##### Table of Contents



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, 2007
 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
 $1,393,800
 $15,807,000
 (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
    
    7Part II5. Market for Common equity, related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
    
    76. Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    87. Financial Statements and Supplementary Data
    
    138. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    138A. Controls and Procedures
    
    138B. Other Information
    
    14Part III9. Directors, Executive Officers, Promoters and Control Persons: Compliance with Section (A) of the Exchange Act
    
    1410. Executive Compensation
    
    1611. Security Ownership of Certain Beneficial Owners and Management
    
    1812. Certain relationships and Related Transactions
    
    1913. Exhibits
    
    2014. Principal Accountant Fees and Services
    
    2015. Signatures
    
    21Certification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906




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PART I
 
 ITEM 1. BUSINESS
 Background
     1




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




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Document Security Products
 ä â
    Year Ended December 31Product Type
    
    2007
    
    2006Entertainment and Toy Technologies and Products
    
    
    72
    %
    
    
    48
    %Anti-Counterfeiting and Anti-Diversion Technologies and Products
    
    
    22
    %
    
    
    42
    %Document Security Products
    
    
    6
    %
    
    
    10
    %
 Marketing
  3




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Major Customers
  Manufacturing
   4




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Patents
 â
     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
  6




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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
  High Bid
    
    Low BidJanuary 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 31, 2007
    
    $
    .87
    
    
    $
    .45April 1, 2007 to June 30, 2007
    
    $
    .76
    
    
    $
    .51July 1, 2007 to September 30, 2007
    
    $
    .66
    
    
    $
    .38October 1, 2007 to December 31, 2007
    
    $
    .78
    
    
    $
    .40January 1, 2008 to March 14, 2008
    
    $
    .61
    
    
    $
    .32
   Recent Sales of Unregistered Securities
  7




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Issuer Repurchases of Equity Securities
  
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 Forward-Looking Information
 The following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with the financial statements and related notes. In
addition to historical information, this discussion 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
    10




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Risk Factors
  Dependency on Major Customer.
 Possible Inability to Develop New Business
 Inability to Obtain Raw Materials and Products for Resale.
 Uneven Pattern of Quarterly and Annual Operating Results
 11




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Volatility of Stock Price
 Intellectual Property.
 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
 12




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Business Combinations
 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
 Disclosure Controls and Procedures
  Internal Control over Financial Reporting
  13




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Changes in Internal Control over Financial Reporting
  
 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
 Richard Levitt
 14




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Philip B. White
 Rudolph A. Lutterschmidt
 Terry W. Stovold
  Corporate Governance
  Audit Committee Financial Expert
  15




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##### Table of Contents



Code of Ethics
  Section 16(a) Beneficial Ownership Reporting Compliance
    
 ITEM 10. EXECUTIVE COMPENSATION
  NonqualifiedName
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nonequity
    
    
    deferredand
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock
    
    
    Option
    
    
    incentive plan
    
    
    compensation
    
    
    All otherprincipal
    
    
    
    
    
    Salary
    
    
    Bonus
    
    
    awards
    
    
    awards
    
    
    compensation
    
    
    earnings
    
    
    compensation
    
    
    Totalposition
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)(a)
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)
    
    
    (f)
    
    
    (g)
    
    
    (h)
    
    
    (i)
    
    
    (j)Michael A. Feinstein, M.D.
Chairman and Chief
    
    
    2007Executive Officer
    
    
    2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000Terry W. Stovold
Director of Worldwide
    
    
    2007
    
    
    
    36,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122,657
    (1)
    
    
    158,657Technical Sales
    
    
    2006
    
    
    
    36,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,060
    (1)
    
    
    94,060
 
 (1)
    
    Sales commissions 16




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(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)EquityIncomeNumber
    
    Number
    
    PlanOf
    
    Of
    
    AwardsSecurities
    
    Securities
    
    Number of SecuritiesUnderlying
    
    Underlying
    
    UnderlyingOptions
    
    Options
    
    Unexercised
    
    Option
    
    Option(#)
    
    (#)
    
    Options
    
    Exercise
    
    ExpirationName
    
    Exercisable
    
    Unexercisable
    
    (#)
    
    Price
    
    DateMichael A.
Feinstein, M.D.
    
    
    150,000
    
    
    
    
    
    
    
    150,000
    
    
    $
    .17
    
    
    April 29, 2009Michael A.
Feinstein, M.D.
    
    
    100,000
    
    
    
    
    
    
    
    100,000
    
    
    $
    .10
    
    
    April 29, 2010Michael A.
Feinstein, M.D.
    
    
    100,000
    
    
    
    
    
    
    
    100,000
    
    
    $
    .215
    
    
    April 29, 2011Terry W. Stovold
    
    
    0
    
    
    
    
    
    
    
    0
  Director Compensation
  Feesearned
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nonqualifiedor
    
    
    
    
    
    
    
    
    
    Nonequity
    
    deferredpaid in
    
    Stock
    
    Option
    
    incentive plan
    
    compensation
    
    All othercash
    
    awards
    
    awards
    
    compensation
    
    earnings
    
    compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)Herman M. Gerwitz (1)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Stanley G. Hart (2)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Richard Levitt (3)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Philip B. White (4)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 (1)
    
    Mr. Gerwitz holds 200,000 presently exercisable stock options.(2)
    
    Mr. Hart holds 350,000 presently exercisable stock options.(3)
    
    Mr. Levitt holds 350,000 presently exercisable stock options.(4)
    
    Mr. White holds 150,000 presently exercisable stock options awarded to him prior
to his appointment as a director. 17




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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 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. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  18




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Common StockNumberOf SharesBeneficially
    
    Percentage ofName of Beneficial Owner
    
    Owned
    
    Class (1)5% StockholdersWestvaco Brand Security, Inc. (2)
One High Ridge ParkStamford, CT 06905
    
    
    3,917,030
    
    
    
    7.3
    %Philip N. Hudson
P.O. Box 160892San Antonio, TX 78280-3092
    
    
    3,777,777
    
    
    
    7.0
    %Ross. L Campbell675 Lewis LaneAmbler, PA 19002 (3)
    
    
    3,264,457
    
    
    
    6.1
    %Directors, Officers and Named ExecutiveMichael A Feinstein, M.D.
(4)
    
    
    3,186,281
    
    
    
    6.1
    %Herman M. Gerwitz
(5)
    
    
    392,500
    
    
    
    *Stanley G. Hart
(6)
    
    
    350,000
    
    
    
    *Richard Levitt (7)
    
    
    600,000
    
    
    
    1.1
    %Philip B. White
(8)
    
    
    357,833
    
    
    
    *Terry W. Stovold
    
    
    0
    
    
    
    *All Executive Officers and Directors as a Group (6
individuals) (9)
    
    
    4,987,214
    
    
    
    9.2
    %
 
 *
    
    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.(4)
    
    Includes 640,000 shares held by a pension plan of which Dr. Feinstein is a trustee,
100,000 shares held in an IRA and 350,000 presently exercisable stock options.(5)
    
    Includes 50,000 shares held by a trust on behalf of a child of Mr. Gerwitz and 200,000
presently exercisable stock options.(6)
    
    Includes 350,000 presently exercisable stock options.(7)
    
    Includes 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. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
     19




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ITEM 13. EXHIBITS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
  Audit Committee Approval
  20




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SIGNATURES
  NOCOPI TECHNOLOGIES, INC.
 Date: March 31, 2008
    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)
    
    March 31, 2008/s/ Rudolph A. Lutterschmidt

Rudolph A. Lutterschmidt
    
    Vice President, Chief
Financial Officer and
Chief Accounting
Officer (Principal
Financial and
Accounting Officer)
    
    March 31, 2008/s/ Herman M. Gerwitz

Herman M. Gerwitz
    
    Director
    
    March 31, 2008/s/ Stanley G. Hart

Stanley G. Hart
    
    Director
    
    March 31, 2008/s/ Richard Levitt

Richard Levitt
    
    Director
    
    March 31, 2008/s/ Philip B. White

Philip B. White
    
    Director
    
    March 31, 2008
 21




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INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Balance Sheets as of December 31, 2007 and 2006
    
    
    F-3Statements of Operations for the Years ended
December 31, 2007 and 2006
    
    
    F-4Statements of Stockholders Equity (Deficiency) for
the Years ended December 31, 2007 and 2006
    
    
    F-5Statements of Cash Flows for the Years ended
December 31, 2007 and 2006
    
    
    F-6Notes to Financial Statements
    
    F-7 to F-14
 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 Sheets*
 December 312007
    
    2006AssetsCurrent assetsCash and cash equivalents
    
    $
    263,600
    
    
    $
    53,100Accounts receivable less allowance for
doubtful
accounts (2007  $5,000; 2006  $20,000)
    
    
    221,900
    
    
    
    92,000Arbitration settlement receivable
    
    
    
    
    
    
    50,000Inventory
    
    
    92,300
    
    
    
    58,300Prepaid and other
    
    
    56,200
    
    
    
    24,800Total current assets
    
    
    634,000
    
    
    
    278,200Fixed assetsLeasehold improvements
    
    
    72,500
    
    
    
    71,200Furniture, fixtures and equipment
    
    
    509,400
    
    
    
    481,400581,900
    
    
    
    552,600Less: accumulated depreciation and
amortization
    
    
    548,500
    
    
    
    528,50033,400
    
    
    
    24,100$
    667,400
    
    
    $
    302,300Liabilities and Stockholders Equity (Deficiency)Current liabilitiesDemand and other short-term loans
    
    
    
    
    
    $
    99,000Accounts payable
    
    $
    364,200
    
    
    
    409,400Accrued expenses
    
    
    137,200
    
    
    
    296,600Accrued income taxes
    
    
    800
    
    
    
    Deferred revenue
    
    
    5,000
    
    
    
    5,800Total current liabilities
    
    
    507,200
    
    
    
    810,800Commitments and contingenciesStockholders equity (deficiency)Series A preferred stock, $1.00 par valueAuthorized - 300,000 sharesIssued and outstanding  noneCommon stock, $.01 par valueAuthorized - 75,000,000 sharesIssued and outstanding
2007 - 52,275,837 shares; 2006 -
51,686,811 shares
    
    
    522,800
    
    
    
    516,900Paid-in capital
    
    
    12,008,500
    
    
    
    11,731,700Accumulated deficit
    
    
    (12,371,100
    )
    
    
    (12,757,100
    )160,200
    
    
    
    (508,500
    )$
    667,400
    
    
    $
    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 312007
    
    
    2006RevenuesLicenses, royalties and fees
    
    $
    512,000
    
    
    $
    298,100Product and other sales
    
    
    881,800
    
    
    
    468,4001,393,800
    
    
    
    766,500Cost of revenuesLicenses, royalties and fees
    
    
    106,100
    
    
    
    102,800Product and other sales
    
    
    442,400
    
    
    
    278,700548,500
    
    
    
    381,500Gross profit
    
    
    845,300
    
    
    
    385,000Operating expensesResearch and development
    
    
    164,600
    
    
    
    145,400Sales and marketing
    
    
    241,600
    
    
    
    146,400General and administrative
(exclusive of legal expenses)
    
    
    180,900
    
    
    
    232,700Legal expenses
    
    
    46,800
    
    
    
    36,300633,900
    
    
    
    560,800Net income (loss) from operations
    
    
    211,400
    
    
    
    (175,800
    )Other income (expenses)Reversal of accounts payable and accrued
expenses
    
    
    175,900
    
    
    
    Interest income
    
    
    6,200
    
    
    
    500Interest, bank charges and financing cost
    
    
    (6,700
    )
    
    
    (14,800
    )175,400
    
    
    
    (14,300
    )Net income (loss) before income taxes
    
    
    386,800
    
    
    
    (190,100
    )Income taxes
    
    
    800
    
    
    
    Net income (loss)
    
    $
    386,000
    
    
    $
    (190,100
    )Net income (loss) per common shareBasic
    
    $
    .01
    
    
    $
    (.00
    )Diluted
    
    $
    .01
    
    
    $
    (.00
    )Weighted average common shares outstandingBasic
    
    
    52,078,349
    
    
    
    51,224,394Diluted
    
    
    53,392,882
    
    
    
    51,224,394
 
 *
    
    The accompanying notes are an integral part of these financial statements. F-4




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Nocopi Technologies, Inc.
 
 Statements of Stockholders Equity (Deficiency)*
 For the Period January 1, 2006 through December 31, 2007
 Common stock
    
    
    Paid-in
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    DeficitBalance  January 1, 2006
    
    
    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
    )Sales of common stock
    
    
    589,026
    
    
    
    5,900
    
    
    
    276,800Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    386,000Balance  December 31, 2007
    
    
    52,275,837
    
    
    $
    522,800
    
    
    $
    12,008,500
    
    
    
    ($12,371,100
    )
 
 *
    
    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 312007
    
    
    2006Operating ActivitiesNet income (loss)
    
    $
    386,000
    
    
    $
    (190,100
    )Adjustments to reconcile net income (loss)
to cash
provided by (used in) operating activitiesDepreciation and amortization
    
    
    20,000
    
    
    
    23,300Increase (decrease) in allowance for
doubtful accounts
    
    
    (15,000
    )
    
    
    5,000Reversal of accounts payable and accrued
expenses
    
    
    (175,900
    )
    
    
    Compensation expense  stock option grants
    
    
    
    
    
    
    48,000215,100
    
    
    
    (113,800
    )(Increase) decrease in assetsAccounts receivable
    
    
    (114,900
    )
    
    
    (49,500
    )Arbitration settlement receivable
    
    
    50,000
    
    
    
    50,000Inventory
    
    
    (34,000
    )
    
    
    (58,300
    )Prepaid and other
    
    
    (31,400
    )
    
    
    15,600Increase (decrease) in liabilitiesAccounts payable and accrued expenses
    
    
    (28,700
    )
    
    
    (39,900
    )Accrued income taxes
    
    
    800
    
    
    
    Deferred revenue
    
    
    (800
    )
    
    
    (4,200
    )(159,000
    )
    
    
    (86,300
    )Net cash provided by (used in) operating
activities
    
    
    56,100
    
    
    
    (200,100
    )Investing ActivitiesAdditions to fixed assets
    
    
    (29,300
    )
    
    
    (5,200
    )Net cash used in investing activities
    
    
    (29,300
    )
    
    
    (5,200
    )Financing ActivitiesIssuance of common stock
    
    
    282,700
    
    
    
    173,100Proceeds from demand and other loans
    
    
    7,000
    
    
    
    91,000Demand and other loan repayments
    
    
    (106,000
    )
    
    
    (10,000
    )Net cash provided by financing activities
    
    
    183,700
    
    
    
    254,100Increase in cash and cash equivalents
    
    
    210,500
    
    
    
    48,800Cash and cash equivalentsBeginning of year
    
    
    53,100
    
    
    
    4,300End of year
    
    $
    263,600
    
    
    $
    53,100Supplemental Disclosure of Cash Flow InformationInterest paid
    
    $
    5,500
    
    
    
    Supplemental 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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##### Table of Contents



NOCOPI TECHNOLOGIES, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 December 31, 2007 and 2006
 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 ink technologies for the Entertainment and
Toy and the Document and Product Authentication markets in the United States and foreign
countries. The Company operates in one principal industry segment.2.
    
    Significant Accounting PoliciesFinancial Statement Presentation Amounts included in the accompanying financial statements
have been rounded to the nearest hundred, except for number of shares and per share
information.Estimates 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.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 account, 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.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.Patent costsare charged to expense as incurred due to the uncertainty of their recoverability
as a
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##### Table of Contents



result of the Companys adverse liquidity situation during previous periods.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. The table below presents the computation of basic and diluted weighted average common
shares outstanding:
 2007
    
    
    2006Basic shares outstanding
    
    
    52,078,349
    
    
    
    51,224,394Incremental shares from
assumed conversion of stock options and warrants
    
    
    1,314,533Diluted shares outstanding
    
    
    53,392,882
    
    
    
    51,224,394
 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.
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##### Table of Contents



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 is effective for fiscal years beginning after December 15, 2006, and was
effective for us beginning with the first quarter of 2007, and the provisions of FIN 48 were
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 adopted FIN 48
effective January 1, 2007. The adoption of FIN 48 did not require an adjustment to the opening
balance of retained earnings at January 1, 2007.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS No. 157).
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
SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value
and the expanded disclosures about fair value measurement. SFAS No. 157 is effective for
fiscal years after November 15, 2007 and interim periods within those fiscal years. The
Company does not believe that the adoption of the provisions of SFAS No. 157 will impact the
amounts reported in the financial statements, however, additional disclosures will be required
about the inputs used to develop the measurements of fair value and the effect of certain
measurements reported on the Statement of Operations.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities(SFAS No. 159). SFAS No. 159 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. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 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 whether it will adopt this statement
and its impact on its financial statements and footnote disclosures.In December 2007, the FASB issued SFAS No.141 (revised 2007), Business Combinations
(SFAS 141R), which establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements for users of financial statements to evaluate the nature
and financial effects of the business combination. SFAS 141R is effective for us starting
January 1, 2009. Since the standard is generally applicable only for acquisitions completed in
the future, we are unable to determine the effect this standard would have on the accounting
for such acquisitions.
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##### Table of Contents



3.
    
    Concentration of Credit RiskCertain financial instruments potentially subject the Company to concentrations of credit
risk. These financial instruments consist primarily of cash and cash equivalents and
accounts receivables. The Company places its temporary cash investments with high credit
quality financial instruments to limit its credit exposure. There is a concentration of
credit risk with respect to accounts receivable due to the number of major customers.4.
    
    Demand and Other Short-Term LoansDuring 2007, the Company received an unsecured loan of $7,000 from Michael A.
Feinstein, M.D., its Chairman of the Board to finance the Companys working capital
requirements. During 2007, the Company repaid loans in the amount of $106,000 provided by
five individuals from 2005 to 2007 including $29,000 lent by Dr. Feinstein and a $15,000 loan
from Herman M. Gerwitz, a Director. At December 31, 2007, the Company had no loans
outstanding.During 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 M. 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 repaid during 2006 and 2007. 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-5 years; 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 loans were used to finance the Companys working
capital requirements.5.
    
    Stockholders Equity (Deficiency)During 2007, the Company sold 568,193 shares of its common stock to nine non-affiliated
individual investors and 20,833 shares to Philip B. White, a Director, for a total of $282,700
pursuant to a valid private placement.During 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 purchased common stock in a private placement in 2004 to correct the
purchase price based on the date of receipt of the investment.
 F-10




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##### Table of Contents



6.
    
    Other Income (Expenses)Included in Other income (expenses) for the year ended December 31, 2007 is $175,900 related
to the reversal of certain accounts payable and accrued consulting fees that the Company,
with legal counsel, has determined to be no longer statutorily payable.7.
    
    Income TaxesThe Company recorded a provision of $800 for estimated state income taxes for the year ended
December 31, 2007. Management of the Company believes that it will be able to use available
net operating loss carryforwards to offset federal and all other state income taxes in 2007.
There is no income tax benefit for 2006 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, 2007 and 2006, the Company had NOLs approximating $7,919,000 and $9,171,000,
respectively. The operating losses at December 31, 2007 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, 2007 and
2006. The Company has established a 100% valuation allowance of approximately $3,247,000 and
$3,760,000 at December 31, 2007 and 2006, respectively, for the deferred tax assets due to the
uncertainty of their realization.The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN 48), on January 1, 2007. There were no unrecognized tax benefits as of
the date of adoption and no unrecognized tax benefits at December 31, 2007. There were no
interest and penalties recognized in the statement of operations and in the balance sheet. Tax
years from 2004 through 2007 remain subject to examination by major tax jurisdictions.8.
    
    Commitments and ContingenciesThe Company conducts its operations in leased facilities and leases equipment under
non-cancelable operating leases expiring at various dates to 2013.Future minimum lease payments under non-cancelable operating leases with initial or remaining
terms of one year or more at December 31, 2007 are: $40,500  2008; $40,900  2009;
$40,900 2010; $42,200  2011; $43,400  2012 and $10,900  2013.Total rental expense under operating leases was $37,600 in each of the years 2007 and 2006.From time to time, the Company may be subject to legal proceedings and claims that arise in
the ordinary course of its business.
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##### Table of Contents



9.
    
    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 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.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.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 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, 2007 and 2006, there was no
unrecognized compensation expenses related to non-vested market-based share awards.
 F-12




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##### Table of Contents



Exercise
    
    
    WeightedNumber of
    
    
    Price Range
    
    
    AverageShares
    
    
    Per Share
    
    
    Exercise PriceOutstanding at December 31, 2005
    
    
    1,675,000
    
    
    $
    .17 to $.45
    
    
    
    .24Options granted
    
    
    400,000
    
    
    
    .22
    
    
    
    .22Options canceled
    
    
    325,000
    
    
    .30 and .45
    
    
    .39Outstanding at December 31, 2006 and 2007
    
    
    1,750,000
    
    
    $
    .10 to $.22
    
    
    $
    .16
 Exercise
    
    WeightedOption
    
    Price Range
    
    AverageShares
    
    Per Share
    
    Exercise PriceExercisable at year end:2006
    
    
    1,350,000
    
    
    $
    .10 to $.17
    
    
    $
    .152007
    
    
    1,750,000
    
    
    $
    .10 to $.22
    
    
    $
    .16Options available for future grant under all plans:2006 and 2007
    
    
    825,000
  Range of exercise prices
    
    $
    .10 to $.22Number outstanding at
December 31, 2007
    
    
    1,750,000Weighted average remaining contractual life (years)
    
    
    2.04Weighted average exercise price
    
    $
    .16Exercisable options:Number outstanding at
December 31, 2007
    
    
    1,750,000Weighted average remaining
Contractual life (years)
    
    
    2.04Weighted average exercise price
    
    $
    .16
 There were no stock options granted during 2007. 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 were 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
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##### Table of Contents



determined using the Black-Scholes pricing model with the following assumptions: expected
life-5 years; interest rate-4.92%; volatility-59% and dividend yield-0.At December 31, 2007, 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 2007 or 2006.
 10.
    
    Major Customer and Geographic InformationThe Companys three largest non-affiliated customers accounted for approximately 86% and 65% of
revenues in 2007 and 2006, respectively, and approximately 100% and 75% of net accounts
receivable at December 31, 2007 and 2006, respectively. 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:
 2007
    
    
    2006North America
    
    $
    1,054,500
    
    
    $
    479,700Asia
    
    
    330,200
    
    
    
    274,800Europe
    
    
    8,300
    
    
    
    1,200Australia and New Zealand
    
    
    800
    
    
    
    10,800$
    1,393,800
    
    
    $
    766,500
 11.
    
    Subsequent EventIn January 2008, the Company signed an agreement with a licensee of the Company whereby the
licensee acquired an interest in a patent held by an unrelated third party. The Companys
contribution, through royalty offsets, to the licensees acquisition of these patent rights is
$40,000. The Company received, among other things, certain assurances regarding its continuing
ability to manufacture and sell products to this licensee.
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##### Table of Contents



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, LLC (13)10.15
    
    Addendum #1 to Patent License Agreement with Giddy Up, LLC and Color Loco, LLC (13)10.16
    
    Amendment dated July 18, 2007 to Lease Agreement dated March 19, 2003
relating to premises at 9 Portland Road, West Conshohocken, PA 19428 (14)14.1
    
    Code of Ethics (11)31.1*
    
    Certification of Chief Financial Officer required by Rule 13a-14(a).




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##### Table of Contents



ExhibitNumber
    
    Description31.2*
    
    Certification of Chief Executive Officer required by Rule 13a-14(a).32.1*
    
    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(13)
    
    Incorporated by reference to Registrants Annual Report on Form 10-KSB for the Year Ended
December 31, 2006(14)
    
    Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the Three
Months Ended September 30, 2007