UNITED
STATES




Securities
and Exchange Commission


Washington,
D.C. 20549




Form 10-K/A


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




For
the fiscal year ended September 30, 2009


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




For
the transition period from to




Commission
file number: 333-91436






ECOLOGY
COATINGS, INC.


(Exact
name of registrant as specified in its charter)


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




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




(Address
of principal executive offices) (Zip Code)




(248) 370-9900




(Registrant’s
telephone number)




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




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


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




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




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




Yes 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




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




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




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




Large
accelerated
filer  □                       Accelerated
filer  □




Non-accelerated
filer  □                         Smaller
reporting company  x




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




As of
March 31, 2009, approximately 11,810,684 shares of our common stock, par value
$0.001 per share, were held by non-affiliates, which had a market value of
approximately $7,086,410 based on the available OTCBB closing price of $.60 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 December 21, 2009 was 32,885,684.




Documents
Incorporated by Reference: None.








1







EXPLANATORY
NOTE






In
connection with our annual report on Form 10-K for
the year ended September 30, 2009, we are filing this
Amendment No. 1 to include the following information:










2. We
have amended our discussion in Item 9A Controls and Procedures to
clarify that we discovered that we failed to
disclose the impact on earnings per common share of the beneficial conversion
feature associated with the issuance of our convertible preferred shares and,
thus, webelieve our disclosure controls were ineffective during the
period covered by this report.




















With the
exception of the foregoing changes, no other information in the report on Form
10-K for the year ended September 30, 2009 has been supplemented,
updated or amended.   2


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




Market
Prices




Our
common stock, par value $.001 per share (the “Common Stock”), is currently
quoted on the 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
      Close
            
            Low
      CloseFiscal
      Year 20101st
      Quarter (through November 16, 2009)
            
            $
            .55
            
            
            $
            .25Fiscal
      Year 20091st
      Quarter
            
            $
            1.04
            
            
            $
            .652nd
      Quarter
            
            $
            .95
            
            
            $
            .253rd
      Quarter
            
            $
            .89
            
            
            $
            .314th
      Quarter
            
            $
            2.00
            
            
            $
            .40Fiscal
      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
            
            $
            3.18
            
            
            $
            .762nd
      Quarter
            
            $
            2.22
            
            
            $
            1.463rd
      Quarter
            
            $
            4.85
            
            
            $
            1.594th
      Quarter
            
            $
            4.90
            
            
            $
            2.95





As of
September 30, 2009, we had approximately 242 shareholders of record of our
common stock.  As of that date, Equity 11 held 18,895,038 shares of
our common stock if it converts all of its preferred shares into common
shares.  We have agreed to register 4,340,000 common shares to be
converted by Equity 11 from its convertible preferred shares  pursuant
to our Securities Purchase Agreement and Convertible Preferred Securities
Agreement with Equity 11.  The sale of all or a significant portion of
the 4,340,000 shares held by Equity 11 could have a material negative effect on
the price of our common stock.





Dividends





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





Securities
Authorized for Issuance Under Equity Compensation Plans





Our
shareholders approved the 2007 Stock Option Plan and authorized 4,500,000 common
shares to be reserved for options exercised under the Plan.  In fiscal
year 2008, our Board of Directors authorized an additional 1,000,000 common
shares to be reserved for exercises under the Plan.  The following
table sets forth certain information as of September 30, 2009, concerning
outstanding options and rights to purchase common stock granted to participants
in all of our equity compensation plans and the number of shares of common stock
remaining available for issuance under such equity compensation
plans.




Number
      of SecuritiesRemaining
      Available forNumber
      of Securities to be
            
            
            
            
            Future
      Issuance Under EquityIssued
      Upon Exercise of
            
            
            Weighted-Average
      Exercise
            
            Compensation
      PlansOutstanding
              
              Options,
      Warrants
            
            
            Price
      of Outstanding Options,
            
            (Excluding
              
              Securitiesand
      Rights
            
            
            Warrants
      and Rights
            
            Reflected
      in Column (a))Equity
      compensation plans approved by security holders
            
            4,500,000
            
            
            $1.22
            
            -Equity
      compensation plans not approved by security holders
            
            631,119
            
            
            .51
            
            368,881





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, 2009.  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.




Set forth
below is a description of all of our sales of unregistered securities during the
last three years.  All sales were made to “accredited investors” as
such term is defined in Regulation D promulgated under 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.





On August
28, 2008, we entered into a Securities Purchase Agreement with Equity 11 for the
issuance 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, for each acquisition of convertible preferred shares, Equity 11 will
be issued warrants to purchase up to 2,500,000 shares of our common stock at
$.75 per share.  As of September 30, 2009, under the Securities
Purchase  Agreement, Equity 11 had been issued 2,436 shares of 5%
Convertible Preferred Shares and had been issued warrants to purchase 1,178,500
shares.





On May
15, 2009, we entered into a Convertible Preferred Securities Agreement (the
“Preferred Securities Agreement”) with Equity 11 for the issuance and sale of
5.0% Cumulative Convertible Preferred Shares, Series B at a purchase price of
$1,000 per share.  The Preferred Securities Agreement did not replace
or terminate the terms of the Securities Purchase Agreement.  That is,
the terms of the Securities Purchase Agreement will continue to apply to
preferred stock and warrants issued under the Securities Purchase
Agreement.  Similarly, the terms of the Preferred Securities Agreement
will apply to preferred stock issued under the Preferred Securities
Agreement.





Equity 11
may convert the convertible preferred shares into our common stock at a
conversion price that is twenty percent (20%) of the average of the closing
price of our common stock on the Over-The-Counter Bulletin Board for the five
trading days prior to each investment.  As of September 30, 2009, we
had issued 566 Convertible Preferred Shares to Equity 11 under the Preferred
Securities Agreement.  On December 14, 2009, we extended the
termination date of the Preferred Securities Agreement until the earlier to
occur of June 15, 2010 or the acceptance by our Board of Directors of a new
investment in us by a third party in an amount of at least
$3,000,000.





On September 30, 2009, we and SAC,
entered into a Securities Purchase Agreement for the issuance and sale of
our 5.0% Cumulative Convertible Preferred Shares, Series B (the “Convertible
Preferred Shares”) at a purchase price of $1,000 per share.  SAC is
owned by Richard Stromback a former member of our Board of
Directors.  Until April 1, 2010, SAC has the right to purchase up to
3,000 Convertible Preferred Shares.  The Convertible Preferred Shares
have a liquidation preference of $1,000 per share.  SAC may convert
the Convertible Preferred Shares into shares of our common stock at a conversion
price that is seventy seven percent (77%) of the average closing price of our
common stock on the Over-The-Counter Bulletin Board for the five trading days
prior to each investment.  The Convertible Preferred Shares will pay
cumulative cash dividends at a rate of 5% per annum, subject to declaration by
our Board of Directors, on December 1 and June 1 of each year.  We
have agreed to provide piggyback registration rights for common stock converted
by SAC under a Registration Rights Agreement.  Fifty percent (50%) of each investment,
up to a maximum of $500,000, will be placed in a fund and disbursed as directed
by SAC to satisfy our outstanding debts, accounts payable and/or investor
relations programs (“Discretionary Fund”).  On October 1, 2009, SAC
acquired 240 of our Convertible Preferred Shares, Series B with a purchase price
per share of $1,000.  We received $240,000 of gross proceeds and net
proceeds of $120,000 after payments were made from the Discretionary Fund for
outstanding obligations owed to Mr. Stromback.





We issued
the following promissory notes during 2008:





Note Holder
            Issue Date(s)
            Amount Owing on September 30,
      2009Investment
      Hunter, LLC
            March
      1, 2008
            $358,207Mitchell
      Shaheen I
            June
      18, 2008
            $198,787Mitchell
      Shaheen II
            July
      14, 2008
            $134,513George
      Resta
            March
      1, 2008
            $47,976





The notes
had limited conversion rights until their dates of maturity.  They no
longer have the ability to convert to our common stock but we may consider such
conversion in order to conserve cash.





During
the prior three years, we issued the following warrants:





Number of Warrants
            Issue Date
            Expiration Date
            Acquisition Price per Share
            Held By500,000
            December
      18, 2006
            December
      18, 2016
            $.90
            Trimax,
      LLC2,000,000
            November
      11, 2008
            November
      11, 2018
            $.50
            Trimax
      LLC12,500
            March
      1, 2008
            March
      1, 2018
            $1.75
            George
      Resta262,500
            February
      5, 2008
            February
      5, 2018
            $2.00
            Hayden
      Capital USA, LLC125,000
            March
      1, 2008
            March
      1, 2018
            $1.75
            Investment
      Hunter. LLC210,000
            June
      9, 2008
            June
      9, 2018
            $2.00
            Hayden
      Capital USA, LLC100,000
            June
      21, 2008
            June
      21, 2018
            $.75
            Mitchell
      Shaheen100,000
            July
      14, 2008
            July
      14, 2018
            $.50
            Mitchell
      Shaheen15,000
            July
      14, 2008
            July
      14, 2018
            $1.75
            George
      Resta15,000
            July
      14, 2008
            July
      14, 2018
            $1.75
            Investment
      Hunter, LLC14,400
            October
      1, 2009
            October
      1, 2019
            $.42
            Stromback
      Acquisition CorporationTotal:  3,354,400








On July
21, 2007, we completed a Private Placement and raised $4,232,970 from the sale
of our common stock to private investors.





The
following summarizes the above recent sales of unregistered
securities:





Title
            Date
            Underwriters Or Purchasers
            Consideration
            Exemption
            Ability To Convert
            Terms of Conversion
            Use of ProceedsPrivate
      Placement Memorandum
            July
      21, 2007
            (1)
            $2
      per share
            4(2)
      of ’33 Securities Act
            
            -
            Working
      CapitalInvestment
      Hunter, LLC
            March
      1, 2008
            -
            $500,000
            4(2)
      of ’33 Securities Act
            Prior
      to June 30, 2008
            Lower
      of $1.75 or price of “New Offering”
            Working
      CapitalMitchell
      Shaheen I
            June
      18, 2008
            -
            $150,000
            4(2)
      of ’33 Securities Act
            Prior
      to July 18, 2008
            Lower
      of $.50 or price of “New Offering”
            Working
      CapitalMitchell
      Shaheen II
            July
      14, 2008
            -
            $100,000
            4(2)
      of ’33 Securities Act
            Prior
      to August 10, 2008
            “New
      Offering” price
            Working
      CapitalGeorge
      Resta
            March
      1, 2008
            -
            $50,000
            4(2)
      of ’33 Securities Act
            Prior
      to June 30, 2008
            Lower
      of $1.75 or price of “New Offering
            Working
      Capital


(1)
            The
      list of PPM purchasers include:  Daniel Ahlsrtrom, Edward F
      Andrews, Alan Andrews, Donald Bailey Trust, Eugene Baratta, Marty
      Bartnick, Michael Battaglia, Deanna Berman, John R Bourbeau, John
      Bourbeau, Jr., Kastytis Buitkus, Bruce C Bullard, James C Carson, Thomas
      Commes, William F Coyro, Jr., Jon Crouse, Shawn Van Drehle, Paul Dudgeon,
      Gary Dudgeon, Ferguson Financial Group, Albert Hodgson, James Hoen, Guy T
      Humeniuk, Rae Ann Hoffman Jones, Andrew & Danielle Kapoor, Jeffrey
      Knudson, F. Thomas Krotine, John Lindeman, Henry & Michelle Lindeman
      III, Michele & Maria Longordo, Chris Marquez, Simone Mastantuono, Neil
      Master, Steven & Antonia Mellos, John Morgan, James Padilla, Timothy
      Perkins, Sasha Prakash, Paul & Susan Prentis, Trimax, LLC, Grace
      Rosman, Joseph Savel, Scott Schaffer, Robert Sims, Stephen & Darlene
      Stephens, David T Sterrett, Jr., David Susko, Patrick Sweeney, Kristin
      Wikol, and Michael Wisniekski.


3


ITEM
      9A.
            
            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 ineffective at September 30, 2009 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 in that our
auditors made adjustments to our Black-Scholes calculations used to expense
stock options and warrants.  We have previously disclosed that errors
occurred in calculating expense associated with stock options.  Those
errors were found in the calculations for the Black-Scholes option-pricing model
for the quarter ended March 31, 2009.  In a post-closing adjustment,
we recognized an additional $74,243 in stock options expense.  We have
taken steps to ensure in the future that two people will separately make
calculations involving the Black-Scholes option-pricing model and that each
review the other’s for accuracy and completeness.





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 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 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.





We rely
on computer systems to support our financial reporting capabilities and other
operations. As with any computer systems, unforeseen issues may arise that could
affect our ability to receive adequate, accurate and timely financial
information, which in turn could inhibit effective and timely decisions.
Furthermore, it is possible that our information systems could experience a
complete or partial shutdown. If such a shutdown occurred, it could impact our
ability to report our financial results in a timely manner or to otherwise
operate our business.  Our financial data in our accounting software
(QuickBooks) became corrupted and unusable in late July 2009. The backup system
for our network computer system failed to backup the data.  An outside
IT technical vendor was also unable to restore the file to working
order.  Since the file could not be restored, we manually recreated
our financial data back to the date of our most recent backup data file
(November 20, 2008).  Due to the significant efforts incurred in
recreating the data, we filed a Form 12b-25 with the SEC to extend the filing
date for our Form 10-Q for the June 30, 2009 period for five calendar
days.  As a result of this failure, we modified the backup procedures
for our financial data.  Our CFO is manually backing up the financial
data to CD disks on a weekly basis.  We have also undertaken tests to
ensure the network backup system is working and have scheduled periodic testing
to ensure continued network backup functionality.





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, 2009,
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, 2009
and September 30, 2008, our internal control over financial reporting was
ineffective 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.  We noted
that we failed to disclose the impact on earnings per common share of the
beneficial conversion feature associated with the issuance of our convertible
preferred shares, which are effectively a preferred dividend to preferred
shareholders. We therefore conclude that our disclosure controls over financial
reporting were ineffective as of  and for the years ended September
30, 2009 and 2008. To address this weakness, we are considering forming a
disclosure committee to be included as part of our internal controls over
financial reporting.We have previously noted errors in calculating
expense associated with stock options.  Those errors were found in the
calculations for the Black-Scholes option-pricing model for the quarter ended
March 31, 2009.  In a post-closing adjustment, we recognized an
additional $74,243 in stock options expense.  We have taken steps to
ensure in the future that the multiple calculations involving the Black-Scholes
option-pricing model are reviewed several times for accuracy and
completeness.





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 us to provide only Management’s report in this Form
10-K.





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




During
the three months ended September 30, 2009, 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 for the changes in the process of making the calculations for
stock  option valuation  using the Black-Scholes option
pricing model and the steps taken to ensure greater reliability of our backup
systems for financial information.





4


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, 2009 and 2008, 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, 2009 and 2008, 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
22, 2009


F-1





ECOLOGY COATINGS, INC. AND SUBSIDIARYConsolidated
      Balance SheetsASSETSSeptember
      30, 2009
            
            
            September
      30, 2008Current
      AssetsCash
      and cash equivalents
            
            $
            -
            
            
            $
            974,276Prepaid
      expenses
            
            
            1,400
            
            
            
            25,206Total
      Current Assets
            
            
            1,400
            
            
            
            999,482Property
      and EquipmentComputer
      equipment
            
            
            30,111
            
            
            
            22,933Furniture
      and fixtures
            
            
            21,027
            
            
            
            18,833Test
      equipment
            
            
            9,696
            
            
            
            7,313Signs
            
            
            213
            
            
            
            213Software
            
            
            6,057
            
            
            
            1,332Video
            
            
            48,177
            
            
            
            48,177Total
      fixed assets
            
            
            115,281
            
            
            
            98,801Less:
      Accumulated depreciation
            
            
            (48,609)
            
            
            
            (22,634)Property
      and Equipment, net
            
            
            66,672
            
            
            
            76,167OtherPatents-net
            
            
            443,465
            
            
            
            421,214Trademarks-net
            
            
            6,637
            
            
            
            5,029Total
      Other Assets
            
            
            450,102
            
            
            
            426,243Total
      Assets
            
            $
            518,174
            
            
            $
            1,501,892

















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, 2009
            
            
            September
      30, 2008Current
      LiabilitiesBank
      overdraft
            
            $
            200
            
            
            $
            -Accounts
      payable
            
            
            1,272,057
            
            
            
            1,359,328Credit
      card payable
            
            
            114,622
            
            
            
            92,305Accrued
      liabilities
            
            
            76,084
            
            
            
            12,033Franchise
      tax payable
            
            
            -
            
            
            
            800Interest
      payable
            
            
            189,051
            
            
            
            133,332Notes
      payable
            
            
            582,301
            
            
            
            894,104Notes
      payable - related party
            
            
            257,716
            
            
            
            243,500Preferred
      dividends payable
            
            
            36,800
            
            
            
            6,300Total
      Current Liabilities
            
            
            2,528,831
            
            
            
            2,741,702Total
      Liabilities
            
            
            2,528,831
            
            
            
            2,741,702Commitments
      and Contingencies (Note 5)Stockholders'
      Equity (Deficit)Preferred
      Stock - 10,000,000 $.001 par value sharesauthorized;
      3,002 and 2,010 shares issued and outstandingas
      of September 30, 2009 and September 30, 2008, respectively
            
            
            2
            
            
            
            2Common
      Stock - 90,000,000 $.001 par value sharesauthorized;
      32,835,684 and 32,210,684outstanding
      as of September 30, 2009 andSeptember
      30, 2008, respectively
            
            
            32,859
            
            
            
            32,234Additional
      paid in capital
            
            
            20,645,299
            
            
            
            13,637,160Accumulated
      Deficit
            
            
            (22,688,817
            )
            
            
            (14,909,206
            )Total
      Stockholders' Equity (Deficit)
            
            
            (2,010,657)
            
            
            
            (1,239,810
            )Total
      Liabilities and Stockholders'Equity
      (Deficit)
            
            $
            518,174
            
            
            $
            1,501,892




















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, 2009
            
            
            September
      30, 2008Revenues
            
            $
            -
            
            
            $
            25,092Salaries
      and fringe benefits
            
            
            1,481,111
            
            
            
            2,006,776Professional
      fees
            
            
            3,101,606
            
            
            
            2,735,360Other
      general and administrative costs
            
            
            327,757
            
            
            
            637,668Operating
      Loss
            
            
            (4,910,474
            )
            
            
            (5,354,712
            )Other
      Income (Expenses)Interest
      income
            
            
            142
            
            
            
            5,784Interest
      expense
            
            
            (271,860
            )
            
            
            (1,421,394
            )Total
      Other (Expenses), net
            
            
            (271,718
            )
            
            
            (1,415,610
            )Net
      Loss
            
            $
            (5,182,192
            )
            
            $
            (6,770,322
            )Preferred
      Dividends—Beneficial Conversion Feature
            
            
            (2,488,011)
            
            
            
            (2,225,415)Preferred
      Dividends—Stock dividends
            
            
            (109,408)
            
            
            
            (6,300)Net
      loss available to common shareholders
            
            
            (7,779,611)
            
            
            
            (9,002,037)Basic
      and diluted net loss per share
            
            $
            (0.24
            )
            
            $
            (0.28
            )Basic
      and diluted weighted average ofcommon
      shares outstanding
            
            
            32,330,547
            
            
            
            32,189,864









































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, 2009 and 2008Additional
            
            
            
            
            
            TotalPaid
      In
            
            
            Accumulated
            
            
            Stockholders'Common
      Stock
            
            
            Preferred
      Stock
            
            
            Capital
            
            
            Deficit
            
            
            EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            
            
            
            
            
            
            (Deficit)Balance
      at October 1, 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 debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            358,654
            
            
            
            -
            
            
            
            358,654Stock
      option expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,847,639
            
            
            
            -
            
            
            
            1,847,639Warrants
      issued with 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)Issuance
      of preferred stock
            
            
            
            
            
            
            
            
            
            
            913
            
            
            
            -
            
            
            
            867,970
            
            
            
            
            
            
            
            867,970Beneficial
      conversion feature on preferred stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,488,011
            
            
            
            (2,488,011)
            
            
            
            -Warrants
      issued with preferred stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            45,530
            
            
            
            
            
            
            
            45,530Stock
      option expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,182,773
            
            
            
            
            
            
            
            3,182,773Beneficial
      conversion feature on issuance of debt
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,061
            
            
            
            
            
            
            
            2,061Warrants
      issued with debt
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            63,511
            
            
            
            
            
            
            
            63,511Stock
      issued for services
            
            
            575,000
            
            
            
            575
            
            
            
            
            
            
            
            
            
            
            
            254,425
            
            
            
            
            
            
            
            255,000Stock
      options exercised
            
            
            50,000
            
            
            
            50
            
            
            
            
            
            
            
            
            
            
            
            24,950
            
            
            
            
            
            
            
            25,000Preferred
      dividends
            
            
            
            
            
            
            
            
            
            
            79
            
            
            
            -
            
            
            
            78,908
            
            
            
            (109,408)
            
            
            
            (30,500)Net
      Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,182,192)
            
            
            
            (5,182,192)Balance
      at September 30, 2009
            
            
            32,835,684
            
            
            $
            32,859
            
            
            
            3,002
            
            
            $
            2
            
            
            
            20,645,299
            
            
            
            (22,688,817)
            
            
            
            (2,010,657)



































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, 2009
            
            
            September
      30, 2008OPERATING
      ACTIVITIESNet  loss
            
            $
            (5,182,192
            )
            
            $
            (6,770,322
            )Adjustments
      to reconcile net lossto
      net cash  (used in) operating activities:Depreciation
      and amortization
            
            
            45,075
            
            
            
            37,486Option
      expense
            
            
            3,182,773
            
            
            
            1,847,639Beneficial
      conversion expense
            
            
            2,062
            
            
            
            374,476Issuance
      of stock for debt extension
            
            
            
            
            
            
            162,000Issuance
      of stock for payment of payables
            
            
            200,000
            
            
            
            -Issuance
      of stock for services
            
            
            55,000
            
            
            
            -Warrants
            
            
            63,512
            
            
            
            868,231Changes
      in Asset and LiabilitiesMiscellaneous
      receivable
            
            
            -
            
            
            
            1,118Prepaid
      expenses
            
            
            23,806
            
            
            
            45,683Accounts
      payable
            
            
            (87,271
            )
            
            
            929,539Accrued
      payroll taxes and wages
            
            
            -
            
            
            
            (13,960
            )Accrued
      liabilities
            
            
            64,050
            
            
            
            12,033Franchise
      tax payable
            
            
            (800
            )Credit
      card payable
            
            
            22,317
            
            
            
            77,533Interest
      payable
            
            
            55,718
            
            
            
            117,481Deferred
      revenue
            
            
            -
            
            
            
            (24,884
            )Net
      Cash Used in Operating Activities
            
            
            (1,555,950
            )
            
            
            (2,335,947
            )INVESTING
      ACTIVITIESPurchase
      of fixed assets
            
            
            (16,480
            )
            
            
            (77,094
            )Purchase
      of intangibles
            
            
            (42,961
            )
            
            
            (138,848
            )Net
      Cash Used in Investing Activities
            
            
            (59,441
            )
            
            
            (215,942
            )FINANCING
      ACTIVITIESBank
      overdraft
            
            
            200
            
            
            
            -Repayment
      of notes payable
            
            
            (372,801
            )
            
            
            (591,998
            )Proceeds
      from notes payable and warrants
            
            
            75,216
            
            
            
            1,300,000Issuance
      of preferred stock
            
            
            913,500
            
            
            
            2,010,000Issuance
      of common stock
            
            
            25,000
            
            
            
            -Net
      Cash Provided by Financing Activities
            
            
            641,115
            
            
            
            2,718,002Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            
            (974,276)
            
            
            
            166,113CASH
      AND CASH EQUIVALENTS AT BEGINNINGOF
      PERIOD
            
            
            974,276
            
            
            
            808,163CASH
      AND CASH EQUIVALENTS AT ENDOF
      PERIOD
            
            $
            -
            
            
            $
            974,276





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, 2009
            
            
            September
      30, 2008SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATIONInterest
      paid
            
            $
            132,000
            
            
            $
            79,284Income
      taxes paid
            
            
            -
            
            
            
            -SUPPLEMENTAL
      DISCLOSURE OF NON-CASHFINANCING
      ACTIVITIESIssuance
      of common stock for payment of accounts and notes payable
            
            $
            425,000
            
            
            $
            -Issuance
      of common stock for services
            
            $
            15,000
            
            
            $
            -Issuance
      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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





SEPTEMBER
30, 2009 AND SEPTEMBER 30, 2008









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




Description of
the Company.We were originally incorporated on March 12, 1990
in California (“Ecology-CA”).  Our current entity was incorporated in
Nevada on February 6, 2002 as OCIS Corp. (“OCIS”).  OCIS
completed a merger with Ecology-CA on July 26, 2007 (the “Merger”). In the
Merger, OCIS changed its name from OCIS Corporation to Ecology Coatings,
Inc.  We develop 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 target markets consist of 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, 2009
and 2008, there were 20,323,996 and 12,031,220 potentially dilutive shares
outstanding, respectively.




As of
September 30, 2009, there was $739,484 outstanding in principal and accrued
interest on notes held by Investment Hunter, LLC, George Resta and Mitchell
Shaheen.  These notes are no longer convertible but we may grant
conversion rights to these holders to reduce our need for cash.  To
the degree to which we grant conversion rights, these notes are potentially
dilutive.




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.




As of September 30, 2009 and 2008, we
had no unrecognized tax benefits due to uncertain tax
positions.




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.  Seven patents were issued as of September 30,
2009 and are being amortized over 8 years.




Stock-Based
Compensation.Employee and director stock-based compensation
expense is measured utilizing the fair-value method.




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




Expense
Categories.Salaries and Fringe Benefits of $1,481,111 and
$2,006,776 for the years ended September 30, 2009 and 2008, 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 $3,101,606
and  $2,735,360,  for the years ended September 30, 2009
and  2008, respectively, include amounts paid to attorneys,
accountants, and consultants, as well as the stock based compensation expense
for those services.  Of the $3,101,606 in professional fees incurred
in the year ended in September 30, 2009, $2,383,564 was for options
expense.  Of this amount, $1,368,450 arose from the issuance of
warrants in November 2008 to Trimax to acquire 2,000,000 shares of our common
stock.  Another approximate $360,000 arose from the issuance of stock
options to Sales Attack in September 2008 to acquire 531,000 shares of our
common stock.




Recent Accounting
Pronouncements




In
June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, as amendment to SFAS No. 140(SFAS166). SFAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. SFAS 166 is effective for fiscal years beginning after November 15,
2009. We will adopt SFAS 166 in fiscal 2010 as applicable. It would not have had
any impact on any of the financial statements that we’ve issued to
date.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (SFAS 167). SFAS 167 amends FASB Interpretation No. 46
(Revised December 2003), “Consolidation of Variable Interest Entities—an
interpretation of ARB No. 51,” (FIN 46(R)) to require an enterprise to
perform an analysis to determine whether the enterprise’s variable interest or
interests give it a controlling financial interest in a variable interest
entity; to require ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity; to eliminate the quantitative
approach previously required for determining the primary beneficiary of a
variable interest entity; to add an additional reconsideration event for
determining whether an entity is a variable interest entity when any changes in
facts and circumstances occur such that holders of the equity investment at
risk, as a group, lose the power from voting rights or similar rights of those
investments to direct the activities of the entity that most significantly
impact the entity’s economic performance; and to require enhanced disclosures
that will provide users of financial statements with more transparent
information about an enterprise’s involvement in a variable interest entity.
SFAS 167 becomes effective on January 1, 2010. We do not anticipate SFAS
167 will have a material impact on our consolidated financial statements upon
adoption.




Note 2— Concentrations




For the
years ended September 30, 2009 and  2008, we had no revenues
and  revenues of  $25,092, respectively. One customer
accounted for all of our revenues in the year ended September 30, 2008. As of
September 30, 2009 and 2008, there were no amounts due from this
customer.




We
occasionally maintain bank account balances in excess of the federally insurable
amount of $250,000.  The Company had cash deposits in excess of these
limits on September 30, 2009 and September 30, 2008, of $0 and $724,276,
respectively.




Note
3 — Related Party Transactions




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




We have
an unsecured note payable due to Deanna Stromback, a principal shareholder and
former director and sister of our former Chairman, Rich Stromback, that bears
interest at 4% per annum with principal and interest due on December 31,
2009.  As of September 30, 2009 and September 30, 2008, the note
had an outstanding balance of $110,500.  The accrued interest on the
note was $13,235 and $8,407 as of September 30, 2009 and September 30,
2008, 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 upon mutually agreeable terms and conversion
price.




We have
an unsecured note payable due to Doug Stromback, a principal shareholder and
former director and brother of our former Chairman, Rich Stromback, that bears
interest at 4% per annum with principal and interest due on December 31,
2009.  As of September 30, 2009 and September 30, 2008, the note
had an outstanding balance of $133,000.    The accrued
interest on the note was $15,936 and  $10,125 as of September 30, 2009
and September 30, 2008, 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 upon mutually agreeable
terms and conversion price.




We had an
unsecured note payable due to Rich Stromback, our former Chairman and a
principal  shareholder,  that bore interest at 4% per annum
with principal and interest due on December 31, 2009.  As of September
30, 2009 and September 30, 2008, the note had an outstanding balance of $0.
The unpaid accrued interest on the note was $2,584 as of September 30, 2009 and
September 30, 2008, respectively.  The note carries certain
conversion rights which allow the holder to convert all or part of the
outstanding balance into shares of our common stock upon mutually agreeable
terms and conversion price.




We have
an unsecured  note payable to an entity controlled by JB Smith, a
director of the company. This note bears interest at 5% per annum and is
convertible under certain conditions. It is due within 15 days of demand by the
holder. As of September 30, 2009 and  September 30, 2008, the
note had an outstanding balance of $7,716 and $0,
respectively.  Accrued interest of $96 was outstanding of September
30, 2009.




We have
an unsecured note payable to an entity controlled by JB Smith, a director of the
company. This note bears interest at 5% per annum and is convertible under
certain conditions. It is due within 15 days of demand by the holder. As of
September 30, 2009 and September 30, 2008,  the note had an
outstanding balance of $6,500 and $0, respectively.  Accrued interest
of $18 was outstanding of September 30, 2009.




Future
maturities of related party long-term debt as of September 30, 2009 are as
follows:


12 Months Ended September
    30,2010
            
            $
            257,716




We have a
payable to a Richard Stromback and an entity controlled by him totaling $145,191
and  $63,775 as of September 30, 2009 and September 30, 2008,
respectively, included in accounts payable on the consolidated balance sheets.
See also Note 10—Subsequent Events





Note
4 — Notes Payable




We have
the following notes:





September
              30,
      2009
            September
      30, 2008Chris
      Marquez Note:  Convertible 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 was outstanding at
      September 30, 2008.
            $
            --
            
            
            $
            94,104George
      Resta Note:  Subordinated note payable, 25% per annum,
      unsecured, principal and interest was due June 30, 2008; the Company
      extended the maturity for 30 days, to July 30, 2008 in exchange for
      warrants to purchase 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.
      On November 14, 2008, we agreed to pay the note holder $10,000 per month
      until the principal and accrued interest is paid off. We made such
      payments in October and November of 2008, but did not make payments
      thereafter. Accrued interest of $9,232 and $7,329 was outstanding as of
      September 30, 2009 and September 30, 2008, respectively.
            
            38,744
            
            
            
            50,000Investment
      Hunter, LLC Note:  Subordinated note payable, 25% per annum,
      unsecured, principal and interest was due June 30, 2008; the Company
      extended the maturity for 30 days, to July 30, 2008 in exchange for
      warrants to purchase 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.
      On November 13, 2008, we agreed to pay the note holder $100,000 per month
      until the principal and accrued interest is paid off. The payments for
      October, November, and December were made, but none have been made
      since.  Accrued interest of $64,650 and $73,288 was outstanding
      as of September 30, 2009 and September 30, 2008,
    respectively.
            
            293,557
            
            
            
            500,000Mitchell
      Shaheen Note:  Subordinated note payable, 25% per annum,
      unsecured, principal and interest was due July 18, 2008. Additionally, the
      Company issued a warrant to purchase 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 $48,787 and $10,685 was
      outstanding as of September 30, 2009 and September 30, 2008,
      respectively.
            
            150,000
            
            
            
            150,000Mitchell
      Shaheen Note:  Subordinated note payable, 25% per annum,
      unsecured, principal and interest was due August 10, 2008. Additionally,
      the Company issued a warrant to purchase 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 $34,513 and $5,548 was outstanding
      as of
              September
      30, 2009 and September 30, 2008, respectively.
            
            100,000
            
            
            
            100,000$582,301
            
            
            
            $894,104







All of
the notes shown in the table above are in default and are currently due and
payable.




The notes
held by Investment Hunter, LLC, George Resta and Mitchell Shaheen had
convertibility features when they were issued.  As of September 30,
2009, the convertibility features had expired.




All of
the notes payable in the table above initially had conversion rights and
warrants.  We recognized an embedded beneficial conversion feature
present in these Notes.  We allocated the proceeds based on the fair
value of $340,043 to 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.







Note
5 — Commitments and Contingencies




Consulting
Agreements.




On
June 1, 2007, we entered into a consulting agreement with The Rationale
Group, LLC (“Rationale Group”).  The managing member of Rationale
Group is Dr. William Coyro, Jr., who serves as the chairman of Ecology’s
business advisory board.  The agreement expired June 1,
2009.  Ecology pays Rationale Group $11,000 per month under the
Agreement.  Additionally, Ecology granted Rationale Group 200,000
options to purchase shares of our common stock for $2.00 per
share.  Of these options, 50,000 options vested on December 1,
2007, 50,000 options vested on June 1, 2008, 50,000 options vested on
December 1, 2008, and the remaining 50,000 options vested on June 1,
2009.  Additionally, we agreed to reimburse Rationale Group for all
reasonable expenses incurred by Rationale Group in the conduct of our business.
On February 11, 2009, we amended the agreement upon the following
terms:







·
            Six
      monthly payments to Rationale Group of $5,000, with payments ended on July
      1, 2009.


·
            Re-pricing
      of the 50,000 options that vested on December 1, 2007 by our Board to an
      exercise price of $.50 per share


·
            Rationale
      Group forgave $121,000 owed by us to
them.


·
            Rationale
      Group transferred options to purchase 50,000 shares of common stock that
      vest on June 1, 2009 to Equity 11, our largest
      shareholder.  J.B. Smith, a director of our Board, is the
      managing partner and majority owner of Equity
  11.







On
July 26, 2007, we entered into a consulting agreement with DMG Advisors,
LLC, 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.  The agreement
expired on February 28, 2009.





On July
21, 2009, we entered into a Settlement and Release Agreement with DMG Advisors,
LLC, Kirk Blosch and Jeff Holmes which terminated the parties’ July 26, 2007
Consulting Agreement. We agreed to issue 500,000 shares of our common stock as
payment for services owed under the Former Consulting Agreement.





On July
21, 2009, we entered into a new Consulting Agreement with DMG
Advisors.  DMG Advisors will provide investor, business and financial
services to us under the New Consulting Agreement and will be paid $5,000 per
month for services by the issuance of 25,000 shares of the our common stock per
month.  The Agreement has a term of six months and terminates on
January 15, 2010.





On
April 2, 2008, we entered into a letter agreement with Dr. Robert Matheson
to become chairman of our Scientific Advisory Board.  The letter
agreement provides that we will grant Dr. Matheson options to purchase 100,000
shares of our common stock.  Each option is exercisable at a price of
$2.05 per share.  The options vest as follows: 25,000 immediately upon
grant; 25,000 on October 3, 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
September 17, 2008, we entered into an agreement with Sales Attack LLC, an
entity owned by J.B. Smith, a director of the Company and managing partner of
Equity 11 who is our largest shareholder.  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 became 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.  We paid
$60,000 to Sales Attack LLC during the year ended September 30, 2009. On May 15,
2009, we issued 100 Series B Convertible Preferred Securities in full settlement
of all monthly payment amounts then outstanding and terminated any future
monthly obligations of this Agreement.





On
September 17, 2008, we entered into an agreement with RJS Consulting LLC
(“RJS”), an entity owned by our chairman of the board of directors, Richard
Stromback, under which RJS 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 RJS’s
participation in certain conferences, information technology expenses incurred
by the consultant in the performance of duties relating to the Company, and
certain legal fees incurred by Richard Stromback during his tenure as our Chief
Executive Officer.





On
September 17, 2008, we entered into an agreement with DAS Ventures LLC (“DAS”)
under which DAS will act as a consultant to us.  DAS Ventures, LLC is
wholly owned by Doug Stromback, a principal shareholder and former director and
brother of our Chairman, Rich Stromback,  Under this agreement, DAS
will provide business development services for which he will receive commissions
on licensing revenues equal to 15% of revenues and commissions on product sales
equal to 3% of said sales and reimbursement for information technology expenses
incurred by the consultant in the performance of duties relating to the Company.
This agreement expires on September 17, 2011.





On
November 11, 2008, we settled the lawsuit we filed against Trimax, LLC
(“Trimax”) on September 11, 2008 for breach of contract.  Under the
terms of the settlement, we will pay Trimax $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 Trimax’s attorney.   Additionally, we will
pay Trimax a commission of 15% for licensing revenues and 3% for product sales
that Trimax generates for the Company.   On June 12, 2009, we
terminated the agreement and replaced it with a new one in which the sole
compensation paid to Trimax will be a commission of 15% for licensing revenues
and 3% for product sales to Daewoo. This new agreement expires June 12, 2010 and
can be terminated on 90 days written notice by either party.





On
January 1, 2009, we entered into a new agreement with McCloud Communication to
provide investor relations services to us.  The new agreement calls
for monthly payments of $5,500 for 12 months.  In addition, the
consultant forgave $51,603 in past due amounts owed by the Company in exchange
for a reset of the exercise price on options to purchase 25,000 shares of our
common stock that we issued to the consultant on April 8, 2008. The exercise
price at the time of issuance was $4.75 per share.  This price was
re-set by our Board to $.88 per share on February 6, 2009.





On
January 5, 2009, we entered into an agreement with James Juliano to provide debt
consulting services to us. Mr. Juliano is a principal in Equity 11. The
agreement calls for twelve monthly payments of $7,500 and expires on December
31, 2009.  No monthly payments were made to Mr. Juliano for the year
ended on September 30, 2009.  On May 15, 2009, we issued 37.5
Convertible Preferred Securities in full settlement of all amounts then
outstanding and terminated the agreement.







Employment
Agreements.




On
January 1, 2007, we entered into an employment agreement with Sally J.W.
Ramsey, Vice President New Product Development, 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.  On
December 15, 2008, we amended the agreement to reduce Ms. Ramsey’s annual base
salary to $60,000.  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
September 21, 2009, we entered into a second amendment to the employment
agreement with Ms. Ramsey that amends her employment agreement with us dated
January 1, 2007 to provide for an annual salary of $75,000 effective November 1,
2009.  From December 15, 2008 until September 21, 2009, Ms. Ramsey's annual
salary was $60,000.




On
February 1, 2007, we entered into an employment agreement with Kevin Stolz,
Chief Financial Officer, Controller and Chief Accounting 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.  These options were re-priced to
$1.05 per share on September 15, 2008.  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, Mr. Stolz was
granted 50,000 options to purchase shares of our common stock at $3.00 per
share.  These options were re-priced to $1.05 per share on September
15, 2008.  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, Mr. Stolz 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 Mr. Stolz 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. Mr.
Stolz assumed the additional title of Chief Financial Officer on March 26,
2009.  On July 24, 2009, this agreement was terminated by mutual
agreement of the parties. Mr. Stolz continues in his positions of Chief
Financial Officer, Controller and Chief Accounting Officer.




On
May 21, 2007, we entered into an employment agreement with David W. Morgan,
Chief Financial Officer, that expired on May 21, 2009.  Pursuant
to the agreement, Mr. Morgan was paid an annual base salary of $160,000 and was
granted 300,000 options to acquire our common stock at $2.00 per
share.  These options were re-priced to $1.05 per share on September
15, 2008. 75,000 of the options vested on May 21, 2008, and 225,000 of the
options vested 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.  This
agreement was terminated on December 3, 2008 and Mr. Morgan continued to serve
as our Chief Financial Officer and was being paid $60,000 per annum. Mr. Morgan
resigned on March 26, 2009 and his employment agreement was terminated. We will
pay medical insurance premiums of $1,128 per month through September of 2009 for
him.





On
September 21, 2009, we entered into an employment agreement with Robert G.
Crockett , our CEO. Mr. Crockett has served as our CEO since September 15, 2008.
The agreement expires on September 21, 2012. Mr. Crockett will receive an
annual base salary of $200,000. The Compensation Committee of the Board of
Directors may review Mr. Crockett’s salary to determine what, if any, increases
shall be made thereto. In addition, the vesting for Mr. Crockett’s previously
awarded stock options was adjusted so that 110,000 stock options will vest 12
months, 18 months and 24 months respectively from Mr. Crockett’s initial date of
employment (September 15, 2008).  Mr. Crockett was also granted
stock options to purchase 670,000 shares of our common stock, one-quarter of
which shall vest at 30, 36, 42 and 48 months from Mr. Crockett’s initial date of
employment with us (September 15, 2008) with an exercise price of $.51 per
share. The agreement may be terminated prior to the end of the term for cause.
If Mr. Crockett’s employment is terminated without cause or for “good
reason,” as defined in the agreement, he is entitled to 50% of salary that would
have been paid over the balance of the term of the agreement. Further, a
termination within one year after a change in control shall be deemed to be
a termination without cause.





On
September 21, 2009, we entered into an employment agreement with Daniel V.
Iannotti, our Vice President, General Counsel & Secretary. Mr.
Iannotti  has served as our Vice President, General Counsel since
August 11, 2008. The agreement expires on September 21, 2012. Effective November
1, 2009, Mr. Iannotti will receive an annual base salary of $150,000. The
Compensation Committee of the Board of Directors may review Mr. Iannotti’s
salary to determine what, if any, increases shall be made thereto. In addition,
the vesting for Mr. Iannotti’s previously awarded stock options was adjusted so
that 110,000 stock options will vest 12 months, 18 months and 24 months
respectively from Mr. Iannotti’s initial date of employment (August 11,
2008).  Mr. Iannotti was also granted stock options to purchase
70,000 shares of our common stock, one-quarter of which shall vest at 30, 36, 42
and 48 months from Mr. Iannotti’s’s initial date of employment with us (August
11, 2008) with an exercise price of $.51 per share. The agreement may be
terminated prior to the end of the term for cause. If Mr. Iannotti’s
employment is terminated without cause or for “good reason,” as defined in the
agreement, he is entitled to 50% of salary that would have been paid over the
balance of the term of the agreement. Further, a termination within one
year after a change in control shall be deemed to be a termination without
cause.





On
September 21, 2009, we entered into an employment agreement with F. Thomas
Krotine, our COO. The agreement expires on September 21, 2010. Effective
November 1, 2009, Mr. Krotine will receive an annual base salary of
$65,000. The Compensation Committee of the Board of Directors may review Mr.
Krotine’s salary to determine what, if any, increases shall be made thereto.
Mr. Krotine was also granted stock options to purchase 169,000 shares of
our common stock, one-quarter of which shall vest at 6, 12, 18 and 24 months
from September 21, 2009 with an exercise price of $.51 per share. The agreement
may be terminated prior to the end of the term for cause. If Mr. Krotine’s
employment is terminated without cause or for “good reason,” as defined in the
agreement, he is entitled to 50% of salary that would have been paid over the
balance of the term of the agreement. Further, a termination within one year of
a change in control shall be deemed to be a termination without
cause.




Contingencies.




Lease
Commitments.


a.
            
            The
      Company leases office and lab facilities in Akron, OH on a month-to-month
      basis for $1,800.  Rent expense for the year ended September 30,
      2009 and 2008 was $23,600 and $21,600, respectively.b.
            
            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. Rent expense for
      the year ended September 30, 2009 and September 30, 2008 were $34,699 and
      $10,723 respectively.c.
            
            On
      June 17, 2007, we leased computer equipment with 36 monthly
      payments of $42. We recognized expense of $504 and $504 for the years
      ended September 30, 2009  and 2008, respectively, related to
      this lease.d.
            
            On
      July 17, 2007, we leased computer equipment with 36 monthly
      payments of $44. We recognized expense of $528 and  $528 for the
      years ended September 30, 2009 and 2008, respectively, related to this
      lease.e.
            
            On
      September 22, 2008, we leased a multi-purpose copier with 36 monthly
      payments of $526. The first payment was due November 3,
      2008.  We recognized expense of 5,786 and $0 for the years ended
      September 30, 2009 and 2008,
respectively







Minimum
future rental payments under the above operating leases as of September 30, 2009
are as follows:





Year Ending September 30,
            Amount2010
            $44,5302011
            $5,260TOTAL:
            $49,790








F-8





Note
6 — Equity





Reverse
Merger.A reverse merger with OCIS Corporation was consummated
on July 26, 2007.  The shareholders of Ecology-CA 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 Trimax, LLC to purchase 500,000
shares of our stock at $2.00 per share.  On November 11, 2008, the
exercise price of the warrants was reset to $.90 per share.  The
warrants vested on December 17, 2007. The weighted average remaining life
of the warrants is 7.3 years.




On
February 6, 2008, we issued warrants to Hayden Capital  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
8.3 years.




On
March 1, 2008, we issued warrants to George Resta to purchase 12,500 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 8.3 years.




On
March 1, 2008, we issued warrants to Investment Hunter, LLC to purchase
125,000 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
8.3 years.




On June
9, 2008, we issued warrants to Hayden Capital 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 8.6 years.




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




On July
14, 2008, we issued warrants to Mitchell Shaheen 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 8.6
years.




On July
14, 2008, we issued warrants to George Resta to purchase 15,000 shares of our
common stock at $1.75 per share. The warrants vested upon
issuance.  The weighted average remaining life of the warrants is 8.6
years.




On July
14, 2008, we issued warrants to Investment Hunter, LLC to purchase 15,000 shares
of our common stock at $1.75 per share. The warrants vested upon
issuance.  The weighted average remaining life of the warrants is 8.6
years.




We issued
the following immediately vested warrants to Equity 11 in conjunction with
Equity 11’s purchases of our 5% 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, 201847,000
            
            $
      0.75
            
            January
      23, 2009
            
            January
      23, 201415,000
            
            $
      0.75
            
            February
      10, 2009
            
            February
      10, 201412,500
            
            $
      0.75
            
            February
      18, 2009
            
            February
      18, 201420,000
            
            $
      0.75
            
            February
      26, 2009
            
            February
      26, 201411,500
            
            $
      0.75
            
            March
      10, 2009
            
            March
      10, 201440,000
            
            $
      0.75
            
            March
      26, 2009
            
            March
      26, 201410,750
            
            $0.75
            
            April
      14, 2009
            
            April
      14, 201416,750
            
            $0.75
            
            April
      29, 2009
            
            April
      29, 2014




On
November 11, 2008, we issued warrants to purchase 2,000,000 shares of our common
stock at $.50 per share to Trimax. The warrants vested upon
issuance.  The weighted average remaining life of the warrants is 9.0
years.




Shares.On
February 6, 2008, we entered into an allonge to the promissory note made to
Christopher Marquez on February 28, 2006.  The amount owed, 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.  This note has been paid in full.




On August
28, 2008, we entered into an agreement with Equity 11 to issue up to $5,000,000
in convertible preferred securities.  The securities accrue cumulative
dividends at 5% per annum and the entire amount then outstanding is convertible
at the option of the investor into shares of our common stock at $.50 per
share.  The preferred securities carry “as converted” voting
rights.  As of June 30, 2009, we had issued 2,436 of these convertible
preferred shares.  As 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.  The table above identifies warrants issued in conjunction
with Equity 11’s additional purchases of our 5% convertible preferred stock
through September 30, 2009.




On May
15, 2009, we entered into an agreement with Equity 11 to issue convertible
preferred securities at $1,000 per share. The securities accrue cumulative
dividends at 5% per annum and the entire amount then outstanding is convertible
at the option of the investor into shares of our common stock at a price equal
to 20% of the average closing price of our common shares for the five trading
days immediately preceding the date of issuance. The preferred securities carry
“as converted” voting rights.  As of September 30, 2009, we have
issued 566 of these convertible preferred securities. These shares are
convertible into 5,802,377 of our common shares at the sole discretion of Equity
11.




In the
event of a voluntary or involuntary dissolution, liquidation or winding up,
Equity 11 will be entitled to be paid a liquidation preference equal to the
stated value of the convertible preferred shares, plus accrued and unpaid
dividends and any other payments that may be due on such shares, before any
distribution of assets may be made to holders of capital stock ranking junior to
the preferred shares.







On
September 30, 2009, Ecology Coatings, Inc. we and Stromback Acquisition
Corporation, entered into a Securities Purchase for the issuance and sale
of our 5.0% Cumulative Convertible Preferred Shares, Series B at a purchase
price of $1,000 per share.  Stromback Acquisition Corporation is owned
by Richard Stromback a former member of our Board of
Directors.  Until April 1, 2010, Purchaser has the right to purchase
up to 3,000 Convertible Preferred Shares.  The Convertible Preferred
Shares have a liquidation preference of $1,000 per share.  Purchaser
may convert the Convertible Preferred Shares into common stock of the
Company at a conversion price that is seventy seven percent (77%) of the
average closing price of Company’s common stock on the Over-The-Counter Bulletin
Board for the five trading days prior to each investment.  The
Convertible Preferred Shares will pay cumulative cash dividends at a rate of 5%
per annum, subject to declaration by our Board of Directors, on December 1 and
June 1 of each year.  We have agreed to provide piggyback registration
rights for common stock converted by Purchaser under a Registration Rights
Agreement.  See also Note 10—Subsequent Events





Fifty
percent (50%) of each investment, up to a maximum of $500,000, will be placed in
a fund and disbursed as directed by Purchaser to satisfy our outstanding debts,
accounts payable and/or investor relations programs (“Discretionary
Fund”).




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. On December 2, 2008, our Board of Directors authorized the
addition of 1,000,000 shares of our common stock to the 2007
Plan.  All prior grants of options were included under this
plan.  The plan provides for incentive stock options, nonqualified
stock options, rights to restricted stock and stock appreciation
rights.  Eligible recipients are employees, directors, and
consultants.  Only employees are eligible for incentive stock
options.




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, 2009:





Weighted
      Average Exercise Price Per Share
            Number
      of Options
            Weighted
      Average (Remaining) Contractual Term
            Aggregate
      Fair ValueOutstanding
      as of September 30, 2008
            $1.83
            4,642,119
            9.2
            $5,011,500Granted
            $.61
            1,439,000
            9.8
            $634,491Exercised
            $.50
            50,000
            7.8
            $76,447Forfeited
            $2.13
            900,000
            7.8
            $1,008,404Outstanding
      as of September 30, 2009
            $1.13
            5,131,119
            8.5
            $4,569,065Exercisable
            $1.06
            2,925,119
            6.7
            $3,249,831






2,925,119
of the options were exercisable as of September 30, 2009.  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 September 30, 2009.  Intrinsic value
arises when the exercise price is lower than the trading price on the date of
grant.




Employee
and director stock-based compensation expense is measured utilizing the
fair-value method.




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




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
            86.04%-101.73%Risk
      free interest rate
            .10%-5.11%Expected
      life
            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 the option grant.




Based
upon the above assumptions and the weighted average $1.13 exercise price, the
options outstanding at September 30, 2009 had a total unrecognized compensation
cost of $648,330 which will be recognized over the remaining weighted average
vesting period of .5 years. Options cost of $3,182,773 was recorded as an
expense for the year ended September 30, 2009 of which $799,209 was recorded as
compensation expense and $2,383,564 was recorded as consulting
expense.  Of this amount, $1,368,450 was consulting expense due to the
issuance of warrants to Trimax LLC in November 2008 to acquire 2,000,000 shares
of our common stock.





Note
8 -- Income Taxes





A
reconciliation of the provision for income taxes for the years ended September
30, 2009 and 2008 is as follows:





2009
            2008Income
      tax expense at the statutory rate
            $(1,761,945)
            $(2,301,909)Permanent
      differences
            1,536
            1,920Cash
      to accrual differences
            87,613
            182,340Change
      in valuation allowance
            1,672,796
            2,482,329$ --
            $ --





We have incurred losses since operations commenced in 1990.  We have a
net operating loss carry forward for income tax purposes of approximately
$10,440,946. The total loss carry forward expiring on September 30, 2029 is
$2,093,526, expiring on September 30, 2028 is $3,959,334, expiring on September
30, 2027 is $3,513,085, expiring on September 30, 2026 is $426,697, expiring on
September 30, 2025 is $203,978, expiring on September 30, 2024 is $198,988,
expiring on September 30, 2023 is $25,597 and expiring on September 30, 2022 is
$19,741.  We changed its year-end to September 30th from
February 28th
effective in fiscal 2006.





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, 2009 and 2008, the deferred tax asset based on a 34% tax
bracket consists of the following:




2009
            
            2008Assets:Federal
      loss carry forwards
            
            
            $      3,549,921
            
            $      2,537,985Cash
      basis accounting differences
            
            
            397,142
            
            451,603Stock
      option differences
            
            
            1,799,635
            
            1,066,345Liability:Depreciation
      timing differences
            
            1,227
            
            (804)Deferred
      tax asset
            
            
            5,727,925
            
            4,055,129Valuation  allowance
            
            
            (5,727,925)
            
            (4,055,129)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 $959,506 change in the deferred tax
asset valuation allowance from September 30, 2008.As of September 30,
2009 and 2008, the Company had no unrecognized tax benefits due to uncertain tax
positions.




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,
2009 and 2008, we incurred net losses of ($5,182,192) and ($6,770,322),
respectively.  As of September 30, 2009 and September 30, 2008,
we had stockholders’ deficits of ($2,010,657) and ($1,239,810),
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 primarily through the
issuance of equity securities and debt and through some limited operating
revenues.  Until we are able to generate positive operating cash
flows, additional funds will be required to support our
operations.  We will need to acquire additional immediate funding in
fiscal year 2010 to continue our operations.  The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going
concern.




Note
10 — Subsequent Events





The
Company evaluated subsequent events for potential recognition and/or disclosure
through December 21, 2009, the date the consolidated financial statements were
issued.





On
October 1, 2009, we issued 240 Convertible Preferred Shares at an aggregate
purchase price of $240,000 under our securities purchase agreement with
Stromback Acquisition Corporation.  These securities can be converted
into 571,429 shares of our common stock. A warrant was issued to Purchaser
granting rights to purchase 14,400 shares of our common stock at a purchase
price of $.42 per share. Per the terms of the agreement and at Mr.
Stromback’s direction, we paid $120,000 to him on that date in settlement of
past payables owed to him directly or to RJS Ventures, LLC, a company controlled
by him.





On
November 9, 2009, we issued 50 Convertible Preferred Shares, Series B, at an
aggregate price of $50,000 to Equity 11. These shares can be converted into
714,286 shares of our common stock.





On
November 30, 2009, we issued a note for $3,600 to JB Smith, LC. This company is
owned by J.B. Smith, a member of our board of directors. The interest bears
interest at 5% per annum and is payable with 15 days of demand by the
holder.





On
December 1, 2009, we issued 61 Convertible Preferred Shares, Series A, to Equity
11 in payment of the dividend due on that date. These shares are convertible
into 122,000 shares of our common stock.





On
December 1, 2009, we issued 14 Convertible Preferred Shares, Series B, to Equity
11 in payment of the dividend due on that date. These shares are convertible
into 175,000 shares of our common stock.





On
December 4, 2009, we issued 65 Convertible Preferred Shares, Series B, at an
aggregate price of $65,000 to Equity 11. These shares can be converted into
812,500 shares of our common stock.





On
December 16, we issued 31 Convertible Preferred Shares, Series B, at an
aggregate price of $31,000 to Equity 11.  These shares can be
converted into 606,000 shares of our common stock.














F-9