<PAGE>
                                       
                    U. S. Securities and Exchange Commission
                             Washington, D.C.  20549

                                 FORM 10-KSB/A
                                AMENDMENT NO. 1

(Mark One)
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934
            For the fiscal year ended       September 30, 1997
                                      --------------------------

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
            For the transition period from               to 
                                            ------------    ------------
            Commission file number         0-17569          
                                   -----------------------

                                 FIBERCHEM, INC.
                 (Name of small business issuer in its charter)

           Delaware                                            84-1063897
  (State or other jurisdiction                             (I.R.S. Employer
 of incorporation or organization)                         Identification No.)

1181 Grier Drive, Suite B, Las Vegas, Nevada                     89119
(address of principal executive offices)                      (Zip Code)

Issuer's telephone number: (702) 361-9873

Securities registered under Section 12(b) of the Act:  None

Securities registered under Section 12(g) of the Act:  
                                        
                        Common Stock, $.0001 Par Value
          --------------------------------------------------------
                               (Title of class)

     Indicate by check whether the issuer (1) filed all reports required to 
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months 
(or for such shorter period that the registrant was required to file such 
reports), and (2) has been subject to such filing requirements for the past 
90 days.  YES X  NO
             ---   ---

     Indicate by check if there is no disclosure of delinquent filers in 
response to Item 405 of Regulation S-B contained in this form, and no 
disclosure will 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-KSB or any amendment to this Form 10-KSB.  [X]

     Issuer's revenues for its most recent fiscal year:  $1,523,994

     The aggregate market value of the voting stock held by non-affiliates 
computed by reference to the last sale price of such stock on December 19, 
1997 of $0.19 was $4,591,995
     
     As of December 19, 1997, the Issuer had 25,520,660 shares of Common 
Stock, par value $.0001 per share, outstanding. 

<PAGE>

                               EXPLANATORY NOTE


The Auditor's Report which appears on page F-1A has not been reissued or 
withdrawn by KPMG Peat Marwick LLP as of January 20, 1998.

The Company's Annual Report on Form 10-KSB for the year ended September 30, 
1997 has been filed without the reissuance by KPMG Peat Marwick LLP of their 
report dated January 10, 1997 on the Company's financial statements for the 
year ended September 30, 1996 ("Fiscal 1996"). The Company's Fiscal 1996 
financial statements have been included as they were published on January 10, 
1997.

During November and December 1997 and until January 7, 1998, KPMG 
specifically led the Company to believe that KPMG would reissue their report, 
as well as consent to the use of their report for the purposes of existing 
S-8 Registration Statements and a new SB-2 Registration Statement the Company 
expected to file shortly after filing the Form 10-KSB in order to effect a 
rights offering to the Company's Stockholders. On January 5, 1998 KPMG 
requested payment for their current services prior to physical delivery of 
their consent and reissuance of their report. However on January 7,1998 KPMG 
verbally informed the Company that KPMG had "decided not to accept an 
engagement to reissue or consent." KPMG has specifically declined to give any 
reason for its decision. There can be no assurance that KPMG would have 
reissued their report in its original form and without qualification if it 
completed the Fiscal 1997 audit and the required procedures for reissuance 
were performed.

The Company's current auditors, Goldstein Golub Kessler & Company, P.C. 
("GGK"), provided letters to KPMG at the latter's specific request confirming 
that nothing had come to GGK's attention that would have a material effect on 
the financial statements of the Company for any period prior to October 1, 
1996, including Fiscal 1996.

GGK, the Company's current auditors, have indicated that they will not, at 
this time, change or withdraw their report dated November 21, 1997 or their 
consent dated January 5, 1998, simply because of KPMG's failure to reissue 
its report.

Because of KPMG's belated notice to the Company, the Company's filing of any 
registration, including the rights offering, will be delayed until the 
Company's current auditors can audit Fiscal 1996. The Company anticipates 
that such audit will be completed by the end of February 1998; however, there 
can be no assurance that it will be completed nor even if completed that the 
Company's current auditors will issue a report or consent to the use of their 
report. Because of the delay caused by KPMG, the Company is pursuing various 
alternatives for interim financing, including "bridge" financing and standby 
commitments to the rights offering. There can be no assurance that forecasted 
sales levels will be realized to achieve profitable operations, or that 
additional financing, if needed can be obtained on terms satisfactory to the 
Company, if at all, or in an amount sufficient to enable the Company to 
continue its operations.


                                    2

<PAGE>

                         INDEPENDENT AUDITORS' REPORT


To the Board of Directors
FiberChem, Inc.

We have audited the accompanying consolidated balance sheet of FiberChem, 
Inc. and Subsidiaries as of September 30, 1997 and the related consolidated 
statements of operations, stockholders' equity, and cash flows for the year 
then ended. These financial statements are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
financial statements 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 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 audit provides a 
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of 
FiberChem, Inc. and Subsidiaries as of September 30, 1997, and the results of 
its operations and its cash flows for the year then ended in conformity with 
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared 
assuming that the Company will continue as a going concern.  As discussed in 
Note 1 to the consolidated financial statements, the Company has suffered 
recurring losses from operations which raise substantial doubt about its 
ability to continue as a going concern.  Management's plans in regard to 
these matters are also described in Note 1.  The consolidated financial 
statements do not include any adjustments that might result from the outcome 
of these uncertainties.

/s/ GOLDSTEIN GOLUB KESSLER & COMPANY, LLP

New York, New York

November 21, 1997


                                      F-1
<PAGE>

                         INDEPENDENT AUDITORS' REPORT
                                       
                                       
The Board of Directors and Stockholders
FiberChem, Inc.:


We have audited the accompanying consolidated balance sheets of FiberChem, 
Inc. and subsidiaries as of September 30, 1996 and 1995, and the related 
consolidated statements of operations, stockholders' equity, and cash flows 
for each of the years in the two-year period ended September 30, 1996.  These 
consolidated financial statements are the responsibility of the Company's 
management.  Our responsibility is to express an opinion on these 
consolidated 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 consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of 
FiberChem, Inc. and subsidiaries at September 30, 1996 and 1995, and the 
results of their operations and their cash flows for each of the years in the 
two year period ended September 30, 1996, in conformity with generally 
accepted accounting principles.

The accompanying consolidated financial statements have been prepared 
assuming that the Company will continue as a going concern.  As discussed in 
Note 1 to the consolidated financial statements, the Company has suffered 
recurring losses from operations which raise substantial doubt about its 
ability to continue as a going concern.  Management's plans in regard to 
these matters are also described in Note 1.  The consolidated financial 
statements do not include any adjustments that might result from the outcome 
of these uncertainties.

Las Vegas, Nevada
January 10, 1997          /s/  KPMG Peat Marwick LLP







                                      F-1A
<PAGE>
                                       
                         FIBERCHEM, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                    ASSETS

<TABLE>
<CAPTION>
                                                               September 30,      September 30,
                                                                   1996               1997
                                                               -------------      -------------
<S>                                                               <C>                <C>
Current assets:

 Cash and cash equivalents                                        $3,065,572           $427,488
 Accounts receivable, net of allowance for doubtful
   accounts of $204,711 and $240,796 in 1996 and 1997,
   respectively                                                      305,473            263,947
 Inventories (Note 3)                                              1,457,135          1,563,191
 Prepaid expenses and other                                           59,060             56,941
                                                               -------------      -------------
      Total current assets                                         4,887,240          2,311,567
                                                               -------------      -------------

Equipment                                                            616,192            716,465
Less accumulated depreciation                                       (483,827)          (549,175)
                                                               -------------      -------------
      Net equipment                                                  132,365            167,290
                                                               -------------      -------------

Other assets:

 Patent costs, net of accumulated amortization of
   $1,436,309 at September 30, 1996 and
   $1,678,845 at September 30, 1997 (note 5)                         474,462            287,905
 Technology costs, net of accumulated amortization
   and $354,942 at September 30, 1996 and                            114,764             83,333
   and $386,373 at September 30, 1997 (note 4)
 Financing costs, net of accumulated amortization of
   $65,678 at September 30, 1996 and
   $148,298 at September 30, 1997 (note 6)                           204,245            119,625
  
 Other                                                               247,383                  0
                                                               -------------      -------------
      Total other assets                                           1,040,854            490,863
                                                               -------------      -------------
Total assets                                                      $6,060,459         $2,969,720
                                                               -------------      -------------
                                                               -------------      -------------
</TABLE>


                                       
           The accompanying notes and independent auditor's reports should
          be read in conjunction with the consolidated financial statements.

                                      F-2
<PAGE>

                         FIBERCHEM, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                               September 30,      September 30,
                                                                   1996               1997
                                                               -------------      -------------
<S>                                                              <C>                <C>
Current liabilities:

 Current installments of note payable (note 6)                        $7,315             $6,878
 Accounts payable                                                    270,503             95,469
 Accrued expenses                                                    206,565            307,891
 Interest payable                                                     18,016             17,778
                                                               -------------      -------------
      Total current liabilities                                      502,399            428,016

Senior convertible notes payable (note 6)                          1,675,000          1,650,000
Note payable, net of current installments (note 6)                     2,551              7,942
                                                               -------------      -------------
      Total liabilities                                            2,179,950          2,085,958
                                                               -------------      -------------

Stockholders' equity (notes 4, 6 and 7):

 Preferred stock, $.001 par value.  Authorized
   10,000,000 shares;  205,089 and 218,998 convertible
   shares issued and outstanding at September 30,
   1996 and September 30, 1997, respectively;
   at liquidation value of $15 per share                           3,076,335          3,284,970
 Common stock,  $.0001 par value.  Authorized
   40,000,000 shares at September 30, 1996, and
   50,000,000 shares at September 30, 1997;
   25,705,216 and 25,515,660 shares issued and
   outstanding at September 30, 1996, and
   September 30, 1997, respectively                                    2,571              2,552
 Additional paid-in capital                                       28,714,804         27,192,749
 Deficit                                                         (26,369,551)       (29,596,509)
                                                               -------------      -------------
                                                                   5,424,159            883,762
 Notes receivable for exercise of options                         (1,543,650)               --
                                                               -------------      -------------
      Total stockholders' equity                                   3,880,509            883,762

Commitments and contingencies (notes 6, 7 and 8)
                                                               -------------      -------------
Total liabilities and stockholders' equity                        $6,060,459         $2,969,720
                                                               -------------      -------------
                                                               -------------      -------------
</TABLE>
                                       
           The accompanying notes and independent auditor's reports should
          be read in conjunction with the consolidated financial statements.

                                      F-3
<PAGE>

                       FIBERCHEM, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   Years ended September 30,
                                                               --------------------------------
                                                                   1996                1997
                                                               -------------      -------------
<S>                                                              <C>                <C>   
Revenues                                                            $908,700         $1,523,994
Cost of revenues                                                     367,779            945,434
                                                               -------------      -------------
      Gross profit                                                   540,921            578,560
                                                               -------------      -------------
Operating expenses:

 Research, development and engineering                             1,233,054          1,257,324
 General and administrative                                        1,109,456          1,101,781
 Sales and marketing                                               1,007,975          1,004,172
 Provision for loss on accounts receivable                           201,225             36,085
 Write down of obsolete inventory                                    281,313                 --
                                                               -------------      -------------
      Total operating expenses                                     3,833,023          3,399,362
                                                               -------------      -------------
      Loss from operations                                        (3,292,102)        (2,820,802)
                                                               -------------      -------------
Other income (expense):

 Interest expense                                                   (183,795)          (223,161)
 Interest income                                                     201,268             81,787
 Other, net                                                              --            (264,782)
                                                               -------------      -------------
      Total other income (expense)                                    17,473           (406,156)
                                                               -------------      -------------
      Net loss                                                   ($3,274,629)       ($3,226,958)
                                                               -------------      -------------
                                                               -------------      -------------

Shares of common stock used in computing loss per share           22,274,226         25,623,614
                                                               -------------      -------------
                                                               -------------      -------------

      Net loss per share                                              ($0.15)            ($0.13)
                                                               -------------      -------------
                                                               -------------      -------------
</TABLE>

                                       
          The accompanying notes and independent auditor's reports should
          be read in conjunction with the consolidated financial statements.

                                      F-4
<PAGE>

                       FIBERCHEM, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   YEARS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
                                                      Preferred Stock               Common Stock            Additional
                                                   ----------------------      ------------------------      Paid-In
                                                    Shares       Amount         Shares           Amount      Capital
                                                   -------     ----------     ----------         ------     ----------
<S>                                                <C>         <C>            <C>                <C>        <C>
Balance at  September 30, 1995                     214,462     $3,216,930     20,532,033         $2,053     24,844,392


 Preferred stock dividend:
   In stock (note 7)                                15,214        228,210             --             --       (228,210)
   In cash (note 7)                                     --             --             --             --        (23,645)
 Common stock issued:
   For cash                                             --             --      3,333,333            333      2,653,884
   For services                                         --             --         13,954              1         15,416
   Conversion of senior
     convertible notes payable (note 6)                 --             --      1,437,500            144        991,576
   Conversion of preferred stock (note 7)          (14,587)      (218,805)       145,870             15        218,790
   Exercise of warrants                                 --             --          1,031              1          1,030
   Exercise of options                                  --             --        241,495             24        241,571
 Treasury stock retired                            (10,000)      (150,000)            --             --             --
 Payments received on notes receivable for
   exercise of options                                  --             --             --             --             --
 Deferred compensation earned                           --             --             --             --             --
 Net loss                                               --             --             --             --             --
                                                   -------     ----------     ----------         ------     ----------
Balance at  September 30, 1996                     205,089     $3,076,335     25,705,216         $2,571     28,714,804


 Preferred stock dividend:
   In stock (note 7)                                13,909        208,635             --             --       (208,635)
   In cash (note 7)                                     --             --             --             --        (46,171)
 Common stock issued:
   Exercise of options                                  --             --        150,496             15         55,071
   Exercise of warrants                                 --             --        103,179             10         30,944
   Conversion of senior
     convertible notes payable (note 6)                 --             --         61,304              6         22,994
   Write down of notes receivable for
     exercise of options                                --             --             --             --       (619,504)
 Shares forfeited upon cancellation of notes
     receivable for exercise of options                 --             --       (504,535)           (50)      (756,754)
 Payments received on notes receivable for
     exercise of options                                --             --             --             --             --
 Net loss                                               --             --             --             --             --
                                                   -------     ----------     ----------         ------     ----------
Balance at  September 30, 1997                     218,998      3,284,970     25,515,660          2,552     27,192,749
                                                   -------     ----------     ----------         ------     ----------
                                                   -------     ----------     ----------         ------     ----------
</TABLE>

<TABLE>
<CAPTION>
                                                   Treasury                       Notes
                                                    Stock -                     Receivable
                                                   Preferred                   for Exercise    Deferred
                                                    Stock        Deficit        of Options   Compensation       Total
                                                   ---------  -------------    ------------  -------------   ----------
<S>                                                <C>        <C>              <C>           <C>             <C>
Balance at  September 30, 1995                     (150,000)   (23,094,922)    (1,597,837)        (5,596)     3,215,020
                                                  
                                                  
 Preferred stock dividend:                        
   In stock (note 7)                                     --             --             --             --             --
   In cash (note 7)                                      --             --             --             --        (23,645)
 Common stock issued:                             
   For cash                                              --             --             --             --      2,654,217
   For services                                          --             --             --             --         15,417
   Conversion of senior                           
     convertible notes payable (note 6)                  --             --             --             --        991,720
   Conversion of preferred stock (note 7)                --             --             --             --             --
   Exercise of warrants                                  --             --             --             --          1,031
   Exercise of options                                   --             --             --             --        241,595
 Treasury stock retired                             150,000             --             --             --             --
 Payments received on notes receivable for        
   exercise of options                                   --             --         54,187             --         54,187
 Deferred compensation earned                            --             --             --          5,596          5,596
 Net loss                                                --     (3,274,629)            --             --     (3,274,629)
                                                   ---------  -------------    -----------  ------------     ----------
Balance at  September 30, 1996                            0    (26,369,551)    (1,543,650)             0      3,880,509
                                                  
                                                  
 Preferred stock dividend:                        
   In stock (note 7)                                     --             --             --             --             --
   In cash (note 7)                                      --             --             --             --        (46,171)
 Common stock issued:                             
   Exercise of options                                   --             --             --             --         55,086
   Exercise of warrants                                  --             --             --             --         30,954
   Conversion of senior                           
     convertible notes payable (note 6)                  --             --             --             --         23,000
   Write down of notes receivable for             
     exercise of options                                 --             --        619,504             --             --
 Shares forfeited upon cancellation of notes      
     receivable for exercise of options                  --             --        756,804             --             --
 Payments received on notes receivable for        
     exercise of options                                 --             --        167,342             --        167,342
 Net loss                                                --     (3,226,958)            --             --     (3,226,958)
                                                    -------    -----------     ----------          -----     ----------
Balance at  September 30, 1997                            0    (29,596,509)             0              0        883,762
                                                   ---------  -------------    -----------  ------------     ----------
                                                   ---------  -------------    -----------  ------------     ----------
</TABLE>


                                       
          The accompanying notes and independent auditor's reports should
          be read in conjunction with the consolidated financial statements.

                                      F-5
<PAGE>
                                       
                        FIBERCHEM, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            Years ended September 30,
                                                                          ----------------------------
                                                                              1996            1997
                                                                          -----------      -----------
<S>                                                                       <C>              <C>   
Cash flows from operating activities:

 Net loss                                                                 ($3,274,629)     ($3,226,958)
 Adjustments to reconcile net loss to net
   cash flows used in operating activities:
     Depreciation                                                              50,542           69,853
     Amortization of patent and technology costs                              266,147          273,967
     Amortization of financing costs                                           65,678           82,620
     Accrued interest on notes receivable for exercise of options            (107,367)         (26,985)
     Write off of accrued interest on notes receivable
       for exercise of options                                                     --          248,212
     Common stock issued for services                                          15,417               --
     Reduction in notes receivable for the exercise
       of options in exchange for services                                     42,263              636
     Deferred compensation recognized                                           5,596               --
     Provision for loss on accounts receivable                                201,225           36,085
     Write down of obsolete inventory                                         281,313           36,290
     Changes in assets and liabilities:
       Decrease in note receivable from sale of subsidiary                    106,390               --
       Decrease in accounts receivable                                         59,068            5,441
       (Increase) in inventories                                             (747,146)        (142,346)
       Decrease in prepaid expenses and
         other current assets                                                  50,784            2,119
       Increase (decrease) in accounts payable                                 93,729         (175,034)
       Increase (decrease) in accrued expenses                                (80,942)         101,326
       Increase (decrease) in interest payable                                 18,016             (238)
                                                                          -----------      -----------
     Net cash used in operating activities                                 (2,953,916)      (2,715,012)
                                                                          -----------      -----------

Cash flows from investing activities:

 Purchase of equipment                                                        (45,476)         (83,505)
 Payments for patents                                                        (128,873)         (55,979)
                                                                          -----------      -----------
     Net cash used in investing activities                                   (174,349)        (139,484)
                                                                          -----------      -----------
</TABLE>

                                       
  The accompanying notes and independent auditor's reports should be read in
        conjunction with the consolidated financial statements.
                                                                     (continued)

                                      F-6
<PAGE>

                        FIBERCHEM, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            Years ended September 30,
                                                                          ----------------------------
                                                                              1996            1997
                                                                          -----------      -----------
<S>                                                                       <C>              <C>   
Cash flows from financing activities:

 Proceeds from common stock and warrant Units                              $3,000,000      $        --
 Proceeds from senior convertible notes payable                             2,825,000               --
 Payment of financing costs                                                  (773,987)              --
 Payments on note payable to bank and others                                   (6,832)         (16,319)
 Cash restricted as security for note payable                                      --           18,456
 Proceeds from the exercise of options and warrants                           242,626           86,040
 Proceeds from interest and notes receivable for exercise of options           19,489          174,406
 Payment of dividend on preferred stock                                       (23,645)         (46,171)
                                                                          -----------      -----------
     Net cash provided by financing activities                              5,282,651          216,412
                                                                          -----------      -----------
Net  increase (decrease) in cash and cash equivalents                       2,154,386       (2,638,084)
Cash and cash equivalents at beginning of period                              911,186        3,065,572
                                                                          -----------      -----------
Cash and cash equivalents at end of period                                 $3,065,572         $427,488
                                                                          -----------      -----------
                                                                          -----------      -----------

                                Supplemental Cash Flow Information

Noncash investing and financing activities:

 Senior convertible notes payable converted to common stock                $1,150,000          $25,000
 Reduction in additional paid-in capital due to
   write down of notes receivable for exercise of options                          --          619,504
 Reduction in common stock and additional paid-in capital
   upon cancellation of shares held as collateral for
   notes receivable for the exercise of options                                    --          756,804
 Unamortized deferred financing costs associated with senior
   convertible notes payable converted to common stock                        158,281            2,000
 Preferred stock converted to common stock                                    218,805               --
 Preferred stock issued as dividends                                          228,210          208,635
 Equipment purchased through capital lease                                         --           21,273
 Reduction in notes receivable for exercise of options
   in exchange for services                                                    42,263              636
 Retirement of treasury stock - preferred                                     150,000               --
                                                                          -----------      -----------
                                                                          -----------      -----------
Interest paid                                                                $100,101         $140,785
                                                                          -----------      -----------
                                                                          -----------      -----------
</TABLE>

                                       
  The accompanying notes and independent auditor's reports should be read in
        conjunction with the consolidated financial statements.

                                      F-7
<PAGE>

                        FIBERCHEM, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          September 30, 1996 and 1997
------------------------------------------------------------------------------
------------------------------------------------------------------------------

(1)  NATURE OF BUSINESS AND LIQUIDITY

     FiberChem, Inc. and its subsidiaries (collectively the "Company" or 
"FCI") develops, produces, markets and licenses fiber optic chemical sensors 
(FOCS) for environmental monitoring in the air, water and soil.  The 
Company's primary markets and potential customers are the petroleum 
production, refinery and distribution chains.  Other important markets and 
customers include remediation companies, environmental consultants, shipping 
ports, airports and military bases.  The Company markets its products 
world-wide using strategic alliances, distribution agreements and direct 
sales activities.

     The Company's consolidated financial statements for the years ended 
September 30, 1996 and 1997 have been prepared on a going concern basis which 
contemplates the realization of assets and the settlement of liabilities and 
commitments in the normal course of business.  The Company incurred a net 
loss of $3,274,629 and $3,226,958 for the years ended September 30, 1996 and 
1997, respectively and as of September 30, 1997 had an accumulated deficit of 
$29,596,509.

     Management recognizes that the Company must generate additional revenues 
or reductions in operating costs and may need additional financing to enable 
it to continue its operations.  The Company is reviewing alternatives for 
raising additional capital including an offering (subject to, among other 
things, approval by the SEC) of rights to purchase shares and warrants, to be 
offered to holders of the Company's Common and Preferred Stock, Class D and 
all other Warrants.  The Company has engaged consultants to assist in raising 
additional capital.  (See Note 12.)  However, no assurance can be given that 
forcasted sales will be realized to achieve profitable operations, nor that 
additional financing, if needed, can be obtained on terms satisfactory to the 
Company, if at all, nor in an amount sufficient to enable the Company to 
continue operations.

(2)  SIGNIFICANT ACCOUNTING POLICIES
          
     (a)  PRINCIPLES OF CONSOLIDATION
     
          The accompanying consolidated financial statements include the
          accounts of the Company and its subsidiaries.  All inter-company
          accounts and transactions have been eliminated.  The Company
          develops, produces, markets and licenses fiber optic chemical sensors
          ("FOCS-Registered Trademark-") for environmental monitoring in 
          the air, water and soil.
               
     (b)  CASH AND CASH EQUIVALENTS

          Cash equivalents consist of financial instruments with original
          maturities of no more than 90 days.
          
     (c)  INVENTORIES
     
          Inventories are stated at the lower of cost (first-in, first-out) or
          market.
          
     (d)  EQUIPMENT

          Equipment is stated at cost.  Depreciation is calculated using the
          straight-line method over the estimated useful lives of the assets,
          generally five years.
          
     (e)  TECHNOLOGY COSTS
     
          Technology costs represent values assigned to proven technologies
          acquired for cash and in exchange for issuance of common stock (Note
          4).  Patents on certain technologies are 

                                      F-8
<PAGE>


          pending.  Proven technologies are amortized using the straight-line 
          method over an eight year period.
          
     (f)  PATENT COSTS
     
          Costs incurred in acquiring, filing and prosecuting patents are
          capitalized and amortized using the straight-line method over the
          shorter of economic or legal life.  All existing patents are being
          amortized over eight years.
     
     (g)  REVENUE RECOGNITION
     
          The Company generally recognizes revenue when title passes, which is
          normally upon shipment of product to the customer.  There is
          generally no right of return except for normal warranties.
          
     (h)  WARRANTY

          The Company warrants its products for a period of one year from the
          date of delivery, provided the products are used under normal
          operating conditions.  The Company accrues a reserve for product
          warranty at the time of sale.

     (i)  RESEARCH AND DEVELOPMENT
     
          Research and development costs are expensed as incurred.
          
     (j)  PER SHARE DATA
     
          Loss per common share has been computed based upon weighted average
          shares outstanding during the periods presented.  Contingently
          issuable shares have been excluded because of their anti-dilutive
          effect.
          
          In March 1997, the Financial Accounting Standards Board issued
          Statement No. 128, Earnings Per Share ("SFAS 128"), which modifies
          existing guidance for computing earnings per share and requires the
          disclosure of basic and diluted earnings per share.  Under the new
          standard, basic earnings per share is computed as earnings available
          to common stockholders divided by weighted average shares outstanding
          excluding the dilutive effects of stock options and other potentially
          dilutive securities.  Diluted earnings per share includes the
          dilutive effect of these securities.  The effective date of SFAS 128
          is December 15, 1997 and early adoption is not permitted.  The
          Company intends to adopt SFAS 128 during the quarter ending December
          31, 1997.  Had the provisions of SFAS 128 been applied to the
          Company's results of operations for each of the two years in the
          period ended September 30, 1997, the Company's basic loss per share
          would have been $0.15 and $0.13 per share.
          
     (k)  INCOME TAXES
     
          The Company utilizes Statement of Financial Standards No. 109,
          ACCOUNTING FOR INCOME TAXES ("Statement 109"). Under this asset and
          liability method, deferred tax assets and liabilities are recognized
          for the future tax consequences attributable to differences between
          the financial statement carrying amounts of existing assets and
          liabilities and their respective tax bases and operating loss and tax
          credit carry forwards.  Deferred tax assets and liabilities are
          measured using the enacted tax rates expected to apply to taxable
          income in the years in which those temporary differences are expected
          to be recovered or 

                                      F-9
<PAGE>

          settled.  Under Statement 109, the effect on deferred tax assets 
          and liabilities of a change in tax rates is recognized in income in
          the period that includes the enactment date.

     (l)  STOCK-BASED EMPLOYEE COMPENSATION AWARDS
          
          In Fiscal 1996 the Company adopted Statement of Financial Accounting
          Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
          In accordance with the provisions of SFAS No. 123, the Company has
          elected to apply APB Opinion 25 and related interpretations in
          accounting for its stock options issued to employees and,
          accordingly, does not recognize additional compensation cost as
          required by the new principle.  The Company,  however, has provided
          the pro forma disclosures as if the Company had adopted the cost
          recognition requirements (see Note 7).
     
      (m) ESTIMATES
     
          Preparing financial statements in conformity with generally accepted
          accounting principles requires management to make estimates and
          assumptions that may affect the reported amounts of assets,
          liabilities, revenues and expenses and the disclosure of contingent
          assets and liabilities.  Examples include provision for bad debts;
          inventory obsolescence; and the useful lives of patents, technologies
          and equipment.  Actual results may differ from these estimates.

     (n)  Certain reclassifications have been made in the 1996 presentation to
          conform to the 1997 presentation.
     
     (o)  Recent accounting pronouncements.
     
          In June 1997, the Financial Accounting Standards Board issued
          Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), and
          Statement No. 131, Disclosures about Segments of an Enterprise and
          Related Information ("SFAS 131").  The Company is required to adopt
          these Statements in fiscal 1999.  SFAS 130 establishes new standards
          for reporting and displaying comprehensive income and its components.
          SFAS 131 requires disclosure of certain information regarding
          operating segments, products and services, geographic areas of
          operation and major customers.  Adoption of these Statements is
          expected to have no impact on the Company's consolidated financial
          position, results of operations or cash flows.

(3)  INVENTORIES

     Inventories are stated at the lower of cost (first in, first out) or 
market and consist of:

                                                         September 30,
                                                         -------------
                                                      1996           1997
                                                      ----           ----
    Raw materials                                   $ 439,392      $ 551,832
    Work in process                                    21,305         24,643
    Finished goods                                  1,534,542      1,312,804
                                                   ----------      ---------
        Subtotal                                    1,995,239      1,889,279
    Valuation and obsolescence reserves, 
        primarily against finished goods             (538,104)      (326,088)
                                                   ----------      ---------
    Net inventories                                $1,457,135     $1,563,191
                                                   ----------      ---------
                                                   ----------      ---------

                                      F-10
<PAGE>

(4)  TECHNOLOGY COSTS

     Technology costs include proven technologies acquired by the Companies 
to be utilized for various environmental and medical purposes.  These 
technologies include FOCS-Registered Trademark- which are capable of 
detecting and monitoring various chemical conditions to be used in 
environmental, medical and process control applications.  The technologies 
were acquired by the issuance of Common Stock of the Company valued at 
$349,830 and cash of $187,876.

(5)  PATENT COSTS

     Patent costs include costs incurred in acquiring, filing and prosecuting 
patents and patent applications.  The Company's policy in general is to apply 
for patents in major European and Asian countries as well as in the United 
States.

(6)  NOTES PAYABLE

     In December 1994 the Company borrowed $21,000 from Bank of America 
Nevada ("Bank") at an interest rate of 7.25% per annum.  Principal and 
interest payments of $647 are payable monthly until maturity in January 1998. 
As part of the terms of the loan agreement, the Bank required that a 
certificate of deposit ("CD") be maintained as collateral for the note.  The 
CD is reduced periodically as the note is paid down and accrues interest at a 
rate of 5% per annum.  During August 1997 the remaining balance of the note 
was extinguished using a portion of the proceeds of the CD, which was 
liquidated at the same time.

     On February 15, 1996, the Company completed an offering under Regulation 
S, promulgated under the Securities Act of 1933, as amended (the "Offering"), 
of 8% Senior Convertible Notes due February 15, 1999 (the "Notes"), for 
$2,825,000.  Interest on the Notes is to be paid semi-annually, commencing 
August 15, 1996, at a rate of 8% per annum.  The Notes are convertible into 
shares of Common Stock of the Company at a conversion price (the "Conversion 
Price") of, initially, $0.80 per share at any time after March 26, 1996 and 
before the close of business on February 14, 1999.  The Conversion Price was 
adjusted to $0.4078, a price representing a 10% discount from the average 
closing bid price of the Common Stock for the 30 business days prior to 
February 15, 1997.  As of September 30, 1997, an aggregate face amount of 
$1,175,000 of the Notes had been converted to Common Stock resulting in the 
issuance of 1,498,804 shares of Common Stock.

     The Company paid fees and expenses associated with the offering 
amounting to $428,204, which is being amortized as interest expense over the 
three-year term of the Notes or until conversion, if earlier, when the 
proportionate unamortized amount is charged to additional paid in capital.  
As of September 30, 1997 approximately $160,281 of unamortized deferred 
financing cost has been recorded as a reduction in additional paid-in capital 
associated with the $1,175,000 of the Notes converted to Common Stock.  Also 
in connection with the Offering, the Company issued to the Placement Agent 
for the Offering, for nominal consideration, warrants to purchase up to 
353,125 shares of Common Stock, at an exercise price of $0.80 per share (the 
"Exercise Price"), which has been adjusted to $0.4078 per share.  Also in 
accordance with the terms of the warrants, the number of shares exercisable 
has been adjusted, based on the adjusted Exercise Price, to 692,742 shares of 
Common Stock.   These warrants are exercisable at any time on or after August 
15, 1996 through February 14, 2001 and contain certain piggyback registration 
rights.

     In November 1996, the Company acquired $21,273 in equipment through a 
36-month capital lease with monthly payments of approximately $715 and an 
implicit interest rate of approximately 14.5% per annum.

                                      F-11
<PAGE>

     The maturities of the notes payable are as follows:

                                September 30,   September 30,
                                    1996            1997
                                -------------   -------------
      Fiscal 1997                  $    7,315      $    6,878
      Fiscal 1998                       2,551           7,942
      Fiscal 1999                   1,675,000       1,650,000
                                   ----------       ---------
                                   $1,684,866      $1,664,820
                                   ----------       ---------
                                   ----------       ---------

(7)  STOCKHOLDERS' EQUITY

     During Fiscal 1993 and Fiscal 1994, the Company conducted a private 
placement of convertible preferred stock ("Convertible Preferred Stock").  
Each share of the Convertible Preferred Stock is convertible into ten shares 
of FCI Common Stock, initially at $1.50 per share.  The conversion ratio is 
subject to customary anti-dilution provisions.  Dividends are cumulative and 
are payable annually, at the sole discretion of the holders, in cash (11%) or 
additional shares of Convertible Preferred Stock (8% of the number of shares 
owned at date of declaration). In November 1995, the Company paid cash 
dividends of $23,645 and issued 15,214 shares of Convertible Preferred Stock 
dividends.  In November 1996, the Company paid cash dividends of $46,171 and 
issued 13,909 shares of Convertible Preferred Stock dividends.  The 
Convertible Preferred Stock entitles the holder to a liquidation preference 
of $15 per share upon liquidation, dissolution or winding up of the Company.  
The Convertible Preferred Stock is redeemable by the Company when and if the 
closing bid price of FCI's Common Stock is at least 200% of the conversion 
price for twenty consecutive trading days.  Upon redemption, the Company 
would issue ten shares of its Common Stock for each share of Convertible 
Preferred Stock.  During Fiscal 1996, 14,587 shares of Convertible Preferred 
Stock were converted to 145,870 shares of Common Stock.  As of September 30, 
1997, the Company had 218,998 shares of Convertible Preferred Stock 
outstanding. On September 12, 1997, the Board of Directors determined that, 
in view of the recent trading price of the Company's Common Stock and in view 
of the Company's current cash position, it would not be appropriate to 
declare the annual dividend payable on the Convertible Preferred Stock on 
November 1, 1997. As a result, the dividend amounting to $361,347 (if elected 
entirely in cash, or 17,520 additional shares of Convertible Preferred Stock 
if elected wholly in additional shares) will accumulate in accordance with 
the terms of the Convertible Preferred Stock.

     On May 31, 1996 the Company completed an offering under Regulation S, of 
3,333,333 Units, at a price of $0.90 per Unit for total gross proceeds of 
$3,000,000 before costs and expenses of the offering. The Company paid fees 
and expenses associated with the Unit offering amounting to $345,683.   Each 
Unit consisted of one share of Common Stock and one warrant to purchase one 
share of Common Stock (the "Unit Warrants") the shares and warrants being 
immediately separable.  The Unit Warrants are each exercisable at $1.00 at 
any time from May 31, 1996 through May 30, 2001.  Also in connection with the 
Unit offering, the Company issued to the Placement Agent for the offering, 
for nominal consideration, warrants to purchase up to 333,333 shares of 
Common Stock ("the Placement Agent Warrants"), at an exercise price of $0.90 
per share which  has been adjusted to $0.2343 per share, and the number of 
shares issuable upon exercise has been adjusted to 1,280,411.  These 
Placement Agent Warrants are exercisable at any time from November 30, 1996 
through May 30, 2001.

     In January 1993, the Company's Board of Directors adopted a 1993 
Employee Stock Option Plan ("1993 Plan"), approved by stockholders at the May 
1993 Annual Shareholders meeting, covering an aggregate of 2,300,000 shares 
of  FCI Common Stock.  As of September 15, 1996, an aggregate of 1,681,519 
options had been exercised and 274,641 options forfeited (of which 171,822 
had been regranted) under the 1993 Plan.  The remaining 515,662 options 
expired on September 15, 1996.

     Primarily in order to provide a means to raise additional cash through 
existing outstanding options, warrants and promissory notes receivable, on 
April 4, 1997, the per share exercise price of all employee stock options, 
all Unit and other Warrants (except Class D Warrants) were decreased as 
follows: to $0.32 

                                      F-12
<PAGE>

from April 4 through April 11, 1997, and thereafter adjusted weekly to the 
average closing bid price for the five prior trading days less a discount of 
10% (but never to a price less than $0.30) through May 16, 1997, when the 
prices reverted to the original prices.  As a result, the Company received 
$39,943 for the exercise of 131,453 options at prices ranging from $0.30 to 
$0.32 per share.   Effective April 17, 1997 the per share exercise price of 
Class D Warrants was decreased to $0.30 through May 16, 1997 when the 
exercise price reverted to its prior $1.10 per share.  As a result, the 
Company received approximately $30,954 for the exercise of 103,179 Class D 
Warrants exercised at $0.30 per share.

     In March 1994, the Company's Board of Directors approved a plan by which 
employees and directors of the Company and its subsidiaries would be given an 
opportunity to exercise certain eligible stock options under an early 
incentive plan through the execution of promissory notes.  As of March 15, 
1994, the Company received promissory notes aggregating $1,815,099 for the 
exercise of 1,210,066 stock options.  The promissory notes bear interest at 
7%, and were initially due on or before September 15, 1995. On April 7, 1995, 
the Board of Directors extended the due date of the notes to March 15, 1998.  
The underlying FCI Common Stock was held in escrow, as collateral, until 
payment was made on the promissory notes.  As of September 30, 1996, an 
aggregate of $271,449 had been paid on these notes in addition to $43,467, 
respectively, in interest. The remaining accrued interest of  $228,927 at 
September 30, 1996 is included in other long-term assets in accordance with 
the April 1995 extension of the due date of the notes.  The outstanding 
principal at September 30, 1996 of $1,543,650 is included as a reduction of 
stockholders' equity.  In conjunction with the temporary reduction of the 
exercise prices of the options and warrants effective April 4, 1997 and Class 
D Warrants effective April 17, 1997, as described above, the remaining unpaid 
principal on the promissory notes could be fully paid in an amount determined 
by multiplying the unpaid balance by a fraction, the numerator of which was 
the revised exercise price, and the denominator of which was $1.50 (the 
original exercise price).  If the unpaid principal was not so paid by May 16, 
1997 the underlying collateral shares would be forfeited and all unpaid 
principal and accrued interest would be extinguished.

     As a result, the Company received $160,875 in payment for 520,252 
escrowed shares at prices ranging from $0.30 to $0.32 per share, which amount 
liquidated $780,379 of original note principal.  The remaining $756,804 of 
unpaid note principal was extinguished and the underlying collateral of 
504,535 shares were forfeited to the Company and immediately canceled, 
thereby reducing the total number of shares outstanding.  Unpaid accrued 
interest receivable aggregating $248,212 was expensed.

     In March 1994, the Company's Board of Directors adopted a 1994 Employee 
Stock Option Plan ("1994 Plan"), approved by stockholders at the May 23, 1994 
Annual Shareholders meeting, covering an aggregate of 1,000,000 shares of  
FCI Common Stock.  As of September 30, 1997, the Company has issued 984,885 
stock options, net of forfeitures and regrants, (with initial exercise prices 
ranging from $1.00 per share to $2.125 per share and current exercise prices 
of $1.00 per share) under the 1994 Plan to employees of the Company's 
wholly-owned subsidiary, FCI Environmental, Inc. ("Environmental").  An 
aggregate of 821,114 options remain exercisable under the 1994 Plan.

     On April 7, 1995, the Company's Board of Directors resolved that all 
options to purchase shares of the Company's Common Stock granted prior to 
April 7, 1995, and which had an exercise price in excess of $1.00 per share, 
would as of April 7, 1995 have an exercise price of $1.00 per share, which 
price was above the fair market value of the Common Stock as of the last 
quoted market trade on April 7, 1995.  Options to purchase an aggregate of 
2,309,479 shares at prices ranging from $1.125 to $2.125 per share were 
accordingly changed to $1.00 per share.

     In April 1995, the Company's Board of Directors adopted a 1995 Employee 
Stock Option Plan ("1995 Plan"), approved by the stockholders at the May 8, 
1995 Annual Shareholders meeting, covering an aggregate of 1,000,000 shares 
of FCI Common Stock.  As of September 30, 1997, the Company has issued 
761,547 stock options, net of forfeitures, (with initial and current exercise 
prices ranging from $0.93 per share to $1.38 per share) under the 1995 Plan 
to employees of Environmental and Directors of the Company.  An aggregate of 
643,942 options remain exercisable under the 1995 Plan.

                                      F-13
<PAGE>

     In January 1997 the Company's Board of Directors adopted a 1997 Employee 
Stock Option Plan ("1997 Plan"), approved by the stockholders at the June 23, 
1997 Annual Stockholders Meeting, covering an aggregate of 1,500,000 shares 
of Common Stock and restricting the granting of options to purchase 
approximately 675,000 shares of Common Stock authorized under previous stock 
option plans. As of September 30, 1997 the Company has issued options to 
purchase 636,500 shares of Common Stock at prices ranging from $0.22 to $0.25 
under the 1997 Plan to employees of Environmental and Directors of the 
Company.   An aggregate of 631,500 options remain exercisable under the 1997 
Plan.

     During Fiscal 1996, the Company has expensed an aggregate of $99,000 in 
directors' compensation for the Company's non-management directors, applying 
$63,728 to the payment of promissory notes, interest and payroll taxes, and 
$35,272 to the exercise of 35,272 stock options.  Effective October 1, 1996, 
director compensation was eliminated and replaced by the granting of stock 
options for service as a director and for service on standing committees. 
During Fiscal 1997, the Company granted to its six non-management directors 
options to purchase an aggregate of 186,500 shares of Common Stock at $0.22 
per share, which was the fair market value of the Common Stock as of the date 
of the grants.

      During Fiscal 1996, the Company issued to two individuals a total of 
13,954 shares of  Common Stock of the Company, valued at $15,417 for services 
performed for the Company.

     On August 1, 1995, the Company's Board of Directors resolved that the 
exercise price of all outstanding Class D Warrants be changed from $1.50 per 
share to $1.00 per share, which price was above the fair market value of the 
Common Stock as of the last quoted market trade on August 1, 1995.  An 
aggregate of 1,031 Class D Warrants were exercised during Fiscal 1996; no 
Class D Warrants were exercised during Fiscal 1995.  On August 21, 1996, the 
Board of Directors extended the expiration date of the Class D Warrants from 
their original expiration date of September 15, 1996, to September 15, 2000, 
and changed the exercise price from $1.00 to $1.10 from September 16, 1996 
through September 15, 1997; then $1.15 through September 15, 1998; then $1.20 
through September 15, 1999; then $1.25 through September 15, 2000.

     The Company has granted options under qualified stock option plans as 
well as other option plans to employees, directors, officers, consultants and 
other persons associated with the Company who are not employees of, but are 
involved in the continuing development of the Company.   A summary of the 
status of the Company's stock option plans as of September 30, 1996 and 1997 
and changes during those years are as follows:

<TABLE>
<CAPTION>
                                            1996                           1997
                               ----------------------------     ---------------------------
                                                  Weighted                       Weighted 
                                                   Average                       Average 
Fixed Options                    Options          Exercise       Options         Exercise 
                                                    Price                        Price  
---------------------------    -----------        --------       ---------      ----------
<S>                            <C>                 <C>           <C>               <C>
Outstanding at beginning         2,457,023         $1.00         1,670,552         $0.99
of year
Granted during year                784,504           .99           676,500           .28
Exercised                        (246,282)          1.00         (150,496)           .37
Forfeited                      (1,324,693)          1.00         (100,000)          1.00
                               -----------         -----         ---------        -------
Outstanding at end of year       1,670,552         $0.99         2,096,556         $0.76
                               -----------                       ---------
                               -----------                       ---------
</TABLE>

     The following table summarizes information about stock options 
outstanding and exercisable at September 30, 1996 and 1997.

                                      F-14
<PAGE>

<TABLE>
<CAPTION>
                                                              Weighted Average        Weighted 
                 Range of Exercise    Number Outstanding          Remaining            Average 
September 30          Prices            and Exercisable       Contractual Life      Exercise Price
----------------------------------  ----------------------  --------------------  ------------------
<S>                 <C>                    <C>                   <C>                    <C>
1996                $0.93 - 1.00           1,670,552             3.75 years             $0.99
1997                $0.22 - 1.00           2,096,556             4.80 years             $0.76
</TABLE>

     If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No.123,
net  loss and loss per share would have been adjusted to the pro forma amounts
indicated in the table below:

<TABLE>
<CAPTION>

                                As Reported                    Pro Forma
                       ----------------------------  ----------------------------
                           1996           1997           1996            1997
                       -------------  -------------  -------------  -------------
    <S>                 <C>            <C>            <C>            <C>
    Net Loss            $(3,274,629)   $(3,226,958)   $(3,490,698)   $(3,501,930)

    Loss per share         $(0.15)         $(0.13)        $(0.16)        $(0.14)
</TABLE>

     No tax effect was applied in computing loss per share under SFAS No. 
123. The Company's assumptions used to calculate the fair values of options 
issued was (i) risk-free interest rate of 6.0%, (ii) expected life of five 
years, (iii) expected volatility of 172%, and (iv) expected dividends of zero.

(8)  COMMITMENTS AND CONTINGENCIES

     The Company entered into an agreement to lease office space for a 
five-year period beginning in January 1990, which expired in January 1995.  
The Company and the lessor have agreed to a month-to-month lease which is 
terminable by either party upon 30 days notice.  Monthly payments under the 
lease were originally $8,807 and escalated approximately $1,300 every twelve 
months.  Current base monthly payments under the month-to-month lease are 
$12,786.  Rent expense during Fiscal 1996 and 1997 was $172,492 and $172,551, 
respectively. The Company is pursuing alternatives, including a renewal of 
the month-to-month lease at approximately the current base monthly rental 
charge.

     Effective January 1, 1994, the Company implemented an Internal Revenue 
Code Section 401(k) Profit Sharing Plan (the "Plan").  The Plan provides for 
voluntary contributions by employees into the Plan subject to the limitations 
imposed by Internal Revenue Code Section 401(k).  The Company will match 
employee contributions at a rate of 50% of the employee's contribution up to 
a maximum of 2% of the employee's compensation.  The Company matching funds 
are determined at the discretion of management and are subject to a five-year 
vesting schedule from the date of original employment.  The Company's 401(k) 
matching expense for the years ended September 30, 1996 and 1997  totaled 
$18,508 and $21,263, respectively.

     The Company is involved in litigation incidental to its business.  In 
the opinion of the Company's management, the expected outcome of such 
litigation will not have a material effect on the financial position of the 
Company.

(9)  INCOME TAXES

     Income tax benefit attributable to losses from continuing operations for 
the year ended September 30, 1996 and 1997 differed from the amount computed 
by applying the federal income tax rate of 34% to pretax loss from operations 
as a result of the following:

                                      F-15
<PAGE>

                                                       1996           1997
                                                       ----           ----
Computed "expected" tax benefit                    $(1,113,374)   $(1,097,166)
Reduction in income tax benefit resulting from:
  Non-deductible expenses                               38,374         28,166
  Increase in valuation allowance                    1,075,000      1,069,000
                                                   -----------    -----------
Net tax benefit                                      $      --      $      --
                                                   -----------    -----------
                                                   -----------    -----------

     Components of net deferred tax assets as of September 30, 1996 and 1997 
are as follows:

                                           1996         Change           1997
                                           ----         ------           ----
Deferred tax assets                  $7,889,000     $1,063,000     $8,952,000
Less valuation allowance             (7,873,000)    (1,069,000     (8,942,000)
                                    -----------     ----------    -----------

Total net deferred tax assets            16,000         (6,000)        10,000
Deferred tax liabilities                (16,000)         6,000        (10,000)
                                    -----------     ----------    -----------

Net deferred tax assets             $        --     $       --    $        --
                                    -----------     ----------    -----------
                                    -----------     ----------    -----------

     Deferred tax assets are comprised primarily of the tax effects of the 
net operating loss carryforwards, reserve for inventory obsolescence and 
allowance for doubtful accounts recorded for financial reporting purposes.  
Deferred tax liabilities primarily represent the tax effect of the difference 
between depreciation recorded for financial statement and income tax 
reporting purposes.

     The Company has recorded a valuation allowance in accordance with the 
provisions of Statement 109 to reflect the estimated amount of deferred tax 
assets which may not be realized.  In assessing the realizability of deferred 
tax assets, Management considers whether it is more likely than not that some 
portion or all of the deferred tax assets will not be realized.  The ultimate 
realization of deferred tax assets is dependent upon the generation of future 
taxable income during the periods in which those temporary differences become 
deductible.

     At September 30, 1997, the Company has net operating loss carryforwards 
for federal income tax purposes of approximately $25,449,000 which are 
available to offset future taxable income, if any, through 2012.  However, 
carryforwards to offset future taxable income is dependent upon having 
taxable income in the legal entity originally incurring the loss and will be 
further limited in each year to an amount equal to the Federal long-term tax 
exempt interest rate times the entity's market value at the time a 
significant change in ownership occurred.  The Company cannot determine the 
effect of these limitations.

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following disclosure of the estimated fair value of financial 
instruments was made in accordance with Statement of Financial Accounting 
Standards No. 107 ("SFAS No. 107"), DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL 
INSTRUMENTS. Accordingly, the aggregate fair value amounts presented are not 
intended to represent the underlying value of the net assets of the Company.

     The carrying amounts at September 30, 1997 for cash, receivables, 
accounts payable and accrued liabilities approximate their fair values due to 
the short maturity of these instruments.  In addition the estimated fair 
value of notes payable approximates the related carrying value at September 
30, 1997.

(11) MAJOR CUSTOMERS

     During Fiscal 1997, the Company had sales to one customer of 
approximately $985,000.  During Fiscal 1996, the Company had sales to three 
customers of $190,000, $100,000 and $93,000.
 
                                      F-16
<PAGE>

(12) SUBSEQUENT EVENTS

     On October 2, 1997, the Company entered into an agreement with entrenet 
Group, LLC ("entrenet") for advice and assistance in developing and executing 
business plans, financing strategies and business partnerships, acquisitions 
and mergers.  For its services, entrenet will receive a cash fee of $5,000 
per month for twelve months; $60,000 in the form of a 10% convertible note, 
payable on the earlier of (a) a financial transaction (as defined in the 
agreement) or (b) two years; 5% of the value of any financial transaction (as 
defined in the agreement); and 5% of any financing provided by or introduced 
directly by entrenet.











                                      F-17






<PAGE>

                                       
                                   SIGNATURES

     Pursuant to the requirement of Section 13 or 15(d) of the Securities and 
Exchange Act of 1934, the Registrant has duly caused this report to be signed 
on its behalf by the undersigned, thereunto duly authorized.

Dated:    January 20, 1998

                                  FIBERCHEM, INC.


                                  By:   /s/ Geoffrey F. Hewitt   
                                        -------------------------------------
                                        President and Chief Executive Officer

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

<TABLE>
<CAPTION>
<S>                           <C>                                       <C>
/s/ Geoffrey F. Hewitt        Chairman, President and Chief Executive   January 20, 1998
--------------------------    Officer (Principal Executive Officer)
Geoffrey F. Hewitt        

/s/ Melvin W. Pelley          Chief Financial Officer                   January 20, 1998
--------------------------    (Principal Accounting Officer)
Melvin W. Pelley          

/s/ Scott J. Loomis           Director                                  January 20, 1998
--------------------------
Scott J. Loomis               

/s/ Walter Haemmerli          Director                                  January 20, 1998
--------------------------
Walter Haemmerli

/s/ Gerald T. Owens           Director                                  January 20, 1998
--------------------------
Gerald T. Owens

/s/ Irwin J. Gruverman        Director                                  January 20, 1998
--------------------------
Irwin J. Gruverman

/s/ Dale W. Conrad            Director                                  January 20, 1998
--------------------------
Dale W. Conrad

/s/ Byron A. Denenberg        Director                                  January 20, 1998
--------------------------
Byron A. Denenberg
</TABLE>