UNITED
STATES





Securities
and Exchange Commission


Washington,
D.C. 20549





Form 10-K/A


x
            
            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 □





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 xNo 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  o





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





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





Large
accelerated
filer  □                       Accelerated
filer  □





Non-accelerated
filer  □                         Smaller
reporting company  x





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





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
Form 10-K/A to include the following information:








1. We
have amended our discussion in Item 5 Market For Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities to correct
amounts owing on notes as of September 30, 2009.





2. We
have amended our discussion in Item 9A(T) Controls and Procedures to
clarify that we discovered that we failed to disclose the impact on earnings per
common share of preferred stock dividends and the beneficial conversion feature
associated with the issuance of our convertible preferred shares and, thus, we
believe our internal control over financial reporting was ineffective
during the period covered by this report.





3. We
have amended our Consolidated Statements of Operations for the years ended
September 30, 2009 and September 30, 2008 to include preferred stock dividends
and the beneficial conversion feature associated with the issuance
of our convertible preferred shares in the calculation of
earnings/loss per share as required by the earnings per share disclosure
requirements.





4. We
have amended Note 4, "Notes Payable", to the financial statements to
correct an error in the amount owing to Mitchell Shaheen on September 30,
2009.





5. We
have amended Note 8, "Income Taxes", to the financial statements to add a
reconciliation of income taxes.





6. We
have modified the Exhibit 31.1 Certifications of our Chief Executive Officer and
Chief Financial Officer to conform to the certification language as specified in
SEC rules.





7. We
have signed the report in accordance with SEC instructions.











We are
re-filing the entire report which includes the amendments noted
above.





2


FORM
10-K/A


ECOLOGY
COATINGS, INC.


SEPTEMBER
30, 2009





TABLE
OF CONTENTS


PART
      I
            PageITEM
      1
            Business
            5ITEM
      1A.
            Risk
      Factors
            11ITEM
      1B.
            Unresolved
      Staff Comments
            19ITEM
      2.
            Properties
            19ITEM
      3.
            Legal
      Proceedings
            19ITEM
      4.
            Submission
      of Matters to a Vote of Security Holders
            19PART
      IIITEM
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            20ITEM
      6.
            Selected
      Financial Data
            23ITEM
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            23ITEM
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            29ITEM
      8.
            Financial
      Statements and Supplementary Data
            29ITEM
      9.
            Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
            30ITEM
      9A(T)
            Controls
      and Procedures
            29ITEM
      9B.
            Other
      Information
            30PART
      IIIITEM
      10.
            Directors,
      Executive Officers, and Corporate Governance
            31ITEM
      11.
            Executive
      Compensation
            34ITEM
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            43ITEM
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            44ITEM
      14.
            Principal
      Accountant Fees and Services
            49ITEM
      15.
            Exhibits
      and Financial Statement Schedules
            50Signature
      Page
            53





3





PART I





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





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





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





4


ITEM
1.   DESCRIPTION OF BUSINESS





Ecology
Coatings, Inc. (“Ecology-CA”) was originally incorporated in California on March
12, 1990.  OCIS Corp. (“OCIS”) was incorporated in Nevada on
February 6, 2002.  OCIS completed a merger with Ecology-CA on
July 27, 2007 (the “Merger”).  In the Merger, OCIS issued
approximately 30,530,684 shares of common stock to the Ecology-CA
stockholders.  In this transaction, OCIS changed its name from OCIS
Corporation to Ecology Coatings, Inc. and our ticker symbol on the OTC Bulletin
Board association changed to “ECOC.”  As a result of the merger, we
became a Nevada corporation and Ecology-CA became a wholly owned
subsidiary.





Company
Overview





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





Our
patent and intellectual property activities to date include:





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





●
            two
      European patents allowed and nine pending patent applications in foreign
      countries





●
            one
      ICT international patent
application





●
            three
      trademarks issued by the USPTO – “EZ RecoatTM”, “Ecology CoatingsTM” and
      “Liquid NanotechnologyTM”●
            200+
      proprietary coatings formulations.





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





Business
in General


We have
focused on developing products that support inexpensive mass production
utilization of protective coatings that leverage nano-particle clean technology
and are cured under UV light.  We believe that the use of our “Liquid
NanotechnologyTM” coatings represent a paradigm shift in coatings
technology.  While our competitors have focused their efforts on
improving the industry-standard, thermal-cured powder-coat, water-borne and
solvent-based coatings, we have strived for technological
breakthroughs.  We have developed over 200 individual coating
formulations that we believe address the limitations of traditional
coatings.  The USPTO has issued six patents and have allowed a seventh
covering many of these formulations as well as their
application.  Additionally, the formulations that are not currently
patent protected are protected as trade secrets.





5


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





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





Our
Liquid NanotechnologyTM coatings offer a number of performance and user benefits
over traditional coatings.  We believe that our 100% solids, UV-cured
industrial products represent the coatings industry’s cutting edge in overall
performance, offering bottom line value and environmental advantages to users
because they:





•
            
            Cure
      faster, usually in seconds, not minutes;•
            
            Use
      less floor space, thereby improving operating
  efficiency;•
            
            Use
      dramatically less energy;•
            
            Reduce
      production compliance burdens with the Environmental Protection Agency
      because our coatings produce fewer emissions;•
            
            Provide
      improved coating and/or substrate performance; and•
            
            Boost
      manufacturing productivity by increasing process
    throughput.





Conventional Low-Tech
Coatings





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





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





6


Our Solution - Clean
Technology





Liquid
NanotechnologyTM, our 100% solids UV-cured industrial coatings clean technology,
addresses all of the issues noted above and provides unique performance
combinations.  We have developed over 200 specific individual coating
formulations that address the limitations of traditional carrier-based
coatings,  some of which are patent protected. Our coatings cure in
less than a minute after application without the use of heat.  This
changes the manufacturing dynamic in four ways.  First, UV curing
eliminates the bottleneck effect and makes product disassembly unnecessary,
increasing the speed with which coated products are produced.  Second,
the use of UV curing eliminates the need for thermal heating equipment and/or
drying space, allowing manufacturers to use less floor space.  Third,
the elimination of thermal heating from the manufacturing process produces
dramatic energy cost savings.  Finally, the use of 100% solids results
in fewer harmful airborne emissions being released during production or
application.





Our clean
technology coatings have other advantages.  Indeed, a crucial
advantage of our products is that they are more cost effective than conventional
coatings.  Our 100% solid coatings offer increased efficiency and
result in minimal wasted product: if a manufacturer needs one mil of dry film
thickness, it need only apply and cure one mil of our coating.





Cleantech
Offerings





Paper – Our paper
coatings provide:





·
            high
      speed curing – seconds, not minutes- compatible with
      high speed print operations e.g. 400 feet per minute on flexographic
      labels and printed packaging·
            Barrier
      protection – revolutionary thin film properties with tremendous resistance
      to water, gas and chemical barriers and low oxygen
      transmission





·
            Our
      coatings allow the substitution of lower cost paper instead of expensive
      and non-recyclable plastic.  EcoQuickTM coated paper can replace
      polymer laminates on paper, labels and packaging·
            Nanotechnology-enhanced
      formulations provide coating performance including superior adhesion and
      abrasion resistance.





Metals- Our
metal coatings provide:





·
            The
      UV curing process uses 80 percent less energy, slashes manufacturing floor
      space by up to 80 percent, and eliminates curing
    bottlenecks.·
            High
      speed curing – seconds compared to minutes for heat-cured solvent-based
      and powder coatings.





·
            Barrier
      protection –Unique thin film properties such as water and chemical
      resistance, and low oxygen transmission reducing
  corrosion.·
            Nanotechnology-enhanced
      formulations provide unique coating performance including superior
      adhesion to difficult-to-adhere-to metals with improved scratch
      resistance





·
            Increases
      manufacturing productivity since UV curing uses no heat; so complex
      products containing metal parts with rubber gaskets do not need to be
      disassembled prior to the coating and curing.·
            Reduces
      and/or eliminates EPA compliance burden and
  cost.





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





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





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





7


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





License
Arrangements





We have
not yet been successful in generating substantial licensing or sales revenue and
our coatings have yet to be incorporated into manufacturers’
products.  Many of our potential customers require extensive
performance tests of our technology which can take several years to
complete.  In addition, some potential customers are concerned about
our long-term financial viability.  We are unable to make predictions
regarding the timing and size of any future royalty payments and/or product
sales.  With respect to the licenses described below, we believe that
any royalties depend on the licensee’s ability to market, produce and sell
products incorporating our proprietary technology.  We cannot predict
when we will receive any royalty or sales revenue from these licenses, if
ever.





DuPont.  On
November 8, 2004, we licensed our platform automotive technology to
DuPont.  This non-exclusive license covers all of DuPont’s automotive
metal coating activities in North America.  The license is for a term
of fifteen (15) years, terminating on November 8, 2019.  The
license provides for royalty payments at a stated percentage of net
sales.  To date, we have not received any royalty payments pursuant to
this license as our coatings have yet to be incorporated into products by DuPont
and we cannot predict when we will, if ever.  Royalty payments are
entirely dependent on DuPont’s marketing efforts which are beyond our
control.  DuPont is not required under the agreement to incorporate
our coatings into DuPont products.  The license agreement does not
require DuPont to ensure any minimum level of sales using our
coatings.





Red Spot Paint &
Varnish.  On May 6, 2005, we granted Red Spot Paint &
Varnish an exclusive license to manufacture and sell one of our proprietary
products for use on 22 gallon metal propane tanks.  The duration of
this license is fifteen years, terminating on May 6, 2020.  Upon
consummation of the license, Red Spot made a one-time payment of $125,000 to
us.  All of our revenue in 2007 and 2008 was from this one
customer.  The license also provides for royalty payments at a stated
percentage of net sales.  To date, we have not received any royalty
payments pursuant to this license as our coatings have yet to be incorporated
into Red Spot’s products and we cannot predict when we will, if
ever.  Royalty payments are entirely dependent on Red Spot’s marketing
efforts which are beyond our control.  Red Spot is not required under
the agreement to incorporate our coatings into Red Spot products.  The
license agreement does not require Red Spot to ensure any minimum level of sales
using our coatings.





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





Prior to
reaching a license agreement with a potential customer, we typically work with
the potential customer on a development phase to better understand its needs and
desired performance levels.  A good example of our development phase
is our Collaboration Agreement with Reynolds Innovations Inc. for the
development of a fire standards compliant cigarette.  Although we had
previously developed a unique coating to meet this customer’s needs and had
already passed some initial testing, this Agreement provided for a series of
additional tests that must be satisfactorily passed before our coating was used
in the production of cigarettes.  This development process with
Reynolds could have taken up to two years to complete.  On November
13, 2009, Reynolds terminated the Collaboration Agreement before we completed
any milestone.  No payments or penalties were paid in connection with
the termination.  Both parties faced difficulties in overcoming
manufacturing issues.  Our UV lamps add additional heat in a tightly
controlled (heat and humidity) manufacturing environment.  In addition, no
high-speed sensing equipment exists to verify the coating is in place for every
cigarette produced at the anticipated production speed.   In the face
of manufacturing challenges and large capital expenditures this project would
require, Reynolds terminated the agreement.  As a result of the
termination, we are now free to pursue opportunities with other cigarette and
paper manufacturers.





8


Marketing
Strategy





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





•
            
            Attendance
      and technical presentations at industry trade shows and
      conventions;•
            
            Internal
      and external sales forces, with a force of industry-specific sales people
      who will identify, call upon and build ongoing relationships with key
      purchasers and targeted industries;•
            
            Fostering
      joint development agreements and other research arrangements with industry
      leaders and third party consortiums;•
            
            Print
      advertising in journals with specialized industry
focus;•
            
            Web
      advertising, including supportive search engines and Web site registration
      with appropriate sourcing entities;•
            
            Public
      relations, industry-specific venues, as well as general media, to create
      awareness of us and our products. This will include membership in
      appropriate trade organizations; and•
            
            Brand
      identification through trade names associated with us and our
      products.





Sales
Strategy





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





Our sales
cycle is often longer than one year.   The sales process begins
with the identification of potential customers in selected markets. If the
customer is interested, the customer will generally send application samples to
us for initial analysis and testing.  We then coat the application
samples using our product. Provided we are able to demonstrate the efficacy of
our product on the application sample to the customer, the customer will then
perform extended durability tests.  In most cases, we are unable to
exert any control or influence over the durability test. Upon conclusion of the
durability test, we plan to work with the customer while it decides whether to
purchase our product.   We did not generate any sales revenues in
fiscal year 2009.





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





9


FY 2010
Goals





Our
FY2010 goals, given sufficient capital, are to:


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





Competition





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





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





Intellectual
Property





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





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





·
            nine
      pending patent applications in foreign countries. One patent has been
      allowed in China.





·
            one
      ICT international patent
application





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





·
            200+
      coatings formulations.





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





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





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





10


Research and
Development





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





For
fiscal years 2007, 2008, 2009, we spent approximately $200,000, $275,000 and
$175,000 on research and development, respectively.  This includes
contracted research, salary expenses of Sally Ramsey, our Vice President of New
Product Development, laboratory expenses and raw materials.  During
these three fiscal years, we did not undertake any customer-sponsored research
and development.





Manufacturing





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





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





Employees





As of
November 16, 2009, we had five full-time employees.  As of that date,
we had employment agreements with four of our employees.





ITEM
1A.  RISK FACTORS





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





11


RISKS
RELATED TO OUR COMPANY AND OUR BUSINESS





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





We are a
company that has failed to generate significant revenue as yet.  We
had an accumulated deficit of $22,688,817 as of September 30, 2009, $13,456,402
of this amount is due to non-cash items, including options expense, the issuance
of warrants, beneficial conversion provisions associated with issuance of
preferred stock and certain debt, and stock issued to pay for services,
payables, and debt extensions .  We have a limited operating history
upon which investors may rely to evaluate our prospects.  Such
prospects must be considered in light of the problems, expenses, delays and
complications associated with a business that seeks to generate more significant
revenue.  We have generated nominal revenue to date and have incurred
significant operating losses.  Our operating losses have resulted
principally from costs incurred in connection with our capital raising efforts
and becoming a public company through a merger, promotion of our products, and
from salaries and general and administrative costs.  We have
maintained minimal cash reserves since October 2008 and have relied solely on
additional investment from Equity 11 and from Stromback Acquisition Corporation
(“SAC”).  Neither Equity 11 or SAC is committed to make any additional
investments in us.  We will need to raise additional capital from
Equity 11, SAC or other investors in fiscal year 2010 in order to continue to
fund our operations.





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





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





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





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





Our
auditors have expressed a going concern opinion





We have
incurred losses, primarily as a result of our inception stage, general and
administrative, and pre-production expenses and our limited amount of
revenue.  Accordingly, we have received a report from our independent
auditors included in our annual report of Form 10-K/A that includes an
explanatory paragraph describing their substantial doubt about our ability to
continue as a going concern.





We
need immediate additional financing in 2010 to continue our
operations.





As of
September 30, 2009, we were in default on approximately $739,484 in short term
debt, including accrued interest.  Our past capital raising activities
have not been sufficient to fund our working capital, operational and debt
requirements and we will need to raise additional funds in January 2010 through
private or public financings to continue our operations. Such financing could
include equity financing, which may be dilutive to stockholders, or debt
financing, which would likely restrict our ability to make acquisitions and
borrow from other sources.





During
our last fiscal year ended September 30, 2009, we relied on the sale of
convertible preferred securities to fund our operations.  We raised
$763,716 from the issuance of notes and the sale of  Preferred Series
A and Preferred Series B shares during the twelve months ended September 30,
2009.  On May 15, 2009, we entered into a Convertible Preferred
Securities Agreement with Equity 11 under which Equity 11 may purchase
additional shares of our Preferred Series B stock, but we do not have any
commitments for additional financing from Equity 11.  On September 30,
2009, we entered into a Securities Purchase Agreement with SAC but such
agreement does not commit SAC to provide any additional financing beyond the
initial investment which netted us $120,000.  We have maintained
minimal cash reserves since October 2008 and have relied solely on additional
investments from Equity 11 and SAC.  While there is no maximum amount
Equity 11 can invest in us under its Securities Purchase Agreement and a
$3,000,000 cap on the amount of investment by SAC under its Securities Purchase
Agreement, neither Equity 11 nor SAC is committed to make any additional
investments in us.  The Preferred Series A and Preferred Series B
shares held by Equity 11 and Preferred Series B shares held by SAC can be
converted into shares of our common stock at prices that will likely be highly
dilutive to our common shareholders.





12


We
are dependent on key personnel





Our
success will be largely dependent upon the efforts of our executive
officers.  The loss of the services of our executive officers could
have a material adverse effect on our business and prospects.  We
cannot be certain that we will be able to retain the services of such
individuals in the future.  Our research and development efforts are
dependent upon a single executive, Sally Ramsey, with whom we have entered into
an employment agreement which expires on December 31, 2012.  Our
success will be dependent upon our ability to hire and retain qualified
technical, research, management, sales, marketing, operations, and financial
personnel.  We will compete with other companies with greater
financial and other resources for such personnel.  Although we have
not to date experienced difficulty in attracting qualified personnel, we cannot
be certain that we will be able to retain our present personnel or acquire
additional qualified personnel as and when needed.  On September 21,
2009, we entered into new employment agreements with our Chief Executive
Officer, Chief Operating Officer, and General Counsel and entered into an
amendment to Ms. Ramsey’s employment agreement.  We do not have an
employment agreement with our Chief Financial Officer.





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





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





Risks Related to our
Business





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





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





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





13


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





We
expect that our products will have a long sales cycle





One of
our target markets is the OEM market. OEMs traditionally have substantial
capital investments in their plant and equipment, including the coating portion
of the production process.  In this market, the sale of our coating
technology will be subject to budget constraints and resistance to change with
respect to long-established production techniques and processes, which could
result in a significant reduction or delay in our anticipated
revenues.  We cannot assure investors that such customers will have
the necessary funds to purchase our technology and products even though they may
want to do so.  Further, even if such customers have the necessary
funds, we may experience delays and relatively long sales cycles due to their
internal-decision making policies and procedures and reticence to
change.





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





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





There
is a significant amount of competition in our market





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





We
have limited marketing capability





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





14


We
have limited manufacturing capacity





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





We
are dependent on manufacturers and suppliers





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





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





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





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





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





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





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





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





15


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





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





Risks
related to our license arrangements





We have
licensing agreements with DuPont and Red Spot Paint & Varnish regarding
their use of our technology for specific formulations for designated
applications.  The DuPont license provides multiple formulas for use
on metal parts in the North American automotive market.  To date, this
license has not generated any ongoing royalty payments.  We also have
a licensing agreement with Red Spot that provides formulations for specific tank
coatings. Such licenses are renewable provided the parties are in compliance
with the agreements.  Although these licenses provide for royalties
based upon net sales of our UV-cured coating formulations, it is unlikely that
Red Spot or DuPont will aggressively market products with our coatings and thus
entitle us to receive royalties at any level.





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





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





There
are economic and general risks relating to our business





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





Risks Related to our Common
Stock





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





The
public market for our common stock has historically been very volatile. During
fiscal year 2009, our low and high market prices of our stock were $0.25 per
share (March 24, 2009) and $2.00 per share (August 17, 2009).  Any
future market prices for our shares are likely to continue to be very volatile.
This price volatility may make it more difficult for our shareholder to sell our
shares when desired.  We do not know of any one particular factor that
has caused volatility in our stock price.  However, the stock market
in general has experienced price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of listed
companies.  Broad market factors and the investing public’s negative
perception of our business may reduce our stock price, regardless of our
operating performance. Further, the volume of our traded shares and the market
for our common stock is very limited.  During the past fiscal year,
there have been several days where no shares of our stock have
traded.  A larger market for our shares may never develop or be
maintained. Market fluctuations and volatility, as well as general economic,
market and political conditions, could reduce our market price.  As a
result, this may make it very difficult for our shareholder to sell our common
stock.





16


Control
by key stockholders





As of
September 30, 2009, Richard D. Stromback, Douglas Stromback, Deanna Stromback,
who are the brother and sister of Richard D. Stromback, respectively, Sally J.W.
Ramsey, and Equity 11 held shares representing approximately 75.4% of the voting
power of our outstanding capital stock.  In addition, pursuant to the
investment agreements we entered into with Equity 11, Equity 11 has the right to
effectively control our Board of Directors with the right to appoint three of
the five members of our Board of Directors.  Additionally, Equity 11
has the right to appoint our Chief Executive Officer.  The stock
ownership and governance rights of such parties constitute effective voting
control over all matters requiring stockholder approval.  These voting
and other control rights mean that our other stockholders will have only limited
rights to participate in our management.  The rights of our
controlling stockholders may also have the effect of delaying or preventing a
change in our control and may otherwise decrease the value of the shares and
voting securities owned by other stockholders.





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





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





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





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





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





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





17


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





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





As of
November 16, 2009, we had granted options to purchase 5,131,119 shares of our
common stock under our 2007 Stock Option and Restricted Stock Plan (the “2007
Plan).  As of September 30, 2009, we had issued warrants to purchase
4,518,500shares of our
common stock which includes 1,178,500 warrants issued to Equity
11.  As of September 30, 2009, Equity 11 purchased Preferred Series A
and Preferred Series B shares and has been issued additional Preferred Series A
and Preferred Series B shares as dividends that are convertible into 10,516,370
common shares.  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.





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





Our
Articles of Incorporation authorize the issuance of 90,000,000 shares of common
stock and 10,000,000 shares of preferred stock.  The common stock and
preferred stock can be issued by our Board of Directors without stockholder
approval.  Any future issuances of our common stock or preferred stock
could further dilute the percentage ownership of our existing
stockholders.





Indemnification
of officers and directors





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





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





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





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





Short
Selling may drive the price of our stock down





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





18


ITEM
1B. UNRESOLVED STAFF COMMENTS





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





ITEM
2. PROPERTIES





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





We also
lease approximately 3,600 square feet of laboratory space at 1238 Brittain Road,
Akron, Ohio 44310.  We use this facility for manufacturing, storing
and testing of our products.  We are currently leasing this property
on a month-to-month basis and the monthly rent is $1,800.





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





ITEM
3.  LEGAL PROCEEDINGS





On
November 18, 2009, Investment Hunter, LLC, one of our note holders, filed suit
in the Supreme Court of New York for repayment of $360,920 plus interest,
attorneys fees and costs.  We have previously made payments totaling
$300,000 to Investment Hunter to reduce the balance owed under the
note.  We have engaged counsel in New York to represent our interests
and file pleadings on our behalf.





On
December 15, 2009, McLarty Associates LLC, one of our prior consultants, filed
suit in the Superior Court in Washington, D.C. against us seeking an additional
$150,000 from us under our consulting agreement.  We have previously
paid McLarty Associates $210,000 and issued 90,000 shares of common stock yet we
have not received anything tangible from McLarty
Associates.  We have filed an answer to the complaint
claiming we did not receive any tangible value from McLarty Associates
LLC.





On
January 11, 2010, John Henke, the attorney who represented Trimax, LLC, filed
suit in the 52nd District Court in Rochester Hills, MI to recover $13,750 owed
to him as attorneys fees under the Settlement Agreement we reached with Trimax
on November 11, 2008.  On February 9, 2010, we filed an answer to the
complaint claiming the obligation to Mr. Henke terminated when his client
breached the Settlement Agreement.





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





No
matters were submitted to a vote of our shareholders during the fourth quarter
of the fiscal year ended September 30, 2009.





19


PART II


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





Market
Prices





Our
common stock, par value $.001 per share (the “Common Stock”), is currently
quoted on the 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 Ended September 30, 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.





20


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.





21


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
shares to DMG Advisors, LLC in the following amounts and dates in fiscal year
2009 in connection with a payment resolution of outstanding amounts owed DMG
Advisors, LLC under a Consulting Agreement dated July 26, 2007:





Date Issued
            Number of SharesJuly
      15, 2009
            525,00August
      15, 2009
            25,000September
      15, 2009
            25,000October
      15, 2009
            25,000November
      15, 2009
            25,000December
      15, 2009
            25,000





We issued
the following promissory notes during 2008.  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 the future in order to conserve cash:





Note
      Holder
            Issue
      Date(s)
            Amount
      Owing on September 30, 2009
            Ability
      To Convert
            Terms
      of Conversion (if applicable)Investment
      Hunter, LLC
            March
      1, 2008
            $358,207
            Prior
      to June 30, 2008
            Lower
      of $1.75 or price of “New Offering”Mitchell
      Shaheen I
            June
      18, 2008
            $198,787
            Prior
      to July 18, 2008
            Lower
      of $.50 or price of “New Offering”Mitchell
      Shaheen II
            July
      14, 2008
            $134,513
            Prior
      to August 10, 2008
            $.50
      or “New Offering” priceGeorge
      Resta
            March
      1, 2008
            $47,976
            Prior
      to June 30, 2008
            Lower
      of $1.75 or price of “New Offering





22


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.  A summary of the Private
Placement is shown below:





Title
            Date
            Underwriters
      Or Purchasers
            Consideration
            Exemption
            Use
      of ProceedsPrivate
      Placement Memorandum
            July
      21, 2007
            (1)
            $2
      per share
            4(2)
      of ’33 Securities Act
            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





ITEM
      6.   SELECTED FINANCIAL
DATA





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





ITEM
      7.
            
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


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





23


Overview





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





Operating
Results





Years
Ended September 30, 2009 and 2008





Results
From Operations





Revenuesfor the years ended September 30, 2009 and 2008, were $0 and
$25,092, respectively. Substantially all of our revenues for the year ended
September 30, 2008 derived from our licensing agreement with Red Spot.
These revenues stem from the amortization of the initial payment of $125,000 by
Red Spot to us in May 2005 and not from any subsequent
transactions.





Salaries and
Fringe Benefits. The decrease of approximately $526,000 in
such expenses for the year ended September 30, 2009 compared to the year
ended September 30, 2008 is the result of the elimination of two salaried
employees prior to October 31, 2008, the elimination of a third in March 2009,
the reduction of the salary of one employee effective October 1, 2008, and the
reductions of the salaries of three employees in December 2008. These reductions
were partially offset by the expense associated with the options issued to two
employees in September 2008 and December 2008 as well as the addition of a new
employee in September 2008.





Professional
Fees.The increase of approximately $366,000 in these expenses for the
year ended September 30, 2009 compared to the year ended September 30, 2008 is
the result of the issuance of 2,000,000 options to Trimax in November
2008.  These options vested upon issuance, so the entire charge of
$1,368,000 was recognized in that month. This expense was offset by a reduction
of approximately $1,050,000 in fees and options paid or awarded to consultants
for a variety of services. Three such consultants are no longer under agreement
with us and two others have reduced their ongoing fees to us.





Other General and
Administrative Expenses.The decrease of approximately $310,000 in these
expenses for the year ended September 30, 2009 compared to the year ended
September 30, 2008 reflects reductions in legal fees relating to SEC filings,
in-sourcing the work of preparing SEC filings, the elimination of debt extension
fees, and the reduction of travel and travel-related expenses.





Operating Losses.The increased loss between the reporting periods is explained by the
increases in the expense categories discussed above and the decrease in revenue
over the periods.





Interest Incomefor the years ended September 30, 2009 and 2008 was $142 and $5,784,
respectively. The decrease resulted from a reduction in our average investable
cash balances between and 2008 and 2009.





Interest
Expense. The decrease of approximately $1,150,000 for the year ended
September 30, 2009 compared to the year ended September 30, 2008 is the result
of the expensing of the value of detachable warrants issued with bridge notes in
the earlier period partially offset by the revaluing of previously issued
detachable warrants and an increase of approximately $700,000 in average
outstanding debt for the 2008 period.





24


Income Tax
Provision.  No provision for income tax benefit from net
operating losses has been made for the years ended September 30, 2009 and
2008 as we have fully reserved the asset until realization is more reasonably
assured.





Net Loss.The decrease in the Net Loss of approximately $1,588,000 for the year
ended September 30, 2009 compared to the year ended September 30, 2008, while
more fully explained in the foregoing discussions of the various expense
categories, is due primarily to reductions of approximately $1,150,000 in
Interest Expense, $1,007,000 in certain professional fees, $310,000 in Other
General and Administrative expenses, and $526,000 in Salaries and Fringe
Benefits, partially offset by the expensing of a grant of 2,000,000 options
awarded to a consultant in November 2008 and the fact that we recognized no
revenue in the 2009 period.





Basic and Diluted
Loss per Share. The change in basic and diluted net loss per share for
the year ended September 30, 2009 compared with the year ended September 30,
2008 reflects the decreased Net Loss discussed above.





Liquidity and Capital
Resources





Current
and Expected Liquidity





Cash and
cash equivalents as of September 30, 2009 and September 30, 2008 totaled
($0) and $974,276, respectively.  The decrease reflects cash used in
operations of $1,555,950, cash used to purchase fixed and intangible assets of
$59,441, and cash used to pay down debt of $372,801.  This decrease
was partially offset by borrowings of $75,000 and the issuance of $913,500 in
convertible preferred stock.





We are a
company that has failed to generate significant revenues as yet and have
incurred an accumulated deficit of ($22,688,817), $13,456,402 of this amount is
due to non-cash items, including options expense, the issuance of warrants,
beneficial conversion provisions associated with issuances of preferred stock
and certain debt, and stock issued to pay for services, payables, and debt
extensions.  We have incurred losses primarily as a result of general
and administrative expenses, salaries and benefits, professional fees, and
interest expense.  Since our inception, we have generated very little
revenue.  We have received a report from our independent auditors that
includes an explanatory paragraph describing their substantial doubt about our
ability to continue as a going concern.





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





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





As of
September 30, 2009, we had notes payable to three separate parties on which we
owed approximately $739,484 in principal and accrued interest.  These
notes do not contain any restrictive covenants with respect to the issuance of
additional debt or equity securities by us.  The notes and the accrued
interest totaling $739,484 owing to three note holders were due prior to
September 30, 2008 and their holders demanded payment.  We have paid
$320,000 in principal and accrued interest against the original principal and
interest balance on two of these notes.  We have made a $5,000 payment
to the third note holder to whom we owed approximately $333,300 in principal and
accrued interest as of September 30, 2009.  Additionally, we have
notes owing to shareholders totaling approximately $289,586 including accrued
interest as of September 30, 2009.  These notes were due and payable
on September 30, 2009. None of the debt is subject to restrictive
covenants.  All of the debt is unsecured.





25


As of
September 30, 2009, Equity 11 had purchased 3,002 convertible preferred
shares.  In addition, we entered into a Securities Purchase Agreement
with SAC on September 30, 2009.  On October 1, 2009, SAC acquired 240
shares of our Convertible Preferred Shares, Series B with a purchase price of
$1,000 per share.  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 will need to raise
immediate additional funds in fiscal year 2010 to continue our operations. At
present, we do not have any binding commitments for additional
financing.  If we are unable to obtain additional financing, we would
seek to negotiate with other parties for debt or equity financing, pursue
additional bridge financing, and negotiate with creditors for a reduction and/or
extension of debt and other obligations through the issuance of
stock.  At this point, we cannot assess the likelihood of achieving
these objectives.  If we are unable to achieve these objectives, we
would be forced to cease our business, sell all or part of our assets, and/or
seek protection under applicable bankruptcy laws.





On
September 30, 2009, we had 32,835,684 common shares issued and outstanding and
3,002 in convertible preferred shares issued and outstanding.  These
preferred shares and accumulated and unpaid dividends can be converted into a
total of 10,674,377 shares of our common stock.  As of September 30,
2009, options and warrants to purchase up to 9,649,619 shares of common stock
had been granted.  Additionally, some of our outstanding notes and
accrued interest may be converted into shares of common stock in order to
conserve cash.





Our
financing agreements with Equity 11 allow Equity 11 the opportunity to match any
other offers of financing that we receive.  To date, this provision
has not inhibited our ability to seek alternative financing
arrangements.  Equity 11 chose not to match the financing offer that
we recently received from SAC that resulted in a Securities Purchase Agreement
dated September 30, 2009.  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.





Our
financing agreements with Equity 11 also require that Equity 11 approve any
capital expenditure greater than $10,000.  To date, Equity 11 has not
prevented us from making any capital expenditure greater than
$10,000.





Capital
Commitments





ContractualObligations
            
            Total
            
            
            Less
      Than 1 Year
            
            
            1-3
      Years
            
            
            4-5
      Years
            
            
            After
      5 YearsNotes
      Payable
            
            $
            840,017
            
            
            $
            840,017
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Interest
      on notes payable
            
            
            189,051
            
            
            
            189,051
            
            
            
            —
            
            
            
            —
            
            
            
            —Contractual
      Service Agreements
            
            
            1,681,584
            
            
            
            695,834
            
            
            
            985,750
            
            
            
            —
            
            
            
            —Office
      Leases
            
            
            37,486
            
            
            
            37,486
            
            
            
            --Equipment
      Leases
            
            
            12,830
            
            
            
            7,044
            
            
            
            5,786
            
            
            
            —
            
            
            
            —Total
      Contractual Obligations
            
            $
            2,770,968
            
            
            $
            1,769,432
            
            
            $
            991,536
            
            
            $
            —
            
            
            $
            —





Off-Balance Sheet
Arrangements





Our
off-balance sheet arrangements include contractual service agreements, office
leases and equipment leases.  A summary of our off-balance sheet
arrangements is below:





Less
      Than
              1
      Year
            1-3
              Years
            4-5
              Years
            After
      5
              Years
            TotalContractual
      Service Agreements
            $695,834
            $985,750
            ---
            ---
            $1,681,584Office
      Leases
            $37,486
            ---
            
            
            $37,486Equipment
      Leases
            $7,044
            $5,786
            ---
            ---
            $12,830Total
      Off-Balance Sheet Obligations
            $740,364
            $991,536
            ---
            ---
            $1,731,900





26


Our
off-balance sheet contractual service agreements include services provided by
vendors and services by our employees under employment
agreements.  Vendor services include IP/PR services, legal services
and business and revenue generation consulting services.  The
following table summarizes of our off-balance contractual service
agreements:





Contract
      Service
              Provider
            Purpose
            Monthly
      Amount
            Expiration
            
            Less
      Than
              1
      Year
            1-3
              Years
            4-5
              Years
            After
      5
              Years
            TotalMcCloud
      Communications
            IR/PR
      Services
            $5,000
            12/31/2009
            $15,000
            
            
            
            $15,000Wilson,
      Sonsini, Goodrich & Rosati
            SEC
      Legal Services
            $1,667
            12/31/2009
            $5,001
            
            
            
            $5,001RJS
      Consulting LLC
            Business
      Consulting
            $16,000
            9/17/2011
            $192,000
            $192,000
            
            
            $384,000Robert
      Crockett
            CEO
            $16,667
            9/21/2012
            $200,000
            $400,000
            
            
            $600,000Daniel
      Iannotti
            General
      Counsel & Secretary
            $12,500
            9/21/2012
            $146,500
            $300,000
            
            
            $446,500F.
      Thomas Krotine
            COO
      & President
            $5,417
            9/21/2011
            $63,583
            
            
            
            $63,583Sally
      Ramsey
            Chief
      Chemist
            $6,250
            1/1/2012
            $73,750
            $93,750
            
            
            $167,500Total
      Contractual Service Obligations
            
            $63,501
            
            $695,834
            $985,750
            
            
            $1,681,584





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





27


Contract
      Service
              Provider
            Purpose
            Monthly
      Amount
            Expiration
            
            Less
      Than
              1
      Year
            1-3
              Years
            4-5
              Years
            After
      5
              Years
            TotalSeven
      Industries, Ltd.
            Auburn
      Hills, MI Headquarters
            $2,952
            11/30/2009
            $5,904
            
            
            
            $5,904$3,110
            5/31/2010
            $18,966
            
            
            
            $18,966$3,154
            9/30/2010
            $12,617
            
            
            
            $12,617





We lease
computer equipment and our office printer/copier for our Auburn Hills, MI
headquarters.  A summary of our off-balance sheet leases for computer
equipment and the printer/copier is shown in the table below:





Contract
      Service
              Provider
            Purpose
            Monthly
      Amount
            Expiration
            
            Less
      Than
              1
      Year
            1-3
              Years
            4-5
              Years
            After
      5
              Years
            TotalDell
      Financial Services
            Computer
      Equipment
            $42
            6/17/2010
            $336
            
            
            
            $336Dell
      Financial Services
            Computer
      Equipment
            $44
            7/17/2010
            $396
            
            
            
            $396Ricoh
      America
            Printer/Copier
            $526
            9/22/2011
            $6,312
            $5,786
            
            
            $12,098








See also
Notes to the Consolidated Financial Statements in this prospectus. The details
of such arrangements are found in Note 5 – Commitments and Contingencies and
Note 10 – Subsequent Events.





Critical Accounting Policies
and Estimates





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





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





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





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


Computer
      equipment
            
            3-10 yearsFurniture
      and fixtures
            
            3-7 yearsTest
      equipment
            
            5-7 yearsSoftware
            
            3 years





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





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





28


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





Stock-Based
Compensation.We have a stock incentive plan that provides for
the issuance of stock options, restricted stock and other awards to employees
and service providers. We calculate compensation expense under SFAS 123(R) using
a Black-Scholes option pricing model. In so doing, we estimate certain key
assumptions used in the model. We believe the estimates we use, which are
presented in Note 7 of Notes to the Consolidated Financial Statements, are
appropriate and reasonable.





Recent Accounting
Pronouncements





In
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.





ITEM
      7A.
            
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





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





ITEM
      8.
            
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





Our
financial statements are included following the signature page to this Form
10-K/A commencing on page 58.





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





None.





29


ITEM
      9A(T).
            
            CONTROLS
      AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) or Rule 15d-15(e)
promulgated under the Exchange Act as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were ineffective as of the end of the period covered by this report to provide
reasonable assurance that material information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.





We
reached the conclusion that our disclosure controls and procedures were
ineffective due to our failure to initially disclose the impact on earnings per
common share of the beneficial conversion feature associated with our
convertible preferred shares and our failure to timely identify problems
associated with the electronic storage of our financial data.








Management’s
Report on Internal Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f)
or Rule 15d-15(f). Our management conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework in
Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation
our management concluded that our internal control over financial reporting was
ineffective as of September 30, 2009.





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


We had
material weaknesses in our internal control over financial reporting during the
period covered by this report which were manifested by several
incidents.  In particular, our financial data in our accounting
software (QuickBooks) became corrupted and unusable in late July
2009.  Due to the significant efforts incurred in re-creating the
data, we filed a Form 12b-25 with the SEC to extend the filing date for the our
Form 10-Q for the quarterly period ended June 30, 2009 for five calendar
days.  In addition, 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.  Finally,
we note that we initially 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 dividend to preferred
shareholders.





We are
aware that there is 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 reporting.








Changes
in Internal Control over Financial Reporting





There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule
15d-15 that occurred during our fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





ITEM
      9B.
            
            OTHER
      INFORMATION





None.





30


PART
III


ITEM
      10.
            
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The
following table sets forth as of September 30, 2009, the name, age, and
position of each Executive Officer and Director and the term of office of each
Director and significant employees.





Name
            Age
            PositionRichard
      D. Stromback
            40
            Former
      DirectorJ.B.
      Smith
            37
            DirectorJoe
      Nirta
            46
            DirectorRocco
      DelMonaco, Jr.
            56
            DirectorRobert
      G. Crockett
            51
            Chief
      Executive OfficerF.
      Thomas Krotine
            68
            President
      and Chief Operating OfficerDaniel
      V. Iannotti
            53
            Vice
      President, General Counsel & SecretaryKevin
      Stolz
            46
            CFO,
      Controller and Chief Accounting OfficerSally
      J.W. Ramsey
            56
            Vice
      President – New Product Development





Under
Section 5.1 of the Securities Purchase Agreement and Section 5.1 of the
Preferred Securities Agreement, Equity 11 has the right to elect three of the
five directors to our Board of Directors.  Mr. Smith is one of the
Directors appointed by Equity 11 and Joseph Nirta is the other Equity 11
appointed Director.  Equity 11 has the ability to appoint a third
director at any time but had not done so as of September 30,
2009.  Each other Director serves for a term of one year and until his
successor is duly elected and qualified. Each officer serves at the pleasure of
the Board of Directors subject to any applicable employment
agreements.





Set forth
below is certain biographical information regarding each of our current
executive officers, directors and significant employees as of September 30,
2009.





Richard D.
Stromback.Mr. Stromback served as our Chairman of the Board
of Directors from March 1, 2004 to September 21, 2009.  Mr. Stromback
resigned from our Board of Directors on October 1, 2009.  From Mach 1,
2004 until October 30, 2006 and from August 15, 2007 until September 15, 2008,
Mr. Stromback also served as our Chief Executive Officer.  From 1997
to 2003, Mr. Stromback was the CEO of Web Group, a privately-held IT
staffing firm founded by Mr. Stromback in 1997. Mr. Stromback holds a
B.A. from Brandon University in Canada.





J.B.
Smith.  Mr. Smith became a Director on September 15,
2008.  Mr. Smith currently is the Managing Partner for Equity 11, Ltd.
Equity 11’s portfolio companies employ the largest collection of former federal
law enforcement agents in the private sector.  Smith is also currently
serving as Chairman of Isekurity, the nation’s leader in identity theft
solutions and holds a bachelor’s degree in Administration of Justice from The
Pennsylvania State University.  Smith has served as a member of
Stealth Investigations LLC since 2003, and has been a partner in Sky Blue
Ventures since 2004.  Also known as the creator of the “Philanthropic
InvestmentSM,” Smith is a partner in WM
Reign, Ltd., an investment model solely dedicated to helping finance churches
and Christian causes by utilizing Smith’s “Philanthropic
InvestmentSM” concept.





Joseph
Nirta.On October 20, 2008, Joseph Nirta was elected as a
Director.  Mr. Nirta was the co-founder of BondExchange LLC and BondDesk
Group LLC. The electronic bond trading platform created by Mr. Nirta
revolutionized the online bond trading market. Nirta served as Bond Desk Group’s
chief information officer and a board member since 1999. He has a Bachelor of
Mathematics in Computer Science from the University of Waterloo, Waterloo,
Ontario, and is a Certified Oracle DBA.





31


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





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





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





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





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





32


Sally Judith
Weine Ramsey.Ms. Ramsey is our founder. From 1990 to the
present, Ms. Ramsey served as Vice President of Ecology-CA and from 1990 to
November 2006 served as Secretary.  From 1990 to
November 2003, she served as a director of Ecology-CA. As of July 27,
2007, Ms. Ramsey was elected our Vice President of New Product
Development.  Ms. Ramsey is a graduate of the Bronx School of
Science and holds a B.S. in Chemistry with honors from Hiram
College.





Directors appointed after September
30, 2009





None.





Committees
of the Board of Directors





Audit
Committee





Since
July 2008, the entire Board has acted on any matter requiring Audit Committee
approval.





Our
Board, acting as the Audit Committee, appoints our independent auditors, reviews
audit reports and plans, accounting policies, financial statements, internal
controls, audit fees, and certain other expenses and oversees our accounting and
financial reporting process. Specific responsibilities include selecting, hiring
and terminating our independent auditors; evaluating the qualifications,
independence and performance of our independent auditors; approving the audit
and non-audit services to be performed by our auditors; reviewing the design,
implementation, adequacy and effectiveness of our internal controls and critical
accounting policies; overseeing and monitoring the integrity of our financial
statements and our compliance with legal and regulatory requirements as they
relate to financial statements or accounting matters; reviewing any earnings
announcements and other public announcements regarding our results of
operations, in conjunction with management and our public auditors; and
preparing the report that the Securities and Exchange Commission will require in
our Form 10-K.  On October 18, 2007, the Audit Committee adopted
a written charter.





Compensation
Committee





Since
July 2008, the entire Board has acted on any matter requiring Compensation
Committee approval.





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





Section 16(a)
Beneficial Ownership Reporting Compliance





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





To our
knowledge, based solely on a review of such materials as are required by the
Securities and Exchange Commission, the following officers, directors or
beneficial holders of more than ten percent of our issued and outstanding shares
of Common Stock failed to file in a timely manner with the Securities and
Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934, as amended, during the
fiscal year ended September 30, 2009:





33


Director,
      Officer or 10% Beneficial Owner
            Number
      of Late Reports
            Number
      of Transactions Not Reported On A Timely Basis
            Failure
      to File Required Form
            Date(s)
      of FilingsJB
      Smith, Director
            2
            2
            N/A
            October
      2, 2008 & January 26, 2009Richard
      Stromback, Former Director
            1
            1
            N/A
            January
      26, 2009Daniel
      Iannotti
            1
            1
            N/A
            December
      23, 2008





Code
of Ethics





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





ITEM
11. EXECUTIVE COMPENSATION





The table
below sets forth all cash compensation paid or proposed to be paid by us to the
chief executive officer and the most highly compensated executive officers, and
key employees for services rendered in all capacities to us during fiscal years
ended September 30, 2009 and 2008.





Summary
Compensation Table


Change
      inPensionValue
      andNon-Equity
            
            NonqualifiedIncentive
            
            DeferredStock
            
            Option
            
            Plan
            
            Compensation
            
            All
      OtherYear
            
            Salary
            
            Bonus
            
            Awards
            
            Awards
            
            Compensation
            
            Earnings
            
            Compensation
            
            TotalName
      (a)
            
            (b)
            
            ($)
      (c)
            
            ($)
      (d)
            
            ($)
      (e)
            
            ($)
      (f)  (1)
            
            ($)
      (g)
            
            ($)
      (h)
            
            ($)
      (i)
            
            ($) (j)Richard
      D. Stromback,
            
            
            2009
            
            
            $
            0
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            0Former
      Chairman & CEO (2)
            
            
            2008
            
            
            $
            305,789
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            305,789Robert
      G. Crockett, CEO (3)
            
            
            2009
            
            
            $
            200,000
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            411,867
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            21,261
            (5)
            
            $
            464,3282008
            
            
            $
            8,333
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            254,701
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            1,297
            
            
            $
            263,034Sally
      J.W. Ramsey,
            
            
            2009
            
            
            $
            89,167
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            17,265
            (5)
            
            $
            106,432Vice
      President – New
            
            
            2008
            
            
            $
            195,833
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            12,564
            (5)
            
            $
            208,397Product
      Development (4)F.
      Thomas Krotine
            
            
            2009
            
            
            $
            50,667
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            104,288
            (9)
            
            $
            -0-
            
            $
            -0-
            
            
            
            $
            8,873
            (5)
            
            $
            120,603COO,
      Director
            
            
            2008
            
            
            $
            160,000
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            $
            -0-
            
            
            
            $
            7,342
            (5)
            
            $
            167,342David
      W. Morgan
            
            
            2009
            
            
            $
            54,375
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            (6)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            22,945
            (5)(7)
            
            $
            77,320Vice
      President, CFO and Treasurer  (6)
            
            
            2008
            
            
            $
            210,000
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            180,367
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            27,687
            (5)(7)
            
            $
            418,054Kevin
      Stolz
            
            
            2009
            
            
            $
            67,667
            
            
            
            
            
            
            
            
            
            
            $
            18,304
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            22,438
            (5)
      (6)
            
            $
            108,409CFO (6)
            
            
            2008
            
            
            $
            133,333
            
            
            
            
            
            
            
            
            
            
            $
            160,561
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            16,349
            (5)
            
            $
            310,243Daniel
      Iannotti, General Counsel & Secretary
            
            
            2009
            
            
            $
            115,000
            
            
            
            
            
            
            
            
            
            
            $
            280,264
            
            
            
            
            
            
            
            
            
            
            $
            17,015
            (5)
            
            $
            412,2792008
            
            
            $
            21,058
            
            
            
            
            
            
            
            
            
            
            $
            -0-
            
            
            
            
            
            
            
            
            
            
            $
            1,577
            (5)
            
            $
            22,635





34





(1)
            
            See
      Note 7 in the Consolidated Financial Statements included in our Form 10-K
      for our fiscal year ended September 30, 2009 for a discussion of the
      assumptions underlying the value of the compensation disclosed in this
      column.(2)
            
            Mr. Stromback
      resigned as our CEO on September 15, 2008. Effective October 1, 2008, he
      was engaged by us as a consultant through an entity named RJS Consulting,
      LLC.  Mr. Stromback resigned from our Board on October 1,
      2009.(3)
            
            Mr.
      Crockett began employment with us as CEO on September 17, 2008. His annual
      salary is $200,000.  He was awarded 330,000 options on that
      date, the value of which is disclosed in Option Awards in this table. On
      September 21, 2009, our Board, re-set the strike price of these options to
      $0.51 per share and accelerated the vesting of these options to 110,000
      vesting on September 15, 2009, March 15, 2010 and September 15, 2010,
      respectively. The value associated with the reset of the strike price and
      the acceleration of the vesting period was $168,800 He was awarded 670,000
      options with a strike price of $0.51 per share on September 21, 2009, with
      a value of $243,067(4)
            
            Ms. Ramsey
      entered into an employment agreement with us on January 1,
      2007.  Pursuant to such employment contract, she will receive a
      salary of $180,000 for the calendar year 2007, a salary of $200,000 for
      the calendar years 2008 through 2011, and a salary of $220,000 for
      calendar year 2012.  Pursuant to amendments of her employment
      agreement, Ms. Ramsey’s current salary is $75,000 per
      year.  Ms. Ramsey was awarded options to purchase 450,000
      shares of common stock that vest over five years.(5)
            
            These
      amounts reflect health insurance for all persons shown.(6)
            
            Mr.
      Morgan resigned as Chief Financial Officer on March 26, 2009. Mr. Stolz
      was appointed our Chief Financial Officer on March 26,
      2009.  Mr. Morgan forfeited 225,000 options as a result of his
      resignation.(7)
            
            Reflects
      automobile allowance paid to Mr. Morgan.(8)
            
            Reflects
      $25,395 in new options issued  9/21/09 and $107,488 in value
      associated with accelerating the vesting period associated with 330,000
      options issued in October, 2009. The acceleration was approved by our
      board on September 21, 2009. The options issued in October, 2009 had a
      value of $147,380(9)
            
            On
      September 21, 2009, our Board re-set the strike price of 80,237 of Mr.
      Krotine’s options to $.40 and the strike price of 250,982 of his options
      to $1.00. The value of these resets totaled $43,225. Also on that date,
      our Board issued 169,000 additional options to Mr. Krotine with a value of
      $61,063.





35


Compensation
Policy.





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





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





Compensation
Components





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





Base
Salary. The base salary for each executive officer is reviewed and
compared to the prior year, with considerations given for increase. Base
salary adjustments will be based on both individual and our performance and will
include both objective and subjective criteria specific to each executive’s role
and responsibility.  No increases were given to executives from 2008
to 2009.





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





Bonuses.  To
date, bonuses have been granted on a limited basis, with these bonuses related
to meeting certain performance criteria that are directly related to areas
within the executive’s responsibilities, such as production of product and sales
of product to customers. As we continue to evolve, more defined bonus programs
are expected to be created to attract and retain our employees at all levels. No
bonuses were granted in 2009.





Other.  As
of September 30, 2009, we had no profit sharing plan in place for
employees.  However, this is another area of consideration to add such
a plan to provide yet another level of compensation to our compensation
plan.  We reimburse all or a portion of health insurance costs for its
employees.





Mr. Stromback
earned a base salary of $305,789 during 2008 but no compensation in fiscal year
2009.  He was employed under an employment agreement effective January
1, 2008. He resigned his position as CEO on September 15,
2008.  Effective October 1, 2008, Mr. Stromback signed a consulting
contract with us that expires on September 11, 2011.  The contract
calls for monthly payments of $16,000, a monthly office expense reimbursement of
$1,000, and payment for Mr. Stromback’s attendance at certain
events.  Mr. Stromback resigned from our Board of Directors on October
1, 2009.





Mr.
Crockett was named our CEO on September 15, 2008.  He receives a base
salary of $200,000 and health care benefits.  Additionally, he was
awarded 330,000 options to purchase shares of our common stock at $1.05 per
share.  The options vest in 110,000 option increments over a thirty
month period, with the first tranche becoming exercisable on March 15, 2010, the
middle tranche becoming exercisable on September 15, 2010, and the final tranche
becoming exercisable on March 15, 2011.  The options expire on
September 11, 2018.  He earned $8,333 in base salary in 2008 and the
aforementioned options were valued at $254,701.  Additionally, we paid
$1,297 in medical insurance premiums on his behalf, bringing his total 2008
compensation to $263,034.  On September 21, 2009, we entered into a
three year employment agreement with Mr. Crockett with a annual salary of
$200,000, re-setting the strike price to $0.51 per share and accelerating the
vesting of existing options held by him and granting him an additional 670,000
stock options with an exercise price of $0.51 per share with a term of ten
years.





36


Ms. Ramsey
has a base salary of $60,000 and earned compensation of $89,167 in fiscal year
2009.  Additionally, we paid health insurance premiums of $12,564 on
her behalf.  Her total compensation for 2008 was
$208,397.  She is employed under an agreement dated January 1,
2007.  The employment agreement is for a term of five years from
January 1, 2007 through January 1, 2012.  Her salary for the
first year is $180,000, then $200,000 for years two through four, and finally
$220,000 for year five.  Ms. Ramsey earned a base salary of $157,146
during 2007 along with a bonus of $6,667 for performance criteria she met during
the year.  These earnings, coupled with the $335,442 of stock options
and $10,081 in company-paid health insurance premiums, brought her total
compensation to $509,336 for 2007.  On January 1, 2007, Ms. Ramsey was
granted options to purchase 450,000 shares of our common stock at $2 per
share.  The options vest in tranches of 150,000 each on January 1st of 2010, 2011, and 2012 and
expire on January 1, 2017.  On September 21, 2009, we signed the
Second Amendment to Ms. Ramsey’s employment agreement increasing Mr. Ramsey’s
salary to $75,000 per year.





Mr. Krotine
earned a base salary of $160,000 during 2008 until December 3, 2008 when it was
reduced to $24,000 annually.  In addition, we paid $7,342 in medical
insurance premiums on his behalf, bringing his total compensation for 2008 to
$167,342.  He earned a base salary of $155,248 during
2007.  These earnings, coupled with the $16,545 of stock options and
$5,277 in company-paid health insurance premiums and $5,064 of auto allowance,
brought his total compensation to $182,134 for 2007.  On November 1,
2006, he was awarded options to purchase 321,217 shares of our common stock at
$2 per share.  80,237 of these options vested on November 1, 2007 and
the remaining 240,980 vested on November 1, 2008.  These options
expire on November 1, 2016.  He was also awarded 10,000 options on
February 1, 2007 for service as a director.  These options have an
exercise price of $2 per share, vested on April 1, 2008, and expire on February
1, 2017.  He was employed under an employment agreement that expired
on November 1, 2008.  On September 21, 2009, we entered into a new
employment agreement with Mr. Krotine increasing his salary to $65,000 per year
and awarding him 169,000 stock options to purchase our common stock at $0.51 per
share with a term of ten years.





Outstanding
Equity Awards at Fiscal Year 2009 End


Option
      Awards
            
            Stock
      AwardsEquity
            
            EquityIncentive
            
            IncentiveEquity
            
            
            
            
            
            
            
            
            
            Number
            
            
            
            
            
            Plan
            
            PlanIncentive
            
            
            
            
            
            
            
            
            
            of
            
            Market
            
            Awards:
            
            Awards:Plan
            
            
            
            
            
            
            
            
            
            Shares
            
            Value of
            
            Number
      of
            
            Market
      orNumber
      of
            
            Number
      of
            
            Awards:
            
            
            
            
            
            
            
            
            
            or
      Units
            
            Shares or
            
            Unearned
            
            Payout
      ValueSecurities
            
            Securities
            
            Number
      of
            
            
            
            
            
            
            
            
            
            of
            
            Units
      of
            
            Shares,
            
            of
      UnearnedUnderlying
            
            Underlying
            
            Securities
            
            
            
            
            
            
            
            
            
            Stock
            
            Stock
            
            Units
      or
            
            Shares,
      UnitsUnexercised
            
            Unexercised
            
            Underlying
            
            
            
            
            
            
            
            
            
            That
            
            That
            
            Other
            
            or OtherOptions
            
            Options
            
            Unexercised
            
            Option
            
            Option
            
            Have
            
            Have
            
            Rights That
            
            Rights
      That(#)
            
            (#)
            
            Unearned
            
            Exercise
            
            Expiration
            
            Not
            
            Not
            
            Have
      Not
            
            Have
      NotExercisable
            
            Unexercisable
            
            Options
      (#)
            
            Price
            
            Date
            
            Vested
            
            Vested
            
            Vested
            
            VestedName
      (a)
            
            (b)
            
            (c)
            
            (d)
            
            ($)
      (e)
            
            (f)
            
            (#)
      (g)
            
            ($)
      (h)
            
            (#)
      (i)
            
            ($)
      (j)Richard
      D. Stromback
            
            
            10,000
            
            
            
            0
            
            
            
            
            
            
            
            2.00
            
            
            
            3/01/2017Sally
      J.W. Ramsey
            
            
            0
            
            
            
            450,000
            
            
            
            
            
            
            
            2.00
            
            
            
            1/01/2017F.
      Thomas Krotine
            
            
            321,219
            
            
            
            
            
            
            
            
            
            
            
            .85
            
            
            
            11/01/201610,000
            
            
            
            
            
            
            
            
            
            
            
            1.00
            
            
            
            3/01/2017169,000
            
            
            
            
            
            
            
            .51
            
            
            
            9/21/2019Robert
      G. Crockett
            
            
            110,000
            
            
            
            
            
            
            
            
            
            
            
            .51
            
            
            
            9/15/2018890,000
            
            
            
            
            
            
            
            .51
            
            
            
            9/21/2019Kevin
      P. Stolz
            
            
            25,000
            
            
            
            
            
            
            
            
            
            
            
            1.05
            
            
            
            2/1/201725,000
            
            
            
            25,000
            
            
            
            
            
            
            
            1.05
            
            
            
            2/1/201810,000
            
            
            
            
            
            
            
            
            
            
            
            1.05
            
            
            
            9/17/201810,000
            
            
            
            30,000
            
            
            
            
            
            
            
            1.00
            
            
            
            7/31/2019J.B.
      Smith
            
            
            100,000
            
            
            
            0
            
            
            
            
            
            
            
            1.05
            
            
            
            9/17/2018Rocco
      DelMonaco
            
            
            100,000
            
            
            
            0
            
            
            
            
            
            
            
            1.05
            
            
            
            9/17/2018Joseph
      Nirta
            
            
            
            
            
            
            100,000
            
            
            
            
            
            
            
            1.04
            
            
            
            10/20/2019





37


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





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





Mr. Krotine
was granted 331,217 options under the 2007 Stock Option Plan.  All
options are priced at $2.00 per share and expire in ten
(10) years.  None of the options vested at the time of
issuance.  On November 1, 2007, 80,237 options vested and 240,982
options vested on November 1, 2008.  Mr. Krotine received 10,000
options as part of the 2007 Stock Option Plan for service as a director, which
vested on April 1, 2008.  These options have an exercise price of
$2.00 per share and expire ten (10) years from the date of
issuance.  On September 21, 2009, Mr. Krotine was granted 169,000
additional options priced at $.51 per share with a term of ten (10)
years.  These newly issued options will expire in ten (10) years
(September 15, 2019).





Mr.
Crockett was awarded 330,000 options to purchase shares of our common stock at
$1.05 per share.  None of the options were exercisable at
issuance.  The options vest in 110,000 option increments over a thirty
month period, with the first tranche becoming exercisable on March 15, 2010, the
middle tranche becoming exercisable on September 15, 2010, and the final tranche
becoming exercisable on March 15, 2011.  On September 17, 2009, our
Board re-set the strike price for these options to $.51 per share and adjusted
the vesting of these options so that 110,000 increments each vest on September
15, 2009, March 15, 2010 and September 15, 2010 respectively. The options expire on
September 17, 2018.  On September 21, 2009, Mr. Crockett was granted
670,000 additional options priced at $.51 per share with 167,500 options
exercisable on March 2011, 167,500 options exercisable on September 15, 2011,
167,500 options exercisable on March 15, 2012 and 167,500 options exercisable on
September 15, 2012.  These newly issued options will expire in ten
(10) years (September 15, 2019).


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





38


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





Mr. Nirta
was awarded 100,000 options to purchase shares of our common stock at $1.04 per
share. None of the options were exercisable at issuance. The options vested on
October 20, 2009 and expire on October 20, 2018.





At the
end of 2008, all of the 4,500,000 options available under the 2007 Plan had been
granted.  On December 2, 2008, the Board of Directors authorized the
addition of another 1,000,000 shares to the 2007 Plan.  The table
above indicates options granted under the Plan to certain executives in fiscal
2009.  The balance of the options under the 2007 Plan was granted to
consultants, other employees, and past and current directors.  In
2009, 1,439,000 options were granted under the 2007 Plan, 900,000 were forfeited
and 50,00 were exercised.





Stock
Option Plans





Our Board
of Directors adopted the 2007 Stock Option and Restricted Stock Plan (the “2007
Plan”) on May 9, 2007 and the shareholders approved the Plan on
June 4, 2007. The 2007 Plan authorized us to issue up to 4,500,000 shares
of our common stock for issuance upon exercise of options and grant of
restricted stock awards. On December 2, 2008, the Board of Directors authorized
the addition of another 1,000,000 shares to the 2007 Plan. Since that date, the
number of authorized options under the 2007 Plan has not
increased.  In the fiscal year ended September 30, 2009, we issued
1,379,000 options under the 2007 Plan to our directors, officers and employees,
and 60,000 options were issued to consultants, all of which are subject to
vesting provisions.





The 2007
Plan authorizes us to grant (i) to key employees incentive stock options
and non-qualified stock options and restricted stock awards and (ii) to
non-employee directors and consultants non-qualified stock options and
restricted stock. Our Compensation Committee will administer the Plans by making
recommendations to the board or determinations regarding the persons to whom
options or restricted stock should be granted and the amount, terms, conditions
and restrictions of the awards.





The 2007
Plan allows for the grant of incentive stock options, non-qualified stock
options and restricted stock awards. Incentive stock options granted under the
2007 Plan must have an exercise price at least equal to one hundred percent
(100%) of the fair market value of the common stock as of the date of grant.
Incentive stock options granted to any person who owns, immediately after the
grant, stock possessing more than ten percent (10%) of the combined voting power
of all classes of our stock, or of any parent or subsidiary corporation, must
have an exercise price at least equal to one hundred ten percent (110%) of the
fair market value of the common stock on the date of grant. Non-statutory stock
options may have exercise prices as determined by our Compensation Committee. To
date, no incentive stock options have been granted under the Plan.





39


The
Compensation Committee is also authorized to grant restricted stock awards under
the 2007 Plan. A restricted stock award is a grant of shares of the common stock
that is subject to restrictions on transferability, risk of forfeiture and other
restrictions and that may be forfeited in the event of certain terminations of
employment or service prior to the end of a restricted period specified by the
Compensation Committee.





Compensation
of Directors





J.B.
Smith and Rocco DelMonaco were appointed to our Board of Directors on September
17, 2008. Each received options to purchase 100,000 shares of our common stock
for $1.05 per share. The options become exercisable on September 17, 2009 and
expire on September 17, 2018.  Joseph Nirta was appointed to our Board
on October 20, 2008 and received options to purchase 100,000 of our common stock
for $1.04 per share and which expire on October 20, 2018.





Director
Compensation for fiscal year 2009


Change inPension
      ValueandFees
            
            
            
            
            
            
            
            
            
            
            
            
            
            NonqualifiedEarned
            
            
            
            
            
            
            
            
            
            Non-Equity
            
            DeferredOr
      Paid
            
            Stock
            
            Option
            
            Incentive
      Plan
            
            Compensation
            
            All
      Otherin
      Cash
            
            Awards
            
            Awards
            
            Compensation
            
            Earnings
            
            Compensation
            
            TotalName
      (a)
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)Richard
      D. Stromback (1)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            (1)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-J.B.
      Smith (2)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            76,971
            (2)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            453,259
            (8)
            
            $
            530,230Rocco
      DelMonaco (3)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            76,971
            (3)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            76,971Joseph
      Nirta (7)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            70,483
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            70,483F.
      Thomas Krotine (4)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            (5)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-Robert
      W. Liebig (5)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            (6)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-Donald
      Campion (6)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            (7)
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-
            
            
            $
            -0-





40





(1)
            
            Mr. Stromback
      had 10,000 outstanding vested option awards at an exercise price of $2.00
      per share at fiscal year end 2009.  These options expire on
      March 1, 2017. He resigned as a director on October 1,
    2009.(2)
            
            Reflects
      compensation paid to Sales Attack, LLC, a company wholly-owned by Equity
      11. Mr. Smith is a principal in Equity 11. Of this amount, $29,333 was
      paid in cash while the remainder, $423,926 reflects the value of options
      awarded to Sales Attack.  Mr. Smith had 100,000 outstanding
      vested option awards at an exercise price of $1.05 per share at fiscal
      year end 2009.  These options expire on September 17,
      2018.(3)
            
            Mr.
      DelMonaco had 100,000 outstanding vested option awards at an exercise
      price of $1.05 per share at fiscal year end 2009.  These options
      expire on September 17, 2018.(4)
            
            Mr. Krotine
      had the following options outstanding at fiscal year end
2009:
              · 80,237
      outstanding vested options at an exercise price of $.85 per share which
      expire on November 1, 2016
              · 10,000
      outstanding vested option awards at an exercise price of $1.00 per share
      which expire on March 1, 2017
              · 240,982
      outstanding unvested option awards at an exercise price of $.85 per share
      which expire on November 1, 2016
              · 169,000
      outstanding unvested options at an exercise price of $.51 per share which
      expire on September 21, 2019.
              Mr.
      Krotine resigned as a director on September 15, 2008.(5)
            
            Mr. Liebig
      had 100,000 outstanding option awards at fiscal year end 2008. He resigned
      on July 24, 2008.(6)
            
            Mr. Campion
      had 100,000 outstanding option awards at fiscal year end 2008. He resigned
      on July 13, 2008.(7)
            
            Mr.
      Nirta had 100,000 outstanding option awards at fiscal year end 2009. He
      was appointed a director on October 20,
2008.





Mr.
Stromback did not receive any compensation in 2008 for serving as
Chairman.  Mr. Stromback resigned as a director on October 1,
2009.





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





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





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





Mr.
Morgan resigned as a director on September 15, 2008 and from his employment on
March 26, 2009.  He did not receive any compensation in 2008 for
serving on the Board of Directors.





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





Mr.
Campion, a non-employee director, did not receive any compensation in 2008 for
serving as a director. He resigned on July 13, 2008,





41


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





Effective
September 21, 2009, we entered into an employment agreement with Robert G.
Crockett, under which he serves as the Chief Executive
Officer.  Mr. Crockett  reports to the Chairman of the
Board of Directors.  Mr. Crockett receives 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.  The Crockett Agreement may be terminated prior to the end of
the term by us for cause. If Mr. Crockett’s employment is terminated
without cause or for “good reason,” as defined in the Crockett Agreement, he is
entitled to 50% of salary that would have been paid over the balance of the term
of the Crockett 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 (the “Krotine Agreement”), our COO. The Krotine Agreement is deemed
effective September 21, 2009 (the “Effective Date”) and shall expire on
September 21, 2010. Effective November 1, 2009, Mr. Krotine receives 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. The Krotine Agreement may be terminated prior to the end
of the term by us for cause. If Mr. Krotine’s employment is terminated
without cause or for “good reason,” as defined in the Krotine Agreement, he is
entitled to 50% of salary that would have been paid over the balance of the term
of the Krotine Agreement. Further, a termination within one year of 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 (the “Iannotti Agreement”), our Vice President, General Counsel &
Secretary. Mr. Iannotti  has served as our Vice President, General
Counsel since August 11, 2008. The Iannotti Agreement is deemed effective
September 21, 2009 (the “Effective Date”) and shall expire on September 21,
2012. Effective November 1, 2009, Mr. Iannotti receives 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. The Iannotti Agreement may be terminated prior to the end of the term
by us for cause. If Mr. Iannotti’s employment is terminated without
cause or for “good reason,” as defined in the Iannotti Agreement, he is entitled
to 50% of salary that would have been paid over the balance of the term of the
Iannotti Agreement. Further, a termination within one year after a change
in control shall be deemed to be a termination without cause.





Kevin Stolz
serves as Chief Financial Officer, Controller and Chief Accounting Officer under
an agreement with us effective February 1, 2007.  The agreement
was executed on February 1, 2008 and was terminated on July 28, 2009 and Mr.
Stolz continues to serve on an at-will basis. He reports to the Chief Executive
Officer.





Sally
J.W. Ramsey serves as the Director of Research and Development and New Product
Development.  Her employment agreement is for a term of five years
from January 1, 2007 through January 1, 2012.  Her salary
for the first year is $180,000, then $200,000 for years two through four, and
finally $220,000 for year five but it was reduced to $60,000 effective December
1, 2008.  She reports to the Chief Executive Officer.  On
September 21, 2009, we entered into a Second Amendment To Employment Agreement
with Sally J.W. Ramsey which amends Section 4.1 of her Employment Agreement with
us to provide for an annual salary of $75,000 effective November 1,
2009.


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





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





42


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





The
following table sets forth, as of September 30, 2009, certain information
regarding the beneficial ownership our common stock by: (i) each person
known by the company to be the beneficial owner of more than five percent (5%)
of the outstanding shares of common stock, (ii) each Director and Executive
Officer, and (iii) all Directors and the Executive Officers as a
group.








Beneficially
      Held Shares OutstandingPerson
            Shares
            PercentageEquity
      11/JB Smith(1)
            18,895,038
            36.4%Richard
      Stromback (2)
            11,293,129
            21.7%Sally
      Ramsey (3)
            3,150,000
            6%Rocco
      DelMonaco (4)
            100,000
            *Joe
      Nirta (5)
            100,000
            *Robert
      Crockett (6)
            110,000
            *Daniel
      Iannotti (7)
            110,000
            *Tom
      Krotine (8)
            341,217
            *Kevin
      Stolz (9)
            100,000
            *Directors
      and officers as a group (9 persons):
            34,199,384
            65.7%


* Less
than 1%.


(1)
Includes warrants to acquire 1,178,500 shares, 945,000 shares issuable upon the
exercise of options exercisable within 60 days of September 30, 2009, and
9,299,778 shares issuable upon conversion of 5% preferred stock convertible
within 60 days of September 30, 2009.  These amounts include stock
options to purchase 531,000 shares held by Sales Attack LC and stock options to
purchase 100,000 shares held by JB Smith.  Mr. J.B. Smith is the
Managing Partner of Equity 11, Ltd. and may be deemed to share voting and
dispositive power over the shares held by Equity 11, Ltd and options held by
Sales Attack LC.  Mr. Smith disclaims beneficial ownership of shares
held by Equity 11, Ltd., except to the extent of any pecuniary interest
therein.  Mr. Smith is the managing partner of Sales Attack
LC.  Sales Attack LC provides marketing services to us pursuant to a
Consulting Agreement entered into on September 17, 2008.  The $20,000
monthly obligation of this Agreement was terminated on May 15,
2009.


(2)
Includes 62,500 shares owned beneficially and of record by his wife, Jill
Stromback, but does not include 4,340,000 shares held by Mr. Stromback’s brother
and sister, Doug and Deanna Stromback.  Includes 10,000 shares
issuable upon the exercise of options exercisable within 60 days of September
30, 2009 and also includes 571,428 common shares convertible from 240
convertible preferred shares purchased by Stromback Acquisition Corporation and
warrants to purchase 14,400 common shares issued in connection with that
purchase.


(3)
Includes 3,000,000 shares owned directly and options to acquire 150,000 common
shares.


(4)
Includes options to acquire 100,000 common shares.


(5)
Includes options to acquire 100,000 common shares.


(6)
Includes options to acquire 110,000 common shares.


(7)
Includes options to acquire 110,000 common shares.


(8)
Includes 10,000 shares directly owned and options to acquire 331,217 common
shares.


(9)
Includes options to acquire 100,000 common shares.





43


ITEM
      13.
            
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
    INDEPENDENCE





The
following table identifies the payments and obligations made by us to the Equity
11, an affiliate of the Equity 11 or any person with whom the Equity 11 has a
contractual relationship regarding the Equity 11’s investment in Ecology
Coatings for the past three years:





Payment
      Entity
              Purpose
              Payment
      Amount
              Frequency
              Termination
      Date
              Total
      Payments Made
              Total
      Payments RemainingSeven
      Industries, Ltd. (4)
              Office
      Rent
              $2,951.76
              Monthly
              September
      20, 2010
              $25,591.60(2)
              $25,072.11Sales
      Attack LC (5)
              Marketing
      & Sales Consulting Services
              1)
      $20,000 per month
                2)
      Stock options to purchase 531,000 shares at $1.05 per share
                3)
      Sales commission of 15% of royalties and 3% of product
    sales
              $20,000
      Monthly
              May
      15, 2009
              $169,333(1)
              $0Jim
      Juliano (6)
              Financial
              $7,500
              Monthly
              May
      15, 2009
              $37,500
      (2)
              $0Seven
      Industries, Ltd. (7)
              Promissory
      Notes
              $54,000
              One-Time
              May
      15, 2009
              $54,337
      (3)
              $0JB
      Smith LC (8)
              Promissory
      Note
              $7,000
              One-Time
              Terminated
              $7,010
      (3)
              $0Equity
      11
              Purchase
      of office furniture
              $5,832.12
              One-Time
              November
      14, 2008
              $5,832.12
              $0JB
      Smith LC (9)
              Promissory
      Note
              $7,716.40
              One-Time
              15
      days after demand for payment
              $0
              $7,812.59Equity
      11
              Convertible
      Preferred Shares Dividends
              December
      1, 2009
              One-Time
              If
      not converted prior to dividend date
              
              $121,800
      (11)Equity
      11
              Convertible
      Preferred Shares Dividends
              June
      1, 2010
              One-Time
              If
      not  converted prior to dividend date
              
              $121,800
      (11)Equity
      11 (10)
              Convertible
      Preferred Shares Dividends
              December
      1, 2010
              One-Time
              If
      not converted prior to dividend date
              
              $121,800
      (11)Equity
      11
              Convertible
      Preferred Shares, Series B Dividends
              December
      1, 2009
              One-Time
              If
      not  converted prior to dividend date
              
              $10,975(11)Equity
      11
              Convertible
      Preferred Shares, Series B Dividends
              June
      1, 2010
              One-Time
              If
      not  converted prior to dividend date
              
              $10,975(11)Equity
      11 (10)
              Convertible
      Preferred Shares, Series B Dividends
              December
      1, 2010
              One-Time
              If
      not  converted prior to dividend date
              
              $10,975(11)JB
      Smith LC
              $6500
      Promissory Note
              September
      10, 2009
              One-Time
              15
      days after demand for payment
              $0
              $6,518EQUITY
      11 TOTAL:
              $299,603.72
              $426,752.70




44


(1)
              Includes
      cash payments of $69,333 and issuance of $100,000 in Convertible Preferred
      Securities, Series B.  The May 15, 2009 Convertible Preferred
      Securities Agreement is attached as an exhibit to our Amendment No. 2 to
      S-1 registration statement filed with the SEC on October 20,
      2009.


(2)
            Paid
      through the issuance of Convertible Preferred  Securities,
      Series B.(3)
            Includes
      accrued interest; paid through the issuance of Convertible Preferred
      Securities, Series B.





(4)
            The
      Office Sublease is filed as an exhibit to our Amendment No. 2 to
      S-1  registration statement filed with the SEC on October 20,
      2009.(5)
            The
      September 17, 2008 Consulting Agreement with Sales Attack LLC is filed as
      an exhibit to our Amendment No. 2 to S-1 registration statement filed with
      the SEC on October 20, 2009.  The $20,000 monthly obligation
      under this Agreement was terminated on May 15,
  2009.





(6)
            Mr.
      Juliano’s Consulting Agreement is filed as an exhibit to our Amendment No.
      2 to S-1 registration statement filed with SEC on October
      20,2009.(7)
            These
      promissory notes are filed as exhibits to our Amendment No. 2 to
      S-1  registration statement filed with the SEC on October 20,
      2009.





(8)
            This
      promissory note is filed as an exhibit to our Amendment No. 2 to S-1
      registration statement filed with the SEC on October 20,
    2009.(9)
            This
      promissory note is filed as an exhibit to our Amendment No. 2 to S-1
      registration statement filed with the SEC on October 20,
    2009.





(10)
            We
      have assumed that the Equity 11 will convert these preferred shares to
      common stock prior to the next scheduled dividend date.(11)
            We
      have shown dividend payments for preferred shares until December 1, 2010
      but these dividends payments will continue after this date unless the
      Equity 11 converts the preferred shares to common stock.  We
      have shown dividend payments for Series B preferred shares based on the
      number of Series B preferred owned by the Equity 11 as of August 1,
      2009.  Dividend payments for Series B preferred shares will
      continue after December 1, 2010 unless the Equity 11 converts the
      preferred shares to common stock.





45


Equity
11, its affiliates and all persons who have a contractual relationship with the
Equity 11 have not had any prior transactions with us other than the
transactions described in the table above and the August 28, 2008 Securities
Purchase Agreement and the May 15, 2009 Convertible Preferred Securities
Agreement.





On August
12, 2008, one of our outside law firms, Butzel Long PC entered into an
Investigation Services Agreement with Stealth Investigations, LLC for
investigative services associated with the departure of our prior general
counsel, Adam Tracy.  Stealth Investigations, LLC is owned by J.B.
Smith, the managing partner of Equity 11 and one of our Directors.  At
September 30, 2009, we owed $6,711 to Butzel Long for these
services.  This amount is included in the accounts payable balance
shown on the consolidated balance sheets included in this Form
10-K.





On
September 17, 2008, we entered into a Consulting Agreement with RJS
Consulting LLC (“RJS”).  RJS is wholly owned by our former Chairman,
Richard D. Stromback.  Under the Agreement, RJS will provide
directorship services and services relating to generating new
revenue.  RJS will be paid $16,000/month. In addition, RJS will be
paid based on new revenue generated from RJS’s efforts — 15% of collected new
gross licensing and royalty revenue and 3% of new collected gross revenue from
product sales.  To date, we have not paid any commissions under this
Agreement.  We will also reimburse RJS for various event, legal,
office and IT costs.  We paid $2,700 under this agreement in fiscal
year 2008 and $107,884.35 in fiscal year 2009.  Additionally, we paid
$45,269.51 under this agreement on October 1, 2009 in connection with SAC’s
$240,000 investment in us on that date (we netted $120,000).





On
September 17, 2008, we entered into a Consulting Agreement with DAS
Ventures LLC (“DAS”).  DAS is wholly owned by the brother of our
Chairman (Richard D. Stromback), Douglas Stromback, who is also a
shareholder.  Under the Agreement, DAS will provide services relating
to generating new revenue.  DAS will be paid based on new revenue
generated from DAS’s efforts — 15% of collected gross licensing and royalty
revenue and 3% of collected gross revenue from product sales.  To
date, we have not paid any commissions under this Agreement.





On
September 17, 2008, we entered into a Consulting Agreement with Sales
Attack LC (“Sales Attack”).  Sales Attack is wholly owned by J.B.
Smith, a member of our Board of Directors and owner of Equity 11, Ltd., the
holder of our 5% convertible preferred shares.  Under the Agreement,
Sales Attack will receive 15% of collected gross licensing and royalty revenue
generated from Sales Attack’s efforts  and 3% of collected gross
revenue from product sales.  The agreement also included a monthly
payment of $20,000 but that provision was terminated effective May 15,
2009.  To date, we have not paid any commissions under this
Agreement.





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





We had
unsecured notes payable to Seven Industries, a company that is wholly owned by
J.B. Smith, a member of our Board of Directors and managing partner of Equity 11
outstanding during the year ending September 30, 2009.  The notes bore
interest at 5% per annum with principal and interest due at June 30,
2009.  The highest principal and interest balance on these notes was
$54,985 on May 15, 2009.  The notes and accrued interest could be
converted into shares of our common stock at $.66 per share at the sole
discretion of the note holder.  The notes and the accrued interest
then outstanding were paid off through the issuance of Convertible Preferred
Shares, Series B, on May 15, 2009





From
November of 2003 through September 30, 2006, Richard D. Stromback incurred
expenses for which he was not reimbursed.  The balance at
September 30, 2009 was $49,190.  The highest aggregate amount
owed to him during the fiscal year ended September 30, 2009 was
$49,190.  We made no payments on this balance during the fiscal year
ended September 30, 2009.  It was paid in full on October 1,
2009.





On
December 15, 2003, we entered into a promissory note with Deanna Stromback,
the sister of Richard D. Stromback and a former director, under which it
borrowed a total of $173,030.  The note bears interest at the rate of
4% per annum and is due and payable on December 31, 2009.  She
converted $27,500 of the principal amount of the note into 3,000,000 shares of
common stock on March 1, 2005.  At September 30, 2009, the
outstanding principal balance of this note was $110,500 plus accrued interest of
$13,235.  No payments of principal and/or interest were made on this
note during the fiscal year ended September 30, 2009.  During the
fiscal year ended September 30, 2009, the highest principal amount owed on
this note was $110,500.  On February 25, 2009, this maturity date for
this note was extended until December 31, 2009.





46


On
August 10, 2004, we entered into a promissory note with Douglas Stromback,
the brother of Richard D. Stromback and Deanna Stromback and a former director,
under which it borrowed a total of $200,000.  He converted $27,500 of
the principal amount into 3,000,000 shares of common stock on March 1,
2005.  The note bears interest at the rate of 4% per annum and is due
and payable on December 31, 2009.  At September 30, 2009 the
outstanding principal balance of this note was $133,000 plus accrued interest of
$15,936.  No payments of principal and/or interest were made on this
note during the fiscal year ended September 30, 2009.  During the
fiscal year ended September 30, 2009, the highest principal amount owed on
this note was $133,000.  On February 24, 2009, this maturity date for
this note was extended until December 31, 2009.





On
November 11, 2008, we settled our lawsuit against Trimax Gaming, LLC and
Daryl Repokis pending in Oakland County Circuit Court, Pontiac,
Michigan.  We entered into a new, one year Consulting Services
Agreement with Trimax, LLC (“Trimax”).  According to our records,
Trimax beneficially owns at least 5% of our common stock.  Under the
agreement, Trimax will provide services to generate new revenue for us. Trimax
will be paid $7,500/month.  In addition, Trimax will be paid based on
new revenue generated from Trimax’s efforts — 15% of collected new gross
licensing and royalty revenue and 3% of new collected gross revenue from product
sales.  This agreement was terminated in March 2009.





On
September 10, 2009, we executed a promissory note in favor of Sky Blue Ventures,
LLC (“Sky Blue”) in the principal amount of Six Thousand Five Hundred Dollars
($6,500) bearing interest at five percent (5%) per annum.  The note is
payable in full within 15 days written demand from Sky Blue.  Sky Blue
is 65% owned by J.B. Smith, one of our directors and the managing partner
of Equity 11, Ltd. which holds shares of our 5% Convertible Preferred
Shares and 5% Convertible Preferred Shares, Series B.  Sky Blue, at
its option, may demand payment of all amounts owed under the note within fifteen
(15) days following our completion of either (i) an underwritten
public offering of its securities or (ii) a private offering exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended
which results in proceeds, net of underwriting discounts and commissions, in
excess of One Million Dollars ($1,000,000) (“New Offering”). The amounts due
under the note may also be accelerated upon an event of default or converted
into common shares upon our completing a New Offering.  At
September 30, 2009, the outstanding amount balance of this note was $6,518,
including $18 of accrued interest.  No payments of principal and/or
interest were made on this note during the fiscal year ended September 30,
2009.





On May 5,
2009, we entered into a promissory note with JB Smith LC, which is an affiliate
of the Equity 11 and controlled by JB Smith, a director on our Board of
Directors, under which we borrowed a total of $7,000.  The note bears
interest at the rate of 5% per annum and is due and payable on fifteen (15) days
written notice from JB Smith LC.  At September 30, 2009, the
outstanding principal balance of this note was $0.  This note was
converted into our common stock on May 15, 2009 at a conversion price of $.08
per share.





On August
11, 2009, we executed a promissory note in favor JB Smith LC dated July 1, 2009
in the principal amount of Seven Thousand Seven Hundred Sixteen Dollars and
Forty Cents ($7,716.40) bearing interest at five percent (5%) per
annum.  The note is payable in full within 15 days written demand from
JB Smith LC.  JB Smith LC is wholly owned by J.B. Smith, one of our
directors and the managing partner of Equity 11, Ltd. which holds shares of our
5% Convertible Preferred Shares and 5% Convertible Preferred Shares, Series
B.  JB Smith LC, at its option, may demand payment of all amounts owed
under the note within fifteen (15) days following our completion of either
(i) an underwritten public offering of its securities or (ii) a
private offering exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, which results in proceeds, net of
underwriting discounts and commissions, in excess of One Million Dollars
($1,000,000) (“New Offering”). The amounts due under the note may also be
accelerated upon an event of default or converted into common shares upon our
completing a New Offering.At
September 30, 2009, the outstanding balance of this note was $7,813,
including $96 of accrued interest.  No payments of principal and/or
interest were made on this note during the fiscal year ended September 30,
2009.


47





On July
28, 2009, we and Kevin P. Stolz, our Chief Financial and Accounting Officer,
agreed to terminate Mr. Stolz’s Employment Agreement dated February 1,
2008.  Mr. Stolz remains employed by us in his current
capacity.  Effective September 1, 2009, Mr. Stolz’s salary was reduced
to $42,000 per year and he receives $1,000 per month for medical insurance in
lieu of participating in our medical plan.   Mr. Stolz also received
an additional stock option award to purchase 40,000 shares of our common stock
at $1 per share.





On
September 21, 2009, we entered into an employment agreement with Robert G.
Crockett (the “Crockett Agreement”), our CEO. Mr. Crockett has served as our CEO
since September 15, 2008. The Crockett Agreement is deemed effective September
21, 2009 (the “Effective Date”) and will expire on September 21, 2012.
Mr. Crockett receives 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 on each of 12 months, 18 months and 24 months
from Mr. Crockett’s initial date of employment (September 15, 2008) and the
re-set strike price for such options to $.51 per
share.  Mr. Crockett was also granted stock options to purchase
670,000 shares of our common stock, one-quarter of which shall vest at each of
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 Crockett
Agreement may be terminated prior to the end of the term by us for
cause.  If Mr. Crockett’s employment is terminated without cause
or for “good reason,” as defined in the Crockett Agreement, he is entitled to
50% of salary that would have been paid over the balance of the term of the
Crockett 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 (the “Iannotti Agreement”), our Vice President, General Counsel &
Secretary. Mr. Iannotti has served as our Vice President, General Counsel
since August 11, 2008. The Iannotti Agreement is deemed effective September 21,
2009 (the “Effective Date”) and shall expire on September 21, 2012. Effective
November 1, 2009, Mr. Iannotti receives 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 on each of 12 months, 18 months and 24
months 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 each of
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 Iannotti
Agreement may be terminated prior to the end of the term by us for cause.
If Mr. Iannotti’s employment is terminated without cause or for “good
reason,” as defined in the Iannotti Agreement, he is entitled to 50% of salary
that would have been paid over the balance of the term of the Iannotti
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 (the “Krotine Agreement”), our COO. The Krotine Agreement is deemed
effective September 21, 2009 (the “Effective Date”) and shall expire 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
each of 6, 12, 18 and 24 months from September 21, 2009 with an exercise price
of $.51 per share. The Krotine Agreement may be terminated prior to the end of
the term by us for cause. If Mr. Krotine’s employment is terminated
without cause or for “good reason,” as defined in the Krotine Agreement, he is
entitled to 50% of salary that would have been paid over the balance of the term
of the Krotine Agreement. Further, a termination within one year of a change in
control shall be deemed to be a termination without cause.





On
September 21, 2009, we entered into a Second Amendment To Employment Agreement
with Sally J.W. Ramsey which amends Section 4.1 of 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.





48


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





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





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


For
      the Year Ended September 30,2009
            
            2008Audit
      Fees
            $38,500
            
            $
            37,500Audit
      Related Fees
            33,900
            
            
            22,500Tax
      Fees
            14,580
            
            
            11,771All
      Other Fees
            -0-
            
            
            -0-Total
      Fees
            $86,980
            
            $
            71,771





We
engaged UHY LLP as our independent auditor on August 30, 2007. This
engagement was disclosed in a Form 8-K on that date. The agreed upon audit
and audit related fees for the fiscal year ended September 30, 2009 totaled
approximately $61,900.





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





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





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





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





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





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





49


ITEM
15.  EXHIBITS





Exhibit
              Number
            Description2.1
            Agreement
      and Plan of Merger entered into effective as of April 30, 2007, by
      and among OCIS Corp., a Nevada corporation, OCIS-EC, INC., a Nevada
      corporation and a wholly-owned subsidiary of OCIS, Jeff W. Holmes, R. Kirk
      Blosch and Brent W. Schlesinger and ECOLOGY COATINGS, INC., a California
      corporation, and Richard D. Stromback, Deanna Stromback and Douglas
      Stromback. (2)3.2
            Amended
      and Restated Articles of Incorporation of Ecology Coatings, Inc., a Nevada
      corporation.(2)3.3
            By-laws.
      (1)3.4
            Certificate
      of Designation of 5% Convertible Preferred Shares dated August 29, 2008.
      (9)3.5
            Certificate
      of Designation of 5% Convertible Preferred Shares dated September 26,
      2008. (14)4.1
            Form
      of Common Stock Certificate. (2)10.1
            Promissory
      Note between Ecology Coatings, Inc., a California corporation, and Richard
      D. Stromback, dated November 13, 2003. (2)10.2
            Promissory
      Note between Ecology Coatings, Inc., a California corporation, and Deanna
      Stromback, dated December 15, 2003. (2)10.3
            Promissory
      Note between Ecology Coatings, Inc., a California corporation, and Douglas
      Stromback, dated August 10, 2004. (2)10.4
            Registration
      Rights Agreement by and between Ecology Coatings, Inc., a Nevada
      corporation, and the shareholder of OCIS, Corp., a Nevada corporation,
      dated as of April 30, 2007. (2)10.5
            Consulting
      Agreement among Ecology Coatings, Inc., a Nevada corporation, and DMG
      Advisors, LLC, a Nevada limited liability company dated July 27,
      2007. (2)10.6
            Employment
      Agreement between Ecology Coatings, Inc., a California corporation and
      Kevin Stolz dated February 1, 2007. (2)10.7
            Employment
      Agreement between Ecology Coatings, Inc., a California corporation and
      Sally J.W. Ramsey dated January 1, 2007. (2)10.8
            License
      Agreement with E.I. Du Pont De Nemours and Ecology Coatings, Inc., a
      California corporation, dated November 8, 2004.
(2)10.9
            License
      Agreement between Ecology Coatings, Inc., a California corporation and Red
      Spot Paint & Varnish Co., Inc., dated May 6, 2005.
      (2)10.10
            Lease
      for office space located at 35980 Woodward Avenue, Suite 200,
      Bloomfield Hills, Michigan 48304. (2)10.11
            Lease
      for laboratory space located at 1238 Brittain Road, Akron,
      Ohio  44310. (2)10.12
            2007
      Stock Option and Restricted Stock Plan. (2)10.13
            Form
      of Stock Option Agreement.  (2)10.14
            Form
      of Subscription Agreement between Ecology Coatings, Inc., a California
      corporation and the Investor to identified
      therein.  (2)10.15
            Consulting
      Agreement by and between Ecology Coatings, Inc., a California corporation,
      and MDL Consulting Group, LLC, a Michigan limited liability company dated
      April 10, 2006.  (2)10.16
            Consulting
      Agreement by and between Ecology Coatings, Inc., a California corporation,
      and MDL Consulting Group, LLC, a Michigan limited liability company dated
      July 1, 2006.  (2)10.17
            Antenna
      Group Client Services Agreement by and between Ecology Coatings, Inc., a
      California corporation and Antenna Group, Inc. dated March 1, 2004, as
      amended effective as of July 6, 2007.  (2)10.18
            Consulting
      Agreement by and between Ecology Coatings, Inc., a California corporation
      and Kissinger McLarty Associates, date July 15, 2006, as
      amended.  (2)10.19
            Business
      Advisory Board Agreement by and between Ecology Coatings, Inc., a
      California corporation, and The Rationale Group, LLC, a Michigan limited
      liability corporation, dated September 1,
    2007.  (2)10.20
            Allonge
      to Promissory Note dated November 13, 2003 made in favor of Richard D.
      Stromback dated February 6, 2008. (3)10.21
            Allonge
      to Promissory Note dated December 15, 2003 made in favor of Deanna.
      Stromback dated February 6, 2008. (3)10.22
            Allonge
      to Promissory Note dated August 10, 2003 made in favor of Douglas
      Stromback dated February 6, 2008. (3)10.23
            Third
      Allonge to Promissory Note dated February 28, 2006 made in favor of Chris
      Marquez dated February 6, 2008. (3)10.24
            Employment
      Agreement with Kevin Stolz dated February 1, 2008. (4)10.25
            Promissory
      Note made in favor of George Resta dated March 1, 2008.
  (5)10.26
            Promissory
      Note made in favor of Investment Hunter, LLC dated March 1, 2008.
      (5)10.27
            Scientific
      Advisory Board Agreement with Dr. Robert Matheson dated February 18, 2008.
      (6)10.28
            Promissory
      Note made in favor of Mitch Shaheen dated September 18, 2008.
      (7)10.29
            Promissory
      Note made in favor of Mitch Shaheen dated July 10, 2008.
    (8)10.30
            Extension
      of Promissory Note made in favor of Richard D. Stromback dated July 10,
      2009. (8)10.31
            Extension
      of Promissory Note made in favor of George Resta dated July 14, 2008.
      (8)10.32
            Extension
      of Promissory Note made in favor of Investment Hunter, LLC dated July 14,
      2008. (8)10.33
            Securities
      Purchase Agreement with Equity 11, Ltd. dated August 28, 2008.
      (9)10.34
            First
      Amendment to Employment Agreement of Richard D. Stromback dated August 27,
      2008. (9)10.35
            First
      Amendment to Employment Agreement of Kevin Stolz dated August 29, 2008.
      (9)10.36
            Consulting
      Services Agreement with RJS Consulting LLC dated September 17, 2008.
      (10)10.37
            Consulting
      Services Agreement with DAS Ventures LLC dated September 17, 2008.
      (10)10.38
            Consulting
      Services Agreement with Sales Attack LLC dated September 17, 2008.
      (10)10.39
            First
      Amendment to Securities Purchase Agreement with Equity 11, Ltd. dated
      October 27, 2008. (11)10.40
            Consulting
      Services Agreement with Trimax, LLC dated November 11, 2008.
      (12)10.41
            Promissory
      Note made in favor of Seven Industries date December 24, 2008.
      (13)10.42
            Promissory
      Note dated January 8, 2009 in favor of Seven Industries.
    (15)10.43
            Amendment
      of Seven Industries December 24, 2008 Promissory Note.
  (15)10.44
            Second
      Amendment To Securities Purchase Agreement. (16)10.45
            Convertible
      Preferred Securities Agreement dated May 15, 2009. (24)10.46
            Warrant
      W-6. (16)10.47
            Warrant
      W-8. (18)10.48
            Warrant
      W-9. (19)10.49
            Warrant
      W-10. (20)10.50
            Warrant
      W-11. (21)10.51
            Warrant
      W-12. (22)10.52
            Promissory
      Note in favor of JB Smith LC dated May 5, 2009. (23)10.53
            DMG
      Advisors Consulting and Settlement Agreements. (26)10.54
            Termination
      of Kevin P. Stolz’s Employment Agreement. (27)10.55
            Promissory
      Note in favor of Chris Marquez dated February 28,
  2006.(30)10.56
            First
      Allonge to Promissory Note in favor of Chris Marquez dated December 1,
      2006.(30)10.57
            Second
      Allonge to Promissory Note in favor of Chris Marquez dated July
      26,2007.(30)10.58
            Consulting
      Services Agreement with Jim Juliano dated January 5, 2009.
      (30)10.59
            First
      Amendment to Employment Agreement of Sally J.W. Ramsey dated December 15,
      2008. (30)10.60
            Employment
      Agreement of Richard Stromback dated December 28, 2007.
    (28)10.61
            Office
      Sublease dated September 30, 2008. (29)10.62
            Collaboration
      Agreement with Reynolds Innovations dated August 21, 2009.
      (31)10.63
            Securities
      Purchase Agreement with Stromback Acquisition Corporation dated September
      30, 2009. (32)10.64
            Employment
      Agreement with Robert G. Crockett dated September 21, 2009.
      (33)10.65
            Employment
      Agreement with Daniel V. Iannotti dated September 21, 2009.
      (33)10.66
            Employment
      Agreement with F. Thomas Krotine dated September 21, 2009.
      (33)10.67
            Second
      Amendment of Employment Agreement with Sally J.W. Ramsey dated September
      21, 2009. (33)10.68
            Promissory
      Note in favor of Sky Blue Ventures in the amount of $6,500 dated September
      10, 2009. (34)10.69
            Promissory
      Note in favor of JB Smith LC in the amount of $7,716.40 dated August 11,
      2009. (35)21.1
            List
      of subsidiaries. (2)23.1*
            Consent
      of UHY LLP, an independent registered public accounting firm for
      incorporation of audit opinion by reference into Form
  S-831.1*
            Certification
      of the Chief Executive Officer required by Rule 13a-14(a) or Rule
      15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2*
            Certification
      of the Chief Financial Officer required by Rule 13a-14(a) or Rule
      15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1*
            Certification
      of the Chief Executive Officer and Chief Financial Officer Certifications
      pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002.





50


*           Filed
herewith.





(1)
Incorporated by reference from OCIS’ registration statement on Form SB-2
originally filed with the SEC on September 28, 2002 and amended on September 20,
2002, November 7, 2002 and March 27, 2003.





(2)
Incorporated by reference from our Form 8-K filed with the SEC on July 30,
2007.





(3)
Incorporated by reference from our From 8-K filed with the SEC on February 12,
2008.





(4)
Incorporated by reference from our Form 8-K filed with the SEC on February 22,
2008.





(5)
Incorporated by reference from our Form 8-K filed with the SEC on March 20,
2008.





(6)
Incorporated by reference from our Form 8-K filed with the SEC on April 3,
2008.





(7)
Incorporated by reference from our Form 8-K filed with the SEC on June 24,
2008.





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





51


(9)
Incorporated by reference from our Form 8-K filed with the SEC on August 29,
2008.





(10)
Incorporated by reference from our Form 8-K filed with the SEC on September 19,
2008.





(11)
Incorporated by reference from our Form 8-K filed with the SEC on October 28,
2008.





(12)
Incorporated by reference from our Form 8-K filed with the SEC on November 13,
2008.





(13)
Incorporated by reference from our Form 10-K filed with the SEC on December 24,
2008.





(14)
Incorporated by reference from our Form 8-K filed with the SEC on September 30,
2008.





(15)
Incorporated by reference from our Form 8-K filed with the SEC on January 9,
2009.





(16)
Incorporated by reference from our Form 8-K filed with the SEC on January 23,
2009.





(17)
Incorporated by reference from our Form 8-K filed with the SEC on February 12,
2009.





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





(19)
Incorporated by reference from our Form 8-K filed with the SEC on February 27,
2009.





(20)
Incorporated by reference from our Form 8-K filed with the SEC on March 10,
2009.





(21)
Incorporated by reference from our Form 8-K filed with the SEC on March 27,
2009.





(22)
Incorporated by reference from our Form 8-K/A filed with the SEC on April 16,
2009.





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





(24)
Incorporated by reference from our Form 8-K filed with the SEC on May 20,
2009.





(25)
Incorporated by reference from our Form 8-K filed with the SEC on August 5,
2009.





(26)
Incorporated by reference from our Form 8-K filed with the SEC on July 23,
2009.





(27)
Incorporation by reference from our Form 8-K filed with the SEC on July 29,
2009.





(28)
Incorporation by reference from our Form 8-K filed with the SEC on January 3,
2008.





(29)
Incorporation by reference from our Amendment No. 1 to S-1 registration
statement filed with the SEC on September 10, 2009.





(30)
Incorporation by reference from our Amendment No. 2 to S-1 registration
statement filed with the SEC on October 20, 2009.





(31)
Incorporation by reference from our Form 8-K filed with the SEC on August 24,
2009.





(32)
Incorporation by reference from our Form 8-K filed with the SEC on October 2,
2009.





(33)
Incorporation by reference from our Form 8-K filed with the SEC on September 23,
2009.





(34)
Incorporation by reference from our Form 8-K filed with the SEC on September 11,
2009.





(35)
Incorporation by reference from our Form 8-K filed with the SEC on August 11,
2009.


52


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report on Form 10-K/A to be signed
on its behalf by the undersigned, thereunto duly authorized, this XX day of
March, 2010.





Date:
            May
      21, 2010
            
            ECOLOGY
      COATINGS, INC.Registrant)By:
      /s/ Robert G. CrockettRobert
      G. CrockettIts:  Chief
      Executive Officer(Authorized Officer)By:  /s/
      Kevin StolzKevin
      StolzIts:  Chief
      Financial Officer(Principal
      Financial Officer and Principal Accounting
  Officer





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


Signatures
            
            Title
            
            Date/s/ Robert G. Crockett
              Robert
      G. Crockett
            
            Chief
      Executive Officer
              (Principal
      Executive Officer)
            
            May
      21, 2010/s/Kevin P. Stolz
            
            Chief
      Financial Officer
              (Principal
      Financial Officer and Principal Accounting Officer)
            
            May
      21, 2010Kevin
      P. Stolz/s/ J.B. Smith
              J.B.
      Smith
            
            Director
            
            May
      21, 2010/s/ Rocco DelMonaco
              Rocco
      DelMonaco
            
            Director
            
            May
      21, 2010/s/ Joseph Nirta
            
            Director
            
            May
      21, 2010Joseph
      Nirta








53


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.





As
discussed in Note 1, "Summary of Significant Accounting Policies", the
consolidated financial statements have been restated to correct loss per
share.





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, except with respect to the


matters discussed in Notes 1, 8 and 10,


as to which the date is February 16, 2010





54














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.


55





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.








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, as restated
            
            $
            (7,779,611)
            
            
            $
            (9,002,037)Basic
      and diluted net loss per share, as restated
            
            $
            (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.


56














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.


57








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.


58











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.


59











ECOLOGY
COATINGS, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





SEPTEMBER
30, 2009 AND SEPTEMBER 30, 2008





Note
1 — Summary of Significant Accounting Policies





Description of
the Company.We were originally incorporated on March 12, 1990
in California (“Ecology-CA”).  Our current entity was incorporated in
Nevada on February 6, 2002 as OCIS Corp. (“OCIS”).  OCIS
completed a merger with Ecology-CA on July 26, 2007 (the “Merger”). In the
Merger, OCIS changed its name from OCIS Corporation to Ecology Coatings,
Inc.  We develop 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
(Restated).We restated our basic and diluted net loss per
share to include preferred stock dividends and the beneficial conversion feature
associated with the issuance of preferred stock in the calculation of net loss
per share.  These preferred stock dividends and associated beneficial
conversion features are added to the net loss to arrive at net loss available to
common shareholders.





Basic
loss per share is computed by dividing the net loss available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period.  Diluted loss per share is computed by
dividing the net loss available to common shareholders by the weighted average
number of shares of common stock and potentially dilutive securities outstanding
during the period.  Potentially dilutive shares consist of the
incremental common shares issuable upon the exercise of stock options and
warrants and the conversion of convertible debt and convertible preferred stock.
Potentially dilutive shares are excluded from the weighted average number of
shares if their effect is anti-dilutive.  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.





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.





60


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.





61


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 hve 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.





62


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





63





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:





64





·
            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.





65


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.





66


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.





67


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





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.





68


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.





69


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.





70


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 TermOutstanding
      as of September 30, 2008
            $1.83
            4,642,119
            9.2Granted
            $.61
            1,439,000
            9.8Exercised
            $.50
            50,000
            7.8Forfeited
            $2.13
            900,000
            7.8Outstanding
      as of September 30, 2009
            $1.13
            5,131,119
            8.5Exercisable
            $1.06
            2,925,119
            6.7








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





71


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.





72


Note
10 — Subsequent Events





We evaluated
subsequent events for potential recognition and/or disclosure for the period
beginning September 30, 2009 through December 22, 2009, the date the
consolidated financial statements were originally issued.  We have extended
the date of our evaluation through February 16, 2010 and concluded there were no
other events or transactions occurring during this period that required
recognition or additional disclosure in the financial statements.





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, 2009, 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.