SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark One)

 X       Annual report pursuant to section 13 or 15 (d) of the Securities
---      Exchange Act of 1934 [Fee Required] for the fiscal year ended
         December 31, 1997

                                       or

         Transition report pursuant to section 13 or 15 (d) of the Securities
         Exchange Act of 1934 [No Fee Required] for the transition period from
         _______________ to ________________.


Commission File Number 0-20333
                       -------


                            NOCOPI TECHNOLOGIES, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


              Maryland                                    87-0406496
    ----------------------------                      -------------------
    (State or other jurisdiction                       (I.R.S. Employer
         of incorporation)                            Identification No.)


      537 Apple Street, West Conshohocken, Pennsylvania        19428
      -------------------------------------------------      ----------
          (Address of principal executive offices)           (Zip Code)


Telephone Number, Including Area Code: (610) 834-9600
                                       --------------

Securities registered pursuant to section 12(b) of the Act:


    Title of each class            Name of each exchange on which registered
    -------------------            -----------------------------------------
           None                                Not Applicable


Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock $.01 par value
                           ---------------------------
                                (Title of class)


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                                  Yes X     No
                                     ---      ---

     State the aggregate market value of the voting stock held by non-affiliates
of the registrant. $6,900,000 at March 13, 1998.

     (Applicable only to corporate registrants) Indicate the number of shares
outstanding of each class of registrant's common stock, as of the latest
practicable date. 33,587,332 Shares of Common Stock, $.01 par value at March 13,
1998.

     Documents Incorporated by Reference.

     Proxy Statement for the Annual Meeting of Shareholders to be Held June 8,
1998 (Part III).

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


                        Exhibit Index Begins on Page 20.


<PAGE>


                                     PART I

ITEM 1. BUSINESS

Background

     Nocopi Technologies, Inc. (hereinafter "Nocopi" or "Registrant") was
originally organized to utilize a technology developed by its founders for
impeding the reproduction of documents on office copiers. In its early stages of
development, Nocopi's business consisted primarily of selling burgundy colored,
copy resistant paper to protect corporate documents, that is, to provide
document security. In the last several years, Registrant has continued to refine
its document security technologies but has increasingly focused on developing
and marketing technologies for document and product authentication which can
reduce losses caused by fraudulent document reproduction and by product
counterfeiting and/or diversion.

     Registrant is involved in the business of product and document
authentication and security. It has developed and markets a variety of
products--special inks and paper which deters photocopying and transmission by
facsimile and proprietary inks which print invisibly until activated for the
purpose of identifying counterfeit or diverted products. Registrant's document
authentication products and technologies, over the last three years, have become
the most substantial market for Registrant. Sales are made either through
licensees or directly to end-users.

Anti-Counterfeiting and Anti-Diversion Technologies and Products

     Recent developments in copying and printing technologies have made it ever
easier to counterfeit a wide variety of documents. Lottery tickets, gift
certificates, event and transportation tickets, travellers' checks and the like
are all susceptible to counterfeiting, and Registrant believes that losses from
such counterfeiting have increased substantially with improvements in
technology. Counterfeiting has long caused losses to manufacturers of brand name
products, and Registrant believes these losses have also increased as the
counterfeiting of labeling and packaging has become easier.

     Registrant's document authentication technologies are useful to businesses
desiring to authenticate a wide variety of printed materials and products. These
include a technology with the ability to print invisibly on certain areas of a
document which can be activated or revealed by use of a special highlighter pen
when authentication is required. This is sold under the trade mark COPIMARK(TM).
Other variations of the COPIMARK(TM) technology involve multiple color responses
from a common pen, visible marks of one color that turn another color with the
pen or visible and invisible marks that turn into a multicolored image. A
related technology is Nocopi's RUB & REVEAL(R) system, which permits the
invisible printing of an authenticating symbol or code that can be revealed by
rubbing a fingernail over the printed area. These technologies provide users
with the ability to authenticate documents and detect counterfeit documents.
Applications include the authentication of documents having intrinsic value,
such as checks, travellers' checks, gift certificates and event tickets, and the
authentication of product labelling and packaging. The Rub & Reveal(R)
technology was enhanced during 1995 permitting its use in documents produced on
laser printers, thus affording expanded market opportunities for this
technology. When applied to product labels and packaging, such technologies can
be used to detect counterfeit products whose labels and packaging would not
contain the authenticating marks invisibly printed on the packaging or labels of
the legitimate product, as well as to


                                        2

<PAGE>


combat product diversion (i.e., the sale of legitimate products through
unauthorized distribution channels or in unauthorized markets). During 1993,
Registrant developed its invisible inkjet technology which permits manufacturers
and distributors to track the movement of products from production to ultimate
consumption when coupled with proprietary software. During 1994, Registrant
developed a new technology to address the widespread problem of counterfeiting
in the apparel industry consisting of a reactive thread which can be woven into
a label which is then sewn into a garment. The woven label can be activated in
the same manner as a reactive paper label to reveal the authenticity of the
garment. During 1995, Registrant developed a new covert authenticating
technology which allows a manufacturer of compact discs to identify CD's
produced by that manufacturer. Registrant believes that this technology can
provide CD manufacturers and publishers a tool with which to combat the
significant losses sustained as a result of illegal pirating and counterfeiting
of data, music and video discs.

Document Security Products

     The first product Nocopi developed was a burgundy colored paper that
deterred photocopying and transmission by facsimile. The color was chosen and
designed so that it absorbed most of the light projected on documents during
photocopying except for light in the part of the spectrum the copy process is
incapable of detecting. This colored paper exhibited the ability to inhibit
reproduction at the cost of legibility to the reader. The darker it was, the
better it worked. The trade-off was, and is, tied to security. If a client
needed the security, he would put up with the diminished legibility. Registrant
currently markets its copy resistant papers in three grades, each balancing
improved copy resistance against diminished legibility.

     The next step in the evolution of Registrant's products was the development
of a product which enables the user to select certain areas of a document for
copy protection. This led to the development of user defined, pre-printed forms
on which certain areas were already activated, such as a doctor's prescription
form with the signature area protected or a financial instrument exhibiting the
same kind of protection. This product line is called SELECTIVE NOCOPI(TM).
Registrant also developed several inks which impede photocopying by color
copiers. This technology is called COLORBLOC(R).

     During 1993, Registrant developed a technology for providing secure faxes.
Using this technology, a message printed by a receiving telecopier cannot be
read until the paper has been activated by the recipient. This technology
initially was available for use only in thermal facsimile machines, limiting its
marketability. During 1996, Registrant developed a new technology to allow plain
paper ink jet facsimile machines to receive confidential faxes. This new
technology is called INFOBLOC(TM). An associated technology, called
SECRETPRINT(TM), enables an ink jet computer printer to produce documents in
which, at the discretion of the author, a portion or all of the document can be
rendered confidential until activation. During 1997, Registrant engaged in
market investigations for INFOBLOC(TM) and SECRETPRINT(TM). As a result of these
market investigations, Registrant has established relationships with
manufacturers of ink jet computer printers as well as authors and publishers of
computer software for the entertainment and educational markets. Registrant
believes that these activities may lead, by late 1998, to the commercial
introduction of SECRETPRINT(TM) as an enhancement to specific entertainment and
educational software applications providing for the on demand printing of
invisible text and graphics which can be revealed at a point in time in the
future. Registrant believes that the inherent discovery feature of
SECRETPRINT(TM) can enhance many current entertainment and educational software
packages and make learning more fun for children.


                                        3

<PAGE>


     The following table illustrates the approximate percentage of Registrant's
revenues accounted for by each type of its products for each of the three last
fiscal years:

                                                Year Ended December 31,
                                             ----------------------------------
Product Type                                 1997            1996          1995
------------                                 ----            ----          ----
Anti-Counterfeiting & Anti-Diversion
Technologies and Products                     97%             97%          96%

Document Security Products                     3%              3%           4%


Marketing

     The marketing approach of Registrant is to have sufficient flexibility in
its products and technologies so as to provide cost effective solutions to a
wide variety of counterfeiting, diversion and copier fraud problems. As a
technology company, Registrant generates revenues primarily by collecting
license fees from market-specific manufacturers who incorporate Registrant's
technologies into their manufacturing process and their products. Registrant
also licenses its technologies directly to end users.

     Registrant has identified a number of major markets for its technologies
and products, including security printers, manufacturers of labels and packaging
materials and distributors of brand name products. Within each market, key
potential users have been identified, and, in many cases, already licensed.
Within North America, sales efforts include direct selling by company personnel
to create end user demand and selling through licensee sales forces with support
from company personnel. Registrant has determined that technical sales support
by its personnel is of great importance to increasing its licensees' sales of
products incorporating Registrant's technologies and, therefore, maintains its
commitment to providing such support.

     As continued improvements in color copier and desktop publishing technology
make counterfeiting and fraud opportunities less expensive and more available,
Registrant intends to maintain an interactive product development and
enhancement program with the combined efforts of marketing, applications
engineering and research and development. Registrant's objective is to
concentrate its efforts on developing market-ready products with the most
beneficial ratios of market potential to development time and cost.

Euro-Nocopi S.A.

     In 1994, the Registrant formed a European company, Euro-Nocopi S.A., to
market the Company's technologies in Europe under an exclusive license
agreement. Euro-Nocopi S. A., headquartered in Paris, has sales representatives
in France, England and Germany. Euro-Nocopi sells the full range of Nocopi
products and technologies in the European market, both to European-based
companies and to subsidiaries of U.S.-based corporations. The Registrant
receives a minimum licensing fee and, when certain annual revenue levels are
attained by Euro-Nocopi, an additional royalty stream from revenues generated in
Europe. The Registrant owns approximately an 18% interest in Euro-Nocopi and
holds warrants permitting it to increase its interest to 55%. As part of a
settlement agreement resulting from a dispute between


                                       4
<PAGE>


Euro-Nocopi S. A. and the Registrant in the second quarter of 1997, the
Registrant agreed to modify its warrant by extending its term through December
2001 but making it exercisable beginning the earlier of 1) January 1, 2001; 2)
in the event of a sale of all or part of Euro-Nocopi; or 3) in the event of a
public listing of Euro-Nocopi's shares on a stock market. Prior to the
modification, the warrants were exercisable at any time. Beginning in August
1998, the Euro-Nocopi stock sold to investors may be converted into
approximately one million shares of the Registrant's common stock in the event
that no public offering of Euro-Nocopi has been made by that date.

Major Customers

     During 1997, Registrant made sales or obtained revenues equal to 10% or
more of Registrant's 1997 total revenues from two customers, 3M Corporation and
Paxar Corporation, which accounted for approximately 26% and 20%, respectively,
of 1997 revenues. Registrant anticipates that its reliance on these customers
will diminish as other licensees increase their sales of products incorporating
Registrant's technologies.

Manufacturing

     Nocopi does not have substantial manufacturing facilities. Registrant
presently subcontracts the manufacture of its applications to third party
manufacturers and expects to continue such subcontracting. Applications of
Registrant's technology are effected mainly through printing and coating. The
inks are custom manufactured by the Company. Because some of the processes that
Nocopi uses in its applications are based on relatively common manufacturing
technologies, there appears to be no technical or economic reason for Registrant
to invest capital in its own manufacturing facilities. In the area of its
proprietary inks, however, Registrant desires to control the manufacturing
process for security purposes and has invested $75,000 to establish an ink
making capacity capable of supplying commercial quantities of its security ink.

     Registrant has established a quality control program which currently
entails laboratory analysis of developed technologies. Registrant intends to
expand this program to include placing specially trained Nocopi technicians on
site at third party production facilities to monitor the manufacturing process,
where warranted. There can be no assurance that Registrant will, in fact, expand
this quality control program.

Patents

     Nocopi has received various patents and has patents pending in the United
States, Canada, South Africa, Saudi Arabia, Australia, New Zealand, Japan,
France, the United Kingdom, Belgium, the Netherlands, Germany, Austria, Italy,
Sweden, Switzerland, Luxembourg, and Liechtenstein. Patent applications for
Registrant's technology (including improvements in the technology) have been
filed in numerous other jurisdictions where commercial usage is foreseen,
including Europe, Japan, Australia, and New Zealand, and the rights under such
applications have been assigned to Registrant. Registrant's patent counsel,
which conducted the appropriate searches in Canada and the United States, has
reviewed the results of searches conducted in Europe and advised management that
effective patent protection for Registrant's technology should be obtainable in
all countries in which the patent applications have been filed. There can be no
assurance, however, that such protection will be obtained.


                                        5

<PAGE>


     When a new product or process is developed, the developer may seek to
preserve for itself the economic benefit of the product or process by applying
for a patent in each jurisdiction in which the product or process is likely to
be exploited. Generally speaking, in order for a patent to be granted, the
product or process must be new and be inventively different from what has been
previously patented or otherwise known anywhere in the world. Patents generally
have a duration of 17 years from the date of grant or 20 years from the date of
application depending on the jurisdiction concerned, after which time any person
is free to exploit the product or process covered by a patent. A person who is
the owner of a patent has, within the jurisdiction in which the patent is
granted, the exclusive right to exploit the patent either directly or through
licensees, and is entitled to prevent any person from infringing on the patent.

     The granting of a patent does not prevent a third party from seeking a
judicial determination that the patent is invalid. Such challenges to the
validity of a patent are not uncommon and are occasionally successful. There can
be no assurance that a challenge will not be filed to one or more of
Registrant's patents and that, if filed, such challenge(s) will not be
successful.

     In the United States and Canada, the details of the product or process
which is sought to be patented are not publicly disclosed until a patent is
granted. However, in some other countries, patent applications are automatically
published at a specified time after filing.

Research and Development

     Nocopi has been involved in research and development since its inception,
and intends to continue its research and development activities in three areas.
First, Registrant will continue to refine its present family of products.
Second, Registrant will seek to expand its technology into new areas of
implementation. Third, Registrant will seek to develop specific customer
applications.

     During the years ended December 31, 1997, 1996, and 1995, Nocopi expended
approximately $480,500, $805,100 and $789,100, respectively, on research and
development activities (excluding capital expenditures related to research and
development activities).

Competition

     In the area of document and product authentication and serialization,
Registrant is aware of other technologies, both covert and overt surface marking
techniques, requiring decoding implements or analytical methods to reveal the
relevant information. These technologies are offered by other companies for the
same anti-counterfeiting and anti-diversion purposes the Registrant markets its
covert technologies. Registrant believes its patented and proprietary
technologies provide a unique and cost-effective solution to the problem of
counterfeiting and grey marketing. Registrant is not aware of any competitors
that market paper which functions in the same way as Nocopi security papers,
although management is aware of a limited number of competitors which are
attempting different approaches to the same problems which Registrant's products
address. Registrant is aware of a Japanese company that has developed a film
overlay which is advertised as providing protection from photocopying.
Registrant has examined the film overlay and believes that it has a limited
number of applications. Nocopi security paper is also considerably less
expensive than the film overlay.


                                        6

<PAGE>


     Other indirect competitors are marketing products utilizing the hologram
and copy void technologies. The hologram, which has been incorporated into
credit cards to foil counterfeiting, is considerably more costly than
Registrant's technology. Copy void is a security device which has been developed
to indicate whether a document has been photocopied.

     Registrant has limited resources, and there can be no assurance that
businesses with greater resources than Registrant will not enter the market and
compete with Registrant.

Employees

     At March 1, 1998, Registrant had 14 employees, including management.

Financial Information about Foreign and Domestic Operations

     Certain information concerning Registrant's foreign and domestic operations
is contained in Note 9 to Registrant's Financial Statements included elsewhere
in this Annual Report on Form 10-K, and is incorporated herein by reference.

ITEM 2. PROPERTIES

     Registrant's corporate headquarters, effective March 1, 1998, are located
at 537 Apple Street, West Conshohocken, Pennsylvania 19428. Its telephone number
at that location is (610) 834-9600. These premises consist of approximately
14,800 square feet of space leased from an unaffiliated third party under a
lease expiring in February 2003. Current monthly rental under this lease is
$5,000, increasing to $7,000 per month in September 1998 and subject to further
annual increases on the anniversary date of the lease. Registrant is also
responsible for the operating costs of the building. Registrant intends to
relocate its research facilities, currently in Malvern, Pennsylvania, to the
West Conshohocken location by September, 1998, the expiration date of the lease
for that facility. Registrant believes significant efficiencies will be realized
by having its business operations consolidated at one location.

     Registrant's former corporate headquarters, located at 230 Sugartown Road,
Wayne, Pennsylvania 19087, has been sub-let for the duration of the lease term
at a monthly rental approximating the Registrant's rental obligation. These
premises consist of approximately 2,800 square feet of space leased from an
unaffiliated third party under a lease expiring in July 2001. Current monthly
rental under this lease is $4,300.

     In 1992, Registrant established research facilities at One Great Valley
Parkway, Malvern, Pennsylvania 19355. These facilities, consisting of
approximately 5,000 square feet of space, have been outfitted with approximately
$42,000 in leasehold improvements. The facilities are occupied by Registrant
under a lease expiring in September 1998 at a current monthly rent of $4,200
including common area charges.

     Registrant believes its facilities are adequate for its current needs.


                                        7

<PAGE>


ITEM 3. LEGAL PROCEEDINGS

     Registrant is not aware of any material pending litigation (other than
ordinary routine litigation incidental to its business where, in management's
view, the amount involved is less than 10% of Registrant's current assets) to
which Registrant is or may be a party, or to which any of its properties is or
may be subject, nor is it aware of any pending or contemplated proceedings
against it by any governmental authority. Registrant knows of no material legal
proceedings pending or threatened, or judgments entered against, any director or
officer of Registrant in his capacity as such.

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

     During the fourth quarter of the fiscal year ended December 31, 1997, no
matters were submitted to a vote of Registrant's security holders.


                                       8

<PAGE>


                                     PART II


ITEM 5. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS

     Registrant's Common Stock is traded on the over-the-counter market and
quoted on the NASD over-the-counter Bulletin Board under the symbol "NNUP". The
table below presents the range of high and low bid quotations of Registrant's
Common Stock by calendar quarter for the last two full fiscal years and for a
recent date, as reported by the National Quotation Bureau, Inc. The quotations
represent prices between dealers and do not include retail markup, markdown, or
commissions; hence, such quotations do not represent actual transactions.
Quotations for periods before July 15, 1996, the date on which the Company
amended its Bylaws to effect a one-for-five reverse split of its common stock,
have been adjusted for the reverse split.

                                                    High Bid            Low Bid
                                                    --------            -------
January 1, 1996 to March 31, 1996                    $3.70               $2.55
April 1, 1996 to June 30, 1996                        4.60                2.65
July 1, 1996 to September 30, 1996                    3.85                1.88
October 1, 1996 to December 31, 1996                  2.50                1.00

January 1, 1997 to March 31, 1997                     1.19                 .59
April 1, 1997 to June 30, 1997                         .69                 .38
July 1, 1997 to September 30, 1997                     .41                 .25
October 1, 1997 to December 31, 1997                   .47                 .13

January 1, 1998 to March 13, 1998                      .25                 .16

     As of March 13, 1998, 33,587,332 shares of Registrant's Common Stock were
outstanding. The number of holders of record of Registrant's Common Stock was
approximately 1,100. However, Registrant estimates that it has a significantly
greater number of Common Stockholders because a number of shares of Registrant's
Common Stock are held of record by broker-dealers for their customers in street
name. In addition to the 33,587,332 shares of Common Stock which are
outstanding, Registrant has reserved for issuance 12,784,378 shares of its
Common Stock which underlie outstanding options and warrants to purchase Common
Stock and securities issued by Registrant and Euro-Nocopi S.A., which may be
converted into its common stock.

     Registrant has paid no cash dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future.


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<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data has been derived from the Company's
financial statements. The information set forth should be read in conjunction
with the Company's Financial Statements, the related notes and other financial
information appearing elsewhere herein and Management's Discussion and Analysis
of Results of Operations and Financial Condition. The data for the years 1994
through 1996 includes financial information for Euro-Nocopi S.A. on consolidated
basis. As a result of the loss of control of Euro-Nocopi in 1997, its 1997
financial information is excluded.

                             Selected Financial Data

<TABLE>
<CAPTION>
                                           1997            1996            1995            1994            1993
                                      -----------    ------------     -----------     -----------     -----------
<S>                                   <C>            <C>              <C>             <C>             <C>        
Operating Data
 Revenues                             $ 3,046,000    $  3,640,300     $ 3,019,700     $ 1,761,700     $ 1,286,600

 Loss from operations                    (739,600)       (799,600)       (644,700)     (1,572,600)     (1,288,400)
 Net loss                                (847,000)       (408,300)       (241,900)     (1,419,200)     (1,293,400)

Balance Sheet Data
 Total assets                           3,813,600       3,532,500       4,465,200       4,299,400       3,265,500
 Working capital                        1,307,600       1,891,000       2,645,500       3,128,100       2,437,800
 Notes payable                            950,000         950,000         950,000       1,362,500       1,412,500
 Ownership interest of others
  in consolidated entity                                1,448,300       1,823,100       2,146,000
 Shareholders' equity                   2,184,500         172,200         572,700         255,600       1,642,300
 Average common shares outstanding     17,192,323      14,067,606      14,006,254      13,878,593      13,719,036

Loss per common share                 $      (.05)   $       (.03)    $      (.02)    $      (.10)    $      (.09)
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Basis of Presentation

     Prior to January 1, 1997, the financial statements included the accounts of
the Company and Euro-Nocopi S.A. (Euro), the European affiliate of the Company,
on a consolidated basis. Consolidation was appropriate due to the operational
and financial control the Company exercised over Euro. Additionally, the Company
held approximately an 18% interest in Euro and warrants permitting it to
increase its interest in Euro to 55%. During the second quarter of 1997, the
Company ceased to exercise effective control over Euro. The cessation of
effective control resulted from a dispute which arose in April 1997 between the
Company and Euro under the license agreement between the Company and Euro
concerning Euro's contention that it was entitled to a share of certain minimum
royalties under a worldwide agreement with a manufacturer which distributes
products incorporating the Company's technologies. In an agreement negotiated
during the second quarter of 1997 and concluded in July 1997, the Company agreed
to credit Euro $154,500 as Euro's share of previously collected minimum
royalties, the $154,500 to be applied to license fee payments due the Company by
Euro through the first quarter of 1998. The Company also agreed to pay Euro 35%
of future guaranteed royalties from this manufacturer. The $154,500 settlement
has been charged to cost of sales and was included in the results of operations
for the six months ended June 30, 1997. The Company also agreed to modify its
warrant by extending its term through December 2001 but making it exercisable
beginning the earlier of 1) January 1, 2001; 2) in the event of a sale of all or
part of Euro; or 3) in the event of a public listing of Euro's shares on a stock
market. In addition, the Company agreed to defer to January 1, 2001 its right to


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<PAGE>


acquire, under certain conditions, all remaining shares of Euro for shares of
the Company. This call right expires December 31, 2001.

     Additionally, the licensing agreement between the two companies was amended
relative to the negotiation of future worldwide licensing contracts, the five
directors of Euro who were also Nocopi directors resigned from Euro's Board, and
the Company ceased to exercise effective control of Euro. During the fourth
quarter of 1997, a Nocopi director was elected to Euro's Board of Directors and
the Chief Operating Officer of Euro was appointed to the Company's Board of
Directors. Additionally, Euro is dependent on the Company for the technology it
licenses from the Company and markets in Europe. Accordingly, the Company ceased
consolidating effective January 1, 1997, applied the equity method, and recorded
an adjustment to paid-in capital of $377,300 to record its 18% share of Euro's
net equity at January 1, 1997 resulting primarily from the expiration in 1997 of
certain liquidation privileges on the 82% of Euro's stock not owned by the
Company.

Results of Operations

     The Company's revenues are derived from royalties paid by licensees of the
Company's technologies, fees for the provision of technical services to
licensees and from the direct sale of products incorporating the Company's
technologies, principally pressure sensitive labels. Royalties consist of
guaranteed minimum royalties payable by the Company's licensees in certain cases
and additional royalties which typically vary with the licensee's sales or
production of products incorporating the licensed technology. Service fee and
sales revenues vary directly with the number of units of service or product
provided.

     Because the Company has a relatively high level of fixed costs, 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, as certain
customers have developed experience with the Company's technologies, they have
sought to renegotiate certain provisions of their license agreements and, when
the Company agrees to revise terms, revenues from the customer may be affected.

     Revenues for 1997 were $3,046,000 compared to $3,640,300 in 1996 and
$3,019,700 in 1995, representing a decline of 16% in 1997 compared to 1996.
Revenues for 1996 increased 21% compared to 1995. The decline of $594,300 in
1997 compared to 1996 is due in part to the change in accounting for Euro, whose
revenues are not included in 1997. The Company's 1996 results included revenues
of $418,000 attributable to Euro. In addition, domestic licenses, royalties and
fees declined by $548,100 due primarily to lower minimum license fees due under
renegotiated contracts with 3M Corporation and Georgia-Pacific, offset in part
by a $371,800 increase in product sales, primarily security labels, during 1997.
The $620,600 increase in revenues in 1996 compared to 1995 is due, in part, to
higher product sales, primarily security labels, compared to 1995. In 1996, the
Company


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<PAGE>


produced its initial order of pressure-sensitive security labels for 3M
Corporation. During the second half of 1996, the Company renegotiated its
exclusive license agree ment with Georgia-Pacific. The slower than anticipated
revenue growth from Georgia-Pacific, which led, in part, to the license
renegotiation, negatively affected the Company's second half 1996 revenues
compared to the second half of 1995.

     The Company's 1997 gross profit declined to $1,504,500 or 49% of revenues
from $2,581,600 or 71% of revenues in 1996 and $2,620,900 or 87% of revenues in
1995. The decline in 1997 compared to 1996, both in absolute dollars and as a
percentage of revenues is due to three factors: 1) lower licenses, royalties and
fees resulting from the exclusion of Euro's revenues as well as lower domestic
licenses, royalties and fees; 2) higher levels of sales of tangible products
such as pressure- sensitive labels, which are manufactured or purchased for
resale and carry a significantly higher level of direct costs compared to the
Company's license and royalty revenues; and 3) the Company recorded a one-time
charge to cost of sales totaling $154,500 in the first half of 1997 in
connection with the settlement of its dispute with Euro. The decline in gross
profit in 1996 from 1995 in both absolute dollars and as a percentage of
revenues is due, in part, to the increase in sales of tangible products such as
pressure sensitive labels, which are manufactured or purchased for resale and
carry a higher level of direct costs compared to the Company's license and
royalty revenues.

     Research and development expenses declined to $480,500 from $805,100 in
1996 and $789,100 in 1995. The reduction in 1997 results from the exclusion of
Euro's costs from the statement of operations and a cost containment program
implemented during the year.

     Sales and marketing expenses declined to $662,900 in 1997 from $1,494,100
in 1996. The exclusion of Euro's sales and marketing expenses in 1997 is the
principal reason for the year-to-year decrease in sales and marketing expenses.
Euro's 1996 sales and marketing expenses were $544,400. In addition, the
Company's domestic sales and marketing expenses declined by $286,800 during 1997
as a result of fewer sales personnel, lower commissions and lower discretionary
sales promotion expenses as the Company sought to conserve cash. The decline of
$58,500 in 1996 from the 1995 sales and marketing expense of $1,552,600 relates
primarily to lower commissions and compensation expenses experienced in 1996
compared to 1995.

     General and administrative expenses were $903,600 in 1997 compared to
$943,300 in 1996 and $781,500 in 1995. The decline in 1997 is due primarily to
the exclusion of the general and administrative expense of Euro offset in part
by higher professional expenses incurred during the year. Euro's 1996 general
and administrative expenses were $171,400. The Company also incurred legal and
professional costs of approximately $40,000 in 1997 related to the restructuring
of its ownership and license arrangements with Euro. The increase in 1996
compared to 1995 is attributable to legal fees incurred relative to the
Company's international patent activities and professional fees incurred by
Euro.

     Other expenses, principally legal expenses incurred with related parties,
were $197,100 in 1997 compared to $138,700 in 1996 and $142,400 in 1995. The
increase in 1997 relates primarily to a fee arrangement with the Company's U.S.
Counsel whereby the Company agreed to a one-time fee commitment of $100,000
covering time expended by U.S. Counsel in 1997 and previous years in excess of
payments made under the fixed fee structure negotiated for those years.


                                       12

<PAGE>


     Other income (expenses) include interest on the Series B 7% Subordinated
Convertible Promissory Notes issued in May 1993 and amortization of debt issue
costs related to the Notes. Interest income includes interest on funds invested
in the U.S. as well as the investment of funds held by Euro during the periods
that its accounts were included in the Company's financial statements.

     Equity in loss of affiliate represents the proportionate share in the loss
of Euro attributable to the Company's approximate 18% ownership share from
January 1, 1997, the date on which the Company began applying the equity method.

     Ownership interest of others in consolidated entity represents the
proportionate share in the loss of Euro-Nocopi attributable to the 82% ownership
interest of the outside shareholders of that company for the periods that its
accounts were included in the Company's financial statements on a consolidated
basis.

     The net loss for 1997 was $847,000 compared to losses of $408,300 and
$241,900, respectively, in 1996 and 1995. The increase in the 1997 net loss
compared to 1996 relates primarily to lower revenues in the U.S. attributable,
in part, to the renegotiated license arrangements with 3M Corporation and
Georgia-Pacific, a further change in revenue mix in favor of tangible products
such as labels, which carry lower gross profit margins than licenses and
royalties, and the $154,500 charge in settlement of the dispute with Euro offset
in part by lower overhead expenses as the Company instituted a cost-containment
program in the first quarter of the year to conserve cash during the period of
adverse liquidity which existed until the Company completed its equity financing
late in the year. The increase in the 1996 net loss compared to 1995 related in
part to the lower revenues realized from Georgia-Pacific compared to 1995 which
led to the renegotiation of the Company's agreement with Georgia-Pacific as well
as delays in the development of revenues in other areas of the Company's
business. Also contributing to the 1996 increase in the net loss is the lower
gross profit realized as a result of changes in product mix in favor of tangible
products which carry a higher level of direct costs than licenses and royalties.

Liquidity and Capital Resources

     The Company's cash and cash equivalents increased to $2,714,600 at December
31, 1997. The Company's consolidated cash and cash equivalent position at
December 31, 1996 was $2,229,200 of which $1,641,200 was held by Euro and
$588,000 was held by the Company. The amount held by Euro was available
primarily to fund Euro's operation. Because the financial statements of the
Company can no longer be consolidated with those of Euro, the cash position
declined by the $1,641,200 held by Euro at December 31, 1996. The Company's
domestic cash position increased to $2,714,600 at December 31, 1997 from
$588,000 at December 31, 1996, primarily as a result of a fourth quarter equity
offering in which the Company raised $2,926,000 ($2,548,000 net of expenses)
offset in part by cash required to fund operations during the year. Capital
spending was $19,500 in 1997, $61,500 in 1996 and $112,000 in 1995.

     In December 1997, the Company completed an offering of investment units in
Europe whereby 9,753,339, of a total 10,666,667 investment units offered, were
sold at $.30 per unit. Each unit consists of two shares of common stock and one
five-year stock purchase warrant. Each warrant entitles the holder to purchase
one share of the Company's common stock at a price of $.25 per share, subject to
escalation after three years. Proceeds of the offering totaled $2,926,000
($2,548,000 net of expenses).


                                       13

<PAGE>


     Current debt obligations represent the reclassification of the Company's
$950,000 Series B 7% Subordinated Convertible Promissory Notes due March 31,
1998 into current liabilities. The Company anticipates that approximately
$125,000 of the Notes will be extended.

     Until August 1997, the Company had a line of credit with a bank for up to
$1 million secured by a pledge of securities, including equity securities, made
by certain directors. The line of credit was cancelled in August 1997, and the
collateral returned to the pledgors of the collateral. During the time that the
line of credit was in effect, there had been no funds drawn against it by the
Company.

     The Company does not currently plan any significant capital investment in
the foreseeable future.

     As a result of the 1997 equity offering, the Company believes that it has
sufficient working capital to support its operations and debt service
requirements over the next twelve months.

     The foregoing contains forward looking information within the meaning of
the Private Securities Litigation Act of 1995. Such forward looking statements
involve certain risks and uncertainties including the particular factors
described in this Management Discussion and Analysis. In each case, actual
results may differ materially from such forward looking statements. The Company
does not undertake to publicly update or revise its forward looking statements
even if experience or future changes make it clear that any projected results
(expressed or implied) will not be realized.

Other Factors That May Affect Future Growth and Stock Price

     Prior to the successful completion of the equity offering in late 1997, the
Company's operating results and stock price were adversely affected by the
Company's adverse liquidity, previously discussed, and, in addition, are
dependent upon a number of factors, some of which are beyond the Company's
control. These include:

Uneven Pattern of Quarterly and Annual Operating Results. The Company's
revenues, which are derived primarily from licensing and royalties, are
difficult to forecast due to the long sales cycle for the Company's
technologies, the potential for customer delay or deferral of implementation of
the Company's technologies, the size and timing of inception of individual
license agreements, the success of the Company's 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 the Company's operating
expenses are substantially fixed, income expectations will be subject to a
similar adverse outcome.

New Business Opportunities. The Company, with limited research and development
resources, is compelled to develop new technologies which it believes will
enhance and expand its position in the anti-counterfeiting and anti-diversion
marketplace it serves. There can be no assurance that the resources expended in
this effort will generate significant revenues for the Company.

Intellectual Property. The Company relies on a combination of protections
provided under applicable international patent, trademark and trade secret laws.
It also relies on confidentially, non-analysis and licensing agreements to
establish and protect its rights in its proprietary technologies. While the
Company actively attempts to protect


                                       14

<PAGE>


these rights, the Company's technologies could possibly be compromised through
reverse engineering or other means. There can be no assurance that the Company
will be able to protect the basis of its technologies from discovery by
unauthorized third parties, thus adversely affecting its customer and licensee
relationships.

Volatility of Stock Price. The market price for the Company's common stock has
historically experienced significant fluctuations and may continue to do so. The
Company has, since its inception, 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, the Company receives limited publicity regarding its
business achievements and prospects nor is it extensively followed by securities
analysts and traders. The 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.

Recently Issued Accounting Standards

The following Statements of Financial Accounting Standards are effective for
financial statements for periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Adoption of all three
statements is not expected to impact financial statements or disclosures.

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.

Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of a Business Enterprise" ("SFAS 131"), establishes standards for public
enterprises reporting of information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available and that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.

Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"), revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of


                                       15

<PAGE>


plan assets that will facilitate financial analysis and eliminate certain
existing disclosure requirements.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial Statements of Registrant meeting the requirements of Regulation
S-X (except section 210.3-05 and Article 11 thereof) are included herein
beginning at page F-1 of this Annual Report on Form 10-K.

     For information required with respect to this Item 8, see "Financial
Statements and Schedules on pages F-1 through F-17 of this report.


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

     In October 1997, Registrant appointed BDO Seidman, LLP as the Registrant's
independent public accountant to audit the Registrant's financial statements
replacing Coopers & Lybrand L.L.P. who resigned in August 1997. These events are
more fully described in 8-K filings dated August 25, 1997 and October 27, 1997
which are incorporated herein by reference.


                                       16

<PAGE>


                                    PART III

     The information required by Part III, Items 10 through 13, inclusive of
Form 10-K are incorporated by reference to Registrant's Definitive Proxy
Statement for the Annual Meeting of Shareholders scheduled for June 8, 1998,
which shall be filed with the Securities and Exchange Commission not later than
120 days after the end of the fiscal year to which this Annual Report on Form
10-K relates.


                                       17

<PAGE>


                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
             8-K

(a)  The following Financial Statements are filed as part of this Annual Report
     on Form 10-K

                                                                       PAGE
                                                                       ----

Report of Independent Accountants                                       F-1

Balance Sheets as of December 31, 1997 and 1996                         F-3

Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995                                        F-4

Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995                            F-5

Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995                                        F-6

Notes to Financial Statements                                       F-7 to F-17

Schedule II - Valuation and Qualifying Accounts
and Reserves                                                            F-18

All other schedules are omitted because they are not required or are
inapplicable.

----------

(b)  The Exhibit Index begins on Page 20 of this Annual Report on Form 10-K.

(c)  Registrant filed the following report on Form 8-K during the last quarter
     of the fiscal year covered by this Annual Report on Form 10-K.

     October 27, 1997 - Change in Registrant's Certifying Accountant.


                                       18

<PAGE>


                                   SIGNATURES


     Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                NOCOPI TECHNOLOGIES, INC.
                                Registrant

Dated: April 7, 1998            By: /s/ Richard A. Check
                                    -------------------------------------------
                                        Richard A. Check,
                                        President & Chief Executive Officer

Dated: April 7, 1998            By: /s/ Rudolph A. Lutterschmidt
                                    -------------------------------------------
                                        Rudolph A. Lutterschmidt,
                                        Vice President, Chief Financial Officer
                                        and Chief Accounting Officer


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

Date: April 7, 1998                     /s/ Richard A. Check
                                        ---------------------------------------
                                            Richard A. Check,
                                            Chairman of the Board of Directors


Date: April 7, 1998                     /s/ Susan Cox
                                        ---------------------------------------
                                            Susan Cox, Director


Date: April 7, 1998                     /s/ Dr. Arshavir Gundjian
                                        ---------------------------------------
                                            Dr. Arshavir Gundjian, Director


Date: April 7, 1998                     /s/ Jack H. Halperin
                                        ---------------------------------------
                                            Jack H. Halperin, Director


Date: April 7, 1998                     /s/ Neal Sroka
                                        ---------------------------------------
                                            Neal Sroka, Director


                                       19

<PAGE>


         The following Exhibits are filed as part of this Annual Report on 
Form 10-K:


     Exhibit
     Number                    Description
     ------                    -----------

       3.1   Articles of Incorporation(1)

       3.2   Bylaws(1)

       3.3   Articles of Amendment to Articles of Incorporation(4)

      10.1   Amended and Restated Non-Qualified Stock Option Plan(3)

      10.2   Amended and Restated Incentive Stock Option Plan(3)

      10.3   Summary Plan Description for Nocopi Technologies, Inc. 401(k)
             Profit Sharing Plan(2)

      10.4   License Agreement between Registrant and Euro-Nocopi S.A.(3)

      10.5   Service Agreement between Registrant and Euro-Nocopi S.A.(3)

      10.6   Memorandum of Agreement between Registrant and Euro-Nocopi S.A.(3)

      10.7   Nocopi Technologies, Inc. 1996 Stock Option Plan(4)

      10.8   Settlement Agreement between Registrant and Euro-Nocopi S.A.

      10.9   Employment Agreement between Registrant and Richard A. Check

      10.10  Employment Agreement between Registrant and Norman A. Gardner

      10.11  Employment Agreement between Registrant and Dr. A. Gundjian

      10.12  Form of Common Stock Purchase Warrant

      10.13  Lease Agreement dated February 17, 1998 relating to premises at 537
             Apple Street, West Conshohocken, PA 19428


                                       20

<PAGE>


      16.1   Letter dated August 25, 1997 from Coopers & Lybrand L.L.P. 
             re: Change in Certifying Accountant(5)

      23.1   Consent of Coopers & Lybrand L.L.P.

      23.2   Consent of BDO Seidman, LLP

      27.0   Financial Data Schedule

----------

(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, 1994

(4)   Incorporated by reference to Registrant's Annual Report on Form 10-K for
      the Year Ended December 31, 1996

(5)   Incorporated by reference to Registrant's Current Report on Form 8-K dated
      August 25, 1997


                                       21

<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


     To the Shareholders and Board of Directors of Nocopi Technologies, Inc.

     We have audited the accompanying balance sheet of Nocopi Technologies, Inc.
as of December 31, 1997 and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. We have also audited the
financial statement schedule as of and for the year ended December 31, 1997
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our audit
provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nocopi Technologies, Inc. at
December 31, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

     Also, in our opinion, the schedule presents fairly, in all material
respects, the information set forth therein.


BDO Seidman, LLP
Philadelphia, Pennsylvania
March 3, 1998


                                       F-1

<PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Shareholders and Board of Directors
of Nocopi Technologies, Inc.


We have audited the accompanying consolidated balance sheet of Nocopi
Technologies, Inc. as of December 31, 1996, the related consolidated statements
of income, cash flows and changes in stockholders equity for each of the two
years in the period ended December 31, 1996. We have also audited the financial
statement schedules for the two years ended December 31, 1996 listed on the
index on page F-18 of this Form 10-K. These financial statements and financial
statements schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nocopi
Technologies, Inc. as of December 31, 1996 and the consolidated results of their
operations and cash flows for each of the two years in the period ended December
31, 1996 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information required to
be included herein.


/s/ COOPERS & LYBRAND LLP
-------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 7, 1997


                                      F-2

<PAGE>


                            Nocopi Technologies, Inc.
                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                           December 31
                                                                   ---------------------------
                                                                       1997            1996
                                                                   ----------       ----------
<S>                                                                <C>              <C>
                                 Assets
Current assets
 Cash and cash equivalents                                         $2,714,600       $2,229,200
 Accounts receivable less allowances
  (1997-$44,100; 1996-$37,100)                                        167,400          513,400
 Inventory                                                              5,500            5,100
 Prepaid and other                                                     49,200          105,300
                                                                   ----------       ----------
  Total current assets                                              2,936,700        2,853,000

Fixed assets
 Leasehold improvements                                                45,600           43,200
 Furniture, fixtures and equipment                                    422,600          435,000
                                                                   ----------       ----------
                                                                      468,200          478,200
 Less: accumulated depreciation and amortization                      354,400          296,600
                                                                   ----------       ----------
                                                                      113,800          181,600

Other assets
 Investment in and advances to affiliate                              209,100
 Patents, net of accumulated amortization
  (1997 - $266,600; 1996 - $214,300)                                  537,000          452,000
 Debt issuance costs, net of accumulated
  amortization (1997 - $181,800; 1996 - $156,500)                       6,300           31,600
 Other                                                                 10,700           14,300
                                                                   ----------       ----------
                                                                      763,100          497,900
                                                                   ----------       ----------
                                                                   $3,813,600       $3,532,500
                                                                   ==========       ==========

           Liabilities and Stockholders' Equity

Current liabilities
 Current debt obligations                                            $950,000
 Accounts payable                                                     321,000         $539,800
 Accrued expenses                                                     172,800          139,900
 Accrued commissions                                                  116,700          118,100
 Deferred revenue                                                      68,600          164,200
                                                                   ----------       ----------
  Total current liabilities                                         1,629,100          962,000

Long-term notes payable                                                                950,000

Commitments and contingencies

Ownership interest of others in consolidated entity                                  1,448,300

Stockholders' equity
 Series A preferred stock $1.00 par value
  Authorized - 300,000 shares
   Issued and outstanding - none
Common stock, $.01 par value
  Authorized - 50,000,000 shares
   Issued and outstanding
    1997 - 33,587,332 shares                                          335,900
    1996 - 14,080,654 shares                                                           140,800
 Paid-in capital                                                   10,396,200        7,651,000
 Currency translation adjustment                                      (23,900)          57,100
 Accumulated deficit                                               (8,523,700)      (7,676,700)
                                                                   ----------       ----------
                                                                    2,184,500          172,200
                                                                   ----------       ----------
                                                                   $3,813,600       $3,532,500
                                                                   ==========       ==========
</TABLE>

 See notes to financial statements.


                                       F-3

<PAGE>


                            Nocopi Technologies, Inc.
                            Statements of Operations

<TABLE>
<CAPTION>
                                                                Years ended December 31
                                                   --------------------------------------------------
                                                       1997               1996                1995
                                                   -----------         ----------          ----------
<S>                                                <C>                <C>                  <C>
Revenues
 Licenses, royalties and fees                       $2,085,300         $3,036,800          $2,878,500
 Product and other sales                               960,700            603,500             141,200
                                                    ----------         ----------          ----------
                                                     3,046,000          3,640,300           3,019,700

Cost of sales
 Licenses, royalties and fees                          582,900            496,900             273,200
 Product and other sales                               958,600            561,800             125,600
                                                    ----------         ----------          ----------
                                                     1,541,500          1,058,700             398,800
                                                    ----------         ----------          ----------
  Gross profit                                       1,504,500          2,581,600           2,620,900

Operating expenses
 Research and development                              480,500            805,100             789,100
 Sales and marketing                                   662,900          1,494,100           1,552,600
 General and administrative                            903,600            943,300             781,500
 Other expenses                                        197,100            138,700             142,400
                                                    ----------         ----------          ----------
                                                     2,244,100          3,381,200           3,265,600
                                                    ----------         ----------          ----------
  Loss from operations                                (739,600)          (799,600)           (644,700)

Other income (expenses)
 Amortization of debt issuance costs                   (25,300)           (25,300)            (28,800)
 Interest income                                        27,800            113,900             189,300
 Interest and bank charges                             (71,000)           (72,100)            (80,600)
 Equity in net loss of affiliate                       (38,900)
 Ownership interest of others in net
  loss of consolidated entity                                             374,800             322,900
                                                    ----------         ----------          ----------
                                                      (107,400)           391,300             402,800
                                                    ----------         ----------          ----------
  Net loss                                           ($847,000)         ($408,300)          ($241,900)
                                                    ==========         ==========          ==========
Basic and dilutive loss
 per common share                                        ($.05)             ($.03)              ($.02)


Weighted average common shares outstanding          17,192,323         14,067,606          14,006,254
</TABLE>

See notes to financial statements.


                                       F-4
<PAGE>


                            Nocopi Technologies, Inc.
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                            Common stock                              Currency
                                      ------------------------         Paid-in       Translation       Accumulated
                                         Shares        Amount          Capital       Adjustment          Deficit            Total
                                      -----------     --------        ----------     -----------       -----------         --------
<S>                                    <C>            <C>             <C>              <C>             <C>                 <C>
Balance-January 1, 1995                13,909,584     $139,100        $7,163,300       ($20,300)       ($7,026,500)        $255,600

Exercise of stock options                  15,000          100            28,900                                             29,000

Conversion of Series B notes,
   net of expenses                        119,582        1,200           330,700                                            331,900

Net loss                                                                                                  (241,900)        (241,900)

Translation adjustment                                                                  198,100                             198,100
                                      ----------------------------------------------------------------------------------------------
Balance-December 31, 1995              14,044,166      140,400         7,522,900        177,800         (7,268,400)         572,700

Exercise of stock options                  36,488          400           128,100                                            128,500

Net loss                                                                                                  (408,300)        (408,300)

Translation adjustment                                                                 (120,700)                           (120,700)
                                      ----------------------------------------------------------------------------------------------
Balance-December 31, 1996              14,080,654      140,800         7,651,000         57,100         (7,676,700)         172,200

Equity in net assets of Euro-Nocopi
  S.A. from application of equity
  method of accounting                                                   377,300                                            377,300

Private placement, net of expenses     19,506,678      195,100         2,352,900                                          2,548,000

Nonqualified stock options
 issued as compensation                                                   15,000                                             15,000

Net loss                                                                                                  (847,000)        (847,000)

Translation adjustment                                                                  (81,000)                            (81,000)
                                      ==============================================================================================
Balance-December 31, 1997              33,587,332     $335,900       $10,396,200       ($23,900)       ($8,523,700)      $2,184,500
                                      ==============================================================================================
</TABLE>
See notes to financial statements.

                                      F-5


<PAGE>

                            Nocopi Technologies, Inc.
                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                      Years ended December 31
                                                          -----------------------------------------------
                                                              1997              1996              1995
                                                          -----------       -----------       -----------
<S>                                                       <C>               <C>               <C>
Operating Activities
 Net loss                                                 $  (847,000)      $  (408,300)      $  (241,900)
 Adjustments to reconcile net loss to
  cash used by operating activities
  Depreciation and amortization                                73,300            84,200            68,600
  Amortization                                                 81,200            71,900            70,400
  Allowance for doubtful accounts, net                          7,000            16,100             7,400
  Equity in loss of affiliate                                  38,900
  Ownership interest of others in
   loss of consolidated entity                                                 (374,800)         (322,900)
  Other                                                        18,000                               6,000
                                                          -----------       -----------       -----------
                                                             (628,600)         (610,900)         (412,400)

Changes in assets and liabilities
 Accounts receivable                                          187,600           132,800          (230,400)
 Inventory                                                       (400)           17,100            (8,600)
 Prepaid and other                                             96,300           (14,000)          (17,000)
 Accounts payable and accrued expenses                        131,800           (30,200)          280,400
 Deferred revenue                                              (6,600)         (113,000)          235,300
                                                          -----------       -----------       -----------
                                                              408,700            (7,300)          259,700
                                                          -----------       -----------       -----------
  Cash used in operating activities                          (219,900)         (618,200)         (152,700)

Investing Activities
 Additions to fixed assets                                    (19,500)          (61,500)         (112,000)
 Additions to patents                                        (137,300)          (75,300)         (125,800)
 Cash of Euro, beginning of year                           (1,641,200)
 Other                                                        (44,700)
                                                          -----------       -----------       -----------
  Cash used in investing activities                        (1,842,700)         (136,800)         (237,800)

Financing Activities
 Issuance of common shares, net                             2,548,000
 Exercise of stock options                                                      128,500            29,000
                                                          -----------       -----------       -----------
  Cash provided in financing activities                     2,548,000           128,500            29,000

 Effect of exchange rate changes on cash                                       (126,400)          206,000
                                                          -----------       -----------       -----------
    Increase (decrease) in cash and cash equivalents          485,400          (752,900)         (155,500)
Cash and cash equivalents
 Beginning of year                                          2,229,200         2,982,100         3,137,600
                                                          -----------       -----------       -----------
 End of year                                              $ 2,714,600       $ 2,229,200       $ 2,982,100
                                                          ===========       ===========       ===========


Supplemental cash flow data
  Interest paid                                           $    66,500       $    66,500       $    74,700
                                                          ===========       ===========       ===========

 Additional common stock was issued upon conversion
  of Series B notes
   Conversion of Series B notes, net of debt issuance
    and conversion costs                                                                      $   331,900
                                                                                              ===========
Equity in net assets of Euro-Nocopi
  S.A. from application of equity
  method of accounting                                    $   377,300
                                                          ===========

</TABLE>


See notes to financial statements.


                                      F-6

<PAGE>


                          NOTES TO FINANCIAL STATEMENTS


1.   Organization of the Company

     Nocopi 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 authentication technologies in the United States and foreign
     countries.


2.   Significant Accounting Policies

     Basis of Presentation - Through December 31,1996, the financial statements
     included the accounts of the Company and Euro-Nocopi S.A. (Euro), the
     European affiliate of the Company on a consolidatd basis. The Company has
     an approximately 18% interest in Euro and holds warrants permitting it to
     increase its interest to 55%. The Company's operational and financial
     control of Euro required Euro's operations be included in the Consolidated
     Financial Statements. The 82% equity interest of shareholders other than
     the Company was shown as "Ownership interest of others in consolidated
     entity" in the Statements of Operations and Balance Sheets. All significant
     intercompany accounts and transactions were eliminated. During 1997, the
     Company ceased to exercise effective control over Euro. As a result,
     consolidation was no longer permitted and the Company's investments in Euro
     has been accounted for under the equity method. (See note 8)

     Use of Estimates - The Company's financial statements are prepared in
     conformity with U.S. generally accepted accounting principles ("U.S.
     GAAP"). The preparation of the financial statements in conformity with U.S.
     GAAP 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. The
     investments are in excess of the FDIC insurance limit. Cash equivalents are
     carried at the lower of cost, plus accrued interest, or market value and 
     are held in money market accounts at a local bank. At December 31,1997 and
     1996, Nocopi's investments in money market accounts amounted to $2,589,700
     and $518,300,respectively.  At December 31, 1996, the Balance Sheet for
     "Cash and cash equivalents" includes $1.6 million in cash and cash 
     equivalents of Euro.


                                       F-7

<PAGE>


     This amount was available primarily to fund European operations.

     Inventory is valued at the lower of cost or market, determined on a
     first-in, first-out basis.

     Income taxes - Deferred income taxes are provided for all temporary
     differences and 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.

     Fixed assets are 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, if shorter. 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.

     Patents are stated at cost less amortization and are being amortized on a
     straight-line basis over the life of the patent (approximately fifteen
     years).

     Debt issuance costs incurred in connection with the issuance of long-term
     debt have been capitalized and are being amortized over the life of the
     related debt agreement.

     Revenues, consisting primarily of license fees and royalties, are generally
     recorded as earned over the license term. Product sales are recognized upon
     shipment of products.

     Loss per share - the Company has adopted SFAS No. 128, "Earnings Per
     Share." SFAS No. 128 simplifies the standards for computing earnings per
     share (EPS), replaces simple and primary EPS with a newly defined basic EPS
     and modifies the computation of diluted EPS. Pursuant to SFAS No. 128 the
     Company reflected on its Statements of Operations basic and dilutive loss
     per share (LPS) for the years ended December 31, 1997, 1996 and 1995.
     Adoption of SFAS No. 128 did not impact the amount of LPS and there is no
     difference in the amounts calculated as basic LPS and dilutive LPS because
     options and warrants are anti-dilutive.

     Recoverability of Long Lived Assets - The Company has adopted SFAS No. 121,
     "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
     Assets to be Disposed of." The Statement requires that long-lived assets
     and certain identifiable intangibles, including patents, be reviewed for
     impairment whenever


                                       F-8

<PAGE>


     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 indicating the existence of an impairment which would be
     material to the Company's quarterly or annual financial statements.

     Accounting for Stock-Based Compensation - The Company has implemented SFAS
     No. 123, "Accounting for Stock-Based Compensation." The Statement
     encourages employers to account for stock compensation awards based on
     their fair value on their date of grant. Entities may choose not to apply
     the new accounting method but instead, disclose in the notes to the
     financial statements the pro forma effects on net income and earnings per
     share as if the new method had been applied. The Company has adopted the
     disclosure-only approach of the Standard. See proforma disclosures in 
     Note 7.

     Compensation costs attributable to stock option and similar plans are
     recognized based on any difference between the quoted market price of the
     stock on the date of the grant over the amount the employee is required to
     pay to acquire the stock (the intrinsic value method under Accounting
     Principles Board Opinion 25). Such amount, if any, is accrued over the
     related vesting period, as appropriate.

     Recently Issued Accounting Standards
  
     The following Statements of Financial Accounting Standards are effective
     for financial statements for periods beginning after December 15, 1997 and
     require comparative information for earlier years to be restated. Adoption
     of all three statements is not expected to impact financial statements or
     disclosures.

     Statements of Financial accounting Standards No. 130, "Reporting
     Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
     display of comprehensive income, its components and accumulated balances.
     Comprehensive income is defined to include all changes in equity except
     those resulting from investments by owners and distributions to owners.
     Among other disclosures, SFAS 130 requires that all items required to be
     recognized under current accounting standards as components of
     comprehensive income be reported in a financial statement that is displayed
     with the same prominence as other financial statements.

     Statement of Financial Accounting Standards No. 131, "Disclosure about
     Segments of a Business Enterprise" ("SFAS 131"), establishes standards for
     public enterprises reporting of information about operating segments in
     annual financial statements and requires reporting of selected information
     about


                                       F-9

<PAGE>


     operating segments in interim financial statements issued to the public. It
     also establishes standards for disclosures regarding products and services,
     geographic areas and major customers. SFAS 131 defines operating segments
     as components of an enterprise about which separate financial information
     is available and that is evaluated regularly by the chief operating
     decision maker in deciding how to allocate resources and in assessing
     performance.

     Statement of Financial Accounting Standards No. 132, "Employers'
     Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"),
     revises employers' disclosures about pension and other postretirement
     benefit plans. It does not change the measurement or recognition of those
     plans. It standardizes the disclosure requirements for pensions and other
     postretirement benefits to the extent practicable, requires additional
     information on changes in the benefit obligations and fair values of plan
     assets that will facilitate financial analysis and eliminate certain
     existing disclosure requirements.


3.   Notes Payable and Shareholders' Equity.

     The Company has $950,000 Series B 7% Subordinated Convertible Promissory
     Notes (the B Notes) outstanding. Interest on the B notes is payable on a
     semi-annual basis. The B Notes are payable in full on March 31, 1998, may
     be prepaid at any time and are convertible into common stock of the Company
     at a conversion price of $3.50 per share. The carrying cost of the B Notes
     at December 31, 1997 and 1996 approximates their fair value.

     The Company, on July 15, 1996, amended its Articles of Incorporation to
     effect a one-for-five reverse split of its common stock, to increase the
     par value of its common stock from $.002 to $.01 and to decrease the number
     of shares of common stock authorized under its Articles of Incorporation
     from 90,000,000 to 50,000,000. All applicable share and per share data have
     been adjusted for the reverse stock split.

     In December 1997, the Company completed a private placement in Europe
     whereby 9,753,339 units (each unit consisting of two shares of common stock
     and one warrant to purchase common stock)


                                       F-10

<PAGE>


     were sold raising $2,926,000 in cash ($2,548,000 net of expenses). Each
     warrant is exercisable for the purchase of one share of the Company's
     common stock at a price of $.25 per share during the first three years
     after issuance, subject to escalation on the third anniversary of the
     issuance of the warrants. The warrants will expire five years after
     issuance unless extended by the Board of Directors. In conjunction with the
     private placement, 780,267 warrants, having the same terms and conditions
     as those issued as part of the units, were issued as partial commission to
     the Placement Agent. The European investors were also given the right to
     appoint two representatives to the Company's Board of Directors.


4.   Income Taxes

     At December 31, 1997 and 1996, the Company had net operating loss
     carryforwards totaling approximately $8,200,000 and $7,400,000,
     respectively. These net operating losses are available to offset future
     taxable income through the years 2013 and 2012, respectively. As a result
     of the issuance of the Company's common stock in an equity offering in late
     1997, the amount of the net operating loss carryforwards may be limited.
     Additionally, the utilization of these losses, if available, will depend on
     the generation of sufficient taxable income prior to the expiration of the
     net operating loss carryforwards. Valuation allowances of approximately
     $3,000,000 and $2,800,000 at December 31, 1997 and 1996, respectively, have
     been provided against the deferred tax assets due to uncertainty of
     realization and any limitation as a result of the potential change in
     control of the Company.


                                      F-11

<PAGE>


5.   Related Party Transactions

     During 1997, 1996 and 1995, charges of $472,000, $138,700 and $142,400,
     respectively, were made to firms employing certain officers and directors
     for legal and consulting services. Of these amounts, $274,900 was charged
     in 1997 to paid-in capital for placement and legal fees related to the 1997
     European private placement (See note 3). In October 1997, an executive
     officer of the Placement Agent was appointed to the Company's Board of
     Directors as a representative of the European investors in that private
     placement. In 1995, $50,000 was charged to paid-in capital for legal
     services in connection with debt conversions in that year.


6.   Commitments and Contingencies

     The Company conducts its operations in leased facilities and leases
     equipment under leases expiring at various dates to 2003.

     Future minimum lease payments under operating leases with initial or
     remaining terms of one year or more at December 31, 1997 are: $100,400 -
     1998; $99,600 - 1999; $102,000 - 2000; $104,800 - 2001; and $107,500 -
     2002.

     Total rental expense under operating leases was $123,100 in 1997, $149,600
     in 1996 and $125,100 in 1995.

     The Company has employment contracts with certain executive officers and
     employees, the terms of which expire at various dates through 2002. Future
     minimum compensation payments under these agreements at December 31, 1997
     are $454,000 - 1998; $412,500 - 1999; $387,500 - 2000; $242,500 - 2001; and
     $212,500 - 2002.
     
     From time to time, the Company may be subject to legal proceedings and
     claims which arise in the ordinary course of its business. In the opinion
     of management, the amount of ultimate liability with respect to any present
     actions will not materially affect the financial position or results of
     operations of the Company.

7.   Stock Options and 401(k) Savings Plan

     In accordance with the 1986 Incentive Stock Option Plan, the Company was
     authorized through June 1996 to issue options to purchase up to 300,000
     common shares to management and key employees of the Company. The exercise
     price of the options granted must be equal to the fair market value of such
     shares on the date of grant. The term of each option and the manner in
     which it may be exercised was determined by the Company, subject to the
     requirement that no option may be exercisable more than ten years after the
     date of grant. With respect to any incentive stock option granted to a
     participant who owns more than 10% of the voting rights of the Company's
     capital stock on the date of grant, the exercise price of the option must
     be at least equal to 110% of the fair market value on the date of grant and
     the option may not be exercisable for more than five years from the date of
     grant.


                                      F-12

<PAGE>


     In accordance with the 1986 Non-Qualified Stock Option Plan, the Company
     was authorized through June 1996 to issue options to purchase up to 700,000
     common shares to certain key employees, independent contractors, technical
     advisors and directors of the Company.

     The 1996 Stock Option Plan was approved by the shareholders of the Company
     in June 1996. The Plan provides for the granting of up to 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 difference between fair market value and the option price for
     non-qualified options granted under the plans is charged to income as
     compensation expense over the vesting periods of the related options. There
     was no compensation expense recorded during 1997, 1996 or 1995 as a result
     of below market stock option grants.

     A summary of stock options under these plans follows:

<TABLE>
<CAPTION>

                                                          Exercise      Weighted
                                           Number of     Price Range    Average
                                            Shares        Per Share      Price
                                            ------        ---------      -----

<S>                                         <C>          <C>        <C>        
     Outstanding at December 31, 1994       466,206     $.75 to $3.75    $2.91
     Options granted                        295,200      3.25 to 4.05     3.70
     Options exercised                      (15,000)    1.30 and 2.25     1.95
     Options canceled                       (63,706)     3.25 to 4.05     3.50
                                           --------                       
     Outstanding at December 31, 1995       682,700       .75 to 4.05     3.21
     Options granted                         43,000     3.10 and 4.35     3.75
     Options exercised                      (36,488)     3.00 to 3.75     3.55
     Options canceled                        (8,846)     3.00 to 4.05     3.70
                                           --------
     Outstanding at December 31, 1996       680,366       .75 to 4.35     3.22
     Options granted                        525,000       .30 and .45      .36
     Options canceled                      (422,300)      .75 to 4.35     3.03
                                           --------
     Outstanding at December 31, 1997       783,066     $.30 to $4.35     1.40
                                           ========       


                                                          Exercise      Weighted
                                             Option      Price Range    Average
                                             Shares       Per Share      Price
                                             ------       ---------      -----
Exercisable at year end:
     1995                                   507,436     $.75 to $4.05    $3.35
     1996                                   574,466     $.75 to $4.35    $3.28
     1997                                   377,666     $.30 to $4.35    $2.44
     
Options available for future
grant under all plans:
     1995                                    45,633
     1996                                   700,000
     1997                                   175,000

The following table summarizes information about stock options outstanding at 
December 31, 1997:

                                           Ranges                      Total
                               ------------------------------      -------------
Range of exercise prices:      $.30 to $.45    $2.25 to $4.35      $.30 to $4.35
                               ------------    --------------      -------------
Number outstanding at
December 31, 1997:               525,000          258,066             783,066
                               ------------    --------------      -------------
Weighted average remaining
contractual life (years)           6.52             1.71                4.94
                               ------------    --------------      -------------
Weighted average exercise
price                           $   .36            $2.90               $1.40
                               ------------    --------------      -------------
Exercisable options:
Number outstanding at
December 31, 1997:               125,000          252,666             377,666
                               ------------    --------------      -------------
Weighted average remaining
contractual life                   2.60             1.68                1.98
                               ------------    --------------      -------------
Weighted average exercise
price                              $.30            $2.87               $2.44
                               ------------    --------------      -------------
</TABLE>


                                      F-13

<PAGE>


     The Company applies APB Opinion 25 in accounting for its plans.
     Accordingly, no compensation expense has been recognized in connection with
     stock option grants under the plans. Had compensation expense been
     determined based on the fair value on the grant dates for awards under
     those plans consistent with the method of SFAS No. 123, the Company's net
     loss and basic net loss per common share would have been reported as
     follows:

                                    1997            1996            1995
                                 ----------      ----------      ----------
     Net loss
        As reported              ($847,000)      ($408,300)       ($241,900)
        Pro forma                ($929,700)      ($470,400)       ($629,200)
                                                                  
     Loss per common share                                        
        As reported                  ($.05)          ($.03)           ($.02)
        Pro forma                    ($.05)          ($.03)           ($.04)
                                                               
     The fair value of each option granted is estimated on the day of grant
     based on a modified Black-Scholes option-pricing model with the following
     weighted-average assumptions used for grants in 1997, 1996 and 1995
     respectively: expected volatility of 46%, 76% and 50%; risk free interest
     rates of 6.0% to 7.2%, 6.1% to 6.3% and 5.7% to 6.6% and expected lives
     of two years.

     At December 31, 1997, the Company has reserved 12,784,378 shares of common
     stock for possible future issuance upon exercise of stock options, warrants
     and convertible securities.

     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 1997, 1996 or 1995.


8.   Euro-Nocopi, S.A.

     Euro-Nocopi, S.A. (Euro) was formed in 1994 to market the Company's
     technologies in Europe under an exclusive license arrangement. Euro was
     capitalized through a European private placement which allows those
     investors to convert the Euro stock into approximately one million shares
     of Nocopi Technologies, Inc. common stock beginning in August 1998 in the
     event that no public offering of Euro has been made by that date.

     Prior to January 1, 1997, the financial statements included the accounts of
     the Company and Euro-Nocopi S.A. (Euro), the European affiliate of the
     Company, on a consolidated basis. Consolidation was appropriate due to the
     operational and


                                      F-14

<PAGE>


     financial control the Company exercised over Euro. Additionally, the
     Company held approximately an 18% interest in Euro and warrants permitting
     it to increase its interest in Euro to 55%. During the second quarter of
     1997, the Company ceased to exercise effective control over Euro. The
     cessation of effective control resulted from a dispute which arose in April
     1997 between the Company and Euro under the license agreement between the
     Company and Euro concerning Euro's contention that it was entitled to a
     share of certain minimum royalties under a worldwide agreement with a
     manufacturer which distributes products incorporating the Company's
     technologies. In an agreement negotiated during the second quarter of 1997
     and concluded in July 1997, the Company agreed to credit Euro $154,500 as
     Euro's share of previously collected minimum royalties, the $154,500 to be
     applied to license fee payments due the Company by Euro through the first
     quarter of 1998. The Company also agreed to pay Euro 35% of future
     guaranteed royalties from this manufacturer. The $154,500 settlement has
     been charged to cost of sales and was included in the results of operations
     for the six months ended June 30, 1997. The Company also agreed to modify
     its warrant by extending its term through December 2001 but making it
     exercisable beginning the earlier of 1) January 1, 2001; 2) in the event of
     a sale of all or part of Euro; or 3) in the event of a public listing of
     Euro's shares on a stock market. In addition, the Company agreed to defer
     to January 1, 2001 its right to acquire, under certain conditions, all
     remaining shares of Euro for shares of the Company. This call right expires
     December 31, 2001.

     Additionally, the licensing agreement between the two companies was amended
     relative to the negotiation of future worldwide licensing contracts, the
     five directors of Euro who were also Nocopi directors resigned from Euro's
     Board, and the Company ceased to exercise effective control of Euro. During
     the fourth quarter of 1997, a Nocopi director was elected to Euro's Board
     of Directors and the Chief Operating Officer of Euro was appointed to the
     Company's Board of Directors. Additionally, Euro is dependent on the
     Company for the technology it licenses from the Company and markets in
     Europe. Accordingly, the Company ceased consolidating effective January 1,
     1997, applied the equity method, and recorded an adjustment to paid-in
     capital of $377,300 to record its 18% share of Euro's net equity at January
     1, 1997 resulting primarily from the expiration in 1997 of certain
     liquidation privileges on the 82% of Euro's stock not owned by the Company.


                                      F-15

<PAGE>

9.   Segment, Geographic and Major Customer Information

     The Company operates in one principal industry segment - the development
     and distribution of security products and the licensing of its patented
     authentication technologies. The Company's technologies and products are
     sold principally to the corporate market.

     The following geographic financial information is presented in conformity
     with SFAS 14:

<TABLE>
<CAPTION>
                                               1997(1)         1996(2)         1995(2)
                                            ----------      ----------      ----------
<S>                                         <C>             <C>             <C>
     Revenues:
      United States                         $2,580,400      $2,604,900      $2,198,700
      Europe                                   361,000         872,300         720,500
      Other foreign                            104,600         163,100         100,500
                                            ----------      ----------      ----------
          Total revenues                    $3,046,000      $3,640,300      $3,019,700
                                            ==========      ==========      ==========

     Transfers between geographic segments
      (eliminated in consolidation):
        United States                       $               $  150,200      $  109,600
        Europe                                                  48,000          44,900
                                            ----------      ----------      ----------
          Total transfers                   $               $  198,200      $  154,500
                                            ==========      ==========      ==========

     Loss from operations:
      United States                         $ (739,600)     $ (276,300)     $ (109,400)
      Europe                                                  (523,300)       (535,300)
                                            ----------      ----------      ----------
          Total loss from operations        $ (739,600)       (799,600)     $ (644,700)
                                            ==========      ==========      ==========

     Identifiable assets:
      United States                         $3,602,800      $1,673,300      $2,250,400
      Europe                                   209,100       1,857,100       2,209,300
      Other foreign                              1,700           2,100           5,500
                                            ----------      ----------      ----------
          Total assets                      $3,813,600      $3,532,500      $4,465,200
                                            ==========      ==========      ==========
</TABLE>
     (1)  Does not include the geographic financial information of Euro.

     (2)  Includes the geographic financial information of Euro.
     
                                      F-16

<PAGE>


     Revenues from customers are based on the location of the customers and
     include, in 1997, approximately $200,000 derived from the Company's
     European affiliate. Transfers between geographic areas are recorded
     according to contractual arrangements. Loss from operations consists of
     total revenue less operating expenses and does not include either interest
     or other expenses, net. Identifiable assets of geographic areas are those
     assets used in the Company's operations in each area.

     The Company's two largest customers accounted for approximately 46%, 40%
     and 37% of revenues in 1997, 1996 and 1995, respectively, and approximately
     42%, 35% and 39% of accounts receivable at December 31, 1997, 1996 and
     1995, 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.


                                      F-17


<PAGE>


                            NOCOPI TECHNOLOGIES, INC.

          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
                                         Balance           Additions
                                        Beginning          Charged to                                Balance
                                         of Year           Operations          Deductions          End of Year
                                        ---------          ----------          ----------          -----------
            DESCRIPTION
<S>                                    <C>                  <C>                 <C>                <C>
 Year ended December 31, 1995
  Allowance for doubtful accounts      $   21,800           $  9,600            $10,400            $   21,000
  Inventory reserve                        76,600                               $11,600                65,000
  Income tax valuation allowance        2,443,400            222,500                                2,665,900
 


 Year ended December 31, 1996
  Allowance for doubtful accounts         $21,000           $ 18,300            $ 2,200               $37,100
  Inventory reserve                        65,000                                53,500                11,500
  Income tax valuation allowance        2,665,900            112,500                                2,778,400



 Year ended December 31, 1997
  Allowance for doubtful accounts      $   37,100           $ 23,200            $16,200            $   44,100
  Inventory reserve                        11,500                                 1,500                10,000
</TABLE>

                                      F-18