’s common stock by:
(i) each person known by the company to be the beneficial owner of more
than five percent (5%) of the outstanding shares of common stock, (ii) each
Director and Executive Officer of the Company, and (iii) all Directors and
the Executive Officers as a group.


Amount
      ofCommonStock
      andWarrants
      and
                                    
                                    Percent
      ofNature
      of
                                    
                                    Class
      ofBeneficial
                                    
                                    CommonName and Address of Beneficial
      Owner Group(1)(2)
                                    
                                    Ownership
                                    
                                    StockRichard
      D. Stromback (3)
                                    
                                    
                                    14,644,000
                                    
                                    
                                    
                                    50.27F.
      Thomas Krotine (4)
                                    
                                    
                                    341,217
                                    
                                    
                                    
                                    1.06J.
      B. Smith  and Equity 11, Ltd.
                                    
                                    
                                    1,500,000
                                    
                                    
                                    
                                    4.65Rocco
      DelMonaco
                                    
                                    
                                    -0-
                                    
                                    
                                    
                                    0.00Joseph
      Nirta
                                    
                                    
                                    -0-
                                    
                                    
                                    
                                    0.00Sally
      J.W. Ramsey
                                    
                                    
                                    3,000,000
                                    
                                    
                                    
                                    9.31All
      officers and directors as a group (seven persons)
                                    
                                    
                                    19,485,237
                                    
                                    
                                    
                                    60.42Deanna
      Stromback (5)
                                    
                                    
                                    3,000,000
                                    
                                    
                                    
                                    9.31Douglas
      Stromback (5)
                                    
                                    
                                    3,000,000
                                    
                                    
                                    
                                    9.31





(1)
            
            The
      address of these persons is c/o Ecology Coatings, Inc., 2701 Cambridge
      Court, Suite 100, Auburn Hills, MI 48326.(2)
            
            The
      foregoing beneficial owners hold investment and voting power in their
      shares.(3)
            
            Richard
      D. Stromback’s total shares include 62,500 shares owned beneficially and
      of record by his wife, Jill Stromback.  Additionally, his total
      shares include vested options to purchase 10,000 shares of our common
      stock.(4)
            
            Includes
      options to purchase 331,217 shares of common stock exercisable within
      60 days.(5)
            
            Deanna
      Stromback and Douglas Stromback are the sister and brother, respectively,
      of Richard D. Stromback.









ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE




On August
12, 2008, one of our outside law firms, Butzel Long PC entered into an
Investigation Services Agreement with Stealth Investigations, LLC for
investigative services on behalf of the Company associated with the departure of
the Company’s prior general counsel, Adam Tracy.  Stealth
Investigations, LLC is owned by J.B. Smith, the managing partner of Equity 11
and one of the Company’s Directors. At September 30, 2008, we owed $6,711 to
Butzel Long for these services. This amount is included in the accounts payable
balance shown on the consolidated balance sheets included in this Form
10-KSB.







On
September 17, 2008, we entered into a Consulting Agreement with RJS
Consulting LLC (“RJS”). RJS is wholly owned by our Chairman, Richard D.
Stromback. Under the Agreement, RJS will provide directorship services


23


and
services relating to generating new revenue. RJS will be paid $16,000/month. In
addition, RJS will be paid based on new revenue generated from RJS’s efforts —
15% of collected new gross licensing and royalty revenue and 3% of new collected
gross revenue from product sales. The Company will also reimburse RJS for
various event, legal, office and IT costs.  We paid $2,700 under this
agreement in fiscal year 2008.





On
September 17, 2008, we entered into a Consulting Agreement with DAS
Ventures LLC (“DAS”). DAS is wholly owned by the brother of our Chairman
(Richard D. Stromback), Douglas Stromback, who is also a shareholder. Under the
Agreement, DAS will provide services relating to generating new revenue. DAS
will be paid based on new revenue generated from DAS’s efforts — 15% of
collected gross licensing and royalty revenue and 3% of collected gross revenue
from product sales.





On
September 17, 2008, we entered into a Consulting Agreement with Sales
Attack LC (“Sales Attack”). Sales Attack is wholly owned by J.B. Smith, a member
of our Board of Directors and owner of Equity 11, Ltd., the holder of our 5%
convertible preferred shares. Under the Agreement, Sales Attack will provide
services relating to generating new revenue. Sales Attack will be paid $20,000
per month plus a percentage of new revenue generated from Sales Attack’s efforts
- 15% of collected gross licensing and royalty revenue and 3% of collected gross
revenue from product sales.




On
September 30, 2008, the Company entered into a lease for office space for its
headquarters in Auburn Hills, MI with Seven Industries, Ltd..  The
lease specifies average monthly rent of $2,997.  Seven Industries,
Ltd. is wholly owned by J.B. Smith.  Mr. Smith is the managing partner
of Equity 11.  The Company has entered into a Securities Purchase
Agreement with Equity 11and Equity 11 has the right to designate three of the
five members of the Company’s Directors.







Mr.
DelMonaco is our only independent Director.  Both our Audit Committee
and Compensation Committee Charters set forth the following to determine whether
a Director is independent:  (1) the independence requirements of the
NASDAQ Stock Market,  (2)  a “non-employee director” within the
meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended
(the “1934 Act”), and (3) be an “outside director” under the regulations
promulgated under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the “Code”).





From
November of 2003 through September 30, 2006, Richard D. Stromback incurred
expenses on behalf of the Company for which he was not reimbursed. The balance
at September 30, 2008 was $49,190. The highest aggregate amount owed to him
during the fiscal year ended September 30, 2008 was $49,190. The Company
made no payments on this balance during the fiscal year ended September 30,
2008.





On
December 15, 2003, the Company entered into a promissory note with Deanna
Stromback, the sister of Richard D. Stromback and a former director of the
Company, under which it borrowed a total of $173,030. The note bears interest at
the rate of 4% per annum and is due and payable on December 31, 2008. She
converted $27,500 of the principal amount of the note into 3,000,000 shares of
common stock on March 1, 2005. At September 30, 2008, the outstanding
principal balance of this note was $110,500 plus accrued interest of $8,407. No
payments of principal and/or interest were made on this note during the fiscal
year ended September 30, 2008. During the fiscal year ended September 30,
2008, the highest principal amount owed on this note was $110,500.





On
August 10, 2004, the Company entered into a promissory note with Douglas
Stromback, the brother of Richard D. Stromback and Deanna Stromback and a former
director of the Company, under which it borrowed a total of $200,000. He
converted $27,500 of the principal amount into 3,000,000 shares of common stock
on March 1, 2005. The note bears interest at the rate of 4% per annum and
is due and payable on December 31, 2008. At September 30, 2008 the
outstanding principal balance of this note was $133,000 plus accrued interest of
$10,125. No payments of principal and/or interest were made on this note during
the fiscal year ended September 30, 2008. During the fiscal year ended
September 30, 2008, the highest principal amount owed on this note was
$133,000.









ITEM 13. EXHIBITS


Exhibit
                      Number
                    Description2.1
                    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. (2)3.2
                    Amended
      and Restated Articles of Incorporation of Ecology Coatings, Inc., a Nevada
      corporation (2)3.3
                    By-laws
      of OCIS Corp. (1)3.4
                    Certificate
      of Designation of 5% Convertible Preferred Shares dated August 29, 2008
      (6)3.5
                    Certificate
      of Designation of 5% Convertible Preferred Shares dated September 26, 2008
      (7)4.1
                    Specimen
      Stock Certificate of OCIS (1)4.2
                    Form
      of Common Stock Certificate of the Company (2)10.1
                    Promissory
      Note between Ecology Coatings, Inc., a California corporation, and Richard
      D. Stromback, dated November 13, 2003. (2)10.2
                    Promissory
      Note between Ecology Coatings, Inc., a California corporation, and Deanna
      Stromback, dated December 15, 2003. (2)10.3
                    Promissory
      Note between Ecology Coatings, Inc., a California corporation, and Douglas
      Stromback, dated August 10, 2004. (2)10.4
                    Lock-Up
      Agreement by and between Ecology Coatings, Inc., a California corporation,
      and the principal shareholders of OCIS, Corp., a Nevada corporation, dated
      as of April 30, 2007. (2)10.5
                    Registration
      Rights Agreement by and between Ecology Coatings, Inc., a Nevada
      corporation, and the shareholders of OCIS, Corp., a Nevada corporation,
      dated as of April 30, 2007. (2)10.6
                    Consulting
      Agreement among Ecology Coatings, Inc., a Nevada corporation, and DMG
      Advisors, LLC, a Nevada limited liability company dated July 27,
      2007. (2)10.7
                    Employment
      Agreement between Ecology Coatings, Inc., a California corporation and F.
      Thomas Krotine dated October 30, 2006 (2)10.8
                    Employment
      Agreement between Ecology Coatings, Inc., a California corporation and
      Adam S. Tracy dated November 1, 2006. (2)10.9
                    Employment
      Agreement between Ecology Coatings, Inc., a California corporation and
      Kevin Stolz dated February 1, 2007. (2)10.10
                    Employment
      Agreement between Ecology Coatings, Inc., a California corporation and
      David W. Morgan dated May 21, 2007. (2)10.11
                    Employment
      Agreement between Ecology Coatings, Inc., a California corporation and
      Timothy J. Tanner dated June 1, 2007. (2)10.12
                    First
      Amendment to the Employment Agreement between Ecology Coatings, Inc., a
      California corporation and Adam S. Tracy dated July 1, 2007.
      (2)10.13
                    Employment
      Agreement between Ecology Coatings, Inc., a California corporation and
      Sally J.W. Ramsey dated January 1, 2007. (2)10.14
                    License
      Agreement with E.I. Du Pont De Nemours and Ecology Coatings, Inc., a
      California corporation, dated November 8, 2004.
(2)10.15
                    License
      Agreement between Ecology Coatings, Inc., a California corporation and Red
      Spot Paint & Varnish Co., Inc., dated May 6, 2005.
      (2)10.16
                    Lease
      for office space located at 35980 Woodward Avenue, Suite 200,
      Bloomfield Hills, Michigan 48304. (2)10.17
                    Lease
      for laboratory space located at 1238 Brittain Road, Akron,
      Ohio  44310 (2)10.18
                    2007
      Stock Option and Restricted Stock Plan. (2)10.19
                    Form
      of Stock Option Agreement.  (2)10.20
                    Form
      of Subscription Agreement between Ecology Coatings, Inc., a California
      corporation and the Investor to identified
      therein.  (2)10.21
                    Consulting
      Agreement by and between Ecology Coatings, Inc., a California corporation,
      and MDL Consulting Group, LLC, a Michigan limited liability company dated
      April 10, 2006.  (2)10.22
                    Consulting
      Agreement by and between Ecology Coatings, Inc., a California corporation,
      and MDL Consulting Group, LLC, a Michigan limited liability company dated
      July 1, 2006.  (2)10.23
                    Antenna
      Group Client Services Agreement by and between Ecology Coatings, Inc., a
      California corporation and Antenna Group, Inc. dated March 1, 2004, as
      amended effective as of July 6, 2007.  (2)10.24
                    Consulting
      Agreement by and between Ecology Coatings, Inc., a California corporation
      and Kissinger McLarty Associates, date July 15, 2006, as
      amended.  (2)10.25
                    Business
      Advisory Board Agreement by and between Ecology Coatings, Inc., a
      California corporation, and The Rationale Group, LLC, a Michigan limited
      liability corporation, dated June 1,
  2007.  (2)10.26
                    Consulting
      Agreement by and between Ecology Coatings, Inc., a California corporation
      , and Trimax, LLC, a Michigan limited liability company dated June 26,
      2007.  (2)10.27
                    Series
      I Promissory Note made in favor of Hayden Capital USA, LLC dated February
      5, 2008.  (8)10.28
                    Series
      II Promissory Note made in favor of Hayden Capital USA, LLC dated February
      5, 2008.  (8)10.29
                    Series
      III Promissory Note made in favor of Hayden Capital USA, LLC dated
      February 5, 2008.  (8)10.30
                    Allonge
      to Promissory Note dated November 13, 2003 made in favor of Richard D.
      Stromback dated February 6, 2008.  (8)10.31
                    Allonge
      to Promissory Note dated December 15, 2003 made in favor of Deanna.
      Stromback dated February 6, 2008.  (8)10.32
                    Allonge
      to Promissory Note dated August 10, 2003 made in favor of Douglas
      Stromback dated February 6, 2008.  (8)10.33
                    Third
      Allonge to Promissory Note dated February 28, 2006 made in favor of Chris
      Marquez dated February 6, 2008.  (8)10.34
                    Employment
      Agreement with Kevin Stolz dated February 1, 2008. 
    (9)10.35
                    Promissory
      Note made in favor of Hayden Capital USA, LLC dated May 20, 2008. 
      (10)10.36
                    Extension
      of Series I, II and III Promissory Notes in favor of Hayden Capital USA,
      LLC dated June 9, 2008.  (11)10.37
                    Promissory
      Note made in favor of George Resta dated March 1, 2008. 
      (12)10.38
                    Promissory
      Note made in favor of Investment Hunter, LLC dated March 1, 2008. 
      (12)10.39
                    Scientific
      Advisory Board Agreement with Dr. Robert Matheson dated February 18,
      2008.  (13)10.40
                    Promissory
      Note made in favor of Mitch Shaheen dated June 18, 2008. 
      (14)10.41
                    Promissory
      Note made in favor of Mitch Shaheen dated July 10, 2008. 
      (15)10.42
                    Extension
      of Promissory Note made in favor of Richard D. Stromback dated July 10,
      2009.  (15)10.43
                    Extension
      of Promissory Note made in favor of George Resta dated July 14,
      2008.  (15)10.44
                    Extension
      of Promissory Note made in favor of Investment Hunter, LLC dated July 14,
      2008.  (15)10.45
                    Equity
      11, Ltd. commitment letter dated August 25, 2008. 
  (6)10.46
                    Securities
      Purchase Agreement with Equity 11, Ltd. dated August 28, 2008. 
      (6)10.47
                    First
      Amendment to Employment Agreement of Richard D. Stromback dated August 27,
      2008.  (6)10.48
                    Second
      Amendment to Employment Agreement of David W. Morgan dated August 27,
      2008.  (6)10.49
                    Second
      Amendment to Employment Agreement of F. Thomas Krotine dated August 27,
      2008.  (6)10.50
                    First
      Amendment to Employment Agreement of Kevin Stolz dated August 29,
      2008.  (6)10.51
                    Consulting
      Services Agreement with RJS Consulting LLC dated September 17, 2008. 
      (16)10.52
                    Consulting
      Services Agreement with DAS Ventures LLC dated September 17, 2008. 
      (16)10.53
                    Consulting
      Services Agreement with Sales Attack LLC dated September 17, 2008. 
      (16)10.54
                    First
      Amendment to Securities Purchase Agreement with Equity 11, Ltd. dated
      October 27, 2008.  (17)10.55
                    Consulting
      Services Agreement with Trimax, LLC dated November 11, 2008. 
      (18)14.1
                    Charter
      of Audit Committee (19)14.2
                    Charter
      of Compensation Commmittee (19)21.1
                    List
      of subsidiaries (2)24.1
                    Power
      of Attorney (2)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.*




*           Filed
herewith.




(1)
Incorporated by reference from OCIS’ registration statement on Form SB-2 filed
with the Commission, SEC file no. 333-91436.




(2)
Incorporated by reference from our Form 8-K filed with the Commission on July
30, 2007, SEC file no. 333-91436.




(3)
Incorporated by reference from our Form 8-K/A filed with the Commission on
August 9, 2007, SEC file no. 333-91436.




(4)
Incorporated by reference from our Form 8-K/A filed with the Commission on
August 15, 2007, SEC file no. 333-91436.




(5)
Incorporated by reference from our Form 8-K/A filed with the Commission on
September 17, 2007, SEC file no. 333-91436.



















24




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES




The
following table summarizes the fees that UHY LLP, our current independent
auditor, and Semple, Marchal & Cooper, L.L.P., our auditor for fiscal year
2006 and the first three quarters of fiscal year 2007, billed to us for each of
the last two fiscal years for audit and other services:


For
      the Year Ended September 30,2008
                
                
                2007Audit
      Fees
                
                $
                37,500
                
                
                $
                79,490
                *Audit
      Related Fees
                
                
                22,500
                
                
                
                43,192Tax
      Fees
                
                
                11,771
                
                
                
                -0-All
      Other Fees
                
                
                -0-
                
                
                
                -0-Total
      Fees
                
                $
                71,771
                
                
                $
                122,682




Note:  The
Company engaged UHY LLP as its independent auditor on August 30, 2007. This
engagement was disclosed in Form 8-K on that date. The agreed upon audit
and audit related fees for the fiscal year ending September 30, 2007
totaled approximately $40,000.




Audit
Fees:  Consists of fees for professional services rendered by our
principal accountants for the contemporaneous audit of the Company’s 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.




*Represents
fees paid for audits performed for years ended September 30, 2006 and
2005.




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 the Company’s financial statements and are not reported under
“Audit Fees.”




Tax
Fees:  Consists of fees for professional services rendered by our
principal accountants for tax advice.




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.




Under the
Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by the
Company’s independent accountants must now be approved in advance by the Audit
Committee to assure that such services do not impair the accountants’
independence from the Company. Accordingly, the Audit Committee has adopted an
Audit and Non-Audit Services Pre-Approval Policy (the “Policy”) which sets forth
the procedures and the conditions pursuant to which services to be performed by
the independent accountants are to be pre-approved. Pursuant to the Policy,
certain services described in detail in the Policy may be pre-approved on an
annual basis together with pre-approved maximum fee levels for such services.
The services eligible for annual pre-approval consist of services that would be
included under the categories of Audit Fees, Audit-Related Fees and Tax Fees in
the above table as well as services for limited review of actuarial reports and
calculations. If not pre-approved on an annual basis, proposed services must
otherwise be separately approved prior to being performed by the independent
accountants. In addition, any services that receive annual pre-approval but
exceed the pre-approved maximum fee level also will require separate approval by
the Audit Committee prior to being performed. The Audit Committee may delegate
authority to pre-approve audit and non-audit services to any member of the Audit
Committee, but may not delegate such authority to management.  During
fiscal year 2008, we engaged our Auditor to provide tax services in addition to
audit services but the engagement was not pre-approved by the Audit Committee,
Board or our independent Director. These tax services represent $11,771, or
16.4% of the total for audit related fees, tax fees and all other fees paid
during 2008.





The firm
of UHY LLP ("UHY") acts as our principal independent registered public
accounting firm. Through September 30, 2008 UHY had a continuing relationship
with UHY Advisors, Inc. (“Advisors”) from which it leased auditing staff who
were full time, permanent employees of Advisors and through which UHY’s partners
provide non-audit services.  UHY has no full time employees and
therefore, none of the audit
services performed were provided by permanent full-time employees of
UHY.  UHY manages and supervises the audit services and audit staff,
and is exclusively responsible for the opinion rendered in connection with its
examination.


25







SIGNATURES




In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report on Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized, this 19th day of December,
2008.


ECOLOGY
      COATINGS, INC.,
              a
      Nevada corporationBy:
            /s/
      David W. MorganVice
      President, Chief Financial Officer, and Treasurer
              (Principal
      Financial Officer)




Each
person whose signature appears below authorizes Robert G. Crockett to execute in
the name of each such person who is then an officer or director of the
registrant, and to file, any amendments to this Annual Report on Form 10-KSB
necessary or advisable to enable the registrant to comply with the Securities
Exchange Act of 1934 and any rules, regulations and requirements of the
Securities and Exchange Commission in respect thereof, which amendments may make
such changes in such Report as such attorney-in-fact may deem
appropriate.




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/
      Richard D. Stromback
                    Richard
      D. Stromback
                  Chairman
                  December
      19, 2008/s/
      Robert G. Crockett
                    Robert
      G. Crockett
                  Chief
      Executive Officer
                    (Principal
      Executive Officer)
                  December
      19, 2008/s/David
      W. Morgan
                  Chief
      Financial Officer
                    (Principal
      Financial Officer)
                  December
      19, 2008David
      W. Morgan/s/
      J.B. Smith
                    J.B.
      Smith
                  Director
                  December
      19, 2008/s/
      Rocco DelMonaco
                    Rocco
      DelMonaco
                  Director
                  December
      19, 2008/s/
      Joseph Nirta
                  Director
                  December
      19, 2008Joseph Nirta/s/
      Daniel V. Iannotti
                    Daniel
      V. Iannotti
                  Vice
      President, Secretary and General
                    Counsel
                  December
      19, 2008/s/
      Kevin P. Stolz
                    Kevin
      P. Stolz
                  Controller
      and Chief Accounting Officer
                    (Principal
      Accounting Officer)
                  December
      19, 2008


26


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, 2008 and 2007, 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, 2008 and 2007, 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 flows from operations and net 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


Southfield,
Michigan


December
19, 2008


F-1





ECOLOGY COATINGS, INC. AND SUBSIDIARYConsolidated
      Balance SheetsASSETSSeptember
      30, 2008
                
                
                September
      30, 2007Current
      AssetsCash
      and cash equivalents
                
                $
                974,276
                
                
                $
                808,163Miscellaneous
      receivable
                
                
                -
                
                
                
                1,118Prepaid
      expenses
                
                
                25,206
                
                
                
                70,888Total
      Current Assets
                
                
                999,482
                
                
                
                880,169Property
      and EquipmentComputer
      equipment
                
                
                22,933
                
                
                
                11,285Furniture
      and fixtures
                
                
                18,833
                
                
                
                1,565Test
      equipment
                
                
                7,313
                
                
                
                7,313Signs
                
                
                213
                
                
                
                213Software
                
                
                1,332
                
                
                
                1,332Video
                
                
                48,177
                
                
                
                -Total
      fixed assets
                
                
                98,801
                
                
                
                21,708Less:
      Accumulated depreciation
                
                
                (22,634
                )
                
                
                (3,794
                )Property
      and Equipment, net
                
                
                76,167
                
                
                
                17,914OtherPatents-net
                
                
                421,214
                
                
                
                302,575Trademarks-net
                
                
                5,029
                
                
                
                3,465Total
      Other Assets
                
                
                426,243
                
                
                
                306,040Total
      Assets
                
                $
                1,501,892
                
                
                $
                1,204,123












See the
accompanying notes to the audited consolidated financial
statements.




F-2







ECOLOGY
      COATINGS, INC. AND SUBSIDIARYConsolidated
      Balance SheetsLIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)September
      30, 2008
                
                
                September
      30, 2007Current
      LiabilitiesAccounts
      payable
                
                $
                1,359,328
                
                
                $
                429,790Credit
      card payable
                
                
                92,305
                
                
                
                14,772Deferred
      revenue
                
                
                -
                
                
                
                24,884Accrued
      liabilities
                
                
                12,033
                
                
                
                -Payroll
      taxes payable
                
                
                -
                
                
                
                1,459Accrued
      wages
                
                
                -
                
                
                
                12,500Franchise
      tax payable
                
                
                800
                
                
                
                800Interest
      payable
                
                
                133,332
                
                
                
                15,851Convertible
      notes payable
                
                
                894,104
                
                
                
                170,280Notes
      payable - related party
                
                
                243,500
                
                
                
                243,500Preferred
      dividends payable
                
                
                6,300
                
                
                
                -Total
      Current Liabilities
                
                
                2,741,702
                
                
                
                913,836Total
      Liabilities
                
                
                2,741,702
                
                
                
                913,836Commitments
      and Contingencies (Note 5)Stockholders'
      Equity (Deficit)Preferred
      Stock - 10,000,000 $.001 par value sharesauthorized;
      2,010 and 0 shares issued and outstandingas
      of September 30, 2008 and September 30, 2007, respectively
                
                
                2
                
                
                
                -Common
      Stock - 90,000,000 $.001 par value sharesauthorized;
      32,210,684 and 32,150,684outstanding
      as of September 30, 2008 andSeptember
      30, 2007, respectively
                
                
                32,234
                
                
                
                32,174Additional
      paid in capital
                
                
                13,637,160
                
                
                
                6,165,282Accumulated
      Deficit
                
                
                (14,909,206
                )
                
                
                (5,907,169
                )Total
      Stockholders' Equity (Deficit)
                
                
                (1,239,810
                )
                
                
                290,287Total
      Liabilities and Stockholders'Equity
      (Deficit)
                
                $
                1,501,892
                
                
                $
                1,204,123
























See the
accompanying notes to the audited consolidated financial
statements.


F-3







ECOLOGY
      COATINGS, INC. AND SUBSIDIARYConsolidated
      Statements of OperationsFor
      the Year Ended
                
                
                For
      the Year EndedSeptember
      30, 2008
                
                
                September
      30, 2007Revenues
                
                $
                25,092
                
                
                $
                41,668Salaries
      and fringe benefits
                
                
                2,006,776
                
                
                
                1,409,840Professional
      fees
                
                
                2,735,360
                
                
                
                2,583,927Other
      general and administrative costs
                
                
                637,668
                
                
                
                463,199Operating
      Loss
                
                
                (5,354,712
                )
                
                
                (4,415,298
                )Other
      Income (Expenses)Interest
      income
                
                
                5,784
                
                
                
                20,940Interest
      expense
                
                
                (1,421,394
                )
                
                
                (256,512
                )Total
      Other (Expenses), net
                
                
                (1,415,610
                )
                
                
                (235,572
                )Net
      Loss
                
                $
                (6,770,322
                )
                
                $
                (4,650,870
                )Basic
      and diluted net loss per share
                
                $
                (0.21
                )
                
                $
                (0.16
                )Basic
      and diluted weighted average ofcommon
      shares outstanding
                
                
                32,189,864
                
                
                
                29,178,144


































See the
accompanying notes to the audited consolidated financial
statements.


F-4







ECOLOGY
      COATINGS, INC. AND SUBSIDIARYStatement
      of Changes in Shareholders’ Equity (Deficit) for the Years Ended
      September 30, 2008 and 2007Additional
                
                
                
                
                
                TotalPaid
      In
                
                
                Accumulated
                
                
                Stockholders'Common
      Stock
                
                
                Preferred
      Stock
                
                
                Capital
                
                
                Deficit
                
                
                EquityShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                
                
                
                
                
                
                (Deficit)Balance
      at September 30, 2006
                
                
                28,200,000
                
                
                $
                142,000
                
                
                
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (1,256,299
                )
                
                $
                (1,114,299
                )Beneficial
      conversion feature on convertible debt
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                116,819
                
                
                
                -
                
                
                
                116,819Stock
      option expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,288,670
                
                
                
                -
                
                
                
                1,288,670Warrants
      issued with debt
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,497
                
                
                
                -
                
                
                
                4,497Issuance
      of stock, net of issuance costs of $10,789
                
                
                3,950,684
                
                
                
                4,645,470
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,645,470Creation
      of par value stock
                
                
                -
                
                
                
                (4,755,296
                )
                
                
                -
                
                
                
                -
                
                
                
                4,755,296
                
                
                
                -
                
                
                
                -Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (4,650,870
                )
                
                
                (4,650,870
                )Balance
      at September 30, 2007
                
                
                32,150,684
                
                
                $
                32,174
                
                
                
                -
                
                
                $
                -
                
                
                $
                6,165,282
                
                
                $
                (5,907,169
                )
                
                $
                290,287Issuance
      of stock for debt extension
                
                
                60,000
                
                
                
                60
                
                
                
                -
                
                
                
                -
                
                
                
                161,940
                
                
                
                -
                
                
                
                162,000Issuance
      of warrants for debt extension
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                26,343
                
                
                
                -
                
                
                
                26,343Issuance
      of preferred stock
                
                
                -
                
                
                
                
                
                
                
                2,010
                
                
                
                2
                
                
                
                1,500,585
                
                
                
                -
                
                
                
                1,500,585Beneficial
      conversion feature on preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,225,415
                
                
                
                (2,225,415
                )
                
                
                -Warrants
      issued with preferred stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                509,415
                
                
                
                -
                
                
                
                509,415Beneficial
      conversion feature on convertible debt
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                358,654
                
                
                
                -
                
                
                
                358,654Stock
      option expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,847,639
                
                
                
                -
                
                
                
                1,847,639Warrants
      issued with convertible debt
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                841,887
                
                
                
                -
                
                
                
                841,887Preferred
      dividends
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6,300
                )
                
                
                (6,300
                )Net
      Loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6,770,322
                )
                
                
                (6,770,322
                )Balance
      at September 30, 2008
                
                
                32,210,684
                
                
                $
                32,234
                
                
                
                2,010
                
                
                $
                2
                
                
                $
                13,637,160
                
                
                $
                (14,909,206
                )
                
                $
                (1,239,810
                )














See the
accompanying notes to the audited consolidated financial
statements.


F-5







ECOLOGY
      COATINGS, INC. AND SUBSIDIARYConsolidated
      Statements of Cash FlowsFor
      the Year
                
                
                For
      the YearEnded
                
                
                EndedSeptember
      30, 2008
                
                
                September
      30, 2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet  loss
                
                $
                (6,770,322
                )
                
                $
                (4,650,870
                )Adjustments
      to reconcile net lossto
      net cash  (used in) operating activities:Depreciation
      and amortization
                
                
                37,486
                
                
                
                12,757Option
      expense
                
                
                1,847,639
                
                
                
                1,288,670Interest
      paid through conversion to stock
                
                
                -
                
                
                
                137,391Beneficial
      conversion expense
                
                
                374,476
                
                
                
                116,819Issuance
      of stock for debt extension
                
                
                162,000
                
                
                
                412,500Warrants
                
                
                868,231
                
                
                
                4,497Changes
      in Asset and LiabilitiesMiscellaneous
      receivable
                
                
                1,118
                
                
                
                (1,118
                )Prepaid
      expenses
                
                
                45,683
                
                
                
                (39,531
                )Accounts
      payable
                
                
                929,539
                
                
                
                144,122Accrued
      payroll taxes and wages
                
                
                (13,960
                )
                
                
                (28,428
                )Accrued
      liabilities
                
                
                12,033
                
                
                
                -Credit
      card payable
                
                
                77,533
                
                
                
                14,772Interest
      payable
                
                
                117,481
                
                
                
                (62,893
                )Deferred
      revenue
                
                
                (24,884
                )
                
                
                (41,668
                )Net
      Cash Used in Operating Activities
                
                
                (2,335,947
                )
                
                
                (2,692,980
                )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of fixed assets
                
                
                (77,094
                )
                
                
                (12,050
                )Purchase
      of intangibles
                
                
                (138,848
                )
                
                
                (85,514
                )Net
      Cash Used in Investing Activities
                
                
                (215,942
                )
                
                
                (97,564
                )Repayment
      of notes payable - related parties
                
                
                -
                
                
                
                (53,530
                )Repayment
      of notes payable
                
                
                (591,998
                )
                
                
                (67,642
                )Proceeds
      from notes payable and warrants
                
                
                1,300,000
                
                
                
                500,000Issuance
      of preferred stock
                
                
                2,010,000
                
                
                
                -Issuance
      of common stock
                
                
                -
                
                
                
                2,483,500Net
      Cash Provided by Financing Activities
                
                
                2,718,002
                
                
                
                2,862,328Net
      Increase in Cash and Cash Equivalents
                
                
                166,113
                
                
                
                71,784CASH
      AND CASH EQUIVALENTS AT BEGINNINGOF
      PERIOD
                
                
                808,163
                
                
                
                736,379CASH
      AND CASH EQUIVALENTS AT ENDOF
      PERIOD
                
                $
                974,276
                
                
                $
                808,163




See the
accompanying notes to the audited consolidated financial
statements.




F-6


ECOLOGY
      COATINGS, INC. AND SUBSIDIARYConsolidated
      Statements of Cash FlowsFor
      the Year
                  
                  
                  For
      the YearEnded
                  
                  
                  EndedSeptember
      30, 2008
                  
                  
                  September
      30, 2007SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATIONInterest
      paid
                  
                  $
                  79,284
                  
                  
                  $
                  114,253Income
      taxes paid
                  
                  
                  -
                  
                  
                  
                  -SUPPLEMENTAL
      DISCLOSURE OF NON-CASHFINANCING
      ACTIVITIESConversion
      of notes and interest for common stock
                  
                  $
                  -
                  
                  
                  $
                  1,749,470Issuance
      of common stock for services
                  
                  $
                  -
                  
                  
                  $
                  412,500Issuance
      of common stock for debt extension
                  
                  $
                  162,000
                  
                  
                  $
                  -











See the
accompanying notes to the audited consolidated financial
statements.




F-7




ECOLOGY
COATINGS, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS









Note
1 — Summary of Significant Accounting Policies, Nature of Operations and Use of
Estimates




Description of
the Company.The terms “we”, “us”, “Ecology”, and “the
Company” refer to Ecology Coatings, Inc. We were originally incorporated in
Nevada on February 6, 2002 as OCIS Corp. (“OCIS”). OCIS completed a merger
with Ecology Coatings, Inc. a California corporation (“Ecology-CA”) on
July 26, 2007 (the “Merger”). In the Merger, OCIS changed its name from
OCIS Corporation to Ecology Coatings, Inc. We develop nanotechnology-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 market consists electronics,
automotive and trucking, paper products and original equipment manufacturers
(“OEMs”).




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.




Cash and Cash
Equivalents.We consider all highly liquid investments with
original maturities of three months or less to be cash and cash
equivalents.




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.




Loss Per
Share.Basic loss per share is computed by dividing the net
loss 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 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. We had a net loss for all periods
presented herein; therefore, none of the stock options and/or warrants
outstanding or stock associated with the convertible debt or with the
convertible preferred shares during each of the periods presented were included
in the computation of diluted loss per share as they were anti-dilutive. As of
September 30, 2008 and 2007, there were 12,031,220 and 3,792,080
potentially dilutive securities outstanding.




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 the 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. We cannot be assured of future income to realize the net
deferred income tax asset; therefore, no deferred income tax asset has been
recorded in the accompanying consolidated financial statements.




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
      yearsFurniture
      and fixtures
                      3-7
      yearsTest
      equipment
                      5-7
      yearsSoftware
      Computer
                      3 yearsMarketing
      and Promotional Video
                      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 to the 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.




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. Six patents were issued
as of September 30, 2008 and are being amortized over 8 years.




Stock-Based
Compensation.Our stock option plans are subject to the
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
Share-Based Payment.Under the provisions of SFAS No. 123(R), employee and director
stock-based compensation expense is measured utilizing the fair-value
method.




We
account for stock options granted to non-employees under SFAS No. 123(R) using
EITF 96-18, requiring the measurement and recognition of stock-based
compensation to consultants 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 $2,006,776 and
$1,409,840 for the years ended September 30, 2008 and 2007, respectively,
include wages paid to and insurance benefits for our officers and employees as
well as stock based compensation expense for those individuals. Professional
fees of $2,735,360 and $2,583,927 for the years ended September 30, 2008 and
2007, respectively, include amounts paid to attorneys, accountants, and
consultants, as well as the stock based compensation expense for those
services.




Recent Accounting
Pronouncements




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS 141(R)) and No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160).
SFAS 141(R) will significantly change how business acquisitions are accounted
for and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS 160 will change the accounting and reporting for
minority interests, which will be re-characterized as non-controlling interests
and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective
for both public and private companies for fiscal years beginning on or after
December 15, 2008 (October 1, 2009 for Ecology). Early adoption is
prohibited for both standards. SFAS 141(R) will be applied prospectively. SFAS
160 requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other requirements of SFAS 160
shall be applied prospectively. The adoption of SFAS 160 would have no impact on
our financial position or results of operations for the year ended September 30,
2008




In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133”. This statement changes the disclosure requirements for derivative
instruments and hedging activities. SFAS 161 will become effective for us
beginning in the three months ending March 31, 2009. The adoption of this
pronouncement would have had no impact on our results or financial position as
of September 30, 2008.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented
in conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). SFAS 162 will not have an impact on our financial
statements.





In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 163 will not have an impact on our
financial statements.




F-8


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Note 2— Concentrations




For the
years ended September 30, 2008 and 2007, we had one customer representing 100%
of revenues. As of September 30, 2008 and 2007, there were no amounts due from
this customer.




We
occasionally maintain bank account balances in excess of the federally insurable
amount of $100,000. The Company had cash deposits in excess of this limit on
September 30, 2008 and 2007 of $874,276 and $708,163, respectively.




F-9


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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 a principal shareholder and former director
that bears interest at 4% per annum with principal and interest due on
December 31, 2008. As of September 30, 2008 and September 30, 2007,
the note had an outstanding balance of $110,500. The accrued interest on the
note was $8,407 and $3,836 as of September 30, 2008 and September 30, 2007,
respectively. The note carries certain conversion rights that allow the holder
to convert all or part of the outstanding balance into shares of our common
stock.




We have
an unsecured note payable due to a principal shareholder and former director
that bears interest at 4% per annum with principal and interest due on
December 31, 2008. As of September 30, 2008 and September 30, 2007,
the note had an outstanding balance of $133,000. The accrued interest on the
note was $10,125 and $4,617 as of September 30, 2008 and September 30,
2007, respectively. The note carries certain conversion rights that allow the
holder to convert all or part of the outstanding balance into shares of our
common stock.




We had an
unsecured note payable due to a majority shareholder, officer and director that
bore interest at 4% per annum with principal and interest due on
December 31, 2008. As of September 30, 2008 and September 30, 2007,
the note had an outstanding balance of $0. The unpaid accrued interest on the
note was $2,584 as of September 30, 2008 and September 30, 2007. The note
carries certain conversion rights which allow the holder to convert all or part
of the outstanding balance into shares of the our common stock..




Future
maturities of related party long-term debt as of September 30, 2008 are as
follows:


Year Ending September 30,2009
                      
                      $
                      243,500




We have a
payable to a related party totaling $63,775 and $49,191 as of September 30, 2008
and September 39, 2007, respectively, included in accounts payable on the
consolidated balance sheets.




We also
paid consulting fees for contracted administrative support to a related party
company totaling $8,244 for the year ended September 30, 2007.


F-10


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note
4 — Notes Payable




We have
the following convertible notes:





September
      30, 2008
                September
      30, 2007Convertible
      note payable, 20% per annum interest rate, principal and interest payment
      due December 31, 2007; unsecured, accrued interest of $130
      outstanding at September 30, 2007, convertible at holder’s option
      into common shares of the Company. Conversion price is $1.60 per share.
      This note is stated net of an unamortized discount of $2,400 at September
      30, 2007.
                
                $
                -
                
                
                
                708Convertible
      subordinated note payable, 7.5% per annum interest rate. Principal and
      interest payment due December 31, 2007; unsecured, convertible at
      holder’s option into common shares of the Company at a price per share of
      $2.00. Accrued interest of $415 is outstanding as of September 30,
      2007.
                
                
                -
                
                
                
                26,461Convertible
      note payable, 15% per annum interest rate, principal and interest payment
      was due May 31, 2008; unsecured, convertible at holder’s option into
      common shares of the Company at $1.60 per share. Accrued interest of
      $15,367 and $4,268 was outstanding as of September 30, 2008 and
      September 30, 2007, respectively. This note is stated net of
      unamortized discount of $0 and $13,422 as of September 30, 2008 and
      September 30, 2007, respectively.  The holder made demand
      upon the Company for repayment of this note on August 18, 2008. See Note
      10-Subsequent Evens for further discussion.
                
                
                94,104
                
                
                
                145,873Convertible
      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 15,000
      shares of the Company’s common stock at $1.75 per share. Additionally, the
      Company granted the note holder warrants to purchase 12,500 shares of the
      Company’s common stock at $1.75 per share. All outstanding principal and
      interest is convertible, at the note holder’s option, into the Company’s
      common shares at the lower of the closing price of the shares on the last
      trading date prior to conversion or at the average share price at which
      the Company sells its debt or equity securities in its next public
      offering or other private offering made pursuant to Section 4(2) of
      the Securities Act of 1933, as amended. Demand for repayment was made on
      September 8, 2008. See Note 10-Subsequent Events for further discussion.
      Accrued interest of $7,329 was outstanding as of September 30, 2008. This
      note is stated net of unamortized discount of $0 as of September 30,
      2008.
                
                $
                50,000
                
                
                $
                —Convertible
      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 15,000
      shares of the Company’s common stock at $1.75 per share. Additionally, the
      Company granted the note holder warrants to purchase 125,000 shares of the
      Company’s common stock at $1.75 per share. All outstanding principal and
      interest is convertible, at the note holder’s option, into the Company’s
      common shares at the lower of the closing price of the shares on the last
      trading date prior to conversion or at the average share price at which
      the Company sells its debt or equity securities in its next public
      offering or other private offering made pursuant to Section 4(2) of
      the Securities Act of 1933, as amended. Demand for repayment was made on
      September 5, 2008. See Note 10-Subsequent Events for further discussion.
      Accrued interest of $73,288 was outstanding as of September 30, 2008. This
      note is stated net of unamortized discount of $0 as of September 30,
      2008.
                
                $
                500,000
                
                
                $
                -Convertible
      subordinated note payable, 25% per annum, unsecured, principal and
      interest was due July 18, 2008. Additionally, the Company issued a warrant
      to purchase 100,000 shares of the Company’s common stock at a price equal
      to $.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 $.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 $10,685 was outstanding as of September 30, 2008. This note is
      stated net of unamortized discount of $0 as of September 30,
      2008.
                
                
                150,000
                
                
                $
                -Convertible
      subordinated note payable, 25% per annum, unsecured, principal and
      interest was due August 10, 2008. Additionally, the Company issued a
      warrant to purchase 100,000 shares of the Company’s common stock at a
      price equal to $.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 $.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 $5,548 was outstanding as of September 30, 2008. This
      note is stated net of unamortized discount of $0 as of September 30,
      2008.
                
                
                100,000
                
                
                $
                -$
                894,104
                
                
                $
                173,042







Future
maturities of the notes payable as of September 30, 2008 are as
follows:


Year Ending2009
                  
                  $
                  894,104




The above
notes payable have conversion rights and detachable warrants. These Notes may be
converted for the principal balance and any unpaid accrued interest to Common
Stock. In accordance with guidance issued by the FASB and the Emerging Issue
Task Force (“EITF”) regarding the Accounting for Convertible Securities with a
Beneficial Conversion Feature (EITF No. 98-5), the Company recognized an
embedded beneficial conversion feature present in these Notes. The Company
allocated the proceeds based on the fair value of $1,767,881to the warrants. The
warrants are exercisable through March 31, 2018 and the fair value was
amortized to interest expense over the term of the Notes.







F-11


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Note
5 — Commitments and Contingencies




Consulting
Agreements.On July 15, 2006, we entered into an
agreement that provides for six months of international business development
consulting services. We agreed to pay the consultant $15,000 per month payable
in cash and an additional $15,000 per month payable in shares of our common
stock at a share price of $2.00. We further agreed to pay the consultant a fee
of 2% of any royalties that we receive pursuant to royalty agreements that are
a direct result of the consultant’s material efforts under the consulting
agreement. In addition, we agreed to pay the consultant a fee of 2% of any net
sales that we receive pursuant to joint venture agreements that are a direct
result of the consultant’s material efforts under the consulting agreement. We
will pay the fees to the consultant for the term of any royalty or joint venture
agreements for a period of time not to exceed a period of 48 months. The
agreement was extended for six month increments in January 2007, July 2007, and
January 2008.




On
February 1, 2007, we amended an agreement with a consultant. The consultant
provides various business and financial consulting services, including but not
limited to assistance with raising capital. The original agreement was dated
June 1, 2006 and called for $12,500 to be paid to the consultant in
18 monthly payments commencing February 1, 2007. The amendment called
for additional monthly payments of $9,250 on February 1, 2007, $9,375 on
March 1, 2007, and $9,000 per month from April 1, 2007 and continuing
through September 1, 2007. This agreement was further amended on
December 28, 2007 to extend the agreement until November 1, 2010. The
effective date of the agreement was November 1, 2007. Additionally, the
agreement calls for monthly payments of $16,000. Finally, the agreement calls
for an option grant of 100,000 shares at an exercise price of $3.05 per share.
25,000 options will vest on June 28, 2008, 25,000 options will vest on
December 28, 2008, 25,000 options will vest on June 28, 2009, and
25,000 options will vest on December 28, 2009. All of the options expire on
December 27, 2017. This agreement was terminated on July 31, 2008. See the
caption Contingencies under this Note for further discussion.




On
May 1, 2007, we entered into an agreement with a consultant to provide
information system consulting services. The agreement calls for six monthly
payments of $5,000 plus reimbursement for any out of pocket costs. Additionally,
options to purchase 1,000 shares of common stock at $2.00 per share were issued
to the consultant, with additional options to purchase 500 shares upon the
achievement of certain performance measures. The options are restricted for 12
months and expire 10 years from date of issuance. On October 8, 2007,
we extended the contract with the consultant for six months, and, on May 8,
2008, extended the contract for an additional six months. The expiration date is
now November 8, 2008 and provides for monthly payments of $5,000. This agreement
was terminated on July 31, 2008. See the caption Contingencies under this Note
for further discussion.




On
June 1, 2007, we entered into a consulting agreement with an individual who
serves as the chairman of Ecology’s business advisory board. The agreement
expires June 1, 2009. Ecology will pay the consultant $11,000 per month.
Additionally, Ecology granted the consultant 200,000 options to purchase shares
of our common stock for $2.00 per share. Of these options, 50,000 options vest
on December 1, 2007, 50,000 options vest on June 1, 2008, 50,000
options vest on December 1, 2008, and the remaining 50,000 options vest on
June 1, 2009. Additionally, we will reimburse the consultant for all
reasonable expenses incurred by the consultant in the conduct of Ecology
business.






On
July 26, 2007, we entered into a consulting agreement with a company owned
by two former officers and directors of OCIS Corporation. The terms of the
agreement call for the transfer of the $100,000 standstill deposit paid to OCIS
as a part of a total payment of $200,000. The balance will be paid in equal
installments on the first day of each succeeding calendar month until paid in
full. The agreement calls for the principals to provide services for
18 months in the area of investor relations programs and initiatives;
facilitate conferences between Ecology and members of the business and financial
community; review and analyze the public securities market for our securities;
and introduce Ecology to broker-dealers and institutions, as
appropriate.




On
December 13, 2007, we entered into an agreement with a consultant to
provide investor relations services. The agreement expires on December 13,
2008. The consultant will bill against a non-refundable monthly retainer of
$5,000. The consultant charges on an hourly basis ranging from $35 to $225 per
hour. The term of the contract is 12 months.





On
April 2, 2008, we entered into a letter agreement with an individual to
become chairman our Scientific Advisory Board. The letter agreement provides
that we will grant the individual options to purchase 100,000 shares of our
common stock. Each option is exercisable at a price equal to the final closing
price as quoted on the Over The Counter Bulletin Board on April 3, 2008.
The options vest as follows: 25,000 immediately upon grant; 25,000 on
October 3,


F-12


2008; 25,000
on April 3, 2009, and the remaining 25,000 on October 3, 2009. The
options will all expire on April 3, 2018.




On
April 10, 2008, we entered into an agreement with a consultant to assist us
in securing equity and/or debt financing. The agreement called for payment of
$5,000 at inception and an additional payment of $5,000 on May 1, 2008. The
agreement was terminable upon notice of either party and was terminated on May
31, 2008.




On
September 17, 2008, we entered into an agreement with an entity controlled by an
investor in and a director of Ecology Coatings, Inc. This agreement is for
business and marketing consulting services. This agreement expires on September
17, 2010 and calls for monthly payments of $20,000, commissions on licensing
revenues equal to 15% of said revenues, commissions on product sales equal to 3%
of said sales, and a grant of options to purchase 531,000 shares of our common
stock for $1.05 per share. 177,000 of the options become exercisable on
March 17, 2009, 177,000 of the options become exercisable on September 17, 2009,
and 177,000 of the options become exercisable on March 17, 2010. The options
expire on December 31, 2020.





On
September 17, 2008, we entered into an agreement with our Chairman of the Board
of Directors under which the Chairman will provide advice and consultation to us
regarding strategic planning, business and financial matters, and revenue
generation. The agreement expires on September 17, 2011 and calls 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 the
consultant’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 the consultant during his tenure as
our  Chief Executive Officer.





On
September 17, 2008 we entered into an agreement with a shareholder under which
that shareholder will act as a consultant to us. Under this agreement, the
shareholder will provide business development services for which he will receive
commissions on licensing revenues equal to 15% of said 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 expires on September 17,
2011.




F-13


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Employment
Agreements.On October 30, 2006, we entered into an
employment agreement with an officer that expires on October 30, 2008.
Pursuant to the agreement, the officer is paid an annual base salary of
$160,000. We also granted the officer 321,217 options to purchase its common
stock at $2.00 per share. Twenty-five percent (25%) of the options vested on
November 1, 2007 and the remaining seventy-five percent (75%) will vest on
November 1, 2008. The options expire on November 1, 2016.




On
November 1, 2006, we entered into an employment agreement with an officer
that expires on November 1, 2008. Pursuant to the agreement, the officer
was paid an annual base salary of $100,000. We also granted the officer 150,000
options to acquire its common stock at $2.00 per share. The options will all
vest on November 1, 2008. The options expire on November 1, 2016. On
July 1, 2007, we amended this employment agreement. The amended agreement
will expire on November 1, 2009, and calls for an annual salary $140,000, a
one time bonus of $12,500 and the grant of 87,500 options to purchase our common
stock at $2.00 per share. Upon grant, 25,000 of the options vested, 37,500
options will vest on July 1, 2008, and 25,000 options will vest on
July 1, 2009. All of the options expire on July 1, 2017. This employee
resigned effective July 31, 2008.




On
January 1, 2007, we entered into an employment agreement with an officer
that expires on January 1, 2012. Upon expiration, the agreement calls for
automatic one-year renewals until terminated by either party with thirty days
written notice. Pursuant to the agreement, the officer will be paid an annual
base salary of $180,000 in 2007; an annual base salary of $200,000 for the years
2008 through 2011; and an annual base salary of $220,000 for 2012. In addition,
450,000 options were granted to the officer to acquire our common stock at $2.00
per share. 150,000 options will vest on January 1, 2010, 150,000 options
will vest on January 1, 2011 and the remaining 150,000 options will vest
January 1, 2012. The options expire on January 1, 2022.




On
February 1, 2007, we entered into an employment agreement with an officer
that expired on February 1, 2008. Pursuant to the agreement, the officer
was paid an annual base salary of $120,000 and was granted 25,000 options to
acquire our common stock at $2.00 per share. All of the options vested on
February 1, 2008. The options expire on February 1, 2017. On
February 1, 2008, we entered into a new agreement with this officer. This
new agreement expires on February 1, 2010 and calls for an annual salary of
$140,000. Further, the officer was granted 50,000 options to purchase shares of
our common stock at $3.00 per share. 25,000 options vest on February 1,
2009 and the remaining 25,000 options vest on February 1, 2010. This
agreement was modified effective October 1, 2008. Under the modified agreement,
the employee receives an annual base salary of $70,000, subject to increase to
$140,000 upon the achievement by the Company of revenues of at least $100,000.
Additionally, we granted the employee options to purchase 10,000 shares of our
common stock at $1.05 per share. The options become exercisable on September 17,
2009 and expire on September 17, 2018.




On
May 21, 2007, we entered into an employment agreement with an officer that
expires on May 21, 2009. Pursuant to the agreement, the officer will be
paid an annual base salary of $160,000 and was granted 300,000 options to
acquire our common stock at $2.00 per share. 75,000 of the options vested on
May 21, 2008, and 225,000 of the options will vest on May 21, 2009.
The options expire on May 21, 2017. On October 1, 2007, the Company
modified the employment agreement to increase the salary from $160,000 to
$210,000.




On
December 28, 2007, we entered into an employment agreement with our
Chairman of the Board of Directors and Chief Executive Officer. Under this
agreement, he will continue to be paid at a rate of $320,000 per year through
August 8, 2010. This agreement was terminated by consent of both parties on
September 17, 2008. See also Consulting Agreements under this Note
5.




On August
11, 2008, we employed, on an at-will basis, an individual to serve as Vice
President and General Counsel. The letter documenting the employment calls for a
probationary period of 90 days and stipulates a salary of $150,000 per
year.




On
September 15, 2008, we employed, on an at-will basis, an individual to serve as
Chief Executive Officer. The letter documenting the employment calls for a
probationary period of 90 days and stipulates a salary of $200,000 per year.
Additionally, we issued options to the individual to purchase 330,000 shares of
our common stock at $1.05 per share. 110.000 of the options become exercisable
on March 15, 2010, 110,000 of the options become exercisable on September 15,
2010, and 110,000 of the options become exercisable on March 15, 2011. The
options expire on September 15, 2018.




Contingencies.On
September 11, 2008, we filed a lawsuit against a consultant in the Circuit Court
of Oakland County, Michigan for violation of fiduciary duties. See Note 10 –
Subsequent Events for further discussion.




A lawsuit
was filed against us on September 16, 2008 in the Circuit Court of Oakland
County, Michigan for breach of contract by a consultant previously contracted by
the Company to provide information technology services. The suit seeks damages
in excess of $42,335 plus court costs and attorney fees. See Note 10 –
Subsequent Events for further discussion.  Our financial statements
reflect an accrual for the amount of the damages.




Lease
Commitments.


a.
                  
                  On
      August 1, 2005, we leased our office facilities in Akron, Ohio for a
      rent of $1,800 per month. The lease expired July 1, 2006 and was
      renewed under the same terms through August 31, 2007. The Company now
      leases that property on a month-to-month basis for the same rent. Rent
      expense for the years ended September 30, 2008 and 2007 was $21,600 and
      $21,600, respectively.b.
                  
                  On
      September 1, 2006, we leased our office space in Bloomfield Hills,
      Michigan for monthly rent of $1,800. A new lease was executed on
      April 1, 2007 with monthly payments of $3,200. The lease is on a
      month-to-month basis until terminated by tenant or landlord upon
      60 days notice. The monthly lease amount was reduced to $2,400 on
      September 1, 2007. We vacated this space on August 31, 2008 and have
      no further obligation under the lease. Rent expense for the years ended
      September 30, 2008 and 2007 was $26,400 and $28,850,
      respectivelyc.
                  
                  On
      September 1, 2008, we executed a lease for our office space in Auburn
      Hills, Michigan. The lease calls for average monthly rent of $2,997 and
      expires on September 30, 2010. The landlord is a company owned by a
      shareholder and director of Ecology.d.
                  
                  On
      January 9, 2006, we leased computer equipment with 24 monthly
      payments of $147.
                    We
      recognized expense of $588 and $1,764 for the years ended
      September 30, 2008 and 2007, respectively, related to this
      lease.e.
                  
                  On
      April 17, 2006, we leased computer equipment with 36 monthly
      payments of $75. We recognized expense of $901 for each of  the
      years ended September 30, 2008 and September 30, 2007 related to
      this lease.f.
                  
                  On
      June 17, 2007, we leased computer equipment with 36 monthly
      payments of $42. We recognized expense of $504 and $126 for the years
      ended September 30, 2008  and 2007, respectively, related to
      this lease.g.
                  
                  On
      July 17, 2007, we leased computer equipment with 36 monthly
      payments of $44. We recognized expense of $528 and  $88 for the
      years ended September 30, 2008 and 2007, respectively, related to this
      lease.h.
                  
                  On
      September 22, 2008, we leased a multi-purpose copier with 36 monthly
      payments of $526. The first payment was due November 3,
    2008.





Minimum
future rental payments under the above operating leases as of September 30,
2008 are as follows:





Year
      Ending September 30,2009
                    
                    $
                    42,5892010
                    
                    
                    44,3642011
                    
                    
                    6,312$
                    93,265





F-14


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Note
6 — Equity





Reverse
Merger.A reverse merger with OCIS Corporation was consummated
on July 26, 2007. The shareholders of Ecology acquired 95% of the voting stock
of OCIS. OCIS had no significant operating history. The purpose of the
acquisition was to provide Ecology with access to the public equity markets in
order to more rapidly expand its business operations. The consideration to the
shareholders of OCIS was approximately 5% of the stock, at closing, of the
successor company. The final purchase price was agreed to as it reflects the
value to Ecology of a more rapid access to the public equity markets than a more
traditional initial public offering.






Warrants.On
December 16, 2006, we issued warrants to purchase 500,000 shares of our
stock at $2.00 per share. The warrants were issued to the holder of the
$1,500,000 convertible note. The warrants vested on December 17, 2007. The
weighted average remaining life of the warrants is 8.5 years.




On
February 6, 2008, we issued warrants to purchase 262,500 shares of our
common stock at the lower of $2.00 per share or at the average price per share
at which the Company sells its debt or and/or equity in its next private or
public offering. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.5 years.




On
March 1, 2008, we issued warrants to purchase 137,500 shares of our common
stock at the lower of $2.00 per share or at the average price per share at which
the Company sells its debt or and/or equity in its next private or public
offering. The warrants vested upon issuance. The weighted average remaining life
of the warrants is 9.5 years.




On June
9, 2008, we issued warrants to purchase 210,000 shares of our common stock at
the lower of $2.00 per share or at the average price per share at which the
Company sells its debt or and/or equity in its next private or public offering.
The warrants vested upon issuance. The weighted average remaining life of the
warrants is 9.8 years.




On June
21, 2008, we issued warrants to purchase 100,000 shares of our common stock at
the $.75 per share. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.8 years.




On July
14, 2008, we issued warrants to purchase 100,000 shares of our common stock at
$.50 per share. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.8 years.




On July
14, 2008, we issued warrants to purchase 30,000 shares of our common stock at
$1.75 per share. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.8 years.




We issued
warrants as shown below to the holder of our convertible preferred
stock.







Strike
                    
                    Date
                    ExpirationNumber
                    
                    
                    Price
                    
                    Issued
                    Date100,000
                    
                    
                    $
                    0.75
                    
                    July
      28, 2008
                    July
      28, 20185,000
                    
                    
                    $
                    0.75
                    
                    August
      20, 2008
                    August
      20, 201825,000
                    
                    
                    $
                    0.75
                    
                    August
      27, 2008
                    August
      27, 2018500,000
                    
                    
                    $
                    0.75
                    
                    August
      29, 2008
                    August
      29, 2018375,000
                    
                    
                    $
                    0.75
                    
                    September
      26, 2008
                    September
      26, 2018




Shares.On
February 5, 2008, we entered into an agreement with a convertible note
holder. The amount owed the note holder, including principal and accrued
interest, totaled $142,415 and the note matured on December 31, 2007 (See
Note 4). The maturity date of the note was extended to May 31, 2008, with
interest continuing at 15% per annum. In consideration of this extension, we
issued 60,000 shares of our common stock to the note holder and granted the
holder certain priority payment rights.




On August
28, 2008, we entered into an agreement with an investor 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 $.50 per share.
The preferred securities carry “as converted” voting rights. As of September 30,
2008, we had issued 2,010 of these convertible preferred shares. In the event
that we sell additional convertible preferred securities under this agreement,
we will issue attached warrants (500 warrants for each $1,000 convertible
preferred share sold). The warrants will be immediately exercisable, expire in
five years, and entitle the investor to purchase one share of our common stock
at $.75 per share for each warrant issued.




F-15


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Note
7 — Stock Options




Stock Option
Plan.On May 9, 2007, we adopted a stock option plan and
reserved 4,500,000 shares for the issuance of stock options or for awards of
restricted stock. 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. The vesting terms are set by the Board of Directors. All options
expire 10 years after issuance.




The
Company granted non-statutory options as follows during the year ended September
30, 2008:


WeightedWeighted
                      
                      
                      
                      
                      
                      AverageAverage
                      
                      
                      
                      
                      
                      (Remaining)Exercise
      Price
                      
                      Number
      of
                      
                      Contractual
                      
                      Aggregateper
      Share
                      
                      Options
                      
                      Term
                      
                      Fair
      ValueOutstanding
      as of September 30, 2006
                      
                      $
                      2.00
                      
                      
                      
                      150,000
                      
                      
                      
                      8.7
                      
                      
                      $
                      184Granted
                      
                      $
                      2.04
                      
                      
                      
                      3,036,119
                      
                      
                      
                      9.5
                      
                      
                      $
                      3,681,425Exercised
                      
                      
                      ---
                      
                      
                      
                      ---
                      
                      
                      
                      ---
                      
                      
                      
                      ---Forfeited
                      
                      
                      ---
                      
                      
                      
                      ---
                      
                      
                      
                      ---
                      
                      
                      
                      ---Excersisable
                      
                      $
                      2.00
                      
                      
                      
                      375,800
                      
                      
                      
                      9.8
                      
                      
                      $
                      552,540Outstanding
      as of September 30, 2007
                      
                      $
                      2.03
                      
                      
                      
                      3,186,119
                      
                      
                      
                      9.5
                      
                      
                      $
                      3,681,609Granted
                      
                      $
                      1.49
                      
                      
                      
                      1,456,000
                      
                      
                      
                      10.3
                      
                      
                      $
                      1,329,891Exercised
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Forfeited
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Outstanding
      as of September 30, 2008
                      
                      $
                      1.83
                      
                      
                      
                      4,642,119
                      
                      
                      
                      9.2
                      
                      
                      $
                      5,011,500Exercisable
                      
                      $
                      2.09
                      
                      
                      
                      1,605,228
                      
                      
                      
                      8.4
                      
                      
                      $
                      1,966,657






1,605,228
of the options were exercisable as of September 30, 2008. The options are
subject to various vesting periods between June 26, 2007 and
January 1, 2012. The options expire on various dates between June 1,
2016 and January 1, 2022. Additionally, the options had no intrinsic value
as of June 30, 2008. Intrinsic value arises when the exercise price is lower
than the trading price on the date of grant.




Our stock
option plans are subject to the provisions of Statement of Financial Accounting
Standards (“SFAS”) Number 123(R), Accounting for Stock-Based
Compensation.Under the provisions of SFAS Number 123(R), employee and
director stock-based compensation expense is measured utilizing the fair-value
method.




We
account for stock options granted to non-employees under SFAS Number 123(R)
using EITF 96-18 requiring the measurement and recognition of stock-based
compensation to consultants 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.




On
September 15, 2008, the Board of Directors approved a change in exercise price
on option grants previously made to two officers. This change was effective for
options to purchase 375,000 shares of our common stock. The new exercise price
is $1.05 per share. The weighted average of the price of the options at original
issuance was $2.13. This change resulted in a total incremental compensation
increase of  $240,641, combined, for the two officers.




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 weighted average
assumptions:


Dividend
              
              NoneExpected
      volatility
              
              
              91.69%-101.73%Risk
      free interest rate
              
              
              1.50%-5.11%Expected
      life
              
              5.5
      years




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 our Company.




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 option grant.




Based
upon the above assumptions and the weighted average $1.83 exercise price, the
options outstanding at September 30, 2008 had a total unrecognized compensation
cost of $1,582,378 which will be recognized over the remaining weighted average
vesting period of .7 years. Options cost of $1,847,639 was recorded as an
expense for the year ended September 30, 2008 of which $623,518 was recorded as
compensation expense and $1,224,121 was recorded as consulting
expense.




F-16


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Note 8
— Income Taxes


The
Company has incurred losses since operations commenced in 1990.  The
Company has a net operating loss carry forward for income tax purposes of
approximately $7,464,662. The total loss carry forward expiring on September 30,
2028 is $3,109,937, expiring on September 30, 2027 is $3,488,598, expiring on
September 30, 2026 is $427,056, expiring on September 30, 2025 is $203,978,
expiring on September 30, 2024 is $189,988, expiring on September 30, 2023 is $
25,364 and expiring on September 30, 2022 is $19,741.  The Company
changed its year-end to September 30th from
February 28th
effective in fiscal 2006.





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.





As of
September 30, 2008 and 2007, the deferred tax asset based on a 34% tax bracket
consists of the following:





2008
                
                
                2007Assets:Federal
      loss carry forwards
                
                $
                2,537,985
                
                
                $
                1,481,936Cash
      basis accounting differences
                
                
                451,603
                
                
                
                89,925Depreciation
      timing differences
                
                
                
                
                
                
                939Liability:Depreciation
      timing differences
                
                
                (804
                )
                
                
                -Deferred
      tax asset
                
                
                2,988,784
                
                
                
                1,572,800Valuation  allowance
                
                
                (2,988,784
                )
                
                
                (1,572,800
                )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 $1,415,984 change in the deferred
tax asset valuation allowance from September 30, 2007.




F-17


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Note
9 — Going Concern




The
accompanying 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, 2008
and  2007, we incurred net losses of ($6,770,322) and ($4,560,870),
respectively. As of September 30, 2008 and September 30, 2007, we had
stockholders’ deficit and equity of ($1,239,810) and $290,287,
respectively.




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 through operating revenues and,
primarily, through the issuance of equity securities and debt. Until we are able
to generate positive operating cash flows, additional funds will be required to
support operations. We believe that cash investments subject to a securities
purchase agreement with a investor will be sufficient to enable us to continue
as a going concern through the fiscal year ending September 30, 2009. This
securities purchase agreement does not legally bind the investor to make the
investments and there can be no assurances that the investments will continue.
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. Please see also Note 10 — Subsequent
Events.




F-18


ECOLOGY
COATINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Note
10 — Subsequent Events




On
November 6, 2008, we settled the lawsuit filed against us on September 16, 2008
by a consultant for breach of contract. We paid $26,500 in full settlement of
all claims. This amount was included in Accounts Payable at September 30,
2008.




On
November 11, 2008, we settled the lawsuit we filed against one of two
consultants on September 11, 2008 for breach of contract. Under the terms of the
settlement, we will pay the consultant $7,500 per month for twelve months under
a new consulting agreement and will pay $15,000 in 12 equal monthly payments of
$1,250 to the consultant’s attorney.  Additionally, we will pay the
consultant a commission of 15% for licensing revenues and 3% for product sales
that the consultant generates for the Company.




On
November 11, 2008, we paid in full the principal and accrued interest on the
note payable shown in Note 4 with a September 30, 2008 principal balance of
$94,104. In addition, we issued warrants to the note holder for the purchase of
2,000,000 shares of our common stock at $.50 per share and reset the strike
price of warrants and options previously issued to the note holder to purchase
1,500,000 shares of our common stock at $2 per share. The new price is $.80 per
share.




On
November 13, 2008, we reached agreement with a convertible note holder. The note
holder made demand for payment on September 5, 2008. We made a payment of
$100,000 on October 6, 2008 on the outstanding principal and interest on that
date. On November 13, we made another payment of $100,000 against the
outstanding principal and interest on that date. Further, we agreed to make
additional payments on the remaining principal and interest. These payments will
be $100,000 for each month beginning in December of 2008 and continuing until
all principal and interest has been paid. This note payable is shown in Note 4
with a September 30, 3008 principal balance of $500,000.




On
November 14, 2008, we reached agreement with a convertible note holder. The note
holder made demand for payment on September 8, 2008. We made a payment of
$10,000 on October 8, 2008 on the outstanding principal and interest on that
date. On November 14, we made another payment of $10,000 against the outstanding
principal and interest on that date. Further, we agreed to make additional
payments on the remaining principal and interest. These payments will be $10,000
for each month beginning in December of 2008 and continuing until all principal
and interest has been paid. This note payable is shown in Note 4 with a
September 30, 3008 principal balance of $50,000.




On
December 2, 2008, our Board of Directors authorized the addition of 1,000,000
shares of our common stock to the 2007 Plan.




On
December 3, 2008, we terminated the employment agreement with our Chief
Financial Officer. The Chief Financial Officer continues to be employed by the
Company in that capacity as an at-will employee.





F-19