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

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

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

ITEM 1. DESCRIPTION OF BUSINESS

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

Operating Results

Three Months Ended December 31, 2011 and 2010

Revenues. We generated $2,049 and $2,470 in revenues from product sales for the three months ended December 31, 2011 and December 31, 2010, respectively. Revenues for the 2011 period came from three customers and revenues for the 2010 period came from one customer

Officer Salaries and Fringe Benefits. The increase of approximately $29,000 in such expenses for the three months ended December 31, 2011 compared to the three months ended December 31, 2010 is the result of the increase in the salary of two officers effective May 15, 2011, and an increase in health care expense due to the addition of three new employees.

Professional Fees. The increase of approximately $63,000 in these expenses for the three months ended December 31, 2011 compared to the three months ended December 31, 2010 is due to $18,500 in audit fees associated with the filing of our 10-K for the fiscal year ended September 30, 2011. For fiscal year 2010, the filing did not take place until January 12, 2011. Because of this, a portion of the audit billings were not received and recorded until after December 31, 2010.

Other General and Administrative. These expenses declined by approximately $2,000 for the three months ended December 31, 2011 compared to the three months ended December 31, 2010. Payroll and related expenses related to the hiring of three new employees in May 2011 and one additional employee in October 2011 of approximately $70,000 and $12,000 in fees paid to our chairman in the 2011 period were offset by a reduction in options expense for the same period.

Operating Losses. The increased operating loss of approximately $90,000 between the reporting periods is explained in the discussion above.

Income From Forgiveness of Payables and Debt. This income for the three months ended December 31, 2011 came from the conclusion of a settlement with one of our law firms with whom we have an ongoing working relationship as well as the settlement of a number of notes owed to related parties. The latter amounts were settled through the issuance of shares equal at a price equal to $.50 per share. Our stock was trading at $.06 per share at the time the shares were issued.

Interest Expense. The decrease of approximately $10,000 for the three months ended December 31, 2011 compared to the three months ended December 31, 2010 results from a decrease in average outstanding debt in the current period. This decrease in average outstanding debt occurred as a result of those settlements which occurred in early March 2011.

Income Tax Provision. No provision for income tax benefit from net operating losses has been made for the three months ended December 31, 2011 and 2010 as we have fully reserved the asset until realization is more likely than not.

Net Loss. The change from a net loss of $423,939 for the three months ended December 31, 2010 compared to net loss of $277,139 for the three months ended December 31, 2011 is explained in the foregoing discussions of the various expense categories as well as in the discussion of Income From Forgiveness of Payables and Debt.

Basic and Diluted Loss per Share. The change in basic and diluted net loss per share for the three months ended December 31, 2011 reflects the change in net loss position discussed above as well as by the increase in weighted average shares outstanding during the three months ended December 31, 2011. The net loss was further increased by preferred dividend - beneficial conversion. This is because our newly issued convertible preferred shares can be converted to common shares at $0.06 per share. On December 31, 2011, our common shares were trading at $0.12 per share.

Liquidity and Capital Resources

Cash as of December 31, 2011 and September 30, 2011 totaled $30,197 and $71,784, respectively. The decrease reflects cash used in operations of $293,558 and cash used to purchase fixed and intangible assets of $18,030. This usage was offset by the issuance of $270,000 in convertible preferred stock.

We are a company that has failed to generate significant revenues as yet and have incurred an accumulated deficit of $29,243,330. $17,990,695 of this amount is due to non-cash items, including options expense, the issuance of warrants, preferred stock dividends paid with preferred stock, beneficial conversion provisions associated with issuances of preferred stock and certain debt, and stock issued to pay for services, payables, and debt extensions. We have incurred losses primarily as a result of general and administrative expenses, salaries and benefits, professional fees, and interest expense. Since our inception, we have generated very little revenue. We have received an unqualified audit report from our independent auditors that includes an explanatory paragraph describing their substantial doubt about our ability to continue as a going concern.

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

Historically, we have financed operations primarily through the issuance of debt and the sale of equity securities. On February 28, 2011, we entered into agreements with Fairmount Five ($2,400,000) and John Bonner ($120,000) to sell them our Convertible Preferred Shares, Series C. Since that date, we have sold $2,135,000 of such Series C shares leaving an additional $385,000 to sell to Fairmount Five in fiscal year 2012.

As of December 31, 2011, we were in default on approximately $243,500 in principal of short term debt, plus $54,750 in accrued interest. On December 30, 2011, Mr. Shaheen's motion for summary judgment was granted and a judgment in the amount of $604,330 was entered against us in the Shaheen v. Ecology Coatings, Inc. litigation. 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 the spring of 2012 through private or public financings to continue our operations. Such financing could include equity financing, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to make acquisitions and borrow from other sources.

During our last fiscal year ended September 30, 2011, we relied on the sale of convertible preferred securities and the issuance of debt to fund our operations. We raised $270,000 from the sale of Convertible Preferred Series C shares during the quarter ended December 31, 2011. After December 31, 2011, we had only $385,000 in additional funds available to us under our investment agreement with Fairmount Five. At our current rate of cash use, such funds will last only until April 2012. If we are unable to raise additional capital by April 2012, we may be forced to curtail our operations or seek bankruptcy protection.

Off-Balance Sheet Arrangements

See Note 5 - Commitments and Contingencies - to the Consolidated Financial Statements in this Form 10-Q.

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 product sales are recognized on the date that the product is shipped. 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 from forgiveness of payables and debt. Income from the forgiveness of payables and debt is recognized when all of the conditions associated with the forgiveness have been met.

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

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

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

Patents. It is our policy to capitalize costs associated with securing a patent. Costs consist of legal and filing fees. Once a patent is issued, it is amortized on a straight-line basis over its estimated useful life. For purposes of the preparation of the audited, consolidated financial statements, 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. Employee and director stock-based compensation expense is measured utilizing 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. Our valuation method uses a Black-Scholes option pricing model. In so doing, we estimate certain key assumptions used in the model.