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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For
the fiscal year ended December 31, 2006
 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 000-20333
 Nocopi Technologies, Inc.
  Maryland
    
    87-0406496(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)9C Portland Road, West Conshohocken, PA
    
    19428(Address of principal executive offices)
    
    (Zip Code)
 (610) 834-9600
  Title of each class
    
    Name of each exchange on which registeredNone
    
    Not Applicable
   
  
  o
 þ o
 o
 o þ
 $766,500
 $26,465,000
 (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
  DOCUMENTS INCORPORATED BY REFERENCE
  o þ




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##### 



NOCOPI
TECHNOLOGIES, INC.
 TABLE OF CONTENTS
 Item No.
    
    Page No.Part I1. Business
    
    
    12. Description of Property
    
    
    63. Legal Proceedings
    
    
    64. Submission of Matters to a Vote of Security Holders
    
    
    6Part II5. Market for Common equity, related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
    
    
    66. Managements Discussion and Analysis of Results of Operations and Financial
Condition
    
    
    77. Financial Statements and Supplementary Data
    
    
    128. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    128A. Controls and Procedures
    
    
    128AT. Internal Control Over Financial Reporting
    
    
    138B. Other Information
    
    
    13Part III9. Directors, Executive Officers, Promoters and Control Persons: Compliance with
Section (A) of the Exchange Act
    
    
    1310. Executive Compensation
    
    
    1511. Security Ownership of Certain Beneficial Owners and Management
    
    
    1612. Certain relationships and Related Transactions
    
    
    1813. Exhibits
    
    
    1814. Principal Accountant Fees and Services
    
    
    18Patent License AgreementAddendum #1 to Patent License AgreementCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350




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PART I
 
 ITEM 1. BUSINESS
 Background
     1




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Entertainment and Toy Products
  Anti-Counterfeiting and Anti-Diversion Technologies and Products
  ä ä â
 2




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##### Table of Contents



Document Security Products
 ä â
   Year Ended December 31,Product Type
    
    2006
    
    2005Entertainment and Toy Products
    
    
    48
    %
    
    
    1
    %Anti-Counterfeiting & Anti-Diversion Technologies and Products
    
    
    42
    %
    
    
    86
    %Document Security Products
    
    
    10
    %
    
    
    13
    %
 Marketing
    3




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Major Customers
  Manufacturing
   Patents
 â
  4




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Research and Development
   Competition
     5




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Contrast Technologies (formerly Euro-Nocopi, S.A.)
  Employees
  Financial Information about Foreign and Domestic Operations
  
 ITEM 2. DESCRIPTION OF PROPERTY
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
  6




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High Bid
    
    Low BidJanuary 1, 2005 to March 31, 2005
    
    $
    .13
    
    
    $
    .11April 1, 2005 to June 30, 2005
    
    $
    .13
    
    
    $
    .07July 1, 2005 to September 30, 2005
    
    $
    .11
    
    
    $
    .07October 1, 2005 to December 31, 2005
    
    $
    .14
    
    
    $
    .08January 1, 2006 to March 31, 2006
    
    $
    .29
    
    
    $
    .08April 1, 2006 to June 30, 2006
    
    $
    .26
    
    
    $
    .17July 1, 2006 to September 30, 2006
    
    $
    .35
    
    
    $
    .17October 1, 2006 to December 31, 2006
    
    $
    .64
    
    
    $
    .27January 1, 2007 to March 15, 2007
    
    $
    .87
    
    
    $
    .45
   Recent Sales of Unregistered Securities
  Issuer Repurchases Of Equity Securities
  
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 Forward-Looking Information
 You should read the following discussion and analysis of the Companys financial condition and
results of operation in conjunction with the financial statements and related notes. In addition
to historical information, this discussion
 7




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and analysis contains forward-looking statements based
on current expectations that involve risks, uncertainties and
assumptions. The Companys actual results and the timing of events may differ materially from
those anticipated in these forward-looking statements as a result of various factors, including
those set forth in the Risk Factors section of this Item 6 and elsewhere in this Form 10-KSB .
   Results of Operations
       8




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9




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Plan of Operation, Liquidity and Capital Resources
     Risk Factors
  Inability to Continue in Operation Without New Capital Investment.
 10




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Possible Inability to Develop New Business
 Inability to Obtain Raw Materials and Products for Resale.
 Uneven Pattern of Quarterly and Annual Operating Results
 Volatility of Stock Price
 Intellectual Property.
 11




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Recently Issued Accounting Standards
 Accounting for Uncertainty in Income Taxes Accounting for
Income Taxes
  Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Off-Balance Sheet Arrangements
  
 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 8A. CONTROLS AND PROCEDURES
  12




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ITEM 8AT. CONTROLS AND PROCEDURES
  
 ITEM 8B. OTHER INFORMATION
  
 PART III
 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT.
  Michael A. Feinstein, M.D
 Herman M. Gerwitz
 Stanley G. Hart
 13




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Richard Levitt
 Philip B. White
 Rudolph A. Lutterschmidt
  Audit Committee Financial Expert
  Code of Ethics
  14




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Compliance with Section 16(a) of the Exchange Act
    
 ITEM 10. EXECUTIVE COMPENSATION
 Executive Officer Compensation
   Option Awards(d)EquityIncome(b)
    
    (c)
    
    PlanNumber
    
    Number
    
    AwardsOf
    
    Of
    
    Number ofSecurities
    
    Securities
    
    SecuritiesUnderlying
    
    Underlying
    
    Underlying
    
    (e)
    
    (f)Options
    
    Options
    
    Unexercised
    
    Option
    
    Option(a)
    
    (#)
    
    (#)
    
    Options
    
    Exercise
    
    ExpirationName
    
    Exercisable
    
    Unexercisable
    
    (#)
    
    Price
    
    DateMichael A.
Feinstein, M.D.
    
    
    150,000
    
    
    
    
    
    
    
    150,000
    
    
    $
    .17
    
    
    April 30, 2009Michael A.
Feinstein, M.D.
    
    
    100,000
    
    
    
    
    
    
    
    100,000
    
    
    $
    .10
    
    
    April 30, 2010Michael A.
Feinstein, M.D.
    
    
    
    
    
    
    100,000
    
    
    
    100,000
    
    
    $
    .215
    
    
    April 30, 2011
  15




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Director Compensation
  
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  Common StockNumberOf SharesBeneficially
    
    Percentage ofName of Beneficial Owner
    
    Owned
    
    Class (1)5% Stockholders
Westvaco Brand Security, Inc. (2)
One High Ridge Park
Stamford, CT 06905
    
    3,917,030
    
    7.3%Philip N. Hudson
P.O. Box 160892
San Antonio, TX 78280-3092
    
    3,704,380
    
    6.9%Ross. L Campbell
675 Lewis Lane
Ambler, PA 19002 (3)
    
    3,264,457
    
    6.1%Directors and OfficersMichael A Feinstein, M.D. (4)
    
    3,422,074
    
    6.4%Herman Gerwitz (5)
    
    375,000
    
    *Stanley G. Hart (6)
    
    350,000
    
    *Richard Levitt (7)
    
    635,800
    
    1.2%Philip B. White (8)
    
    337,000
    
    *All Executive Officers and Directors as a Group (6 individuals) (9)
    
    5,220,474
    
    9.8%
 
 *
    
    Less than 1.0%.(1)
    
    Where the Number of Shares Beneficially Owned (reported in the preceding column) includes
shares which may be purchased upon the exercise of outstanding stock options which are or
within sixty days will become exercisable (presently exercisable options) the percentage of
class reported in this column has been calculated assuming the exercise of such presently
exercisable options.(2)
    
    As reflected in a Schedule 13D dated March 14, 2001 filed on behalf of Westvaco Brand
Security, Inc.(3)
    
    As reflected in a Schedule 13D dated April 4, 2005 filed on behalf of Ross L. Campbell. 16




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(4)
    
    Includes 587,974 shares held by a pension plan of which Dr. Feinstein is a trustee and
350,000 presently exercisable stock options.(5)
    
    Includes 200,000 presently exercisable stock options.(6)
    
    Includes 350,000 presently exercisable stock options.(7)
    
    Includes 400 shares owned by Mr. Levitts wife and 350,000 presently exercisable stock
options.(8)
    
    Includes 150,000 presently exercisable stock options and 150,000 presently exercisable stock
options held by Mr. Whites wife.(9)
    
    Includes 1,650,000 presently exercisable stock options.  Number of securitiesremaining available forWeighted-average
    
    future issuance underNumber of securities to
    
    exercise price of
    
    equity compensationbe issued upon exercise
    
    outstanding options,
    
    plans (excludingof outstanding options,
    
    warrants and rights
    
    securities reflected inPlan Category
    
    warrants and rights
    
    compensation plans
    
    column (a))(a)
    
    (b)
    
    (c)Equity Compensation
plans approved by
security holders
    
    
    575,000
    
    
    $
    .20
    
    
    
    -0-Equity Compensation
plans not approved
by security holders
(1)
    
    
    1,175,000
    
    
    $
    .15
    
    
    
    825,000Warrants issued in
connection with
short-term loans
(2)
    
    
    57,000
    
    
    $
    .23
    
    
    
    -0-Total
    
    
    1,807,000
    
    
    $
    .17
    
    
    
    825,000
 
 (1)
    
    Registrants 1999 Stock Option Plan was adopted by the Registrants board of directors
in February 1999. The Plan provides for the grant of incentive or non-qualified options to
purchase up to 2,000,000 million shares of common restricted stock of the Registrant to
employees, directors, consultants and advisors. The Plan is administered by the board of
directors or a committee of not less than two board members appointed by the board and
terminates on the tenth anniversary of its adoption.(2)
    
    Warrants issued in connection with the receipt of $57,000 of short term-notes were
approved by the Board of Directors. The warrants expire in five years. 17




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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
      
 ITEM 13. EXHIBITS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
  18




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Audit Committee Approval
  19




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SIGNATURES
  NOCOPI TECHNOLOGIES, INC.Date: April 16, 2007
    By:
    /s/ Michael A. Feinstein, M.D.Michael A. Feinstein, M.D.Title: Chairman of the Board and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Michael A. Feinstein, M.D.

Michael A. Feinstein, M.D.
    
    Chairman of the Board
and Chief Executive
Officer (Principal
Executive Officer)
    
    April 16, 2007/s/ Rudolph A. Lutterschmidt

Rudolph A. Lutterschmidt
    
    Vice President, Chief
Financial Officer and
Chief Accounting
Officer (Principal
Financial and
Accounting Officer)
    
    April 16, 2007/s/ Herman Gerwitz
    
    
    
    April 16, 2007Herman Gerwitz
    
    Director/s/ Stanley G. Hart
    
    
    
    April 16, 2007Stanley G. Hart
    
    Director/s/ Richard Levitt
    
    
    
    April 16, 2007Richard Levitt
    
    Director/s/ Philip B. White
    
    
    
    April 16, 2007Philip B. White
    
    Director
 20




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##### 



INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    F-2Balance Sheet as of December 31, 2006
    
    F-3Statements of Operations for the Years ended December 31, 2006 and 2005
    
    F-4Statements of Stockholders Deficiency for the Years ended December 31, 2006 and 2005
    
    F-5Statements of Cash Flows for the Years ended December 31, 2006 and 2005
    
    F-6Notes to Financial Statements
    
    F-7 to F-15
  F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      /s/
MORISON COGEN, LLP
 
 F-2




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Nocopi Technologies, Inc.
 
 Balance Sheet*
 December 312006AssetsCurrent assetsCash and cash equivalents
    
    $
    53,100Accounts receivable less $20,000 allowance
for doubtful accounts
    
    
    92,000Inventory
    
    
    58,300Arbitration settlement receivable
    
    
    50,000Prepaid and other
    
    
    24,800Total current assets
    
    
    278,200Fixed assetsLeasehold improvements
    
    
    71,200Furniture, fixtures and equipment
    
    
    481,400552,600Less: accumulated depreciation and amortization
    
    
    528,50024,100$
    302,300Liabilities and Stockholders DeficiencyCurrent liabilitiesDemand and other short-term loans
    
    $
    99,000Accounts payable
    
    
    409,400Accrued expenses
    
    
    296,600Deferred revenue
    
    
    5,800Total current liabilities
    
    
    810,800Commitments and contingenciesStockholders deficiencySeries A preferred stock $1.00 par valueAuthorized - 300,000 sharesIssued and outstanding  noneCommon stock, $.01 par valueAuthorized - 75,000,000 sharesIssued and outstanding  51,686,811 shares
    
    
    516,900Paid-in capital
    
    
    11,731,700Accumulated deficit
    
    
    (12,757,100
    )(508,500
    )$
    302,300
 
 *
    
    The accompanying notes are an integral part of these financial statements. F-3




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Nocopi Technologies, Inc.
 
 Statements of Operations*
 Years ended December 312006
    
    
    2005RevenuesLicenses, royalties and fees
    
    $
    298,100
    
    
    $
    307,400Product and other sales
    
    
    468,400
    
    
    
    220,900766,500
    
    
    
    528,300Cost of salesLicenses, royalties and fees
    
    
    102,800
    
    
    
    108,700Product and other sales
    
    
    278,700
    
    
    
    98,200381,500
    
    
    
    206,900Gross profit
    
    
    385,000
    
    
    
    321,400Operating expensesResearch and development
    
    
    145,400
    
    
    
    145,900Sales and marketing
    
    
    146,400
    
    
    
    109,600General and administrative
(exclusive of legal expenses)
    
    
    232,700
    
    
    
    200,100Legal expenses
    
    
    36,300
    
    
    
    79,600560,800
    
    
    
    535,200Loss from operations
    
    
    (175,800
    )
    
    
    (213,800
    )Other income (expenses)Interest income
    
    
    500
    
    
    
    100Interest, bank charges and financing cost
    
    
    (14,800
    )
    
    
    (2,200
    )(14,300
    )
    
    
    (2,100
    )Net loss
    
    $
    (190,100
    )
    
    $
    (215,900
    )Basic and diluted loss per common share
    
    $
    (.00
    )
    
    $
    (.00
    )Basic and diluted weighted average common
shares outstanding
    
    
    51,224,394
    
    
    
    50,586,181
 
 *
    
    The accompanying notes are an integral part of these financial statements. F-4




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Nocopi Technologies, Inc.
 
 Statements of Stockholders Deficiency*
 For the Period January 1, 2005 through December 31, 2006
 Common stock
    
    
    Paid-in
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    DeficitBalance  January 1, 2005
    
    
    50,586,181
    
    
    $
    505,900
    
    
    $
    11,497,400
    
    
    
    ($12,351,100
    )Stock option compensation
    
    
    
    
    
    
    
    
    
    
    17,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (215,900
    )Balance  December 31, 2005
    
    
    50,586,181
    
    
    
    505,900
    
    
    
    11,514,400
    
    
    
    (12,567,000
    )Sales of common stock
    
    
    1,088,408
    
    
    
    10,900
    
    
    
    162,200Adjustment of share issuance
    
    
    12,222
    
    
    
    100
    
    
    
    (100
    )Fair value of warrants issued for
deferred finance charges
    
    
    
    
    
    
    
    
    
    
    7,200Stock option compensation
    
    
    
    
    
    
    
    
    
    
    48,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (190,100
    )Balance  December 31, 2006
    
    
    51,686,811
    
    
    $
    516,900
    
    
    $
    11,731,700
    
    
    
    ($12,757,100
    )
 
 *
    
    The accompanying notes are an integral part of these financial statements. F-5




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Nocopi Technologies, Inc.
 
 Statements of Cash Flows*
 Years ended December 312006
    
    
    2005Operating ActivitiesNet loss
    
    $
    (190,100
    )
    
    $
    (215,900
    )Adjustments to reconcile net loss to
cash used in operating activitiesDepreciation and amortization
    
    
    23,300
    
    
    
    17,000Bad debt expense
    
    
    5,000
    
    
    
    Compensation expense  stock option grants
    
    
    48,000
    
    
    
    17,000(113,800
    )
    
    
    (181,900
    )(Increase) decrease in assetsAccounts receivable
    
    
    (49,500
    )
    
    
    56,000Arbitration settlement receivable
    
    
    50,000
    
    
    
    50,000Inventory
    
    
    (58,300
    )
    
    
    Prepaid and other
    
    
    15,600
    
    
    
    (11,200
    )Increase (decrease) in liabilitiesAccounts payable and accrued expenses
    
    
    (39,900
    )
    
    
    64,300Deferred revenue
    
    
    (4,200
    )
    
    
    (14,900
    )(86,300
    )
    
    
    144,200Net cash used in operating activities
    
    
    (200,100
    )
    
    
    (37,700
    )Investing ActivitiesAdditions to fixed assets
    
    
    (5,200
    )
    
    
    Net cash used in investing activities
    
    
    (5,200
    )
    
    
    Financing ActivitiesIssuance of common stock
    
    
    173,100
    
    
    
    Demand and other loans
    
    
    91,000
    
    
    
    21,500Demand and other loan repayment
    
    
    (10,000
    )
    
    
    (3,500
    )Net cash provided by financing activities
    
    
    254,100
    
    
    
    18,000Increase (decrease) in cash and cash equivalents
    
    
    48,800
    
    
    
    (19,700
    )Cash and cash equivalentsBeginning of year
    
    
    4,300
    
    
    
    24,000End of year
    
    $
    53,100
    
    
    $
    4,300Supplemental Disclosure of Non Cash Investing and Financing ActivitiesDeferred Financing CostIssuance of warrants for deferred financing cost
    
    $
    7,200
 
 *
    
    The accompanying notes are an integral part of these financial statements. F-6




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NOCOPI TECHNOLOGIES, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 December 31, 2006 and 2005
 1.
    
    Organization of the CompanyNocopi Technologies, Inc. (the Company) is organized under the laws of the State of Maryland.
Its main business activities are the development and distribution of document security products
and the licensing of its patented reactive and authentication technologies in the United States
and foreign countries. The Company operates in one principal industry segment.2.
    
    Significant Accounting PoliciesEstimates- The preparation of the financial statements in conformity with Accounting
Principles Generally Accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the dates of financial statements and the reported amounts of
revenues and expenses during the reported periods. Actual results could differ from those
estimates.Cash and cash equivalents- Cash equivalents consist principally of time deposits and highly
liquid investments with an original maturity of three months or less placed with major banks
and financial institutions. Cash equivalents are carried at the lower of cost, plus accrued
interest, or market value and are held in money market accounts at a local bank. At December
31, 2006, Nocopi investments in money market accounts totaled $46,700.Accounts receivable as amounts become uncollectible, they will be charged to an allowance or
operations in the period when a determination of uncollectibility is made. Any estimates of
potentially uncollectible customer accounts receivable will be made based on an analysis of
individual customer and historical write-off experience. The Companys analysis includes the
age of the receivable, creditworthiness and general economic conditions.Inventoryconsists primarily of ink components and paper and is stated at the lower of cost
(determined by the first-in, first-out method) or market.Concentration of credit risk involving cash During the year, the Company had uninsured cash
balances at one financial institution. This financial institution has a strong credit rating,
and Management believes that credit risk related to these deposits is minimal. At December 31,
2006, the total balance was $46,700.Fixed assetsare carried at cost less accumulated depreciation and amortization. Furniture,
fixtures and equipment are generally depreciated on the straight-line method over their
estimated service lives. Leasehold improvements are amortized on a straight-line basis over the
shorter of five years or the term of the lease. Major renovations and betterments are
capitalized. Maintenance, repairs and minor items are expensed as incurred. Upon disposal,
assets and related depreciation are removed from the accounts and the net amount, less proceeds
from disposal, is charged or credited to income.
 F-7




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Patent costsare charged to expense as incurred due to the uncertainty of their
recoverability as a result of the Companys adverse liquidity situation.Revenues In accordance with Securities and Exchange Commission (SEC) Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition, the Company recognizes revenue when (i)
persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, (ii)
a retailer, distributor or wholesaler receives the goods, (iii) the price is fixed or
determinable, and (iv) collectibility of the sales revenue is reasonably assured. Subject to
these criteria, the Company will generally recognize revenue upon shipment of product. Revenue
from license fees and royalties will be recognized as earned over the license term.Income taxes- Deferred income taxes are provided for all temporary differences and net
operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.Fair value- The carrying amounts reflected in the balance sheets for cash, cash equivalents,
receivables, accounts payable and accrued expenses approximate fair value due to the short
maturities of these instruments.Earnings (loss) per share- The Company follows Statement of Financial Accounting Standards
No. 128, Earnings Per Share resulting in the presentation of basic and diluted earnings per
share. Because the Company reported a net loss in 2006 and 2005, common stock equivalents,
including stock options and warrants were anti-dilutive.Comprehensive income (loss)- The Company follows Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income. Since the Company has no items of comprehensive
income (loss), Comprehensive income (loss) is equal to net income (loss).Recoverability of Long-Lived AssetsThe Company follows Statement of Financial Accounting Standard (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. The Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company is not aware of any events or circumstances which indicate the
existence of an impairment which would be material to the Companys annual financial
statements.Recently Issued Accounting StandardsIn June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance
for the financial statement recognition, measurement and disclosure of uncertain tax positions
recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax
positions must meet a more-likely-than-not recognition threshold at the effective date to be
recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for
fiscal years beginning after December 15, 2006, and will become effective for us beginning
with the first quarter of 2007, and the provisions of FIN 48 will
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be applied to all tax
positions under Statement No. 109 upon initial adoption. The cumulative effect of applying the
provisions of this interpretation will be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. The Company is currently evaluating the potential
impact of FIN 48 on its financial statements.
 In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108). SAB No.
108 addresses the process and diversity in practice of quantifying financial statement
misstatements resulting in the potential build up of improper amounts on the balance sheet.
The Company is required to adopt the provisions of SAB No.108 in fiscal 2006. The adoption of
SAB No. 108 did not have a material impact on its financial statements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements). SFAS No. 157
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The changes to current practice resulting from the application of this Statement
relate to the definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. The Statement is effective for fiscal
years beginning after November 15, 2007 and will become effective beginning with the first
quarter of 2008. The Company has not yet determined the impact of the adoption of SFAS No.
157 on its financial statements and footnote disclosures.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be
measured at fair value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions.
This statement also establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. This Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and will become effective for the
Company beginning with the first quarter of 2008. The Company has not yet determined the
impact of the adoption of SFAS No. 159 on its financial statements and footnote disclosures.3.
    
    Going ConcernSince its inception, the Company has incurred significant losses and, as of December 31, 2006,
had accumulated losses of $12,757,100. For the years ended December 31, 2006 and 2005, the
Companys losses from operations were $175,800 and $213,800, respectively. In addition, the
Company had negative working capital of $532,600 at December 31, 2006. The Company may incur further operating losses and experience negative cash
flow in the future. Achieving profitability and positive cash flow depends on the Companys
ability to generate and sustain significant increases in revenues and gross profits from its
traditional business. There can be no assurances that the Company will be able to generate
sufficient revenues and gross profits to achieve and sustain profitability and positive cash
flow in the future.
 During 2006, the Company raised $173,100 in a valid private placement exempt from registration
under section 4(2) of the Securities Act of 1933, as amended whereby 923,934 shares of the
Companys common stock were sold to five non-affiliated individual investors and 164,474 were
sold to a pension plan controlled by the Companys Chairman of the Board. See Unregistered
Sales of Equity Securities and Use of Proceeds included elsewhere in this report. These
investments,
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combined with continuing expense reductions, have permitted the Company to
continue in operation to the current date. Management of the Company believes that it will
need, and is actively seeking to obtain, additional capital in the immediate future both to
fund investments needed to increase its operating revenues to levels that will sustain its
operations and to fund operating deficits that it anticipates will continue until revenue
increases can be realized. There can be no assurances that the Company will be successful in
obtaining sufficient additional capital, or if it does, that the additional capital will enable
the Company to improve its business so as to have a material positive effect on the Companys
operations and cash flow. The Company believes that without additional capital, whether in the
form of debt, equity or both, it may be forced to cease operations at an undetermined future
date.The Companys independent registered public accountants have included a going concern
explanatory paragraph in their audit report accompanying the 2006 financial statements. The
paragraph states that the Companys recurring losses from operations raise substantial doubt
about the Companys ability to continue as a going concern and cautions that the financial
statements do not include any adjustments that might result from the outcome of this
uncertainty.4.
    
    Demand and Other Short-Term LoansDuring 2006, the Company received unsecured loans totaling $34,000 from two individuals of
which $19,000 was lent by Michael A. Feinstein, M.D., its Chairman of the Board, and $15,000
by Herman Gerwitz, a Director. The loans bear interest at 7% per year and are payable on
demand. During the third quarter of 2006, the Company received unsecured short-term loans
totaling $57,000 from four individuals who were non-affiliates of the Company. The loans bear
interest at 7% per year and were due four months from the date of the loan. Additionally the
Company granted 57,000 warrants to purchase common stock of the Company to these four
individuals at prices ranging from $0.21 to $0.27. The warrants expire in five years. A
deferred financing cost of $7,200 representing the fair value of the warrants was amortized to
income over the four month term of the short-term loans. The fair value of the warrants was
determined using the Black-Scholes pricing model with the following assumptions: expected
life-5years; interest rate-4.88%; volatility-60% and dividend yield-0. In December 2006, the
Company repaid the entire $10,000 due one of the four individual lenders. The Company has received extensions to
April 2007 on the $47,000 of short-term loans outstanding at December 31, 2006 and paid
$25,000 to one of these lenders in February 2007. At December 31, 2006, the Company had
unsecured loans from five individuals totaling $99,000, including $22,000 from Dr. Feinstein
and $15,000 from Mr. Gerwitz, outstanding. The loans were used to finance the Companys
working capital requirements.During 2005, the Company received unsecured loans totaling $21,500 from two individuals of
which $6,500 was lent by Michael A. Feinstein, M.D., its Chairman of the Board and repaid
$3,500 in loans made by this individual. The loans bear interest at seven per cent per year
and are payable on demand. The loans were used to finance the Companys working capital
requirements.5.
    
    Stockholders DeficiencyDuring 2006, the Company sold 923,934 shares of its common stock to five non-affiliated
individual investors and 164,474 shares to a pension plan controlled by Michael A. Feinstein,
M.D., the Companys Chairman of the Board, for a total of $173,100 pursuant to a valid private
placement. Additionally, the Companys Board of Directors, in the third quarter of 2006,
approved the issuance of an additional 12,222 shares of the Companys common stock to a
non-affiliate who
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purchased common stock in a private placement in 2004 to correct the
purchase price based on the date of receipt of the investment.6.
    
    Income TaxesThere is no provision for income taxes for 2006 and 2005 due to the availability of net
operating loss carryforwards (NOLs) for which the Company had previously established a 100%
valuation allowance for deferred tax assets due to the uncertainty of their recoverability. At
December 31, 2006, the Company had NOLs approximating $10,241,000. These operating losses are
available to offset future taxable income through the year 2026. As a result of the sale of
the Companys common stock in an equity offering in late 1997
and the issuance of additional shares, the amount of the NOLs may be limited. Additionally, the utilization of these NOLs
if available, to reduce the future income taxes will depend on the generation of sufficient
taxable income prior to their expiration. There were no temporary differences for the years
ended December 31, 2006 and 2005. The Company has established a 100% valuation allowance of
approximately $4,199,000 at December 31, 2006 for the deferred tax assets due to the
uncertainty of their realization.7.
    
    Commitments and ContingenciesThe Company conducts its operations in leased facilities and leases equipment under
non-cancelable operating leases expiring at various dates to 2009.Future minimum lease payments under non-cancelable operating leases with initial or remaining
terms of one year or more at December 31, 2006 are: $40,100  2007; $10,900  2008 and $1,000
 2009.Total rental expense under operating leases was $37,600 and $37,700 in 2006 and 2005,
respectively.The Company had a consulting agreement with a former executive officer and director, the term
of which expired at December 31, 2002. The Board of Directors of the Company, in mid-2000,
suspended cash payments to the consultant as a potential offset to certain payments made to
the consultant by a licensee of the Company. All other provisions of the agreement remained in
force throughout the term of the agreement. At December 31, 2006, unpaid consulting fees
totaling $166,300 were included in Accrued Expenses on the Balance Sheet.From time to time, the Company may be subject to legal proceedings and claims that arise in
the ordinary course of its business.8.
    
    Stock Options and401(k)Savings PlanThe 1996 and 1999 Stock Option Plans provide for the granting of up to 2,700,000 incentive and
non-qualified stock options to employees, non-employee directors, consultants and advisors to
the Company. In the case of options designated as incentive stock options, the exercise price
of the options granted must be not less than the fair market value of such shares on the date
of grant. Non-qualified stock options may be granted at any amount established by the Stock
Option Committee or, in the case of Discounted Options issued to non-employee directors in
lieu of any portion of an Annual Retainer, in accordance with a formula designated in the
Plan. The 1996
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Stock Option Plan terminated in June 2006 and no further stock options can be
granted under the plan; however, options granted before June 2006 may be exercised through
their expiration date.In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard SFAS 123 (revised 2004), Share-Based Payment(SFAS 123R). SFAS
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS
No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the
approach described in SFAS 123. However, SFAS 123(R) requires share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement
based on their fair values at the date of grant. Pro forma disclosure is no longer an
alternative.On January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective method as
permitted under SFAS 123(R). Under this transition method, compensation cost recognized in
2006 includes compensation cost for all share-based payments granted prior to but not yet
vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123. In accordance with the modified prospective method of adoption, the
Companys results of operations and financial position for prior periods have not been
restated.The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value
of an award.Prior to December 31, 2005, the Company followed the provisions of SFAS No. 123, Accounting
for Stock-Based Compensation. The provisions of SFAS No. 123 allowed companies to either
expense the estimated fair value of stock options or to continue to follow the intrinsic value
method set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), but disclose the pro forma effects on net income had the fair value of
the options been expensed. The Company elected to apply APB 25 in accounting for its stock
option incentive plans. There was no expense recognized on options granted during the year
ended December 31, 2005.Had compensation cost for the Companys stock option plan been determined on the fair value of
the Companys common stock at the dates of awards under the fair value method of SFAS No. 123,
the Companys 2005 net loss and net loss per common share would have been increased to the pro
forma amounts indicated below. In 2005, the fair value amounts were estimated using the
Black-Scholes options pricing model with the following assumptions: no dividend yield, expected
volatility of 60%, risk-free interest rate of 5% and expected option life of five years.
 Net lossAs reported
    
    ($
    215,900
    )Pro forma
    
    ($
    221,900
    )Net loss per common share basic and dilutedAs reported
    
    ($
    .00
    )Pro forma
    
    ($
    .00
    )
 In accordance with APB 25 and related interpretations, compensation expense for stock
options was recognized in income based on the excess, if any, of the quoted market price of the
stock at the grant date of the award or other measurement date over the amount an employee must
pay to
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##### Table of Contents



acquire the stock. Generally, the exercise price for stock options granted to employees
was equal to the fair market value of the Companys common stock at the date of grant, thereby
resulting in no recognition of compensation expense by the Company prior to December 31, 2005.
During the year ended December 31, 2006, the Companys net loss increased by $12,000 as a
result of the adoption of SFAS 123(R) as there was a stock-based compensation grant to an
executive officer during the period. As of December 31, 2006, there was no unrecognized
compensation expenses related to non-vested market-based share awards.A summary of stock options under the Companys stock option plans follows:
 Exercise
    
    
    WeightedNumber of
    
    
    Price Range
    
    
    AverageShares
    
    
    Per Share
    
    
    Exercise PriceOutstanding at December 31, 2004
    
    
    1,475,000
    
    
    $.17 to $.45
    
    $
    .24Options granted
    
    
    400,000
    
    
    .10 and .11
    
    
    .10Options canceled
    
    
    200,000
    
    
    
    .30
    
    
    
    .30Outstanding at December 31, 2006
    
    
    1,675,000
    
    
    $.17 to $.45
    
    
    .24Options granted
    
    
    400,000
    
    
    
    .22
    
    
    
    .22Options canceled
    
    
    325,000
    
    
    .30  and .45
    
    
    .39Outstanding at December 31, 2006
    
    
    1,750,000
    
    
    $
    .10 to $.22
    
    
    $
    .16
 Exercise
    
    WeightedOption
    
    Price Range
    
    AverageShares
    
    Per Share
    
    Exercise PriceExercisable at year end:2005
    
    
    1,275,000
    
    
    $
    .17 to $.45
    
    
    $
    .232006
    
    
    1,350,000
    
    
    $
    .10 to $.17
    
    
    $
    .15Options available for future grant under all plans:2005
    
    
    1,025,0002006
    
    
    825,000
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Range of exercise prices
    
    $
    .10 to $.22Number outstanding at
December 31, 2006
    
    
    1,750,000Weighted average remaining contractual life (years)
    
    
    3.04Weighted average exercise price
    
    $
    .16Exercisable options:Number outstanding at
December 31, 2006
    
    
    1,350,000Weighted average remaining
Contractual life (years)
    
    
    2.66Weighted average exercise price
    
    $
    .15
 On April 30, 2006, the Company, under its directors stock option plan, granted options to
each of its then four directors to purchase 100,000 shares each of its common stock at an
exercise price of $0.215 per share, vesting on January 1, 2007, and expiring in five years. The
options are contingent on the directors attending a certain percentage of Board of Directors
meetings during 2006. In accordance with the fair value method as described in accounting
requirements of SFAS No. 123, The Company recognized consulting expense of $48,000 during the
year ended December 31, 2006. The fair value was determined using the Black-Scholes pricing
model with the following assumptions: expected life-5years; interest rate-4.92%; volatility-59%
and dividend yield-0.Effective April 30, 2005, the Company, under its directors stock option plan, granted options
to two directors to purchase 100,000 shares each of its common stock at an exercise price of
$0.10 per share, vesting on January 1, 2006, and expiring in five years. On September 23, 2005,
the Company granted options to a new director to purchase 100,000 shares of its common stock at
an exercise price of $0.11 per share, vesting on January 1, 2006, and expiring in five years.
The options were contingent on the directors attending a certain percentage of Board of
Directors meetings during 2005. In accordance with the fair value method as described in
accounting requirements of SFAS No. 123, The Company recognized consulting expense of $17,000
during the year ended December 31, 2005.Effective April 30, 2005, the Company granted options to an officer and director under its
directors stock option plan to purchase a total of 100,000 shares of its common stock at an
exercise price of $0.10 per share, which was the market price on grant date, expiring in five
years and vesting on January 1, 2006.At December 31, 2006, the Company has reserved 2,632,000 shares of common stock for possible
future issuance upon exercise of stock options and warrants. The Company sponsors a 401(k)
savings plan, covering substantially all employees, providing for employee and employer
contributions. Employer contributions are made at the discretion of the Company. There were no
contributions charged to expense during 2006 or 2005.9.
    
    Major Customer and Geographic Information
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The Companys largest non-affiliate customers accounted for approximately 65% and 68% of
revenues in 2006 and 2005, respectively, and approximately 75% of
accounts receivable at December 31, 2006. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. The Company also maintains allowances
for potential credit losses.The Companys revenues by geographic region are as follows:
 2006
    
    
    2005North America
    
    $
    479,700
    
    
    $
    508,700Asia
    
    
    274,800
    
    
    
    4,300Australia and New Zealand
    
    
    10,600
    
    
    
    12,400Europe
    
    
    1,200
    
    
    
    900$
    766,500
    
    
    $
    526,300
 10.
    
    Subsequent EventsIn March 2007, the Company received an additional demand loan of $7,000 from its Chairman of
the Board. In early April 2007, the Company received $50,000 from two unaffiliated investors
whereby it sold 104,166 shares of its common stock at $.48 per share.
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Exhibit Index
  ExhibitNumber
    
    Description3.1
    
    Articles of Incorporation (1)3.2
    
    Bylaws (1)3.3
    
    Articles of Amendment to Articles of Incorporation (3)3.4
    
    Article of Amendment to Articles of Incorporation (4)3.5
    
    Amendments to Bylaws (5)4.1
    
    Form of Certificate of Common Stock (12)10.1
    
    Summary Plan Description for Nocopi Technologies, Inc. 401(k) Profit Sharing Plan (2)10.2
    
    Nocopi Technologies, Inc. 1996 Stock Option Plan (3)10.3
    
    Nocopi Technologies, Inc. 1999 Stock Option Plan (4)10.4
    
    Amended Summary Plan Description for Nocopi Technologies, Inc. 401(k) Profit Sharing
Plan (4)10.5
    
    Director Indemnification Agreement (5)10.6
    
    Officer Indemnification Agreement (5)10.7
    
    Stock Purchase Agreement with Westvaco Brand Security, Inc. (6)10.8
    
    Registration Rights Agreement with Westvaco Brand Security, Inc. (6)10.9
    
    Subscription Agreement with Entrevest I Associates (7)10.10
    
    Lease Agreement dated March 19, 2003 relating to premises at 9 Portland Road, West Conshohocken, PA 19428 (7)10.11
    
    Settlement Agreement with Euro-Nocopi, S.A. (8)10.12
    
    Agreement of Terms with Entrevest I Associates (9)10.13
    
    Conversion Agreement (10)10.14*
    
    Patent License Agreement with Giddy Up, LLC and Color Loco, LLC10.15*
    
    Addendum #1 to Patent License Agreement with Giddy Up, LLC and Color Loco, LLC14.1
    
    Code of Ethics (11)31.1*
    
    Certification of Chief Financial Officer required by Rule 13a-14(a).31.2*
    
    Certification of Chief Executive Officer required by Rule 13a-14(a).
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ExhibitNumber
    
    Description32.1*
    
    Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Exhibit filed with this Report.
    
    Compensation plans and arrangements for executives and others.(1)
    
    Incorporated by reference to Registrants Registration Statement on Form 10, as filed with
the Commission on or about August 19, 1992(2)
    
    Incorporated by reference to Registrants Annual Report on Form 10-K for the Year Ended
December 31, 1993(3)
    
    Incorporated by reference to Registrants Annual Report on Form 10-K for the Year Ended
December 31, 1996(4)
    
    Incorporated by reference to Registrants Annual Report on Form 10-KSB for the Year Ended
December 31, 1998(5)
    
    Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the Three
Months Ended September 30, 1999(6)
    
    Incorporated by reference to Registrants Annual Report on Form 10-KSB for the Year Ended
December 31, 2000(7)
    
    Incorporated by reference to Registrants Annual Report on Form 10-KSB for the Year Ended
December 31, 2002(8)
    
    Incorporated by reference to Registrants Annual Report on Form 10-KSB for the Year Ended
December 31, 2003(9)
    
    Incorporated by reference to Registrants Current Report on Form 8-K filed with the
Commission on September 16, 2004(10)
    
    Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the Three
Months Ended September 30, 2004(11)
    
    Incorporated by reference to Registrants Annual Report on Form 10-KSB for the Year Ended
December 31, 2004(12)
    
    Incorporated by reference to Registrants Annual Report on Form 10-KSB for the Year Ended
December 31, 2005 F-17