PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Nocopi Technologies, Inc.

Statements of Operations*

(unaudited)


	Three Months ended						Nine Months ended
	September 30						September 30						Three Months ended June 30						Six Months ended June 30
	2008			2007			2008			2007			2009			2008			2009			2008
Revenues
Licenses, royalties and fees	$	105,600		$	174,400		$	409,700		$	301,000		$	95,300		$	109,900		$	165,800		$	304,100
Product and other sales		92,300			312,600			297,500			777,100			92,200			127,600			135,300			205,200

		197,900			487,000			707,200			1,078,100			187,500			237,500			301,100			509,300

Cost of revenues
Licenses, royalties and fees		21,900			37,600			68,800			81,700			23,300			24,000			43,300			46,900
Product and other sales		63,800			142,900			202,000			366,600			66,200			76,000			113,400			138,200

		85,700			180,500			270,800			448,300			89,500			100,000			156,700			185,100

Gross profit		112,200			306,500			436,400			629,800			98,000			137,500			144,400			324,200

Operating expenses
Research and development		41,000			40,500			123,100			119,400			40,900			39,800			83,100			82,100
Sales and marketing		49,500			75,000			183,000			173,800			95,700			65,600			169,600			133,500
General and administrative		158,100			53,500			407,000			171,700			88,300			112,600			197,900			248,900

		248,600			169,000			713,100			464,900			224,900			218,000			450,600			464,500

Net income (loss) from operations		(136,400	)		137,500			(276,700	)		164,900
Net loss from operations														(126,900	)		(80,500	)		(306,200	)		(140,300	)

Other income (expenses)
Reversal of accounts payable and accrued expenses		—			166,200			37,500			166,200			69,100			37,500			69,100			37,500
Interest income		500			2,300			2,800			3,500			—			900			—			2,300
Interest expense and bank charges		(500	)		(1,700	)		(1,600	)		(5,400	)		(800	)		(500	)		(1,000	)		(1,100	)

		—			166,800			38,700			164,300			68,300			37,900			68,100			38,700

Net income (loss) before income taxes		(136,400	)		304,300			(238,000	)		329,200
Net loss before income taxes														(58,600	)		(42,600	)		(238,100	)		(101,600	)
Income taxes		—			4,900			900			4,900			—			900			—			900

Net income (loss)	$	(136,400	)	$	299,400		$	(238,900	)	$	324,300
Net loss													$	(58,600	)	$	(43,500	)	$	(238,100	)	$	(102,500	)


Net earnings (loss) per common share
Basic	$	(.00	)	$	.01		$	(.00	)	$	.01
Diluted	$	(.00	)	$	.01		$	(.00	)	$	.01
Basic and diluted net loss per common share													$	(.00	)	$	(.00	)	$	(.00	)	$	(.00	)

Weighted average common shares outstanding
Basic		52,285,837			52,275,837			52,281,948			52,012,521
Diluted		52,285,837			53,504,353			52,281,948			53,324,628
Basic and diluted weighted average common shares outstanding														52,541,045			52,284,170			52,413,441			52,280,004

Nocopi Technologies, Inc.

Balance Sheets*


	September 30			December 31				June 30			December 31
	2008			2007				2009			2008
	(unaudited)			(audited)				(unaudited)			(audited)
*Assets*							*Assets*
Current assets
Cash and cash equivalents	$	161,900		$	263,600			$	54,400		$	87,200
Accounts receivable less $5,000 allowance for doubtful accounts		128,600			221,900				115,500			167,100
Inventory		99,600			92,300				81,500			97,200
Prepaid and other		32,100			56,200				22,100			35,900

Total current assets		422,200			634,000				273,500			387,400

Fixed assets
Leasehold improvements		72,500			72,500				72,500			72,500
Furniture, fixtures and equipment		184,900			509,400				184,900			184,900

		257,400			581,900				257,400			257,400
Less: accumulated depreciation and amortization		230,500			548,500				237,700			233,100

		26,900			33,400				19,700			24,300

Total assets	$	449,100		$	667,400			$	293,200		$	411,700


*Liabilities and Stockholders’ Equity (Deficiency)*							*Liabilities and Stockholders’ Equity (Deficiency)*

Current liabilities
Line of credit								$	75,000			—
Accounts payable	$	334,400		$	364,200				263,200		$	272,200
Accrued expenses		105,100			137,200				114,600			117,100
Accrued income taxes		—			800
Deferred revenue		10,000			5,000				17,200			10,000

Total current liabilities		449,500			507,200				470,000			399,300

Stockholders’ equity (deficiency)
Common stock, $.01 par value Authorized – 75,000,000 shares Issued and outstanding 2008 – 52,285,837 shares; 2007 – 52,275,837 shares		522,900			522,800
Common stock, $.01 par value
Authorized — 75,000,000 shares
Issued and outstanding
2009 — 52,926,462 shares; 2008 — 52,285,837 shares									529,300			522,900
Paid-in capital		12,086,700			12,008,500				12,174,800			12,132,300
Accumulated deficit		(12,610,000	)		(12,371,100	)			(12,880,900	)		(12,642,800	)

		(400	)		160,200
Total stockholders’ equity (deficiency)									(176,800	)		12,400

Total liabilities and stockholders’ equity (deficiency)	$	449,100		$	667,400			$	293,200		$	411,700

Nocopi Technologies, Inc.

Statements of Cash Flows*

(unaudited)


	Nine Months ended September 30						Six Months ended June 30
	2008			2007			2009			2008
Operating Activities
Net income (loss)	$	(238,900	)	$	324,300
Adjustments to reconcile net income (loss) to cash used in operating activities
Net loss							$	(238,100	)	$	(102,500	)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization		9,900			15,200			4,600			6,600
Reversal of accounts payable and accrued expenses		(37,500	)		(166,200	)		(69,100	)		(37,500	)
Compensation expense – stock option grants		76,100			—
Compensation expense — stock option grants								7,900			30,500

								(294,700	)		(102,900	)
		(190,400	)		173,300

(Increase) decrease in assets
Accounts receivable		93,300			(229,500	)		51,600			78,800
Arbitration settlement receivable		—			50,000
Inventory		(7,300	)		3,200			15,700			(1,400	)
Prepaid and other		24,100			(18,000	)		13,800			19,600
Increase (decrease) in liabilities
Accounts payable and accrued expenses		(24,400	)		(14,700	)		57,600			(41,600	)
Accrued income taxes		(800	)		4,900			—			(800	)
Deferred revenue		5,000			(800	)		7,200			—

		89,900			(204,900	)		145,900			54,600

Net cash used in operating activities		(100,500	)		(31,600	)		(148,800	)		(48,300	)


Investing Activities
Additions to fixed assets		(3,400	)		(17,600	)		—			(1,200	)

Net cash used in investing activities		(3,400	)		(17,600	)		—			(1,200	)


Financing Activities
Net borrowings under line of credit								75,000			—
Issuance of common stock								41,000			—
Exercise of warrants		2,200			—			—			2,200
Issuance of common stock		—			282,700
Proceeds from demand loan		—			7,000
Repayment of short-term loans		—			(77,000	)

Net cash provided by financing activities		2,200			212,700			116,000			2,200

Increase (decrease) in cash and cash equivalents		(101,700	)		163,500
Decrease in cash and cash equivalents								(32,800	)		(47,300	)
Cash and cash equivalents at beginning of year		263,600			53,100			87,200			263,600

Cash and cash equivalents at end of period	$	161,900		$	216,600		$	54,400		$	216,300


Supplemental disclosure of cash flow information
Cash paid for interest	$	2,700		$	5,500		$	400		$	2,700
Cash paid for income taxes	$	2,000			—			—		$	1,600

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Financial Statements

The accompanying unaudited condensed financial statements have been prepared by Nocopi Technologies, Inc. (the “Company”). These statements include all adjustments (consisting only of normal recurring adjustments) which management believes necessary for a fair presentation of the statements and have been prepared on a consistent basis using the accounting policies described in the summary of Accounting Policies included in the Company’s ~~2007~~2008 Annual Report on Form ~~10-KSB.~~10-K. Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the ~~2007~~2008 Annual Report on Form ~~10-KSB~~10-K should be read in conjunction with the accompanying interim financial statements. ~~Certain amounts in the 2007 financial statements have been reclassified in order for them to be in conformity with the 2008 presentation.~~ The interim operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2008~~2009 may not be necessarily indicative of the operating results expected for the full year.

Note 2. ~~Management Plan~~Going Concern

~~The~~Since its inception, the Company ~~recorded~~has incurred significant losses and, as of June 30, 2009, had accumulated losses of $12,880,900. For the six months ended June 30, 2009, the Company had a net loss from operations of ~~$238,900 in the first nine months of 2008~~$306,200 and ~~had~~ negative cash flow ~~during that period.~~from operations of $148,800. At ~~September~~June 30, ~~2008,~~2009, the Company had negative working capital of $196,500 and ~~stockholder’s equity. At September 30,~~a stockholders’ deficiency of $176,800. For the year ended December 31, 2008, the Company’s net loss from operations was $362,300. Due in part to the recession that has and is continuing to negatively impact the country’s economy, the Company, which is substantially dependent on its licensees to generate licensing revenues, 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 and its newly formed Loss Prevention Division. There can be no assurances that the Company will be able to generate sufficient revenues and gross profits to return to and sustain profitability and positive cash flow in the future.

During 2008, the Company ~~had no loans outstanding; however, during the third quarter of 2008, it secured~~negotiated a $100,000 revolving line of credit with a bank ~~to provide working capital in~~as an additional potential source of capital. During the ~~future, if needed. There have been no borrowings~~second quarter of 2009, the Company borrowed $75,000 under the line of ~~credit. While~~credit to fund its operating activities. There can be no assurances that the bank will continue to make the line of credit available in the future. During the second quarter of 2009, the Company raised $41,000 in a private placement whereby 640,625 shares of the Company’s common stock were sold to two non-affiliated individual investors. Management of the Company is ~~not actively seeking additional investment at the present time due~~continuing to ~~the improvements in its revenues during 2007 and 2008 compared~~seek potential investors to ~~earlier years, it may seek investment in the future, if~~fund investments needed to ~~support working capital requirements or~~increase its operating revenues to ~~provide funding for~~levels that will sustain its operations, to fund the start-up of a new business ~~opportunities.~~line and to fund operating deficits that it anticipates will continue until revenues from traditional product lines increase and revenues from new product lines can be realized. There can be no assurances that the Company will be successful in obtaining sufficient additional ~~investment~~capital,

or if ~~such~~it does, that the additional ~~investment is sought. At this time, management of~~capital will enable the Company to impact its revenues so as to have a material positive effect on the Company’s operations and cash flow. The Company believes that ~~its current cash reserves, borrowing capacity and revenue opportunities will allow~~without additional capital, whether in the form of debt, equity or both, it may be forced to ~~remain~~cease operations in ~~operation for at least one year from~~ the ~~date of this report. There can be no assurances that revenues in future periods will be sustained at levels that will allow the Company to return to and maintain positive cash flow.~~near future.

Note 3. Stock Based Compensation

The Company follows SFAS 123(R), “Share-Based Payment” and uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award.

In February 2009, the Board of Directors of the Company, under the Company’s 1999 Stock Option Plan, granted options to acquire 200,000 shares of its common stock to five employees of the Company, options to acquire 75,000 shares of its common stock to two consultants and options to acquire 50,000 shares of its common stock to an officer of the Company at $.12 per share. The options vest after one year and expire after five years. In accordance with the fair value method as described in accounting requirements of SFAS No. 123(R), compensation expense of approximately $22,900 is being recognized over the vesting period of the options through February 2010 to account for the cost of services received by the Company in exchange for the grant of stock options. During the three months and six months ended June 30, 2009, compensation expense of approximately $6,000 and $7,900, respectively, was recognized. As of June 30, 2009, the unrecognized portion of compensation expense was approximately $15,000.

On April 30, 2008, under the Company’s directors’ option plan (the “Plan”), options to acquire 100,000 shares of the Company’s common stock were granted to each of the five members of the Board of Directors of the Company, including one member who is also an executive officer of

the Company, at $.45 per share. Under the terms of the Plan, the options ~~will~~ (i) ~~vest~~vested on January 1, 2009 ~~provided the director attends at least 75% of the year’s board meetings~~ and (ii) will expire five years from the date of grant. In accordance with the fair value method as described in accounting requirements of SFAS No. 123(R), compensation expense of approximately $121,700 ~~is being~~was recognized during 2008 ~~over the vesting period of the options~~ to account for the cost of employee and director services received by the Company in exchange for the grant of stock options. During the three and ~~nine~~six months ended ~~September~~June 30, 2008, compensation expense of approximately ~~$45,600~~$30,500 was recognized.

The Company’s 1999 Stock Option Plan terminated in February 2009 and ~~$76,100, respectively, was recognized. As of September 30, 2008, the unrecognized portion of expense was approximately $45,600. There were~~ no further stock options can be granted under the plan; however, options granted before the termination date may be exercised ~~or cancelled during the nine months ended September 30, 2007.~~through their expiration date.

(ii) repaid loans in the amount of $77,000 provided by four individuals in 2005 and 2006 including the $15,000 loan from Herman Gerwitz, a Director. At September 30, 2008 and December 31, 2007, the Company had no loans outstanding.

~~Note 7.~~5. Stockholders’ Equity (Deficiency)

During the second quarter of 2009, the Company sold 640,625 shares of its common stock to two non-affiliated individuals for a total of $41,000 pursuant to a private placement. During the second quarter of 2008, a non-affiliated warrant holder exercised warrants to acquire 10,000 shares of common stock of the Company at $.22 per share. During the second quarter of 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.

Note 8.6. Other Income (Expenses)

~~Included in~~ Other income (expenses) includes, for the ~~nine~~three months and six months ended ~~September~~June 30, ~~2008 is $37,500 related to~~2009, the reversal of ~~certain~~$69,100 of accounts payable ~~and accrued expenses~~related to invoices received from 2001 through 2003 from a business for consulting services that the Company, with legal counsel, has determined to be no longer statutorily ~~payable. In~~payable as the ~~three and nine months ended September 30, 2007,~~statute of limitations to bring a claim has expired. Other

income (expenses) included, for the three months and six months ended June 30, 2008, the reversal of ~~$166,200~~$37,500 of ~~fees~~accounts payable and accrued expenses that ~~had been accrued, but not paid, under a consulting agreement that terminated in December 2002. During the third quarter of 2007,~~ the Company, with legal counsel, determined ~~that~~to be no longer statutorily payable as the statute of limitations ~~on the consultant’s ability~~ to bring a claim had expired.

Note 9.7. Income Taxes

There is no income tax benefit for the three months and ~~nine~~six months ended ~~September~~June 30, 2009 and June 30, 2008 because the Company has determined that the realization of the net deferred tax asset is not assured. The Company has created a valuation allowance for the entire amount of such benefits. ~~In the three months and nine months ended September 30, 2007, the Company recorded a provision of $4,900 for estimated federal corporate alternative minimum taxes.~~ The Company recorded an income tax expense of $900 in the ~~nine~~three months and six months ended ~~September~~June 30, 2008 for certain state income taxes due for 2007 in excess of the tax liability recorded in that year.

There was no change in unrecognized tax benefits during the period ended ~~September~~June 30, ~~2008~~2009 and there was no accrual for uncertain tax positions as of ~~September~~June 30, ~~2008.~~2009.

Tax years from 2005 through ~~2007~~2008 remain subject to examination by U.S. federal and state jurisdictions.

Note ~~10. Earnings (loss)~~8. Loss per Share

In accordance with SFAS No. 128,Earnings per Share, basic earnings (loss) per common share is computed using net earnings divided by the weighted average number of common shares outstanding for the periods presented. Diluted earnings per common share assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which the market price exceeds the exercise price, less shares that could have been purchased by the Company with related proceeds. Because the Company reported a net loss for the three months and ~~nine~~six months ended ~~September~~June 30, 2009 and June 30, 2008, common stock equivalents, consisting of stock options and warrants, were ~~anti-dilutive for those periods.~~anti-dilutive.

Item 2.

NOCOPI TECHNOLOGIES, INC.

Management’s Discussion and Analysis

of Financial Condition and Results of ~~Operations~~Operation

Forward-Looking Information

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition should be read in conjunction with the Condensed Financial Statements and related notes included elsewhere in this report as well as with the Company’s audited Financial Statements and Notes thereto for the year ended December 31, 2007 included in the Company’s Annual Report on ThisForm ~~10-KSB filed with the Securities and Exchange Commission on March 31, 2008.~~

~~The information in this discussion~~10-Q contains forward-looking statements within the meaning of Section 27A of the ~~Private~~ Securities ~~Litigation Reform~~ Act of ~~1995. Forward-looking~~1933 and Section 21E of the Securities Exchange Act of 1934, regarding, among other things, anticipated improvements in operations, the Company’s plans, earnings, cash flow and expense estimates, strategies and prospects, both business and financial. All statements ~~involve known~~other than statements of current or historical fact contained in this report are forward-looking statements. The words “believe,’’ “expect,’’ “anticipate,’’ “should,’’ “plan,’’ “will,’’ “may,’’ “intend,’’ “estimate,’’ “potential,’’ “continue’’ and ~~unknown~~similar expressions, as they relate to the Company, are intended to identify forward-looking statements.

The Company has based these forward-looking statements largely on its current expectations and projections about future events, financial trends, market opportunities, competition, and the adequacy of the Company’s available cash resources, which the Company believes may affect its financial condition, results of operations, business strategy and financial needs. This Form 10-Q also contains forward-looking statements attributed to third parties. All such statements can be affected by inaccurate assumptions, including, without limitation, with respect to risks, uncertainties, anticipated operating efficiencies, new business prospects and the rate of expense increases. In light of these risks, uncertainties and ~~other factors, which may cause~~assumptions, the Company’s actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Such factors include those described in “Risk Factors.” The forward-looking statements ~~included~~ in this report may ~~prove to be inaccurate. In light~~not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. For these reasons, and because of ~~the significant uncertainties inherent in these forward-looking statements, and~~ the uncertainty relating to the current financial crisis in today’s economic environment and the potential reduction in demand for the Company’s products, you should not consider this information to be a guarantee by the Company or any other person that its objectives and plans will be achieved. When you consider these forward-looking statements, you should keep in mind the “Risk Factors” and other cautionary statements set forth in this Item 2 and elsewhere in this Form 10-Q. The Company’s forward-looking statements speak only as of the date made. The Company ~~does not undertake~~undertakes no obligation to ~~publicly~~ update or revise ~~its~~any forward-looking statements, ~~even if experience~~whether as a result of new information, future events or ~~future changes make it clear that any projected results (expressed or implied) will not~~otherwise.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be ~~realized.~~read in conjunction with the Condensed Financial Statements and related notes included elsewhere in this report as well as with the Company’s audited Financial Statements and Notes thereto for the year ended December 31, 2008 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2009, and keeping in mind this entire cautionary statement regarding forward-looking information.

Results of Operations

The Company’s revenues are derived from (i) royalties paid by licensees of the Company’s technologies, (ii) fees for the provision of technical services to licensees and ~~from~~(iii) the direct sale of ~~(i)~~(a) products incorporating the Company’s technologies, such as inks, security paper and pressure sensitive labels, and ~~(ii)~~(b) equipment used to support the application of the Company’s technologies, such as ink-jet printing systems. Royalties consist of guaranteed minimum royalties payable by the Company’s licensees and/or additional royalties, which typically vary with the licensee’s sales or production of products incorporating the licensed technology. Technical services, in the form of on-site or telephone consultations by members of the Company’s technical staff, may be offered to licensees of the Company’s technologies. The consulting fees are billed at agreed upon per diem or hourly rates at the time the services are rendered. Service fees and sales revenues vary directly with the number of units of service or product provided.

The Company recognizes revenue on its lines of business as follows:

a) License fees and royalties are recognized when the license term begins. Upon inception of the license term, revenue is recognized in a manner consistent with the nature of the transaction and the earnings process, which generally is ratably over the license term;

b) Product sales are recognized (i) upon shipment of products; (ii) when the price is fixed or determinable and (iii) when collectability is reasonably assured; and

c) Fees for technical services are recognized when (i) the service has been rendered; (ii) an arrangement exists; (iii) the price is fixed or determinable based upon a per diem or hourly rate; and (iv) collectability is reasonably assured.

The Company believes that, as fixed ~~costs~~cost reductions beyond those it has achieved in recent years may not be achievable, its operating results are substantially dependent on revenue levels. Because revenues derived from licenses and royalties carry a much higher gross profit margin than other revenues, operating results are also substantially affected by changes in revenue mix.

Both the absolute amounts of the Company’s revenues and the mix among the various sources of revenue are subject to substantial fluctuation. The Company has a relatively small number of substantial customers rather than a large number of small customers. Accordingly, changes in the revenue received from a significant customer can have a substantial effect on the Company’s total revenue and on its revenue mix and overall financial performance. Such changes may result from a customer’s product development delays, engineering changes, changes in product marketing strategies and the like. In addition, certain customers have, from time to time, sought to renegotiate certain provisions of their license agreements and, when the Company agrees to revise terms, revenues from the customer may be affected. The addition of a substantial new customer or the loss of a substantial existing customer may also have a substantial effect on the Company’s total revenue, revenue mix and operating results.

Revenues for the ~~third~~second quarter of 2009 were $187,500 compared to $237,500 in the second quarter of 2008, ~~were $197,900 compared to $487,000 in the third quarter of 2007,~~ a decrease of ~~$289,100,~~$50,000, or approximately ~~59%~~21%. Licenses, royalties and fees decreased by ~~$68,800,~~$14,600, or approximately ~~39%~~13%, to ~~$105,600~~$95,300 in the ~~third~~second quarter of ~~2008~~2009 from ~~$174,400~~$109,900 in the ~~third~~second quarter of ~~2007.~~2008. The decrease in licenses, royalties and fees is due primarily to lower licensing revenues derived from ~~the Company’s~~three licensees in the ~~Entertainment~~entertainment and Toy Products business as their shipments to retail customers were significantly lower than in the same period of the previous year. Product and other sales were $92,300 in the third quarter of 2008 compared to $312,600 in the third quarter of 2007, a decrease of $220,300, or approximately 70%. In the second quarter of 2007, a new licensee in the Entertainment and Toy Products business placed initial orders with the Company for the reactive inks used in its product lines that utilize the Company’s technologies. These initial quantities of ink, along with additional purchases subsequent to the second quarter of 2007, have proven adequate to manufacture sufficient product to meet the licensee’s customer demands through the current time. The Company has not received substantial ink orders from this licensee to date in 2008. Additionally, sales of the Company’s security paper declined in the third quarter of 2008 compared to the third quarter of 2007.

For the first nine months of 2008, revenues were $707,200, $370,900, or approximately 34%, lower than revenues of $1,078,100 in the first nine months of 2007. Licenses, royalties and fees of $409,700 in the first nine months of 2008 were $108,700, or approximately 36%, higher than $301,000 in the first nine months of 2007, due primarily to the inception during the first half of 2007 of a license arrangement with one new licensee in the Entertainment and Toy Products business from whom royalty revenues commenced in the second quarter of 2007 offset in part by the non-renewal of one license during 2007. Product and other sales declined by $479,600, or approximately 62%, to $297,500 in the first nine months of 2008 from $777,100 in the first ninetoy

910

~~months~~products business and lower royalties from a licensee in the retail receipt and document fraud market resulting from the conversion of ~~2007. As discussed above,~~an exclusive license to a non-exclusive license at a lower royalty rate at the ~~first nine months~~beginning of ~~2007 included initial~~2009 offset in part by revenues from two licenses signed in late 2008 and early 2009. The conversion to a non-exclusive license with this licensee in the retail receipt and document fraud market enables the Company to enter this market to sell its security products directly to loss prevention departments within retail businesses and chains and to license other printers who serve this market segment. Product and other sales decreased by $35,400, or approximately 28%, to $92,200 in the second quarter of 2009 from $127,600 in the second quarter of 2008. Sales of both ink and security paper declined in the second quarter of 2009 compared to the second quarter of 2008. The lower level of ink sales in the second quarter of 2009 compared to the second quarter of 2008 is due primarily to lower ink requirements of the third party printers of the Company’s ~~reactive inks sold to a new~~major licensee in the ~~Entertainment~~entertainment and ~~Toy Products~~toy products business ~~that~~due to the licensees’ decline in sales during the current period of economic decline. The Company derived revenues of approximately $121,100 from licensees and their printers in the entertainment and toy products market in the second quarter of 2009 compared to approximately $155,700 in the second quarter of 2008. Sales of security paper also declined in the second quarter of 2009 compared to the second quarter of 2008.

For the first six months of 2009, revenues were ~~not repeated~~$301,100, $208,200, or approximately 41%, lower than revenues of $509,300 in the first ~~nine~~six months of 2008. Licenses, royalties and fees of $165,800 in the first half of 2009 were $138,300, or approximately 45%, lower than $304,100 in the first half of 2008, due primarily to the same factors that caused the revenue decline in the second quarter of 2009 compared to the second quarter of 2008. Product and other sales declined by $69,900, or approximately 34%, to $135,300 in the first half of 2009 from $205,200 in the first half of 2008. The lower level of ink sales in the first half of 2009 compared to the first half of 2008 is due primarily to lower ink requirements of the third party printers of the Company’s major licensee in the entertainment and toy products business related to the licensees’ declines in sales during the current period of economic decline. The Company derived revenues of approximately $185,600 from licensees and their printers in the entertainment and toy products market in the first half of 2009 compared to approximately $353,500 in the first half of 2008. Additionally, ink sales to the Company’s licensee in the retail receipt and document fraud market declined in the first half of 2009 compared to the first half of 2008. The Company also experienced a decline in sales of its security papers in the ~~nine months~~first half of ~~2008~~2009 compared to the first ~~nine months~~half of 2007. The Company derived approximately $119,600 and $473,100 in the third quarter and first nine months of 2008, respectively, in revenues from licensees and their printers in the Entertainment and Toy Products market compared to approximately $376,000 and $783,400 in the third quarter and first nine months of 2007, respectively. The Company believes that revenues from licensees in the Entertainment and Toy Products market will grow in future periods compared to the third quarter and first nine months of 2008 as its licensees expand their lines of products utilizing the Company’s technologies, develop new and expand existing retail outlets for their products and ink inventories at the licensed printers require replenishment. There can be no assurances that revenues from licensees in the Entertainment and Toy Products market will increase in future periods, nor can the timing of such potential revenue increases be predicted, particularly given the uncertain economic conditions currently being experienced worldwide.2008.

The Company’s gross profit decreased to ~~$112,200~~$98,000 in the ~~third~~second quarter of ~~2008~~2009 or approximately ~~57%~~52% of revenues from ~~$306,500~~$137,500 or approximately ~~63%~~58% of revenues in the ~~third~~second quarter of ~~2007.~~2008. Licenses, royalties and fees ~~carry~~have historically carried a ~~substantially~~ higher gross profit than product and other sales, which generally consist of supplies or other manufactured products which incorporate the Company’s technologies or equipment used to support the application of its technologies. These items (except for inks which are manufactured by the Company) are generally purchased from third-party vendors and resold to the end-user or licensee and carry a ~~significantly~~ lower gross profit than licenses, royalties and fees. ~~As both~~The lower gross profit in the second quarter of 2009 compared to the second quarter of 2008 results primarily from lower gross revenues ~~represented by~~from licenses, royalties and fees and ~~from~~ product and other sales ~~decreased~~ in the ~~third~~second quarter of ~~2008~~2009 compared to the ~~third~~second quarter of ~~2007,~~2008.

For the first six months of 2009, the gross profit was $144,400, or approximately 48% of revenues, compared to $324,200, or approximately 64% of revenues, in ~~both~~the first six months of

2008. The decrease in the gross profit in absolute dollars and as a percentage of revenues ~~was negatively affected.~~

~~For the first nine months of 2008, the gross profit was $436,400, or approximately 62% of revenues, compared to $629,800, or approximately 58% of revenues,~~ in the first ~~nine months~~half of ~~2007. While the gross profit in absolute dollars decreased in the first nine months of 2008~~2009 compared to the first ~~nine months~~half of ~~2007, the~~2008 resulted from lower gross ~~profit, expressed as a percentage~~revenues of ~~revenues increased~~both licenses, royalties and fees and product and other sales in the first ~~nine months~~half of ~~2008~~2009 compared to the first ~~nine months~~half of ~~2007 resulting from the increase in revenues represented by licenses, royalties and fees in the first nine months of 2008 compared to the first nine months of 2007.~~2008.

As the variable component of cost of revenues related to licenses, royalties and fees is a low percentage of these revenues and the fixed component is not substantial, period to period changes in revenues from licenses, royalties and fees can significantly affect both the gross profit from licenses, royalties and fees as well as the overall gross profit. Primarily due to the ~~increase~~decrease in revenues from licenses, royalties and fees in the ~~first nine months~~second quarter of ~~2008 from~~2009 compared to the ~~first nine months~~second quarter of ~~2007,~~2008, the gross profit from licenses, royalties and fees ~~increased~~decreased to approximately ~~83%~~76% of revenues from licenses, royalties and fees in the second quarter of 2009 from approximately 78% in the second quarter of 2008 and to approximately 74% of revenues from licenses, royalties and fees in the first ~~nine months~~half of ~~2008~~2009 from approximately ~~73%~~85% in the first ~~nine months~~half of 2007. The gross profit from licenses, royalties and fees improved nominally in the third quarter of 2008 to approximately 79% of revenues from licenses, royalties and fees from approximately 78% in the third quarter of 2007.2008.

The gross profit, expressed as a percentage of revenues, of product and other sales is dependent on both the overall sales volumes of product and other sales and on the mix of the

specific goods produced and/or sold. As a result of lower sales of both inks and security paper products ~~as well as higher fixed expenses due~~in the second quarter of 2009 compared to ~~a staff addition in mid-2007,~~the second quarter of 2008, the gross profit from product and other sales declined to approximately ~~31%~~28% of revenues in the second quarter of 2009 compared to approximately 40% of revenues from product and other sales in the ~~third~~second quarter of 2008 ~~from approximately 54% in the third quarter of 2007~~ and to approximately ~~32%~~16% of revenues from product and other sales in the first ~~nine months~~half of ~~2008~~2009 compared to approximately 33% of revenues from ~~approximately 53%~~product and other sales in the first ~~nine months~~half of ~~2007.~~2008.

Research and development expenses of ~~$41,000~~$40,900 and ~~$123,100~~$83,100 in the ~~third~~second quarter and first ~~nine~~six months of ~~2008 approximated the $40,500~~2009 were comparable to $39,800 and ~~$119,400~~$82,100 in the ~~third~~second quarter and first ~~nine~~six months of ~~2007.~~2008.

Sales and marketing expenses ~~decreased~~increased to ~~$49,500~~$95,700 in the ~~third~~second quarter of 2009 from $65,600 in the second quarter of 2008 ~~from $75,000~~and to $169,600 in the ~~third quarter~~first six months of ~~2007. The decrease primarily reflects lower commission expense related to the lower level of revenues~~2009 from $133,500 in the ~~third~~first six months of 2008. The increase in both the second quarter and first six months of ~~2008~~2009 compared to the ~~third~~second quarter and first six months of ~~2007 offset in part by~~2008 reflects fees paid to atwo sales ~~consultant engaged late~~consultants involved in the ~~third quarter of 2007 and expenses associated with the maintenance~~start up of the Company’s new ~~web site. In the first nine months of 2008, sales and marketing expenses increased to $183,000 from $173,800~~Loss Prevention Division, participation in three Loss Prevention trade shows in the ~~first nine months of 2007. The increase primarily reflects expenses associated with the Company’s attendance at two trade shows, fees paid to a sales consultant engaged late in the third~~second quarter of ~~2007 as well as development~~2009 and ~~maintenance~~related travel expenses ~~associated with the Company’s new web site~~ offset in part by lower commission expense on the lower level of ~~revenues~~sales and lower costs associated with the Company’s web site in the second quarter and first ~~nine~~six months of ~~2008~~2009 compared to the second quarter and first ~~nine~~six months of ~~2007.~~2008.

General and administrative expenses ~~increased~~decreased to ~~$158,100~~$88,300 in the ~~third~~second quarter of ~~2008~~2009 from ~~$53,500~~$112,600 in the ~~third~~second quarter of ~~2007.~~2008. The ~~increase~~decrease in the ~~third~~second quarter of ~~2008~~2009 compared to the ~~third~~second quarter of ~~2007~~2008 is due primarily to: a) ~~$45,600~~$6,000 in expenses recorded in the ~~third~~second quarter of 2009 in connection with the issuance of 325,000 options to purchase shares of the Company’s common stock in February 2009 to employees, an officer and others compared to $30,500 in expenses recorded in the second quarter of 2008 in connection with the issuance of 500,000 options to purchase shares of the Company’s common stock to members of the Company’s Board of Directors in April 2008; b) no patent acquisition and maintenance expenses in the second quarter of 2009; c) lower insurance expense in the second quarter of 2009

compared to the second quarter of 2008 ~~(there were no options issued~~related to favorable policy renewals and d) lower legal expenses due to lower requirements in ~~2007); b)~~the second quarter of 2009 compared to the second quarter of 2008 offset in part by higher compensation expense due ~~in part~~ to ~~greater securities law compliance obligations and~~ the inception in June 2008 of ~~a three-year~~an employment agreement with the Company’s Chief Executive Officer whereby the Chief Executive Officer receives minimum compensation of $85,000 per year beginning in June 2008; c) higher patent acquisition and maintenance expenses and d) higher legal and accounting fees related to higher levels of services required.Officer.

For the first ~~nine~~six months of ~~2008,~~2009, general and administrative expenses ~~increased~~decreased to ~~$407,000~~$197,900 from ~~$171,700~~$248,900 in the first ~~nine~~six months of ~~2007~~2008 due primarily to: a) the non-recurrence of the Company’s one-time contribution in the first half of 2008 of $40,000 to a licensee of the Company under an agreement whereby the licensee acquired an interest in a patent held by a third party and the Company received, among other things, certain assurances regarding its continuing ability to manufacture and sell products to this licensee; b) ~~$76,100~~$7,900 in expenses recorded ~~through September 30,~~in the first half of 2009 in connection with the issuance of 325,000 options to purchase shares of the Company’s common stock in February 2009 to employees, an officer and others compared to $30,500 in expenses recorded in the first half of 2008 in connection with the issuance of 500,000 options to purchase shares of the Company’s common stock to members of the Company’s Board of Directors in April 2008; c) no patent acquisition and maintenance expenses in the first half of 2009; and d) lower insurance expense in the first half of 2009 compared to the first half of 2008 ~~(there were no options issued~~related to favorable policy renewals offset in ~~2007); c)~~part by higher compensation expense due ~~in part~~ to ~~greater securities law compliance obligations and~~ the inception in June 2008 of an employment agreement with the Company’s Chief Executive ~~Officer; d) higher patent acquisition and maintenance expenses and e) higher legal and accounting fees related to higher levels of services required.~~Officer.

Other income (expenses) inincludes, for the ~~first nine~~three months and six months ended June 30, 2009, the reversal of $69,100 of accounts payable related to invoices received from 2001 through 2003 from a business for consulting services that the Company, with legal counsel, has determined to be no longer statutorily payable as the statute of limitations to bring a claim has expired. Other income (expenses) included, for the three months and six months ended June 30, 2008, ~~includes~~ the reversal of $37,500 of accounts payable and accrued expenses that the Company, with legal counsel, ~~has~~ determined to be no longer statutorily ~~payable. Other income (expenses)~~payable as the statute of limitations to bring a claim had expired. Additionally, the Company incurred interest expense in the ~~third~~second quarter and first ~~nine~~

six months of ~~2007 included the reversal of $166,200 of accrued consulting fees that the Company, with legal counsel, determined to be no longer statutorily payable. Additionally, interest income~~2009 on funds ~~invested decreased in the third quarter and first nine months~~borrowed under its line of ~~2008 compared to the third quarter and first nine months of 2007 due to lower levels of funds invested and lower interest rates associated with the financial crisis in today’s economy.~~credit. There was no interest expense in the ~~third~~second quarter and first ~~nine~~six months of 2008 as there were no loans outstanding during those periods.

The net loss of ~~$136,400~~$58,600 in the ~~third~~second quarter of ~~2008~~2009 compared to the net ~~income~~loss of ~~$299,400~~$43,500 in the ~~third~~second quarter of ~~2007~~2008 results primarily from a lower gross profit on a lower level of revenues, ~~stock option expense,~~ higher compensation expense as well as consulting fees, business show and notravel expense related to the start up Company’s new Loss Prevention Division offset in part by lower commissions and other sales related expenses, lower stock option compensation expense, lower patent related costs and higher income ~~from~~related to the reversal of accounts payable that are no longer statutorily payable. The net loss of $238,100 for the six months ended June 30, 2009 compared to the net loss of $102,500 in the six months ended June 30, 2008 results primarily from a lower gross profit on the lower level of revenues, higher compensation expense as well as consulting fees, business show and ~~accrued expenses~~travel expense related to the start up Company’s new Loss Prevention Division offset in part by ~~lower commission expense. The net loss~~the non-recurrence of ~~$238,900 for the nine months ended September 30, 2008 compared to net income of $324,300 in the nine months ended September 30, 2007 results primarily from~~ a one time transaction with a licensee, lower commissions and other sales related expenses, lower stock option ~~expense, higher~~ compensation expense, lower patent related costs and ~~lower~~higher income ~~derived from~~related to the reversal of accounts payable ~~and accrued expenses~~ that are no longer statutorily ~~payable offset in part by lower commission expense.~~payable.

Management of the Company does not believe that inflation and changing prices have had a significant effect on its revenues and results of operations during the second quarter and first half of 2009 and the second quarter and first half of 2008.

Plan of Operation, Liquidity and Capital Resources

The Company’s cash and cash equivalents decreased to ~~$161,900~~$54,400 at ~~September~~June 30, ~~2008~~2009 from ~~$263,600~~$87,200 at December 31, ~~2007.~~2008. During the ~~nine months~~first half of ~~2008,~~2009, the Company received ~~$2,200~~$41,000 from the ~~exercise~~sale of ~~warrants to purchase 10,000~~640,625 shares of its common stock, borrowed $75,000 from a bank under its line of credit and used ~~$100,500~~$148,800 to fund ~~operations and $3,400 to fund capital purchases.~~operations.

While the Company has added new licensees in the ~~Entertainment~~entertainment and ~~Toy Market~~toy market over the past ~~two~~three years and ~~has~~had obtained significant increases in revenues from licenses, royalties and product sales from these licensees and their third party printers through the end of 2008, its working capital requirements have increased primarily in support of inventory and receivables related to these ~~revenues; however, during 2007,~~revenues. During the ~~Company achieved significant increases~~first half of 2009, the Company’s revenues declined significantly as a result of declines in licensing revenues from its principal licensees in the entertainment and ~~recorded net income~~toy products business and incurred expenditures related to the inception of ~~$386,000~~a new division that will sell the Company’s security products directly to loss prevention departments within retail businesses and ~~$56,100 of operating cash flow. The~~chains and to license other printers who serve this market segment. Primarily resulting from these two factors, the Company recorded a net loss of ~~$238,900~~$238,100 in the first ~~nine~~six months of ~~2008~~2009 and had negative operating cash flow of $148,800 during that period. At ~~September~~June 30, 2009, the Company had negative working capital of $196,500 and stockholders’ deficiency of $176,800. For the full year of 2008, the Company had a net loss of $271,700 and had negative operating cash flow of $175,200 during the year. At December 31, 2008, the Company had negative working capital of $11,900 and ~~stockholder’s~~$12,400 in stockholders’ equity. ~~At September 30, 2008, the Company had no loans outstanding; however, during~~During the third quarter of 2008, itthe Company secured a $100,000 line of credit with a bank as an additional potential source of working capital. During the second quarter of 2009, the Company borrowed $75,000 under the line of credit to ~~provide working capital in the future, if needed. There have been no~~fund its operating activities. The Company is presently required to pay interest only on borrowings under the line of credit. While the Company is not actively seeking additional investment at the present time due to the improvements in its revenues during 2007 and 2008 compared to earlier years, it may seek investment in the future, if needed, to support working capital requirements or to provide funding for new business opportunities. There can be no assurances that the ~~Company~~bank will ~~be successful in obtaining additional investment if such additional investment is sought. At this time, management~~continue to make the line of the Company believes that its current cash reserves, borrowing capacity and revenue opportunities will allow it to remain in operation for at least one year from the date of this report. There can be no assurances that revenues in future periods will be sustained at levels that will allow it to return to and maintain positive cash flow.

While the investment received in 2007 and improvement in operations positively impacted the Company’s liquidity situation, it continues to maintain a cost containment program including curtailment of discretionary research and development and sales and marketing expenses, where

~~possible. In 2007, it increased employment by one individual, acquired capital equipment to increase its ink production capacity and,~~credit available in the ~~second quarter of 2008, finalized an employment agreement with its Chief Executive Officer.~~future.

The Company’s plan of operation for the twelve months beginning with the date of this quarterly report consists of capitalizing on the specific business relationships it has developed in the ~~Entertainment~~entertainment and ~~Toy Products~~toy products business through ongoing applications development for these licensees. The Company is also actively pursuing potential opportunities for its applications in new ~~markets.~~markets including the retail loss prevention market. The Company believes that these initiatives can provide increases in revenues and it will continue to increase its production and technical staff as necessary and invest in capital equipment needed to support potential growth in its ink production requirements. The Company ~~may raise~~has received and continues to seek additional capital, in the form of debt, equity or both to support its working capital requirements. There can be no assurances that the Company will be successful in raising additional ~~capital if such additional capital is sought.~~capital.

The Company generates a significant portion of its total revenues from licensees in the ~~Entertainment~~entertainment and ~~Toy Products~~toy products market. A continuation of the slowdown in consumer spending ~~particularly during this holiday season,~~that was experienced in the first half of 2009 due to the current negative economic environment ~~could~~may adversely affect the sales of these licensees’ products that are generally sold

through retail ~~outlets.~~outlets over the balance of the year. The Company’s revenues, results of operations and liquidity would likewise be negatively ~~impacted.~~impacted as they were in the first half of 2009.

Risk Factors

The Company’s operating results, financial condition and stock price are subject to certain risks, some of which are beyond the Company’s control. These risks could cause actual operating and financial results to differ materially from those expressed in the Company’s forward looking statements, including the risks described below and the risks identified in other documents which are filed and furnished with the SEC including the Company’s annual report on Form ~~10-KSB~~10-K filed on March 31, ~~2008:~~2009:

Dependency on Major Customer.The ~~Company’s recent growth in~~Company derives a significant percentage of its revenues ~~and return of profitability in 2007 has resulted primarily from relationships developed~~through a relationship with a major customer and two of its operating companies. Revenues ~~derived~~obtained directly from this customer and indirectly, through its third party ~~printer,~~printers, equaled approximately ~~67%~~64% of the Company’s second quarter 2009 revenues, ~~in the first nine months of 2008 and~~ approximately ~~71%~~61% of the Company’s first half 2009 revenues and approximately 63% of the Company’s 2008 full year ~~2007~~ revenues. The Company also has substantial receivables from these businesses. While multi-year licenses exist with these organizations, the Company is dependent on its licensees to develop new products and markets that will generate increases in its licensing and product revenues. The inability of these licensees to ~~maintain at least current~~return to levels of sales of products utilizing the Company’s technologies achieved in earlier periods could adversely affect ~~its~~the Company’s operating results and cash flow. As the Company’s licensees are subject to, and have been adversely affected, by economic conditions related to the current economic conditions, the Company’s revenues may be adversely impacted. Two of the license agreements with this customer are currently in force through year-end 2009 and a third through year-end 2010. The agreements contain mutual renewal options. There can be no assurances that the licenses will continue in force at the same, or more favorable, terms beyond the current termination dates.

Possible Inability to Develop New Business. While the Company ~~has~~ raised cash through additional capital investment in 2007 and ~~improved its operating~~generated cash flow from operations in 2007, it ~~intends to limit~~has had limited increases in its operating ~~expenses.~~expenses until this time. However, additional expenditures are required in 2009 to fund the new Loss Prevention Division. Management of the Company believes that any significant improvement in the Company’s cash flow from operations must result from increases in revenues from traditional sources and from new revenue ~~sources.~~sources including its new Loss Prevention Division. The Company’s ability to develop new revenues may depend on the extent of both its marketing activities and its research and development activities, both of which are limited. There are no assurances that the resources that the Company can

relationships. Management of the Company believes that the capital investment ~~in 2007~~ and ~~improvements in~~positive operating cash flow in 2007 have allowed the Company to improve its relationships with its vendors and professional service providers. There are, however, no assurances that the Company will be able to continue to maintain its vendor relationships in an acceptable manner.

Uneven Pattern of Quarterly and Annual Operating Results. The Company’s revenues, which are derived primarily from licensing, royalties and sales of products incorporating its technologies, are difficult to forecast due to the long sales cycle of its technologies, the potential for customer delay or deferral of implementation of its technologies, the size and timing of inception of individual license agreements, the success of its licensees and strategic partners in exploiting the market for the licensed products, modifications of customer budgets, and uneven patterns of royalty revenue and product orders. As the Company’s revenue base is not substantial, delays in finalizing license contracts, implementing the technology to initiate the revenue stream and customer ordering decisions can have a material adverse effect on the Company’s quarterly and annual revenue expectations and, as ~~its~~the Company’s operating expenses are substantially fixed, income expectations will be subject to a similar adverse outcome. As licensees for the ~~Entertainment~~entertainment and ~~Toy Products~~toy products markets are added and the Company’s new Loss Prevention Division begins operations, the unpredictability of the Company’s revenue stream may be further impacted.

Volatility of Stock Price. The market price for the Company’s common stock has historically experienced significant fluctuations and may continue to do so. From inception through 2006 and again in 2008 and the first six months of 2009, the Company ~~had~~ operated at a loss and has not produced revenue levels traditionally associated with publicly traded companies. The Company’s common stock is not listed on a national or regional securities exchange and, consequently, it receives limited publicity regarding its business achievements and prospects. Additionally, securities analysts and traders do not extensively follow the Company’s stock and its stock is also thinly traded. The Company’s market price may be affected by announcements of new relationships or modifications to existing relationships. The stock prices of many developing public companies, particularly those with small capitalizations, have experienced wide fluctuations not necessarily related to operating performance. Such fluctuations may adversely affect the market price of the Company’s common stock.

Access to Capital.The Company presently needs to raise additional capital to fund its historical and new business operations. The current crisis in the financial markets has caused serious deterioration in the net worth and liquidity of many investors, including that of potential investors in the Company, and seriously eroded investor confidence in general thereby making it more difficult for the Company to raise capital. If the Company is unable to secure capital, in the form of debt, equity or both, its ability to maintain its business operations in their current form may be adversely affected. There can be no assurances that the Company will be successful in obtaining additional investment in sufficient amounts to fund its ongoing business operations.

Intellectual Property.The Company relies on a combination of protections provided under applicable international patent, trademark and trade secret laws. The Company also relies on confidentiality, non-analysis and licensing agreements to establish and protect its rights in its proprietary technologies. While the Company actively attempts to protect these rights, its technologies could possibly be compromised through reverse engineering or other means. In addition, the Company’s ability to enforce its intellectual property rights through appropriate

assurances that the Company will be able to protect the basis of its technologies from discovery by unauthorized third parties or to preclude unauthorized persons from conducting activities that infringe on its rights. The Company’s adverse liquidity situation in previous years had also impacted its ability to obtain patent protection on its intellectual property and to maintain protection on previously issued patents. The Company has ~~made payments of $11,900 for all known~~been advised by its patent counsel that no patent maintenance fees are known to be due during ~~2008.~~2009. There can be no assurances that the Company will be able to continue to prosecute new patents and maintain issued patents. As a result, the Company’s customer and licensee relationships could be adversely affected and the value of its technologies and intellectual property (including their value upon liquidation) could be substantially diminished.

Economic Conditions. The Company’s revenue is susceptible to changes in general economic conditions and athe current global recession, the effects of which are expected to continue through at least 2009. Decreasing consumer confidence, further slowdown in consumer spending or other ~~significant~~ downturn in the U.S. economy as a whole or in any geographic markets from which the Company derives revenue, could substantially impact its sales, liquidity and overall results of operations, as these factors may result in decreased demand for the Company’s products from its customers and licensees, and the Company’s ability to develop new customers and ~~overall results~~licensees. Due to the uncertainty surrounding the economy, and the Company’s inability to predict the effect such conditions will have on its customers and licensees, the Company cannot predict the scope or magnitude of ~~operations.~~the negative effect that the recent global financial crisis and economic slowdown will have on it.

~~Recent~~Recently Adopted Accounting Pronouncements

During September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007 with earlier adoption encouraged. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In ~~February 2008,~~April 2009, the FASB issued FASB Staff Position No. 107-1 (“FSP FAS ~~157-2, Effective Date of~~107-1”) and APB 28-1 (“APB 28-1”), which amends FASB Statement No. ~~157, which delayed~~107,Disclosures about Fair Value of Financial Instruments and APB Opinion No. 28,Interim Financial Reporting, to require disclosures about the ~~effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at~~ fair value ~~in the~~of financial ~~statements on a recurring basis, until January 1,~~instruments for interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. The ~~Company adopted SFAS 157 on January 1, 2008 for all financial assets and liabilities, but the implementation~~adoption of this staff position did not ~~require additional disclosures or~~ have a ~~significant~~material impact on the Company’s financial statements.

In April 2009, the FASB issued FASB Staff Position No. 157-4 (“FSP FAS 157-4”), which provides additional guidance in accordance with FASB No. 157,Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The ~~Company has~~adoption of this staff position did not ~~yet determined the impact the implementation of SFAS 157 will~~ have a material effect on the Company’s ~~non-financial assets~~financial statements.

In April 2009, the FASB issued FASB Staff Position No. 115-2 (“FSP FAS 115-2”) and ~~liabilities~~FASB Staff Position No. 124-2 (“FSP FAS 124-2”), which ~~are not recognized or disclosed on a recurring basis. However,~~amends the ~~Company does not anticipate that the full~~other-than-temporary impairment guidance for debt and equity securities. FSP FAS 115-2 and FSP FAS 124-2 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of ~~SFAS 157 will significantly impact its~~this staff position did not have a material effect on the Company’s financial statements.

~~During February 2007,~~In May 2009, the FASB issued SFAS No. ~~159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS 159”)~~165,Subsequent Events, which ~~permits entities to choose to measure many~~is effective for interim or annual financial instruments and certain other items at fair value. The objective of SFAS 159 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. The Company has adopted SFAS 159 on January 1, 2008 and has elected not to measure any additional financial assets, liabilities or other items at fair value.

~~In December 2007, the FASB issued~~periods ending after June 15, 2009. SFAS No. ~~141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R~~165 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 alsogeneral

1517

~~establishes~~standards of accounting and disclosure ~~requirements~~of events that occur after the balance sheet but before financial statements are issued or are available to ~~enable the evaluation of the nature and financial effects of the business combination. This statement is effective for~~be issued.

However, since the Company ~~beginning January 1,~~is a public entity, management is required to evaluate subsequent events through the date that financial statements are issued and disclose the date through which subsequent events have been evaluated, as well as the date the financial statements were issued. SFAS No. 165 was adopted for its interim period ending June 30, 2009. Subsequent events have been evaluated through August 14, 2009, ~~and will change~~ the ~~accounting for business combinations on a prospective basis.~~date the financial statements were issued as further discussed in EITF Topic No. D-86.

Recently Issued Accounting Pronouncements Not Yet Adopted

In ~~December 2007,~~June 2009, the FASB issued SFAS No. ~~160, Noncontrolling Interests in Consolidated Financial Statements—~~167,Amendments to FASB Interpretation No. 46(R).

This Statement is a revision to FIN 46(R) and changes how a company determines when an ~~amendment~~entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of ~~Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 establishes accounting~~whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and ~~reporting standards for ownership interests in subsidiaries held by parties other than~~design and a company’s ability to direct the ~~parent,~~activities of the ~~amount of consolidated net income attributable to~~entity that most significantly impact the ~~parent and to the noncontrolling~~entity’s economic performance.

This Statement requires an additional reconsideration event when determining whether an entity is a variable interest entity when any changes in ~~a parent’s ownership interest,~~facts and circumstances occur such that the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interestsholders of the ~~parent and~~equity investment at risk, as a group, lose the ~~interests~~power from voting rights or similar rights of those investments to direct the activities of the ~~noncontrolling owners.~~ entity that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. These requirements will provide more relevant and timely information to users of financial statements.

This ~~statement is~~Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for ~~the Company beginning January 1, 2009.~~interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. This ~~statement~~pronouncement is not currently applicable to the ~~Company since it has no majority-owned subsidiaries.~~Company.

In ~~March 2008,~~June 2009, the FASB issued ~~Statement~~SFAS No. ~~161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”),~~ 168,The FASB Accounting Standards Codification,which ~~is effective January 1, 2009. SFAS 161 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding~~establishes the Codification as the source of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, SFAS 161 requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular format. SFAS 161 is not currently applicable to the Company since the Company does not have derivative instruments or hedging activity.

~~In May 2008,~~authoritative GAAP recognized by the FASB ~~issued Statement of Financial Accounting Standards No. 162,~~~~The Hierarchy~~of~~Generally Accepted Accounting Principles(“FAS 162”). This Standard identifies the sources of accounting principles and the framework for selecting the principles~~ to be ~~used in the preparation of financial statements of~~applied by nongovernmental entities that are presented in conformity with generally accepted accounting principles. FAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. The Standard is effective 60 days following SEC approval of the Public Company Accounting Oversight Board amendments to remove the hierarchy of generally accepted accounting principles from the auditing standards. FAS 162 is not expected to have an impact on the financial statements.

~~In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3,~~~~Determination of the Useful Life of Intangible Assets~~~~, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,~~~~Goodwill and Other Intangible Assets.~~~~This Staff Position~~entities. SFAS 168 is effective for financial statements issued for ~~fiscal years beginning~~interim and annual periods ending after ~~December~~September 15, ~~2008, and interim periods within those fiscal years. Early~~2009. The adoption ~~is prohibited. This FSP is not currently applicable to the Company since the Company does not have any intangible assets.~~

~~In June 2008, the FASB issued FSP EITF 03-6-1,~~~~Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities~~~~. This FSP provides that~~

unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company does not currently have any share-based awards that would qualify as participating securities. Therefore, application of this FSP is not expected to have an effect on the Company’s financial reporting.

~~In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1,~~~~Accounting for Convertible Debt That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)~~(“FSP 14-1”). FSP 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008. The FSP includes guidance that convertible debt instruments that may be settled in cash upon conversion should be separated between the liability and equity components, with each component being accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. The Company does not currently have any convertible debt instruments. Therefore, application of this FSPSFAS 168 is not expected to have an effect on the Company’s financial reporting.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

1718

Item 4T. Controls and Procedures

(a) Disclosure Controls and Procedures

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified within the rules and forms of the SEC, and are designed to ensure that information required to be disclosed by the Company in these reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, ~~its~~our internal controls over financial reporting.

1819

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~Not Applicable~~On May 27, 2009, the Company sold 250,000 shares of its Common Stock, par value $.01 per share, to an individual investor (who was acquainted with a member of the Company’s Board of Directors) for $16,000, or $0.064 per share; on June 11, 2009, the Company sold 390,625 shares of its Common Stock, par value $.01 per share, to an individual investor (who was acquainted with a member of the Company’s Board of Directors) for $25,000, or $0.064 per share. All shares were sold in private transactions exempt from registration pursuant to Section 4(2) of the Securities Act. No underwriters were involved in these transactions or received any commissions or other compensation. Proceeds of the sales were used to fund the Company’s working capital requirements.

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

(a) Exhibits

	~~3.1~~		~~Amended and Restated Articles of Incorporation.~~

	~~3.2~~		~~Amended and Restated Bylaws.~~

	~~10.18~~		~~Business Loan Agreement, Promissory Note and Commercial Security Agreement dated August 19, 2008 between the Company and Sovereign Bank.~~

	31.1		Certification of Chief Executive Officer required by Rule 13a-14(a).


31.2		Certification of Chief Financial Officer required by Rule 13a-14(a).


32.		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.

1920


MARYLAND		87-0406496

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
~~of incorporation or organization)~~


9C Portland Road, West Conshohocken, PA		19428

(Address of principal executive offices)		(Zip Code)


Large accelerated filero	Accelerated filero	Non-accelerated filero		Smaller reporting companyþ
		(Do not check if a smaller reporting company)	~~Smaller reporting company~~þ


					Weighted Average						Weighted Average
	Number		Exercise		Exercise		Number		Exercise		Exercise
	of Shares		Price		Price		of Shares		Price		Price
Outstanding, December 31, 2007		1,750,000	$	.10 to $.22	$	.16
Outstanding options - December 31, 2008								2,250,000	$	.10 to $.45	$	.23


Issued		500,000	$	0.45	$	.45		325,000	$	.12	$	.12

Outstanding options, September 30, 2008		2,250,000	$	.10 to $.45	$	.23

Canceled								950,000	$	.17	$	.17


Outstanding options - June 30, 2009								1,625,000	$	.10 to $.45	$	.24


Weighted average remaining contractual life (years)		2.02						2.79

Exercisable options, September 30, 2008		1,750,000	$	.10 to $.22	$	.16
Exercisable options - June 30, 2009								1,300,000	$	.10 to $.45	$	.27


Weighted average remaining contractual life (years)		1.29						2.32


DATE: ~~November~~August 14, ~~2008~~2009	NOCOPI TECHNOLOGIES, INC.
	/s/ Michael A. Feinstein, M.D.
	Michael A Feinstein, M.D.
	Chairman of the Board, President & Chief Executive Officer


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


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


	PAGE
Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Statements of Operations for Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2008~~2009 and ~~September~~June 30, ~~2007~~ 2008		1

Balance Sheets at ~~September~~June 30, ~~2008~~2009 and December 31, ~~2007~~ 2008		2

Statements of Cash Flows for ~~Nine~~Six Months Ended ~~September~~June 30, ~~2008~~2009 and ~~September~~June 30, ~~2007~~ 2008		3
Notes to Financial Statements		4-8
~~Notes to Financial Statements~~		~~4-7~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		~~8-17~~9-18
Item 4T. Controls and Procedures		19

~~Item 4T. Controls and Procedures~~		18

Part II. OTHER INFORMATION

Item 1. Legal Proceedings
~~Item 1. Legal Proceedings~~		1920

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		1920

Item 3. Defaults upon Senior Securities		1920

Item 4. Submissions of Matters to a Vote of Security Holders		1920
Item 5. Other Information		20
~~Item 5. Other Information~~		19

Item 6. Exhibits		19

~~SIGNATURES~~		20

~~EXHIBIT INDEX~~ SIGNATURES		21

EXHIBIT INDEX		22


*		~~The~~See accompanying notes ~~are an integral part of~~to these financial statements.



DATE: ~~November~~August 14, ~~2008~~2009	/s/ Rudolph A. Lutterschmidt
	Rudolph A. Lutterschmidt
	Vice President & Chief Financial Officer